According to the National Insurance Crime Bureau (NICB), cases of suspected fraud in the U.S. rose 27% from 2010 through 2012, producing more than 100,000 questionable claims. Fraud costs U.S. property-casualty insurers an estimated $30 billion annually.

Just look at one recent example that occurred in last month Miami: 22 people were charged in a major home insurance fraud ring totalling about $7.6 million in losses from various insurance companies. The ring staged at least 17 fake home damage incidents such as fires and floods, and false claim settlements were paid to the fraudsters.

This latest example of insurance fraud is just a ripple in the water. In 2012, home insurance fraud in the U.S. was the second most popular type of fraud, with 17,000 questionable claims made.

Insurance is, or should be, a straightforward equation: The premiums of the many pay for the losses of the few. However, the growth of fraud is turning this equation upside down. Given the bottom-line impact on the industry and the growing cost to policyholders, there is an urgent need for a fight against fraud.

There are various avenues the industry can take, but the main point is that the insurance community has an opportunity to set the equation right again.

How can we stamp out fraud once and for all?

1. Take a holistic approach. The industry needs a concerted effort to use every available tool to prevent fraud from happening in the first place and to help identify it when it has. There needs to be a range of different measures that take advantage of technology and demand cultural and behavioral changes.

2. Make it a boardroom issue. You would think that fraud figures would be as easily available as those for combined ratios or gross written premiums, but they're not. How about instituting a required section on fraud in a carrier's annual report and SEC filings? Carriers need to ensure that fraud is a high priority, strategic issue in their business.

3. Don't wait until a claim has been filed. Waiting to identify fraud at the claims stage is putting the cart before the horse. Nailing fraud at the point of underwriting should be the priority because it's more about the history of the individual or business being covered than the actual risk itself. Creating a comprehensive record-checking system can help eradicate fraud before it happens.

4. You can't lose when you share. Sharing information among the insurance community is absolutely critical, yet this is still not happening universally. Although the NICB is encouraging more coordination across the industry, many U.S. carriers are still working independently. In contrast, UK insurers benefit from the existence of the Compensation Recovery Unit, a government database designed to recoup money paid out in benefits to people injured in accidents. For example, if an insurer gets a claim, they can search the database and see if that person already has a claims record. If they've already had half a dozen claims in the past, the chances of fraud rise significantly.

5. Data speaks for itself. The use of a wider data set to get a better picture of fraud indicators is also important. Some carriers are already implementing advanced analytics and claims predictive modeling to help in areas such as workers' compensation claims and auto bodily injury.

6. Examine industry-wide behaviors toward claims. If a claim is paid in cash for a “stolen” item, does that reward a potential fraud? Better perhaps to provide a “like-for-like” service. Unfortunately, some carriers have focused on cost cutting in areas such as providing a replacement service for household goods, arguing that paying out in cash is cheaper and easier. It might make sense in the short term, but it can have the unfortunate effect of promoting fraud and increasing costs over a longer period.

7. Enact rehabilitation programs. Ensuring the claimant has to attend a prescribed rehabilitation program for example means that a fraudster will have to effectively work for their money. It may be a simple change, but it makes it harder for fraudsters to gain.

As markets mature, insurers get better at managing fraud–but it can never be managed out completely. Situations like the Florida fraud ring may still happen, but perhaps on a smaller scale if solutions like the above points are put in place. No one can do anything about the catastrophic impact of a hurricane or an earthquake, but fraud is one catastrophe that every part of the industry should be working hard to minimize.

Special Reports /

7 Steps Toward Stamping Out Insurance Fraud

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