Insurance fraud has been around since, well, the beginning of insurance.
The ancient Greeks created a form of maritime insurance to indemnify against potential losses incurred with the sinking of a commercial ship in transit. It became a common scheme for the boat owner to hide the boat in a foreign port and collect the insurance money. Even in those early times, special investigators were hired to determine if the boat had indeed sunk.
Fast-forward to the present, and, for the last few decades, the industry has been using increasingly sophisticated technology to address fraud. Now, several technologies can change the game for detection.
For example, machine learning, social media and aerial imagery can all contribute. All generate and rely on massive amounts of data, including many new data sources. Whether we are talking about opportunistic fraud or organized crime rings – these technology areas provide terrific opportunities to combat fraud.
Of course, fraud may occur during the underwriting OR the claims process. When a person or business is applying for insurance, there is always the potential to purposely supply incorrect information to get a lower rate. On the claims side, fraud may occur at many points during the lifecycle. In the case of staged accidents, it is occurring even before the accident occurs.
So how is the advance of technology aiding in fraud detection today? First, let’s look at new data sources.
Rate evasion can be more easily spotted today due to the wide variety of new data sources that can provide checks on the information provided by a customer or agent. For example, for auto, it is easier to spot true garaging locations or identify if a vehicle has been in a flood. For property, there is a wealth of data about the current characteristics of the property.
When it comes to machine learning, big data approaches with massive computing power and huge data sets can spot patterns and anomalies that it would be impossible for humans to spot – and do so with a lower rate of false positives. Social media has become a central tool for investigators and law enforcement, especially for workers’ comp fraud. We’ve all heard stories about individuals claiming disabling injuries then show up in Instagram pictures skiing or skydiving. The social media universe also yields a lot of information about connections between various individuals and businesses that can be mapped to identify fraud rings. Using aerial imagery, it becomes easier to compare before and after pictures of a property to determine if damage was caused by a particular weather event.
One of the biggest benefits of all this new capability is that technology allows fraud to be detected significantly earlier in a claim and with greater accuracy, so that Special Investigative Units (SIUs) and claims processes are more effective (compared with before, when SIUs or management found out about a fraud three to four weeks or longer after FNOL, by which point it was too late).
There is still much work to be done to find the right solution partners, integrate new solutions with existing systems and determine the optimum balance of technology and human expertise. But there is now greater potential to finally make significant headway in reducing fraud, especially the potential for earlier identification and more accurate outcomes. That’s what’s new and encouraging in this long-running battle!
The FBI reports that the total cost of insurance fraud is estimated to be more than $40 billion per year, costing the average U.S. family – in the form of increased premiums – between $400 and $700. A long-established and growing problem, insurance fraud has its many guises – ranging from tiny, one-off opportunistic cases to multimillion-dollar syndicates of customers and suppliers working together to routinely defraud insurers.
Luckily, digital enhancements within the insurance industry have been able to help companies lessen certain fraud risks – particularly when data analytics is brought into the mix.
To remedy insurance fraud using data analytics, individuals and businesses must be analyzed as they exist in the real world – as holistic, connected entities. To make these kinds of connections accurately, detection strategies must process high volumes of data in real time, be able to generate and constantly update a view of entities and apply a scoring model to the full picture. This allows companies to track and catch fraud, even across insurance lines and when multiple people are involved.
Fortunately, there are now technologies that are able to do just that – detect fraud and understand risk throughout a customer’s lifecycle. This will, in the long run, provide better claims processing and a healthier insurance system.
Quantexa, a data analytics firm that uses AI technology to piece together suspicious customer behavior, enables companies to make better decisions with their data. Their technology allows users to knit together vast and disparate data sets and derive actionable intelligence, a task that would normally take a human many months to complete. This technology can be focused on a single person and the many data points that are correlated to him or her, or larger entities such as corporations.
Technology like that of Quantexa’s can gather both claims and policies and build a network that provides three levels to which one can apply analysis:
The claim: This analyzes claim behavior over a long period. For instance, has a person filed for soft tissue damage multiple times? If so, how often and at what rate? This frequency could be a marker for fraud. There is also the ability to review if claims are filed close to when policies are taken out – another marker for fraud.
The entity: The entity can be either a claimant or, say, a medical provider; the analysis lies within the relationship between the two entities. Believe it or not, there are instances where medical providers have intentionally and habitually provided the wrong injury code; for example, if a claimant is in the hospital for an injured leg, the medical provider bills the insurance company for a more expensive procedure, such as a hysterectomy. Technology can detect and assess injury code discrepancies.
The network: This is based on the density of relationships and connections between claimants, witnesses, medical providers and beyond, and can stem from both claim information and transactional data. For instance, are multiple claims from “different” claimants all going to the same bank account? Factors can be pieced together to paint a larger picture on where fraud is originating.
Technology allows fraud to be detected much earlier on and across much larger schemes than humans ever could – a fact that should give thieves something to be concerned about, and all honest insurance policyholders something to rejoice about.
As the insurance industry races to adopt new technologies and stay one step ahead of the insurtech disruptors, blockchain has become a widely discussed topic. With use cases in fraud protection, risk management, claim processing and smart contracts, blockchain has a promising future with benefits for both independent agents and carriers. Although adoption is still in its initial inception, interesting pilot use cases are popping up across the industry.
Blockchain’s greatest value lies in its distributed ledger technology, which acts as a uniform source of truth. This technology is very hard to hack and provides a wealth of benefits to every member of the insurance distribution channel. Let’s take a look at some of the ways blockchain is being used in insurance today.
In my experience and research, the most commonly discussed use case of blockchain lies in the execution of smart contracts. For those unfamiliar with the concept, blockchain’s distributed ledger allows one computer to register an outgoing transaction and then enables a peer group of computers to validate and accept the transaction through a consensus-driven approach. This means that copies of the transactions are now stored in a distributed fashion across the network, and hacking or altering this information will require more than 50% of the computers in the network to be compromised simultaneously. This ensures that the source of truth is preserved and protected in a robust fashion and can be accessed by any legitimate party with the right permission levels.
While the execution of smart contracts in travel insurance has already made a splash – see AXA or FlightDelay or Lemonade – there remain other use cases that are sure to make a large impact. One example is flood insurance. In areas prone to heavy rainfall and flash floods, insurers can use regional geological data to automatically trigger insurance claims. Meaning, once flood waters reach a predetermined level, a smart contract trigger will spontaneously file a claim for the insured. Another application with a similar process is earthquake insurance. If an earthquake were to occur above a certain magnitude, the smart contract would initiate the insured’s claim based on regional geological data and preset factors in the contract.
I also see blockchain expanding into the auto insurance space through the use of telematics devices. These devices are already able to track data in terms of wear and tear, collisions and driving patterns. Such data can be used to calculate insurance premiums that are more targeted and personalized. In a broader sense, IoT-based sensor data can power the metered insurance space in the shared economy (Uberization).
For both the insurer and the insured, the smart contracts built on the blockchain will drive more efficiency across the insurance value chain. A key factor in the expansion and adoption of smart contracts in the insurance industry is data. Smart contracts are only viable if there are external sources of data that are validated and reliable. The more data that is universally shared and available, the more innovative insurance products will be adopted.
Fraud Protection and Proof of Insurance
The FBI estimates the U.S. government spends more than $40 billion per year on insurance fraud, leading to my next, and possibly most compelling, application of blockchain. With an aggregated repository of data that is validated and maintained by carriers, agents and government entities, it becomes easy to track down insurance fraud spanning multiple carriers. IBM has already announced a new framework for securely operating blockchain networks to directly fight insurance fraud, and I expect more companies to follow suit.
In addition to fraud protection, blockchain technology is powering another compliance innovation: proof of insurance. In December 2017, a consortium of insurance leaders dubbed the RiskBlock Alliance launched RiskBlock, a proof-of-insurance tool built on the blockchain framework. It was designed to help insurers, insureds and law enforcement simplify how they verify insurance coverage in real time, eliminating the need for paper-based insurance cards. Nationwide is already in the pilot stage with RiskBlock and hopes to expand the program this year.
Insurance Distribution Model
Despite new insurtech entrants disrupting the industry every day, innovations such as blockchain ensure that the insurance agent will always remain the cornerstone of the insurance distribution model. As reported in the examples above, the common theme among the benefits of blockchain’s distributed ledger technology — the ability to automatically file claims, process data and inform policies — drives efficiency and visibility into the entire insurance ecosystem. For carriers, a uniform and validated data source allows transparency into risk assessment, underwriting and a channel to reach the end-insured directly. With automated processes executed through blockchain, brokers are able to focus on building relationships, expanding their offerings and solidifying their role in the distribution model. Similarly, customers benefit from personalized and increased touch points, leading to better tailored insurance policies and cost efficiencies. As these relationships grow, so does the velocity of business…it’s a win-win for all the constituents in the value chain.
We are only just beginning to see the potential of blockchain technology in insurance. With blockchain and insurtech startups, coalitions such as RiskBlock Alliance and major carriers leading the charge, the insurance industry is poised for an imminent digital revolution.
An agent received the following email from a customer:
“A few people are telling me to save money on car insurance by NOT telling the insurance company who is driving my cars. I have a 23- and 16-year-old – the older one had two accidents, but her premium is reasonable at $2,300 per year for good coverage. These people are telling me that the cars are covered no matter who is driving so don’t tell them about your kids.”
These “people” are allegedly other agents bidding on her personal lines account. I don’t know about you, but I call this email insurance fraud. I suspect most regulators and state attorney generals would concur. For example, here is just one of many fraud statutes from Florida:
817.236False and fraudulent motor vehicle insurance application: Any person who, with intent to injure, defraud, or deceive any motor vehicle insurer, including any statutorily created underwriting association or pool of motor vehicle insurers, presents or causes to be presented any written application, or written statement in support thereof, for motor vehicle insurance knowing that the application or statement contains any false, incomplete, or misleading information concerning any fact or matter material to the application commits a felony of the third degree, punishable as provided in s. 775.082, s. 775.083, or s. 775.084.
A felony conviction is not an inconsequential thing, nor are the civil penalties and possible incarceration associated with insurance fraud laws. In addition to the fact that insurance fraud is illegal in every state, those that have adopted the NAIC’s Insurance Fraud Prevention Model Act or their own version of that law make reporting of such fraud mandatory. For example, the model act says:
“A person engaged in the business of insurance having knowledge or a reasonable belief that a fraudulent insurance act is being, will be or has been committed shall provide to the commissioner the information required by, and in a manner prescribed by, the commissioner.”
The industry and state regulators encourage the reporting of insurance fraud. States with mandatory reporting requirements usually have mechanisms for confidentiality and immunity. If you’re an agent who is aware of this market conduct, have you reported it? If you’re an underwriter or adjuster who is aware of an agent who has engaged in this practice, have you reported it in addition to terminating the agent?
In my blog, I often give “big data” a hard time, but this is an example of how it can supplement underwriting and claims. In a recent blog post, I expressed my distaste when my personal lines carrier sent me an additional auto insurance bill for almost $600 because it apparently learned that my son, who moved out three years ago, still gets his vehicle registration renewal mailed to our house. The presumption, without verification from us, was that he still lives here.
I don’t have a problem with this practice, just with the execution and presumption (from my viewpoint) that I’m dishonest. There is nothing wrong with verifying information provided by an insured or agent, and ‘big data,” without misplaced overreliance, can be a viable tool for that purpose. This is one reason why an agent who engages in the fraudulent behavior described above is being foolhardy. With the growth of data analytics, more and more agents are going to get caught engaging in this type of fraud. And I hope that carriers will have the backbone to report them and get them out of the business.
This is not a singular or unique tale. I’ve heard it from agents before. Too many agents compete unethically, and some do it illegally. Whether it’s the personal lines agent deliberately underinsuring a home with a “guaranteed replacement cost” provision or the commercial lines agent undervaluing property insured on a blanket basis without a margin clause, the offender needs to be reported and driven out of the insurance industry.
Are you willing to do your part in cleaning up the insurance fraud swamp?
In our previous post, on claims, we highlighted the importance of claims as a customer touch-point – a poor claims experience is indeed a leading cause of customer churn. However, fraudulent claims are also a massive area of carrier losses. There is a tricky balance to be struck here. Treating every claimant like a potential criminal is an obvious no-no, but objective scrutiny must exist at some point in the policy lifecycle.
Fraud is the dark matter of the insurance universe. Discovered cases cost insurers (and ultimately policyholders too) millions every year, and its full hidden extent can only be guessed at – it is in some sense the gap between how risk models should work and how they appear to work on the ground, with undiscovered fraud ultimately getting priced into premium costs.
Derek Brink, VP and research fellow in information security and IT GRC at Aberdeen Group, recently estimated the cost of fraud at between 5% and 10% of insurers’ annual revenue, noting also that it takes firms a median time of 20 months to detect continuing fraud. Every penny saved on fraud is an additional penny back onto insurers’ bottom lines, and what defeating fraud would ultimately mean is that they could offer their policyholders more competitive prices.
“Fraud concern is no newcomer to the insurance industry, especially in the healthcare and motor lines of business. The fact that the internet is not attributable has made the fraud situation even worse as digitization proceeds at a pace.” — David Piesse, chairman of IIS Ambassadors and ambassador Asia Pacific at International Insurance Society (IIS)
In this post, we assess both the size of the fraud problem and a range of approaches for containing it. The following stats and outside perspectives are drawn from our Global Trend Map; a breakdown of all survey respondents, and details of our methodology, are included in the full report, which you can download for free whenever you please.
People most readily associate insurance counter-fraud with the claims department, because this is where fraudsters cash in and has historically been the point in the cycle where most frauds get unmasked. However, there is a limit to how far reactive approaches to fraud can take insurers, and stopping fraud closer to its roots is certainly preferable to focusing exclusively on the “final mile” (namely claims) for its interception.
It’s clear that the next generation of counter-fraud will be cross-functional, tracking potential fraud indicators across the entire insurance lifecycle. We asked insurance carriers to indicate which departments were currently involved in combating fraud within their organizations.
Understandably, we see a large role attributed to dedicated fraud departments as well as to claims departments, and this is unlikely to change moving forward (the less than 100% figure for fraud departments may be due to the counter-fraud function sometimes being subsumed elsewhere). Other departments that stand out as having central roles are senior leadership, operations, analytics, underwriting and risk.
“If you stop fraudsters coming into the business in the first place then you have to spend less from the beginning, enabling you to improve the journey for other, genuine customers. But it’s difficult to get that balance in a competitive marketplace as the investment isn’t so obvious. It requires a change of mind-set.” — John Beadle, head of counter fraud and financial crime, RSA
The fight against fraud is by no means limited just to carriers. Indeed, with the shift toward more active counter-fraud approaches, greater attention is being brought to bear on indirect channels. Historically, brokers and affiliate partners have been given incentives primarily on a volume basis and have directed plenty of bad business toward carriers. Insurers can therefore make substantial savings by educating their brokers and affiliates on best practice, to root out fraud at the application stage before it ever enters their wheelhouse – although they obviously need to tread a fine line between on-boarding bad business and turning away good customers.
“Part of the problem is the appetite for fraud detection in the broker channel. We’ve had to convince brokers to protect us against fraud because, by sending us that business, they ultimately end up suffering, too. Brokers see sales as a volume and growth business rather than one built on quality, and, as a company, we are always interested in quality.” — Steve Jackson, head of financial crime at Covea Insurance.
A couple of general stats
An overwhelming majority (92%) of our carrier respondents believed fraud is increasing, and we saw a similar level of concern from the rest of the industry.
29% of carriers believe that the majority of insurance fraud goes undetected, and 59% believe that some insurance fraud goes undetected (12% don’t know). The rest of the industry are in line with this assessment.
Slaying the Dragon: Approaches for Defeating Fraud
We don’t have scope here to explore specific counter-fraud solutions in detail. However, we did ask our respondents and industry contributors about different high-level approaches. These include before-the-claim strategies, data-sharing coalitions, the Internet of Things (IoT) and blockchain technologies.
“We can look at using smart technologies that look at probability and profiles of individuals’ past behaviors. If someone fits a certain profile, there is a higher probability they will be a fraudster. It’s an interesting area but also dangerous.” — Steve Jackson
i. Before-the-Claim Strategies
By identifying policies intended to facilitate fraud at the time of underwriting, insurers can prevent fraud advancing to the point of a claim being made; as a general rule, the more relevant data that can be pre-populated, the fewer opportunities there are for opportunistic fraudsters at the application stage. This directly reduces the amount of fraud that gets through the lines and helps also to unburden the claims department. Encouragingly: Two-thirds of insurers and reinsurers indicated that they had a before-the-claim fraud strategy.
Fraudsters do not just recycle specific items of (fraudulent) data but also deploy the same distinctive methodologies against multiple targets. Effective data-sharing in counter-fraud means that, once unmasked, a fraud tactic is truly disarmed. Reassuringly then, we registered universal approval for this sort of initiative from the entire industry.
94% of insurers and reinsurers are in favor of a data-sharing coalition to prevent fraud.
iii. Internet of Things
When it comes to IoT, much of the attention is on preventative and value-added services (check out our earlier post on the topic). However, one of the more immediate boons of the technology is its role as a fraud deterrent.
Take workers’ compensation insurance in a factory or construction environment, for example. Installing IoT devices onsite for monitoring purposes makes it much more difficult to dress up instances of non-compliance for the purpose of inflating a claim (or making one in the first place), and means compliant clients can be treated accordingly. IoT also applies to personal lines: With full transparency over where a car has been and what motions it has undergone, auto customers are, generally speaking, less likely to lie about or exaggerate what has happened.
At the same time though, IoT can also be a new attack vector for fraud. By hacking an IoT device, you could in theory spoof whatever behavior you want, to deceive your insurer – which would be particularly attractive if target-based discounts were in play. Imagine hacking your FitBit to show 10km of jogging a day while you remain safely ensconced before your television awaiting your health-insurance rewards. So cybersecurity is as important for the insurance aspect of IoT as it is for every other.
Another multi-faceted technology with clear applications for counter-fraud is blockchain: a distributed ledger for recording transactions between different parties without relying on a trusted (though oftentimes untrustworthy) central authority for verification. We spoke briefly to David Piesse, chairman of IIS Ambassadors and ambassador Asia Pacific at the International Insurance Society (IIS), to find out more:
“The emergence of the new internet, commonly called the blockchain, means we no longer have to trust the internet but in fact can make sure it tells the truth. In Estonia, they wrapped the internet with a blockchain technology that has removed digital fraud from the healthcare sector in that country, and this is now being applied elsewhere.
“It’s possible to map the blockchain protocol over the insurance combined ratio, with fraud and expense reduction on the top line and an increase in earned premium on the bottom line via new product and operational efficiency. This can give the C-suite an opportunity to see the effect of the new technology on their profitability before investment income.”
Blockchain continues its march into insurance apace. Indeed, Munich Re and Swiss Re last October founded the B3i Consortium with the express intention to “explore the potential of distributed ledger technologies to better serve clients through faster, more convenient and secure services.” Blockchain clearly has massive implications for all forms of data and monetary interchange, and we look forward to seeing its continued application both in counter-fraud and more widely.
This year’s Global Trend Map did not contain a dedicated section on blockchain, but we look forward to including one in our 2018 edition, so stay tuned!