The insurance industry consists of more than 7,000 companies that collect over $1 trillion in premiums each year. The massive size of the industry contributes significantly to the cost of insurance fraud by providing more opportunities and bigger incentives for committing illegal activities.
The total cost of insurance fraud (non-health insurance) is estimated to be more than $40 billion per year. That means Insurance Fraud costs the average family between $400 and $700 per year in the form of increased premiums.
Insurance Fraud Bureau (IFB) data revealed that over twenty one thousand fraudulent motor policies were potentially linked to ‘ghost broking’ in the previous 12 months, with the ABI stating almost a six-figure sum of fraudulent motor applications being confirmed or suspected. With the threat of insurance fraud ever-present and with criminals continually probing insurers and brokers to uncover gaps, a mixture of artificial intelligence, data science and digitally skilled investigative colleagues are vital in the industry-wide fight back. We are discusses current insurance fraud trends, while sharing her own examples of how technology and talent are being deployed to tackle insurance fraudsters.
IFB analysis finds there is an insurance claim linked to ‘crash for cash’ schemes every four minutes – just one of many strategies in the organised fraud playbook, which continually expands and develops.
These strategies often link to topical or current events – indeed, we’re still internally identifying evolving insurance trends caused by pandemic disruption. For example, we saw a direct correlation of insurance fraud spikes every time lockdown restrictions lifted and the teams had to be at the top of their game!
What is Insurance Fraud?
Fraud occurs when someone knowingly lies to obtain a benefit or advantage to which they are not otherwise entitled or someone knowingly denies a benefit that is due and to which someone is entitled. According to the law, the crime of insurance fraud can be prosecuted when:
- The suspect had the intent to defraud. Insurance fraud is a “specific” intent crime. This means a prosecutor must prove that the person involved knowingly committed an act to defraud.
- An act is completed. Simply making a misrepresentation (written or oral) to an insurer with knowledge that is untrue is sufficient.
- The act and intent must come together. One without the other is not a crime.
- Actual monetary loss is not necessary as long as the suspect has committed an act and had the intent to commit the crime.
What Types of Insurance Fraud or Other Crimes Does the Fraud Division Handle?
The Fraud Division is responsible for enforcing the provisions of Chapter 12 of the California Insurance Code, commonly referred to as the Insurance Fraud Prevention Act. Current law requires the Fraud Division to investigate various felony provisions of the Insurance Code as well as other crimes including California Penal Code, Sections 548-550 and California Labor Code, Section 3700.5. Investigations conducted by the Fraud Division usually involve some aspect of suspected insurance fraud or other related crimes.
Cases investigated by the Fraud Division most often consist of criminal acts involving automobile property and personal injury, workers’ compensation, health insurance and residential and commercial property claims.
The changing market for insurance fraud
Digital adoption accelerated during Covid, in particular the use of apps and online portals for self-service and claims reporting. This digital focus increases the threat of account takeovers being used for fraud purposes – such as ID theft, changing the details of a genuine customer, or hijacking a legitimate policy. Also, with vulnerable customers increasingly embracing digital channels, consumer protection becomes even more important (see 3 trends reshaping the insurance).
More established organised fraud tactics also continue to impact the industry. These include ghost broking, where impersonation of legitimate brokers remains a concern, especially given this strategy tends to target more vulnerable communities.
As the conflict in Ukraine displaces millions of citizens, there is the possibility of a further increase in the rate of this.
Furthermore, across the industry, issues such as the use of deep fakes for fraud purposes are also emerging – from heavily doctored photos and documents, through to voice re-creation.
Insurance fraud is a deliberate deception perpetrated against or by an insurance company or agent for financial gain. Fraud may be committed at different points by applicants, policyholders, third-party claimants, or professionals who provide services to claimants. Insurance agents and company employees may also commit insurance fraud. Common frauds include “padding” (inflating claims), misrepresenting facts on an insurance application, submitting claims for injuries or damage that never occurred, and staging accidents.
People who commit insurance fraud include:
- organized criminals who steal large sums through fraudulent business activities,
- professionals and technicians who inflate service costs or charge for services not rendered, and
- ordinary people who want to cover their deductible or view filing a claim as an opportunity to make a little money.
Some insurance lines are more vulnerable to fraud than others. Healthcare, workers’ compensation, and auto are generally considered the most affected insurance sectors.
Digital in insurance
We already had pre-Covid plans underway to significantly ramp-up and invest in the tech stack in place for counter-fraud operations. This focus has continued, delivering a robust counter-fraud set-up. Under our current system, the models we have work in around 20 milliseconds, with our platform being scalable enough for us to block many fraudulent quotes per second if required (see How InsurTechs & Tech-Driven Innovation Changing the Insurance Industry?).
On the customer side, it’s important to recognise that people still want the convenience offered by digital channels. Therefore, the onus is on us to blend automation with checks for that perfect balancing act of safety and convenience.
By taking this approach, we can save a lot of vulnerable customers from these types of exploitation – without compromising on service levels or customer experience.
Unlocking the full counter-fraud value of data
Although identified motor fraud rates remain low for us – even reducing between 2019 and 2020 while market rates increased – fraudsters are continually evolving their tactics to try and avoid insurer counter-fraud efforts. Data comes to the rescue here, often sourced from price comparison forms, spanning some 140 fields of information for pre-sale fraud analysis. This data alone can be manipulated into thousands of features for fraud identifiers.
But insurers and brokers will first need to achieve data hygiene to unlock full counter-fraud potential.
Data must be ethically gathered and analysed in a secure method that respects customer rights and privacy.
Firms in the industry will need to enact full data usage reviews to ensure they are harnessing insight for maximum operational value, while ensuring full compliance.
Data can then be used to analyse and understand fraud trends as they emerge, linking these to contributing factors, or topical themes where relevant, to tackle application fraud at the earliest possible stage – and in turn also reducing it at the claims stage (see Insurance Claims Management. How Big Data & AI Technology Helps InsurTech?).
Don’t neglect the ‘human touch’
In all this, there remains a strong human element required in delivering a successful counter-fraud strategy, which is why BGL Insurance has nurtured more specialist, tech-focused counter-fraud skills and heavily invested in its people – including by recently establishing a new colleague skills and development framework.
We’re seeing demand for training and retaining talent intensifying across many industries where fraud has seen a major uptick.
Other industries have found themselves vulnerable to both opportunistic and organised fraud – experienced fraudsters plus new, emerging threats. As a result, counter-fraud skills are heavily in demand across the board.
Algorithms flag insurance fraud at point of quote
Given the sheer volume of quotes and policies we handle every day, there was clear need to introduce advanced data science techniques. AI and machine learning are now a critical part of our counter-fraud strategy.
This focus on data-driven solutions has led to algorithms being deployed to detect fraud at point of quote and granular modelling for post-sale analysis.
This has succeeded in cutting detection rates down from an average of 50 days, to less than a week.
But algorithms need to keep up with fraudsters’ tactics. They deteriorate over time – they need daily updates to prevent new fraud tactics slipping through the cracks!
Where next on the insurance fraud front?
We’re certainly aware that in response to new tech and data-driven defenses, organised fraud groups are increasing their use of advanced tech such as bots, for example, as a way to apply for large volumes of fraudulent policies.
There will always be an ongoing cycle of fraud trends and so the challenge remains to identify these as early as possible, blocking fake quotes, policies, and claims accordingly. Topical scams will likely continue post-Covid, although we expect scam financial services ads to decline now they fall under the remit of the imminent Online Safety Bill.
AUTHOR: Julia Walker-Smith – Associate Director, Underwriting Services & Customer Support at BGL Group