While the insurance fraud crisis worsens and fraud perpetrators find new and innovative approaches to their illegal activities, the insurance industry needs to take a proactive stance to put a stop to the bleeding-or at least slow it down. In the past, insurance agents may have thought they could sit back and put the onus on the insurance company to identify questionable applicants, detect fraudulent behavior, and take the necessary action. But, more and more insurance companies are looking to insurance agents to know their own customers and act as the first line of defense in protecting the insurer and to help minimize the fraud impact to the bottom line.
The little white lies of claim fraud that costs a few dollars here and a few dollars there have now grown to a sophisticated and organized crime wave costing the industry $80 billion dollars annually, according to the Coalition Against Insurance Fraud (CIAF). This eye-popping dollar figure combined with the consumer’s blind-eye and passive acceptance of insurance fraud leaves an insurer holding the bag and footing the bill. But, insurers know they can’t win this battle alone and are pushing the shared responsibility to the agent ranks to try and head off the problem as early in the process as possible, and better detect suspect applicants before they become fraud-feeding policyholders.
While technology has long been viewed as the weapon of choice in fighting fraud, the independent agent may have felt that the technology responsibility was best left to the insurer. Sounds like a plan, but unfortunately not a good one, given that the agent themselves can also be held responsible if they are found to be doing business with the wrong folks – for example, those on OFAC’s (Office of Foreign Assets Control) list of 5000+ names. So, in order to meet legal obligations under the USA Patriot Act, the agent must be the front line gatekeeper. Criminal violations of the statutes administered by OFAC can result in severe penalties, including personal fines of up to $250,000 and 12 years in jail, not including civil penalties that may also apply.
Certainly, the agent does not have the financial or human resources to implement the most current fraud-fighting technologies, but working closely with the carrier and understanding their fraud-detection methodologies and utilizing resources like MIB’s (www.mib.com) Security Alert Services to meet their legal obligations, the agent has a fighting chance to better know their customers and screen them for potential unsavory activity.
While the responsibility for early applicant screening lies with the agent, the insurer must also take an active role in order to enable a truly effective fraud-fighting process. To date, unfortunately, the most effective method in the insurance fraud detection effort has been accidentally tripping over fraud with little success on the proactive front. But for all involved, the effort and success rate needs to change to get ahead of the fraud. It’s up to the agent and the carrier working hand-in-hand to make it happen.
Early years-1 step forward, 2 back
The earliest fraud detection technologies were primarily simple hard-coded programs that would flag known suspect circumstances; for example, certain medical conditions with claims over $100. While somewhat successful early on, the fraud wizards quickly learned to submit multiple claims of $75, so as not to raise any red flags.
Relational databases and analytical tools comprised the next set of technologies in the battle against fraud. With query languages and ‘if, then, else’ tests, the carriers were able to tap into large volumes of data to identify patterns and trends to better predict potential areas of fraud. However, these tools continued to require the insurer to look for the ‘known’ problem and had little ability to uncover potential areas of fraud without the business analyst first pointing the analysis in that direction. In other words, they had to already know what they were looking for and they essentially used the tools to confirm fraud suspicions.
Even when fraud patterns were detected, the time and effort it took to make the necessary system changes would often leave the insurer fixing a problem long after the fraud perpetrator had moved on to uncover a new opportunity.
Although these fraud technologies delivered some positive results, the cost to the policyholder relationship was often not worth the price. Since the earlier technology tools would often err on the side of caution, any suspect claim would be flagged and result in a subsequent investigation. Oftentimes, valid claims were flagged (AKA false positives) and the legitimate claimant became incensed when being so closely scrutinized by their insurance company.
Fast forward-today’s tools
Fraud technology has come a long way in the past couple of years by offering toolsets and software with advanced computational techniques and the ability to ‘learn’ from experience to get even better at fraud detection and pattern identification. This ‘learning’ characteristic enables the software to adapt and increase in sophistication as more and more intelligence is gathered over time. The more intelligent the tools become, the more chance of detecting fraud in the early stages and predicting potential areas of fraud before the criminals have even uncovered the opportunity. The greater the fraud-detection automation the less reliance on the human element, the greater the accuracy, and the fewer false positives to chase down.
Combining the early generation of fraud-fighting tools with these new advanced predictive analytics and adaptive optimization techniques (rough sets, classifier systems, revolutionary programming) gives the insurance industry the opportunity to gain ground in the fraud race.
Only as good as the data
While technology has come a long way in the effort to fight fraud, these tools are still heavily reliant on the volume and quality of the data used in the analysis, detection and prediction. While more data will be acquired as the tools are used, starting with the most accurate and complete set of information will only speed up progress. The agent is a wealth of policyholder information and may have the most complete and current set of data and intelligence on their client set. Given that assumption, the more the agent can share and validate with the carrier, the better for all involved. Granted, for the time being the carriers themselves will continue to struggle with their silos of data scattered across the enterprise, but many are now working to consolidate and validate these data subsets to create a more complete, current and accurate view of the client base.
Don’t stand still
Certainly, the states and the Feds will continue to work to establish tougher laws and will expand fraud bureaus. Insurance carriers will continue to invest in fraud technology and establish Special Investigative Units (SIU). But, the wise agent will know that their role in identifying the troublemakers early in the process is critical to success. Working with the carriers, understanding their fraud fighting methods, utilizing available services like those offered by MIB and knowing the client is the best line of defense in winning the war on fraud.
Eric Miller, is senior principal with Highpoint Partners, LLC. and a member of the Association of Certified Fraud Examiners. Eric can be reached at firstname.lastname@example.org or (704) 370-0117.