The never-ending challenge of fraudulent schemes and scams perpetrated by fraud artists and insurance cheats is a formidable obstacle confronting insurers, adjusters, investigators, and prosecutors each and every day.
Insurance fraud is systemic and can threaten the financial stability of an insurance carrier. The recent, highly publicized Russian organized crime rings operating in New York are a clear indication that our society is not immune from sophisticated international crime syndicates that ply their trade on unsuspecting insurers. Committing insurance fraud is perceived to be a low-risk, high-return business and, often, the rewards are used to finance illicit activities such drug trafficking and organized crime.
Claim investigators continue to be educated and trained in new methodologies and investigative techniques. It seems, however, that there are never enough resources or expertise to tackle the problem — and it is a global problem.
The pan-European trade association estimates that the minimum total for insurance fraud each year in the 25 European countries represents EUR 8 billion ($10.1 billion), according to Dexter Morse, senior claim specialist with Converium Re-insurance in Zurich. In recent years, the United Kingdom has struggled to mount a concerted effort to tackle insurance fraud. Recent figures from the Association of British Insurers, which represents around 400 companies, estimate that insurance fraud is in the vicinity of $25 billion annually. Estimates put home and motor insurance fraud alone at $1.8 billion per annum, and rising.
In the United Kingdom, insurers have been frustrated by the lack of interest shown by law enforcement as insurance fraud spirals out of control. In most cases, insurers have had only one recourse: to investigate and, where appropriate, deny claims. Perpetrators of fraud were allowed a virtual conviction-free reign.
Now, the British insurance industry is in the process of implementing new initiatives, including pilot programs involving the sharing of data, while improving the level of cooperation among insurers, as well as working on new fraud detection methods. A recommendation has been made that the City of London Police and the Serious Fraud Office be allocated more funds to fight insurance fraud. The boundless nature of this crime, however, may undermine the centralized strategy currently being contemplated.
Despite the increased resources, data sharing, and continued education and training, it appears that claim fraud will continue to rise for many years to come. Insurers globally must develop a strategy, not only to reduce the cost of fraudulent claims, but to reduce the ever-increasing cost of managing the process. With margins shrinking and pressures mounting, insurers must now take a serious look at how to get the most from their adjusters and special investigation departments.
More Bang for the Buck
Many insurers have elected to outsource some non-core investigative functions, and those who have chosen this route have reported significant savings with improved efficiencies and a higher level of accountability from external vendors. "Corporations externalize business processes, not because it is the latest business trend, but because of two key incentives: cost efficiencies (economies of scale) and a broader market reach (economies of scope), each resulting in bottom-line benefit to shareholders and customers," wrote Joseph A. DiVanna, in his book, Synconomy.
As insurers contemplate the best way to handle their claim and fraud investigations, they also should look at ways to leverage the expertise and knowledge of external providers to help drive down costs. Insurers will continue to invest in technology that puts the data at their fingertips. What to do with the data is the next big challenge.
In time, I am sure that we will see a more holistic approach to the claim investigation process. The challenges of identifying, detecting, investigating, and prosecuting claim fraud perpetrators will be a service industry unto its own, allowing insurers to get on with the core business functions that they know best.
Phil Peart is the former Editor-in-Chief of Fraud International. Fraud International has been integrated into Claims.
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