As Digitizing Increases, So Does Fraud Risk

While digitizing has improved customer experience, sped service and cut costs, it also opened opportunities for bad actors to commit fraud.


Insurers have offered some level of digital capabilities for sales and service for years, but customers’ and distributors’ adoption has been slow. When the COVID-19 pandemic emerged, carriers had to evolve their digital offerings seemingly overnight. While this shift to digital improved customer experience, sped up service and policy issuance and cut costs, it also opened up opportunities for bad actors to commit financial and identity fraud. 

Strong digital capabilities mean insurers also need strong identity verification and fraud mitigation capabilities. The best way to keep the security up to date is to think of it as a continuous process, with regular evaluation of the defenses and enhancements or deployment of new solutions when necessary. 

The Rise of Digital Interactions

Insurance customers, like those in other financial areas, are at risk of identity theft. In most cases, this happens through a large-scale data breach, but it may also occur when a family member fraudulently purchases a policy, for example. As more interactions occur digitally, the number of fraud instances rises. 

Aite-Novarica Group research shows that more than 75% of carriers across life, personal and small commercial lines of business saw more digital activity from customers for both underwriting and claims in 2020. Underwriting data submission is seeing online activity grow significantly. For half of insurers, the rate of digital data submission grew by 50% or more from the year before. 

Other drivers of higher digital activity for life insurers include the adoption of electronic health records for use in underwriting, changing the way agents and customers interact. In personal lines, inspections can be conducted virtually, and artificial intelligence can help assess property or vehicle damage and move the claims process along independently. 

This higher rate of digital transactions is expected to continue, bringing in a new era for insurance carriers. While this shift is largely due to the pandemic, it’s also related to consumer preferences. Younger purchasers are increasingly buying goods and services across industries online, and older customers have familiarized themselves with these methods more during the pandemic. 

See also: Innovation in Fraud-Detection Systems

Emerging Risks

While digital interactions improve the customer experience, they also make carriers and policyholders vulnerable to a new level of risk. Sixty-seven percent of insurers noted that they have seen a higher level of fraudulent activity as a result of their increased digital traffic. Fraud has increased nearly evenly in three main areas: the point of application, the point of account access and the point of payment. 

Account takeover is of high concern for life insurers; the lack of advanced identity security available at call centers serves as an opportunity for those looking to commit fraud. They might call saying they forgot their policy number, then answer security questions with stolen personal data and reset the account password to take over the account fully. Property/casualty insurers have noted a rise in claims fraud through illegally obtained policies. 

Multilayered Approach to Minimize Customer Friction

Insurers should ensure their fraud mitigation and identify verification processes provide a smooth customer experience while also protecting all stakeholders from advanced fraud tactics like synthetic identities and stolen personal information. This should involve a multilayered approach that spans both functional areas and capabilities, assessing gaps and strengths. A multilayered approach requires merging data from all available sources, combining fraud solutions and increasing security controls based on specific user information. Multifactor authentication, digital fraud risk scores and link analysis can all help insurers address fraud risk. No single technology will detect and prevent all fraud, but, rather, a combination of solutions and coordination across functional areas will bolster defense throughout the policy life cycle.

To learn more about how insurers are combatting the increased fraud activity emerging with digital capabilities, read Aite-Novarica Group’s full report Insurance Fraud: Rethinking Approaches in the Digital Age.

Manoj Upreti

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Manoj Upreti

Manoj Upreti is a strategic adviser at Aite-Novarica Group. He has 15 years of experience in product development, market research and digital transformations in the life insurance, annuity and retirement industries.

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