Return of the Guru

Why Won’t Insurers Spend to Defeat Fraud?

Ara Trembly
Insurance Experts' Forum, March 31, 2011

In a down economy, everyone looks for new and different ways to make money, including criminals. Thus it should be no surprise that, according to our industry experts, insurance fraud is on the rise.

Obviously, more fraud is more costly to insurers and, in the end, more costly to insureds. Yet it seems that carriers are not responding to this threat with any kind of investment in anti-fraud technologies.

“Opportunistic fraud tends to increase in down economies, so insurers have been more diligent over the past couple years, but it has not necessarily led to any significant increase in IT investments [in anti-fraud measures],” states Mark Breading, partner, SMA Strategy Meets Action. “We've seen more of a constant level of investment for the industry as a whole as opposed to any uptick.”

I find this puzzling: It’s not as if there is any shortage of existing or new methods to prevent insurance fraud.

“Near real-time analytics, such as those used by credit card companies, are promising for catching organized fraud before it incurs larger losses,” says Rod Travers, EVP, Robert E. Nolan Co. “Retrospective analysis and proactive resolution are important deterrents as well because fraudsters quickly learn they can't get away with it.”

We also can’t really blame the reluctance to spend on the newness of the threat, since insurance fraud is as old as the industry itself. In fact, the industry’s lackluster response to increased fraud may have its roots in the idea that such activities have always existed and have thus been relegated to the category of “cost of doing business.”

That makes sense because such an attitude would tend to have a great deal of inertia. As Newton explains it, a body at rest tends to remain at rest unless acted upon by some outside force. The insurance industry has viewed fraud as a constant for so long that even when an outside force (the economy) increases the frequency of fraud, we tend to maintain our view.

But how long can we afford to remain inert? How big a loss will it take for our industry to realize that this threat is growing not only in frequency but in sophistication? Perhaps we tell ourselves that once the economy gets better, fraud will abate. But this ignores the obvious fact that if fraud efforts are successful, they will continue, regardless of the unemployment rate or GDP. In any case, according to some economists, full recovery from the current malaise may take another decade.

At the moment, the industry’s ship is willing to tolerate the ever-increasing leaks in its hull, perhaps doing a little bailing with a shot glass to keep things at status quo. But just as anti-fraud technology improves over time (even if it is not bought), criminals’ technical sophistication and knowhow also increase. If we don’t invest in stopping the bad guys, they will be far ahead of us before long.

Insurers who want to keep their vessels afloat need to pay attention to what is happening now, instead of hoping for a future that may never come.

Ara C. Trembly (www.aratremblytechnology.com) is the founder of Ara Trembly, The Tech Consultant, and a longtime observer of technology in insurance and financial services.

Readers are encouraged to respond to Ara using the “Add Your Comments” box below. He can also be reached at ara@aratremblytechnology.com.

This blog was exclusively written for Insurance Networking News. It may not be reposted or reused without permission from Insurance Networking News.

The opinions of bloggers on www.insurancenetworking.com do not necessarily reflect those of Insurance Networking News.

Comments (1)

Mr Trembly,

INOVATUS, LLC would like to air our response to your article, "Why Won't Insurers Spend Money to Defeat Fraud"? Carrier's have historically all tried to defeat fraud on the "back end" after it has occurred. Although this has historically been somewhat effective, the problem with dealing with fraud and fraudsters after the fact is twofold. First, and foremost, it is very costly. The technology is expensive, and disruptive to the carrier's claims process. So is the addition of staff (SIU, analysts, etc) necessary to identify and fight fraud. Secondly, it does not take much of a challenge for the courts and other regulatory bodies to align with the "consumer" (the fraudsters) whose job is to protect the consumers. We believe that these are just a few of the reasons for all the negative "inertia" that holds the industry back from dealing with the problem.

We disagree with your statement that "Near real-time analytics, such as those used by credit card companies, are promising for catching organized fraud before it incurs larger losses...". The process of selling insurance is much more complicated with many more variables than issuing credit cards. Additionally there is one VERY IMPORTANT factor that you have overlooked... the state regulators and Insurance Commissioners whose mission is to ensure that no consumer is unfairly discriminated against. Consumers are not guaranteed a credit card, but the rules for insurance (a form of consumer protection) are very different. As we see it, the problem really begins upstream with how the insurer initially classifies risk. As long as they continue to use current antiquated techniques and analytics (e.g. credit based insurance scores) that confuse the consumer's ability to pay with the real measure of risk (loss ratio) that the industry should be trying to mitigate the problem will continue.

We at INOVATUS have studied insurance fraud and have a suite of solutions that are implemented well forward in the insurance sales process that better classify risk and defeat fraud PRIOR to the policy being issued. Most insurers that we have presented to "see it, and get it". They see the results of our model and are working with us to implement and begin the process of reducing fraud. We agree that "Retrospective analysis and proactive resolution are important deterrents...", it is the foundation of our studies and solutions. We at INOVATUS would like to continue our discussion of how INOVATUS is dealing with the issues of fraud and (larger) risk classification.

Respectfully,

John F. Petricelli
EVP Analytics - INOVATUS, LLC
jpetricelli@inovatusllc.com
www.inovatusllc.com

Posted by: John P | April 1, 2011 9:29 AM

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