Fighting Endemic Fraud
Insurance Networking News, October 1, 2008
Data mining, rules-based tools, neural networking, predictive modeling, case management systems ... such is the growing smorgasbord of technologies that Pittsburgh-based Highmark Inc. is implementing to reduce fraud. Working with the Minneapolis, Minn.-based Fair Isaac Corp., the independent licensee of the Blue Cross and Blue Shield Association developed a fraud analytical tool, and is now running reports and doing data extraction in minutes and, sometimes, seconds rather than in hours, days or even weeks. The health insurer also implemented a post-pay solution from Fair Isaac that quickly ranked 21,000 providers, enabling Highmark to uncover a significant number of new cases of fraud. Furthermore, in the past year it has referred $9 million worth of fraud cases to law enforcement.
Highmark is eager to test a new pre-pay solution, given that it may only recover 20% to 30% of the funds in post-pay since the indebted entities have often squandered the assets, according to Tom Brennan, director of special investigations for Highmark.
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INORDINATE FRAUD COSTS
Highmark is one of many insurance firms now initiating or deepening their outsourcing relationships with anti-fraud vendors in a drive to increase fraud referrals, enhance their reputation, improve loss ratios, lower loss adjustment expenses and boost other savings, which they can plow into added benefits for their customers. Such technology is as important today as ever, with insurers suffering enormous fraud costs, and a growing sense that their victimization may be worsening. With a credit and mortgage crisis buffeting the U.S. economy as well as European countries such as the United Kingdom and Spain, there are signs that mounting financial hardship is spawning more fraudsters. "As the economy tends to slip and soften, we see an increase in crime," says Mark Lowers, president and CEO of Lowers & Associates, a risk mitigation service provider based in Purcellville, Va. "Because unemployment begins to creep up, people are stressed over losses of homes, and a weakening economy pushes people over the edge sometimes."
Of the 45 state fraud bureaus that the Coalition Against Insurance Fraud tracks, about one-third of the states say they are witnessing an increase in the number of open fraud cases involving mortgage and title issues, according to Dennis Jay, executive director of the Washington-based organization. While home arson fires related to foreclosure have seen "healthy increases" in the last 18 months in several areas of the country, the number of automobile arson fires is particularly startling. "This year will likely set a record year for people getting rid of unwanted vehicles, whether by arson or other means," says Jay.
In the United Kingdom, attempts to commit fraud by including material falsehoods on application forms for insurance products (as well as loans and credit cards) rose 13% to total 21,780 cases in the first quarter of 2008, up from 19,239 from the year-earlier period, according to CIFAS, a fraud prevention service based in London.
"The increase in application fraud (often to hide adverse credit history) demonstrates that because people are getting into debt earlier, and because the 'credit crunch' has diminished their access to finance, they are now resorting to fraudulent applications for funds," says Peter Hurst, the company's chief executive.
Fair Isaac, for one, has seen escalating interest in fraud technology in the U.K. "Right now the market is kind of forcing insurers to get more and more on top of this," says Mike Gordon, VP of emerging industries for the technology supplier.
THE LURE OF OUTSOURCING
In large part, insurers are outsourcing fraud prevention and detection technology work to minimize potentially massive losses. For instance, 3% of all healthcare spending-or $68 billion-is lost to healthcare fraud, according to an estimate by the National Health Care Anti-Fraud Association (NHCAA), headquartered in Washington.
Tom Brennan
The NHCAA considers this estimate conservative, and others place the figure closer to 10%. In any case, an insurer that pays out $5 billion on claims is throwing away tens of millions of dollars on fraudulent ones. "And those costs get passed on to the consumer," explains Highmark's Brennan. Though not quite as severe as healthcare fraud, P&C fraud also is fierce: some $15 billion to $20 billion in fraud is perpetrated against such firms, according to Gordon.
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