Double-edged Sword

This summers movie blockbuster Terminator 3 features an apocalyptic battle between man and machine. In the war on insurance fraud, though, man and technology can and should work together for ultimate success.

Insurance fraud exacts a huge financial toll that raises the tab for all buyers. The insurance industry estimates the cost of fraud represents 10 percent to 15 percent of each premium dollar. Some observers estimate its annual cost to the industry at $18 billion.

Insurance fraud can be broadly categorized into three areas: false claims for bodily injury; arson for profit; and false or intentional auto theft and physical damage. It assumes many forms, including staged accidents and faked injuries. It also can surface as more subtle variants, such as exaggerating minor injuries to maximize compensation. Some fraud results from accidents that actually occurred but from which the claimant is exaggerating symptoms and disability for so-called secondary gain factors. Inflating repair bills or intentional destruction of property to evade debt obligations or alleviate financial distress are other examples.

Effective fraud fighting requires collaboration between IT professionals and claims handlers. In many organizations, each of these departments is a silo that may communicate with the other sparingly or reluctantly. Corporate structures aligned by function may spawn turf wars between the IT professionals and claims people, both of whom may presume ownership over fraud fighting.

IT professionals have various technology tools they can leverage to fight fraud. Barry Zalma, an insurance coverage attorney from Culver City, Calif., says, The best technology tools for fraud fighting are the many computer databases, such as ISOs ClaimSearch and services that provide background information like property ownership, litigation, and criminal prosecution.

Starting Points for Fighting Fraud
Two key starting points are, first, identifying markers for fraud, and second, once known, how do you find them? Computer systems are good for discerning patterns, e.g., the same claimant surfaces a number of times. Newer software programs can sift through vast gobs of data to sniff out hidden connections among claims that share common characteristics, including names, Social Security numbers, and vehicle identification numbers.

Without intelligence from front-line claims people, though, tech tools are impotent as fraud-fighting tools. In the battle of Iraq, the latest high-tech weaponry would be useless if front-line troops clung to their old equipment just because it felt familiar.

Claims people may know exactly where financial leakage occurs and can pinpoint fraud targets. Yet their ability to detect possible fraud markers may be crude and anecdotal. The relationship between IT and claims is symbioticeach needing the other in order to launch an effective counterattack on insurance fraud. One department trying to fight fraud without collaboration with the other is like trying to swim by using only one arm. You would make little progress and exhaust yourself by flailing around in circles. Claims and IT departments are two arms that can deliver a strong one-two punch to insurance fraud.

To develop fraud-fighting technology and strategies, IT professionals must work with claims people to understand the types of indicators associated with fraud. Some indicators may be qualitative; others may be numerical. Clearly, those that are most quantitative lend themselves more to technological means of identifying possible fraud.

Red Flags on the Fraud Dashboard
For example, IT folks may learn any or all of the following represent signs of potential fraud to claims adjusters:
Unusual time lag from the date of accident to the date of report.
Attorney retention on the date of the accident or within three days.
A claimant or a policyholder with a claims history of filing prior insurance claims.
Unwitnessed accident.
Claimant who seems to use insurance terminology.
Claimant who seems overeager for a first-call settlement.
First-party insured in financial distress who loses property under suspicious circumstances.
Repetitive physical therapy treatments undergone for low-impact trauma and accidents.
Treating doctor is one who often is the attending physician in personal injury cases.
Anonymous tip says the claimant is faking injury or is gainfully employed in a moonlighting capacity.

This is a useful checklist for starters. A key point is different lines of insurance coverage may have different indicators of fraud. Such red flags must be customized to each companys needs and experience. Bob Morrissey, proprietor of Trinity Internal Audit Services/Consultants, Fairfield, N.J., asserts, Insurers should develop their own red flags based on previous case modus operandi and what could go wrong thinking. Showing them the effectspast frauds and the resultant monetary loss and the future potential exposurefacilitates getting the CIO and IT folks to buy into it.

Building Bridges To Fight Fraud
Another mundane but daunting challenge will be for CIOs to get the attention of preoccupied claims people. Busy adjusters may view the fraud topic territorially, sensing an intrusion from IT personnel. Some adjusters might view IT overtures as a subtle rebuke of past claims practices.

Alternatively, claims people might believe fraud is not a problem at their company or that IT has a solution in search of a nonexistent or immaterial problem. There also is an insular, not invented here mentality on the part of some claims operations. In fairness, many are so bogged down with high caseloads they roll their eyes when IT people appear with another project.

To mitigate resistance, IT professionals might consider the following approaches:
Tread carefully when entering an adjusters turf.
Emphasize there is no implied criticism of past practice; rather, this represents an opportunity to improve an already strong claims operation.
Fraud may be a bigger issue than anyone realizes, and claims and IT can partner together to fight it.
The claims department is an internal customer. The IT department wants to make sure it provides claims with all the tools needed to combat fraud.
Fighting fraud may deter frivolous claims or help leverage quicker turnover of existing claims. Hence, more effective fraud fighting may, in the long run, moderate adjuster caseloads.

Another challenge IT professionals face lies in getting the time and attention from the claims people in the field. Many of them are spread thin. Caseloads are high. Service standards are exacting. Turnover often is high. Many adjusters are so busy its difficult for them to find time to sit down with IT folks. Every minute spent meeting about fighting fraud is one less minute available to investigate claims, handle files, and move them toward conclusion.

IT professionals will encounter more acceptance and cooperation if they ask, When would be a good time to discuss fraud-fighting strategies? rather than sending an e-mail to the claims manager decreeing, We will meet at 3:00 p.m. to discuss claims fraud. Small nuances in approaching claims leadership are low-tech ways to gain a forum, establish strong communication channels, and overcome turf sensitivities.

Questions for IT To Ask Claims
Here are a few icebreakers to begin with:
How significant do you think fraud is as a component of claims payments?
Do you see potential in fighting fraud to impact loss outcomes materially (and positively)?
In what lines of coverage or types of claims is fraud most suspected?
What are the markers or signposts of fraud the adjusters look for?
What software or hardware tools could help adjusters spot possible fraud?
In a perfect world, what kinds of tech tools would make it easier to spot fraud?

Such questions can start a fruitful dialogue between the CIO and the vice president of claims. In turn, this should trickle down to the IT staff and the front-line claims adjusters. These questions begin to dissolve the silo organizational structures that sometimes create friction between the line (claims) and staff (IT) functions within many insurance companies.

A key threshold decision is whether an insurer will leverage in-house IT resources for fighting fraud, use an outside vendor, or some combination of the two. Achieving fraud-fighting collaboration is necessary regardless of whether you want to build fraud-fighting infrastructure yourself and/or buy or rent it. Many complex systems for niche applications are best obtained from commercial developers that can spread the research and development over a larger market than can an internal IT staff. Successful fraud-fighting strategies blend high-tech tools with high-touch interpersonal strategies to forge effective, collaborative working relationships. The fight against fraud is not a once and done deal, something you cross off a checklist and then move beyond. It is an ongoingand, to an extent, never-endingprocess.

Chances are any Terminator 4 movie will not feature an apocalyptic war between insurers and fraudsters. We will not see Arnold Schwarzenegger glare at an arsonist and say, Ill be back. Nevertheless, the key to winning this war lies in blending the skills of the CIO with the claims department. Using these tips and strategies can transform an insurer into a terminator of fraud.

Kevin Quinley is senior vice president, Risk Services, Medmarc Insurance Group, Chantilly, Va. He can be reached at kquinley@medmarc.com.

Five Tips for Getting on the Claims Departments Fraud Agenda
1. Be selective about adjuster time demands.
2. Provide lots of lead time.
3. Ask for input on scheduling time to attack fraud.
4. Rememberthe claims team works with you, not for you.
5. Be flexible. In claims, despite the best-laid plans, stuff happens, to paraphrase a bumper sticker.

Build a Fraud-Fighting Scorecard For Results
Another way IT and claims professionals can team up together is by developing a results scorecard to keep track of anti-fraud outcomes. An old management maxim says, That which gets measured gets done. If you keep track of a fraud scorecard, it can provide a baseline for future comparisons. It may help motivate the claims staff to set new records and raise the performance bar on fraud fighting. Examples of a fraud-fighting scorecard might include:
Number of cases referred to prosecutors or law enforcement
Criminal arrests and civil complaints
Claims denied or reduced due to fraud
Claims referred to a Special Invest-igations Unit (SIU)