The Biggest Fraud Challenges
FOR INSURANCE COMPANIES
The insurance industry is modernizing fast in numerous ways. Positive developments of modernization can also be found in the fight against fraud. However, insurers face several challenges in effectively responding to fraud. Some insurers have already taken their first steps, while most insurers are starting up their progressive programs. To stay ahead in dynamic times and to be sustainable in the future, it is time for insurance companies to convert words into action.
This ebook combines the top challenges when it comes to fighting fraud. Learn what these challenges are and what can be done to avoid pitfalls.
A challenge or an opportunity?
The biggest challenges in effectively responding to fraud are related to data. Protection and privacy, quality of internal data, and access to data sources are among top concerns for P&C carriers.
Legal Aspects of Data Protection and Privacy
Insurers have a responsibility to keep customer data secure and confidential. The insurance industry is built on the trust between insurers and their clients, but what happens when carriers want to expand? Privacy policies vary between countries and even states or provinces within them.
In the United States, for example, privacy laws are not as strict as in Europe, where they are less lenient, and the use of external data is increasingly becoming a sensitive topic. However, in Norway and Sweden, even tax returns are public information because transparency stands above privacy. Internationally-operating insurers will have to deal with such differences, and need vendors who understand and can operate according to those laws.
Inadequate Access to External Data
More and more, insurance processes are carried out from a distance. The insurers rarely visit a customer's home anymore and many policyholders prefer to settle their affairs online. Because of this, carriers need other ways to assess physical properties or businesses. External data sources provide that solution through generating information that wouldn't typically be offered to a carrier. Howeveer, the challenge lies in knowing which external data to leverage to minimize risks and optimize the lifecycle process.
During the underwriting process, external data can be used as a basis for acceptance, rejection or as input for pricing models. It can also improve overall portfolio health and combined ratios. The challenge here, though, is that the availability of external data varies per country, and new regulations, like the GDPR, could make it harder to leverage these resources.
Internal Data Quality
Here are 3 of the most common pitfalls:
Core System Changes
When carriers transitioned from filing cabinets to on-prem core systems, and now with our current jump to the cloud, data migrations haven't always been perfect. Data becomes scattered and sometimes that can mean someone's customer profile does too. Putting the pieces back together by hand can be a real challenge, and one that carriers don't have time to take care of themselves.
Enforcement of Data Quality
Many core systems allow you to input policyholder information without flagging something suspicious, like being born in 2970 vs. 1970. Although we all have finger slip-ups sometimes, this incorrect data can affect a book of business.
International Uniformity
For carriers that need to add information about a policyholder that has lived in different countries, or for those insurers that operate internationally, the formatting differences can be a pain in the neck between addresses and phone numbers alone. Data standardization is a must to give underwriters, adjusters, and investigators a clear policyholder overview.
When choosing an external partner make sure they have systems in place that are able to flag inccoracte data formats.
Why Fraud Detection Is a Priority
Fighting fraud is a manual operation in many companies. It's time consuming, frustrating, and occasionally error-prone, if not done correctly. With an automated system, carriers can almost immediately detect claims that need further attention or require an active follow-up, making their operation smoother and improving customer experience. This has a direct, positive impact on both brand protection and customer churn.
- Outdated Internal Fraud Systems
“Such an integrated solution makes working on and sharing of cases less error prone.”
Non-biased Alert Handling
Fraud investigations aren’t carried out at random. There is always a reason, feeling, or indication for starting an investigation. Nowadays, more and more techniques have been developed to detect unwanted bias too. With an automated system, the influence of bias and/or prejudice when investigating data will be limited. This will improve the quality of analyses and thus, the decisions that are based on them will be more reliable.
Artificial Intelligence
AI is transforming the way insurance companies work, and fast. It improves efficiency and accuracy in various processes throughout the policy lifecycle. However, it’s essential to use AI responsibly, ensuring transparency and fairness to foster trust. AI systems in insurance should clearly explain how decisions are made, so that both customer and regulators have full understanding of the processes.
Generative AI (GenAI) is also making a significant impact, helping insurance professionals extract valuable insights from unstructured data sources, such as customer service transcripts, claims notes, and policy documents.
Leverage the advantages of STP
It is virtually impossible to screen all incoming claims manually. Let alone keeping up with high, and constantly changing, compliance regulations. Automating the process by scoring claims through a predefined model helps. The claims that score below a certain threshold can immediately be paid out. Only claims that score above the threshold need to be looked at, either by senior claim handlers or by a fraud investigator. Automated tools will leave fewer fraud cases undetected. Furthermore, fraud tools will potentially enable a high level (as high as 90%) of claims and policy applications that will be straight-through processed.
Prevent Rather Than Cure?
The leading insurance companies actively work on managing fraud and risks within their portfolio. These companies are using proactive measures to remove fraudsters from their portfolio and actively prevent potential fraudsters from entering. The bigger portion of the insurers, though, still rely on a “cure rather than prevent” strategy only. For these companies, the only option to cover their fraud losses is to raise additional premiums. Here, the honest client is directly paying the fraudster’s salary.
“Sharing data between companies could help to prevent, detect, and investigate insurance fraud.”
Insurers unite!
If a person is charged with committing insurance fraud, the chances are that other insurers are, or were, confronted with the same scheme from the same person. In most cases, once they're caught, their current policy would be immediately invalidated. However, they can still jump between carriers. By sharing information between insurance companies, these fraudsters can be identified and prevented from committing the same scheme over and over.
The information gathered on people, objects, and past claims helps carriers to make accurate and objective decisions on how to manage fraud and risk within their portfolio. Insurers greatly benefit from having access to more and more data. Ever-growing data lakes can be used to detect fraud at an earlier stage. Sharing data between companies could help to prevent, detect, and investigate insurance fraud.
To achieve a sustainable growth, it is crucial to gain extensive insights in the risks associated with the new potential clients.
A Fraud Fighting Culture Impacts The Entire Organization
- Actively involve senior management
- Train staff
- Align the Key Performance Indicators (KPIs)
Conclusion
The challenges described in this ebook are just the tip of the fraud fighting iceberg. New means of communication and new technologies are adapted each day and it can be hard to keep up.
What it boils down to is the importance of creating a fraud fighting culture – the sooner, the better. An automated fraud detection system can greatly help a company in creating such a culture. But it is not the end game. Regular trainings, C-level commitment, new processes and the sharing of learnings are just as important. Effective fraud fighting is an ongoing process of adaption and optimization.
Insurance companies are only able to work on a limited number of projects. Projects that are not critical for the company are postponed. Often, automated fraud detection is one of those postponed projects. For instance, the implementation of a new core system. This type of project is a tremendous undertaking and typically requires significant resources which creates a competitive disadvantage. Fortunately, automated fraud detection goes hand-in-hand and can be implemented during a core systems project.
Fraud should not be tolerated! Honest insurance requires automated fraud detection. Organizations should invest time, money and effort to overcome their biggest fraud challenges. Only then, both the organization AND its honest customers will be rewarded.
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:
Commercial Insurance – Fighting Fraud
With One Hand Tied Behind Our Backs
