The precipitous drop in P&C insurance claims signals a calm before the storm. Now is the time for insurers to prepare for rising fraud risks. (Photo credit here)

Writing this from the comfort of my home office on a beautiful spring day, I'm very much aware of the relative tranquility around me. Windows open, I hear melodic birdsong carried on the breeze and the subtle rustling of trees. Conspicuously absent? The ceaseless droning of motor vehicles on the streets outside.

The novel coronavirus has upended the world around us. In the weeks since the pandemic sparked varying degrees of stay-at-home orders and lockdowns around the globe, a large portion of the public has been relegated to their residences. Many work from home, their daily back-and-forth commutes a memory growing ever more distant.

It is no surprise, then, that P&C insurers' claims volume has fallen dramatically. Quite simply, there are far fewer cars on the roads and, thereby, far fewer accidents. People, by and large, spend their days in their houses and apartments, by default safeguarding themselves from most crime and catastrophe. With airline flights sparse, entertainment meccas and hotels temporarily shuttered, and even short-distance travel discouraged, few people need travel insurance.

That begs the question: What will P&C insurers experience when the restrictions begin to lift? No doubt they expect claims volume to climb. But what they might not be banking on is a corresponding rise in fraud. Here's why.

Fraud on the horizon

With large and growing numbers of people un- or under-employed, declining sales and business revenues, and falling GDP, the world faces a looming recession. The resulting financial straits will lead some individuals to commit fraud and financial crimes, including insurance schemes like claims fraud.

A recent study by the University of Portsmouth in the U.K. shows a clear correlation between reductions in GDP and an overall increase in all forms of fraud. As Professor Mark Button, director of the university's Centre for Counter Fraud Studies, explained:

"Recessions lead to increased financial pressures on more people and a small minority use fraudulent means to address such pressures. Respected economists have predicted the current crisis could lead to a substantial reduction in GDP with lowest estimates of a 7.4% fall and highest estimates of a 35% fall by the OBR. These predictions could mean fraud levels increasing from at least 30.3% and possibly even doubling if the 35% fall was to occur. These are rough estimates but illustrate that a substantial increase in fraud is likely as a consequence of the economic downturn."

During a recent virtual workshop I hosted with a global insurer, one executive articulated the company's need for better regulatory response to address financial, operational and reputational risks and make more optimal use of the data sets they were amassing. The executive described how a slump in new business sales and sinking customer retention would fiscally challenge some agents, putting the company on alert for increases in commission-based frauds (e.g., falsifying sales performance) and premium theft or misappropriation.

No time to waste

So how can insurers prepare for the challenges ahead? With claims down and most personnel working remotely, now is an ideal time to thoroughly review existing fraud processes and procedures. Ensure that each part of the insurance value chain is made aware of, and prepared for, potential fraud attacks. Identify and remedy existing weak points within the current fraud detection and prevention structures.

As part of this review, don't neglect to assess and shore up your analytic capabilities, which are playing an increasingly important role in fraud detection and prevention across the industry. Key machine learning techniques, for example, can help insurers uncover potential fraud that looking at individual claims or applications alone simply cannot.

For optimal results, consider a three-pronged attack, using analytics at three distinct but naturally interwoven levels:

Level 1: The claim or new business application. Most insurers are currently working at this level. Adding or fine-tuning analytics here can simultaneously help accelerate the identification of potential fraud and reduce false positives.

Level 2: The entity. The "entity" can be any number of things, typically a claimant, agent, physical address, IP address, mobile phone, bank account, vehicle repair shop, etc. Moving up a level from the individual claim, the next step is to look for anomalies or outliers in behavior among related entities.

Level 3: The network. This final level draws on a data management technique to build out network diagrams illustrating relationships between the entities in Level 2. Some of these relationships will not be readily explained — a potential indication of fraud or claims leakage.

These strategies can now be run in real time to help deliver instant results at points within the new business or claims life-cycle process, wherever the insurer needs it most.

It won't be long before the sound of droning engines returns to compete with the birdsong and rustling leaves. Workers will return to their daily commutes. They'll leave homes and property unattended. We'll hopefully welcome the shift, yet none of us will return to the world we left just weeks ago. We'll instead adjust to a new normal, one likely shadowed by the strife of a global recession. Still, our optimism and resolve will enable us to overcome the challenges ahead.

Claims will climb, most of them legitimate. Agents, the vast majority honest and hardworking, will serve customers. Whatever we face in the months ahead, the insurers that wisely prepare now are apt to find themselves well-positioned to navigate the tumultuous times ahead.

David Hartley (david.hartley@sas.com) is global director of fraud & security intelligence for insurance at SAS, where for nearly 20 years, he has helped insurance companies apply leading-edge analytics to detect and prevent fraud. Earlier in his career, he was part of a small team that established Lloyds Bank as the U.K.'s largest bancassurer in the mid-1990s.

These opinions are the author's own.

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