Fighting fraud is an ongoing war in the insurance industry. But with the use of innovative technologies designed to manage and analyze data, carriers are gaining an edge in preventing and detecting claims fraud. With $80 billion lost to insurance fraud every year across all business lines, insurers are investing in more-intuitive technology such as rules-based analysis, data mining and predictive modeling to aid investigators in uncovering crooked claims, according to James Quiggle, director of communications for the Coalition Against Insurance Fraud (Washington, D.C.).
"Technology elevates fraud investigations to a new level by providing hard and actionable data that will help investigators uncover hidden scams," says Quiggle. Technology "also shortens that investigation cycle, identifying questionable claims earlier," he adds.
Distinguishing fraudulent claims early in the claims processing cycle is critical, primarily because once a payment is out the door, it is nearly impossible to recoup. The challenge is having technology sophisticated enough to identify the fraud. Vendors that have created systems that analyze data to spot fraudulent claims include Fair Isaac (Minneapolis), ISO (Jersey City, N.J.), Computer Sciences Corp. (CSC; El Segundo, Calif.), ChoicePoint (Alpharetta, Ga.) and Pegasystems (Cambridge, Mass.).
Ellen Wilcox, president of Boston-based Pilgrim Insurance Co. ($100 million in premium), a licensed insurer that provides business process outsourcing services to property and casualty insurers, acknowledges that "Carriers are getting better at finding fraud." But, they are not investing enough in the technologies "they need to eliminate fraud," she adds. "It's a challenge to stay ahead of those committing fraud, and that is why technology is important."
Though there are cutting-edge technologies, such as voice-based biometrics, that can help identify fraud before claims are processed, insurers largely are not utilizing these tools yet and often find themselves teetering between identifying fraud and accusing customers of committing fraud, according to John Lucker, a principal national leader of advanced data mining and predictive modeling at Deloitte (New York). "There is a lot of sensitivity surrounding these technologies," says Lucker, adding that false positives are a major industry concern. "Insurers have to be careful how they are doing business. They have to be fair with claims practices and cannot accuse."
Fraud hits all sectors of the insurance industry, with $13.9 billion lost to auto insurance fraud, $2.1 billion lost to homeowners insurance fraud, and $9.8 billion lost to business and commercial fraud, according to the Coalition Against Insurance Fraud; however, with almost $54 billion lost to fraud every year, health insurance is hit the hardest (see chart, page 39). "The health industry is hit so hard because it is the most commonly used insurance and so many systems can be vulnerable to fraud," says the Coalition Against Insurance Fraud's Quiggle. "Claims are scrutinized using computer analysis, and if you bombard the systems with hundreds and thousands of fake claims using deceptive codes, they will fly under the radar," he explains.
Claims fraud comes in two types: hard and soft. Although both hard fraud and soft fraud are intentional, hard fraud is malicious. "Hard fraud is typically perpetrated by people with true criminal intent and is often organized by crime rings that conduct various types of fraudulent schemes," says Deloitte's Lucker.
Examples of hard fraud include auto crash rings in which people deliberately crash into another car and fake a medical injury to collect the claims money, or retail store fall rings in which someone will fake a fall in a retail store. "Organized gangs are going after insurance companies in a very industrial manner by lodging huge volumes of claims at once to try to defy the systems that flag fraud," says the Coalition Against Insurance Fraud's Quiggle.
Soft fraud, on the other hand, occurs when typically honest people embellish the truth, committing low-dollar scams. "Many people who commit soft fraud wouldn't steal a ballpoint pen from a drug store," says Quiggle. "They don't consider lying on an application about how far they drive [to be] fraud. They consider it something they deserve from insurance companies after paying policyholders' premiums for years." For instance, the destruction from Hurricane Katrina created an opportunity for homeowners to claim damages to furniture they may not have owned or damage to homes that may have existed prior to the hurricane. Another common form of soft fraud is claiming disability or workers' compensation to extend time off from work.
Claims handlers are on the front lines of identifying fraudulent claims. They are charged with referring suspicious claims to carriers' special investigation units (SIUs). Using technology, claims handlers and SIUs can examine the volumes of claims data to proactively combat both hard and soft fraud, better manage workflow and more efficiently communicate investigation outcomes.