Recently, members of a Florida ring accused of staging fires and floods to make fraudulent home insurance claims were arrested. The suspects are accused of bilking homeowners insurers out of $7 million. Paul Bermingham, executive director of Xchanging Claims Services, a $1 billion business processing, procurement and technology services provider for the global insurance industry , explains why the industry needs to adopt a more holistic approach by incorporating a range of different measures that take advantage of technology and demand cultural and behavioral changes.
According to the National Insurance Crime Bureau (NICB), cases of suspected fraud in the U.S. rose 27 percent from 2010 through 2012, reaching more than 100,000 questionable claims. Fraud costs U.S. property and casualty insurers approximately $30 billion annually. Just look at the recent example that occurred in Miami, Florida in February. Twenty two people were charged in a major home insurance fraud ring totaling about $7.6 million in losses from various insurance companies. At least 17 fake home damage incidents such as fires and floods were staged and false claims were paid out to the fraudsters. This is just one example of many. In 2012, home insurance fraud in the U.S. was the second most popular type of fraud with 17,000 questionable claims made.
In the UK, the Association of British Insurers (ABI) cites that insurance fraud is currently more than a $1.6 billion a year industry with an average of 2,670 fraudulent claims made every week in the UK. The problem is also significant in Singapore as well, with the General Insurance Association of Singapore estimating that 20 percent of all automotive insurance claims paid (about $140 million) were fraudulent. Now, more than ever before, it is crucial for our entire industry – regardless of region – to protect itself and its honest policyholders.
Fraud has a negative effect both on insurance companies and consumers. Insurance companies are all too aware of its ability to grossly erode profit margins, not to mention the hours staff spend on efforts to combat the fraud, and consumers see their premiums rise.
The NICB found that automotive fraud was most prevalent, followed by home, workers’ compensation and employers’ liability, commercial automotive, and commercial general liability.
Insurance companies have taken steps to improve the ability to identify and address fraudulent claims, but these efforts are typically fragmented. Because of the lack of a collective industry approach – most carriers work independently. In relation to technology, insurers sometimes lack the proper data mining system to help identify potential fraud and the business processes to follow up on flagged claims activity. Another major issue prohibiting the discouragement of fraud is consumers’ tolerant attitude toward insurance fraud. And finally, it’s a challenge because insurance lends itself well to many different types of fraud. While the vast majority of fraudulent acts relate to first party fraud (such as is the case with the Florida fraud ring), third party fraud is also quite prevalent.
Many consumers are surprisingly tolerant about the idea of defrauding their insurer. A 2008 survey by the Coalition Against Insurance Fraud found that one in five adults in the US – that’s around 45 million people – felt that it was acceptable to defraud insurance companies under certain circumstances. Many of this group would probably be horrified to be labeled as ‘fraudsters,’ but yet they still harbor the Robin Hood mentality.
As the number of fraudulent claims continues to rise, fraud management has moved higher on the priority list of senior management. Some companies have invested in improving data quality and adopting technology tools, but many still lack the business processes, workforce competencies, and organizational structure needed to act on the insights gained from data analysis. Other companies have worked to enhance their operating model, but have failed to develop a clear strategy of what they hope to achieve.