Gaining on the Fraudsters
Q: What technology infrastructure problems impede more effective fraud control?
A: Rioux: One of the challenges of fraud detection is legacy systems. Data is distributed among different data systems and there is no common warehouse. Erie Insurance has made a commitment to find fraud and investigate fraud. We are in the process of researching technology solutions to combat fraud. The Erie wants to incorporate the best-of-breed concepts that will contain a front-end detection and back-end investigation tool.
A: Balko: Access to data is a major challenge. Too often the data we are interested in is spread out over different systems, in different locations, in different formats, with different vendors, or is just not captured. Once we gain access to data, we are effective in data mining and mapping of fraud relationships. Carriers should submit information into a data warehouse or a fraud data mart. It would be ideal if data could be standardized to enable the development of one common interface program instead of dozens.
A: Worthington: Legacy systems slow down day-to-day SIU operations, while also creating real personnel challenges. They force you to either exhaustively search for new employees with knowledge of archaic systems, or spend long hours training people.
A: Lucker: Perhaps the greatest impediment to improved and heightened fraud control is the siloed condition of most insurance company's technology infrastructure. More often than not effective ties and hooks have not been put in place to bind information from disparate legacy processing systems together (e.g.: application/policy management, billing, claims, customer information, premium audit, vehicle/property, etc.). With data stored in different structures, databases, and timeframes, and often referenced via different key/id values, significant data access challenges exist within most insurance companies. Data warehousing and data mining efforts have begun to help with this ""one view"" paradigm through the use of smaller, more manageable data marts that bring this distributed data together for customers, policies, and claims. But much more work needs to be done to get such systems online and invent new automated fraud detection techniques to utilize these combined data systems. Furthermore, the organizational and functional culture must make fraud control part of the operational objectives.
Today many companies consider fraud management to be the responsibility of certain areas (fraud detection, SIU) when that responsibility should lie within each and every business area (policy application, underwriting, policy issuance, premium collections, claims, etc.) and be brought together through some form of company fraud prevention task force. Awareness of the problems that fraud presents to an insurer should be managed to bring functional and technical areas together and foster more collaboration, cooperation and technological utilization.
A: Boehning: Many companies' legacy systems can impede implementation of technology resources. Often carriers' own internal systems are not effectively integrated, preventing good use of internal information, as well as external resources and new applications. For example, systems may not have the ability to share data-or to route data effectively within the organization to the correct individual. Carriers need to ensure their technology staff is well informed and knowledgeable about the latest developments in fraud-detection technology and that they provide adequate resources to fight fraud effectively.
IT departments need to stay current on the latest developments. IT personnel can keep abreast of developments in a number of ways, including continuing education, use of expert consultants, and participating at industry trade shows, fraud conferences and forums where other insurers share their experiences and expertise. Outsourcing is another option for certain kinds of processing and projects. Companies can also focus on current technologies and standards. For example, it will be important to get new standards in place, such as the ACORD XML transaction standards for the P&C industry, to easily move data between organizations. This will further facilitate anti-fraud efforts.
Q: Have insurer investments in fraud-detection technology increased, decreased or stayed the same this year?
A: Balko: With an estimated 10% of claims wholly or partly fraudulent, carriers need to ask themselves, "Can we afford not to make the investment in fraud detection technology?" However, like other capital or resource outlays, fraud automation must—and can—demonstrate a return on the investment.
A: Worthington: Our tech spending has remained flat, but the scrutiny on every purchase order has increased substantially. During tough economic times, there are insurance companies that consider cutting their SIU to realize the short-term savings. They know full well, though, that the lack of an investigative unit will hurt them in the end. The challenge of any SIU is to demonstrate how many unspent dollars were saved through its good work. Companies generally accept that an SIU pays for itself, but it's always difficult to map a true cost-benefit analysis.
A: Boehning: ISO and Insurance Research Council's study ""Fighting Insurance Fraud: Survey of Insurer Anti-Fraud Efforts"" (January 2002) shows that, of insurers that are able to track their spending to fight fraud, 53% were spending more than they were three years ago, 44% were spending about the same, and only 4% were spending less. Of those spending more, 37% (that is, 37% of the 53%) were spending 15% more, 14% were spending from 10% to 15% more, 14% were spending from 5% to 10% more, and 19% were spending from 0% to 5% more. (The remaining 16% of insurers who are spending more did not report how much more.) On balance, it would seem that insurers as a group are spending more to fight fraud and that some are spending significantly more. While the above data pertain to total expenditures on fighting fraud, it would seem that a substantial portion of the increased spending was for fraud-detection technology.
To the extent that funding for anti-fraud activities is increasing, it would seem that the expected return on fighting fraud exceeds the expected return on investment for alternative activities. The laws of economics governing rational enterprises in competitive markets dictate that funds go first to activities yielding the highest returns and the least (or not at all) to activities yielding lower returns. Clearly, anti-fraud efforts have a direct return—any savings from detecting fraud and avoiding payment of fraudulent claims goes straight to the insurers' bottom line.
The slow economy, weak stock markets, and declines in insurers' surplus make it both more difficult and more important for insurers to invest in the war on fraud. Adverse economic conditions increase the temptation of scam artists to perpetrate insurance fraud and insurers' exposure to fraud-related losses. At the same time, adverse conditions make it all the more difficult for insurers to fund all activities, anti-fraud and otherwise. Individual companies' willingness to invest in anti-fraud technology in the current depressed environment depends on how they perceive the value and cost-effectiveness of those technologies when compared to other initiatives vying for scarce resources.
Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio
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