Insurance Digital Transformation
Maximizing opportunities through fraud mitigation
Introduction
Digital transformation has accelerated for the insurance industry during the pandemic, and that momentum is continuing as organizations look to increase their digital investments. But the promise of faster, easier, remote access to data – as well as greater efficiency and service to insureds – comes with a downside: fraud.
For many criminals, insurance fraud seems like an easy pathway to profit. A pair of brothers in Philadelphia thought so when, after years of going without insurance on their business, quickly obtained $750,000 in coverage and set their failing hookah bar ablaze to collect on a fraudulent claim. Unfortunately, their story is a dramatic illustration that insurance fraud is far from a victimless crime. The brothers’ arson destroyed a historic neighborhood, killed pets and drove hundreds of people from their homes and businesses, causing at least $20 million in damage. Several neighboring businesses had to close their doors permanently. Each brother was sentenced in 2021 to nine years in prison and forced to pay restitution of $22 million.
According to the Association of Certified Fraud Examiners (ACFE) report, "The Next Normal: Preparing for a Post-Pandemic Fraud Landscape," 51% of organizations have uncovered more fraud since the onset of the pandemic, and 71% expect the level of fraud impacting their organization to increase over the next year. Certified Fraud Examiners estimate organizations lose 5% of their revenue to fraud every year. By this measure, the U.S. P&C industry in 2021 lost more than $30 billion to fraud in underwriting, claims and operations. Insurers can protect growth and profitability by focusing on mitigating fraud risks.
Some insurers are fighting back against fraud. For example, Erie Insurance Group has established a program called Fraud Finders, which lets customers report suspected fraud, and makes a variety of anti-fraud education resources available, including videos that illustrate types of insurance fraud.
Debate surrounds the emergence of generative AI, or GenAI, and its potential to revolutionize fraud tactics. The concern lies in whether bad actors will exploit GenAI at a pace surpassing legitimate use, akin to hacking services. This prompts questions about investment in both customer support and fraud protection infrastructures.
Digital Transformation: A Coin with Two Sides
As insurers pursue digital initiatives to bring efficiencies, enhance service and improve the customer experience, companies are also seeing more claims and underwriting fraud. The same digital environment that makes it easier for customers and employees to interact, also assists those inclined to commit fraud. The challenge is continuing to innovate while approaching fraud mitigation holistically. An ACFE benchmarking report indicates nearly three-fourths of organizations see fraud detection and prevention as slightly to significantly more challenging today, and 55% of organizations expect to boost their anti-fraud technology budgets in the next two years. Fortunately, tools exist to vastly improve anti-fraud efforts, so insurers can focus on profitable growth.
The Promise of Digital Transformation
Insurers are reinventing their businesses through digital technologies for various reasons. A main one is customers' rising expectations for convenient, fast and seamless digital experiences. Operational efficiencies offer benefits in all phases of the policy lifecycle, from quoting to underwriting to billing to claims. Legacy systems and manual processes not only slow down transactions, but also can make it harder for companies to obtain a complete picture of a customer's account. Digital transformation lets insurers pull diverse data sets into a single view, engage each customer more deeply, offer additional coverages, and make informed decisions about managing their risk portfolios and growth strategies.
The Secret to a Great Customer Experience
Making insurance more digital is great for improving the customer experience. For example, automation of certain processes and new online portals can accelerate previously time-consuming tasks and increase customer convenience. But the true secret ingredient to a great insurance experience is fraud detection and prevention. Fraudulent claims have multiple, long-term impacts. Fraud hikes costs for all customers, erodes insurers’ profitability and slows their operations. Fraud detection and prevention that functions in real-time or near real-time and at scale is the solution to making insurance work to the benefit of all.
Artificial Intelligence and Filling in Missing Data
Insurance applications that contain false information are problematic for underwriting and claims departments. But applications that omit certain data are also a problem. For example, legacy systems that can only handle structured data might be missing critical information that could influence the insurer's decision to quote, price and bind accounts. In financial services, know your customer (KYC) programs are critically important. For insurers, a 360-degree view can mean the difference between a profitable account and a costly mistake. Artificial intelligence (AI) models can identify trends and patterns in structured and unstructured data, filling in relevant facts that otherwise might be missing in a customer's risk profile.
One insurer underwrote a nail salon that it later discovered had a liquor license and hosted events where it served alcoholic beverages. The existence of the liquor license and hospitality business didn’t show up in the salon’s risk profile because the insurance application never asked about such activities. Data capture that uses legacy processes can miss significant risk factors that not only deprive insurers of adequate premium but also can drive up claim costs.
Despite its potential, the adoption of AI necessitates vigilant oversight and accountability. The specter of AI-induced hallucinations underscores the importance of ethical AI governance and regulatory compliance. Insurers must prioritize transparency and responsible AI usage to maintain customer trust and regulatory integrity.
Looking Beyond Traditional Data Sources
While most of the information an insurer needs for underwriting and claims may come from the customer, it's important to look beyond traditional data sources to gain a complete picture and uncover potential problems. Third-party and open-source information – including but not limited to unstructured data in email, documents, claims notes, videos and social media – can supplement an insurer's own data.
A real-life example: An insurance company was having a very difficult time reaching a customer about a claim, who didn't respond to repeated attempts to reach him. A search of open-source data revealed the customer had been convicted and was sitting in jail in another country. AI and network analytics are important tools that can show connections insurers might otherwise miss.
About FRISS
FRISS is the leading provider of Trust Automation for P&C insurers. Real-time, data-driven scores and insights prevent fraud and give instant confidence and understanding of the inherent risks of all customers and interactions.
Based on next generation technology, the Trust Automation Platform allows you to confidently manage trust throughout the insurance value chain – from the first quote all the way through claims and investigations when needed.
Thanks to FRISS, trust is normalized throughout the organization, enabling consistent processes to flag high risks in real time.
Further reading:
Insurance Fraud Report 2024
FRISS’ survey of insurance professionals explores the trends and developments in fraud, the most commonly encountered fraud schemes of the past year, and the top challenges of insurance fraud detection.The arson story
Read more about the Philadelphia arson story.Navigating the AI storm: balancing threats and opportunities in insurance fraud detection
By leveraging AI automation and GenAI intelligently, insurers can enhance fraud detection capabilities while mitigating risks to consumer data.Mastering tomorrow: the role of AI in revolutionizing insurance fraud detection
In the dynamic realm of insurance, adaptation is paramount. Emerging trends, particularly the integration of Artificial Intelligence is reshaping the landscape of fraud detection and prevention.How Real-Time Fraud Analytics Enables Real-Time Decisions
A FRISS blog discusses the features and data sources insurers should look for in fraud management technology, and how real-time analytics can support real-time decision making.
