Insurers are facing continued uncertainty about profitability,along with pressures on pricing and low interest rates on theirfixed-income investments. In this kind of environment, thereis an unceasing search for p&c carriers to find ways to controlcosts and improve overall risk management.

Fraud control is an area with strong potential for increasinginsurers' profitability. According to an Accenture survey of European P&C insurers, during the lastthree years 71 percent of respondents experienced an averageincrease of 10 percent in the number of fraudulent claimsprocessed. Fraudulent claims are on the rise for NorthAmerican insurers, as well, with Aite Group reportingthat nearly $80 billion in fraudulent claims are made each year in the U.S.alone.

The insurers we surveyed estimated that better fraud detection capabilities could reduce as much as five percent oftheir total claims costs. Since this is money that goes almostdirectly to the bottom line, it is well worth exploring howinsurers can improve their detection and prevention capabilitieswithout adversely affecting the processing of legitimateclaims.

See related article: 5 Steps to Better Fraud Detection

Our own experience is that an effective fraud detection programcan yield benefits including savings in the range of one to threepercent of total claims paid out, depending upon the maturity levelof the policy. The best approach for achieving these savingsrelies upon teamwork—combining better service levels and moreefficient claims processing, as well as advanced analytics tools for greater focus in detecting andfighting fraud. Better service levels, in particular, generatepositive customer feedback, helping increase customer loyalty anddeterring individual episodes of fraud.

As our earlier U.S. research indicated, customers are morelikely to commit fraud when they feel that service levels aresubstandard. Click on the next page to learn about fourproven strategies for addressing fraud.

Critical Strategies to Win the Fight

1. Using business rules to detect irregularities.Business rules can allow for the identification of anomalies orirregularities during the processing of claims. Such rules,for example, compare claims based on various types of fraud(individual or organized) and determine whether experts shouldinvestigate the fraudulent incidents. Sophisticated analyticstools can also detect such irregularities, saving insurers money,time and effort.
2. Employing predictive modeling. Predictiveanalytics methods and models can be used to review historicalfraudulent claims and identify factor and elements that can helpprevent future fraud. The goal is to detect potential fraudas early as possible in the claims process and thus reduce paymentsmade to fraudsters. When predictive modeling is combined withother tools as part of a concerned global effort, it can be highlyeffective.
3. Undertaking network analysis. Examiningthe relationship that exists between concerned parties can helpspecialized investigators detect organized insurancefraud. Technological developments in this area can helpinvestigators link different players. New technology solutionscan help identify the extent of the relationship between theinvestigated parties, and the information and insights gathered canbe used to define indicators that point to possible fraudulentactivity.
4. Closing the loop and intervening. Thesefraud detection strategies—including the integration of fraudindicators within the claims handling process—can work incombination to increase the overall effectiveness of fraudprevention. When a risk is identified, immediate action can betaken, including investigation by specialists and interactionbetween the claims management unit and the insured.

Along with improving customer service and overall claimsprocessing, these are the basic elements in reducing fraudlosses. At the next level, insurers can develop a claimsanalytics platform with a common infrastructure, using a broadrange of models, including those addressing injury, subrogation,litigation and large loss claims.

Fraud analytics, along with other tools and methods, can beexpanded to address other claims issues. The broad use ofanalytics and statistical tools—along with improved productivity inmanaging claims and a reduction in fraudulent claims—can helpinsurers generate important cost reductions. For example,optimizing the validation of claims process and using more robustanalytics to make the process more effective can reduce the overallnumber of fraudulent claims managed. Similarly, reducing themanual effort needed to analyze data allows for more time spent onreporting that really adds value.

Few insurers would argue that increasing the rate of frauddetection, as well as fraud avoidance and recovery rates, can havea significant impact on profitability. Insurers pursuing anapproach that combines fraud detection with improved service andprocessing capability, however, can realize long-term benefits interms of customer satisfaction andretention. A concerted, coordinated effort ismost likely to yield the best results.