Six Tools Insurance Companies Are Using to Mitigate Fraud
Homeowner insurance fraud occurs when someone knowingly submits a false, inflated or misleading claim on his or her homeowner's policy. This type of fraud may appear in various forms. According to the Coalition Against Insurance Fraud, about 10 percent of property insurance losses are the result of fraud. Therefore, this type of insurance fraud directly influences the premiums that all property owners pay. In fact, the FBI estimates that insurance fraud costs the average U.S. family between $400 and $700 per year in the form of increased premiums alone. Clearly, property insurance fraud is a significant problem.
Examples of Homeowner Insurance Fraud
To understand how insurance companies mitigate this fraud, we first need to identify the most common types of homeowners insurance fraud. These include the following:
- Overstating the value of items involved in the theft of property from a home or vehicle.
- Faking the theft or damage of property.
- Falsifying the extent, cause, date or location of the damage.
- Intentional property damage initiated by the homeowner in order to make a claim.
- Reporting and staging a phony burglary.
- Requesting that a contractor increase their estimate or produce fake invoices/receipts, often with an intent to "cover the deductible" or generate additional funds. The contractor may initiate this scheme, however, if the homeowner agrees, then this constitutes fraud.
- Hiding that home is actually vacant, used as a rental or commercial business.
Arson remains of the most significant sources of high-value homeowner insurance fraud. Perpetrators often think that the fire will destroy the arson evidence. According to the FBI’s Uniform Crime Report, nationwide, there are approximately 13 arson offenses for every 100,000 inhabitants. The site also notes that the average dollar loss per arson was $15,573.
Criminal Consequences for Home Insurance Fraud
The consequences for homeowner insurance fraud varies by state, as most have their own insurance laws that regulate fraud. Every state clearly stipulates that insurance fraud is a crime. Most homeowner insurance fraud is classified as either “soft” or “hard”. Soft fraud occurs when a homeowner overstates the damage in an existing claim. This type of fraud is a misdemeanor, punishable by fines, jail time of up to one year, community service, and probation. Hard fraud, on the other hand, occurs when a homeowner either intentionally causes a loss or fabricates the circumstances of a loss for the explicit purpose of profiting from insurance payments. This fraud is a felony, punishable by strict penalties including the possibility of jail time in state prison for a number of years, which vary by state. Below is a chart that demonstrates the claimant’s attitudes toward soft fraud.
Six Tools Insurance Companies Use to Mitigate Fraud
Insurance companies must be proactive in order to fight back against fraud. Not only does fighting fraud help the insurer’s bottom line, but it also prevents expensive legal costs. Insurers must take proactive steps in order to identify potential fraud early and provide a process to react once they detect fraud. Below is a list of actions insurance companies take in order to minimize fraud.
1. Implement a fraud detection strategy – This requires insurance companies to think through the entire claims process from start to finish. The insurer must balance implementing automatic and manual fraud detection strategies while ensuring prompt claim processing. Insurance companies must consider the following:
- How can we identify fraud before a claim is paid?
- How can we improve fraud investigation efficiency?
- How can we keep track of changing fraud behaviors?
- How can we reduce false positive signals?
- What is the best approach to automate the fraud-detection process and predict the likelihood of fraud?
The answers to these questions will lead the organization to implement an effective strategy that evolves with the business and the changing landscape of property insurance fraud. Most insurance companies now invest heavily in artificial intelligence in order to assist in their fraud detection efforts. James Quiggle, Director of Communications at the Coalition against Insurance Fraud, says, “More and more insurance companies are looking toward machines to help deal with often basic scams, thereby freeing up investigators for more complicated aspects for investigations that only humans can handle.” AI is necessary in order to allow claim specialists to focus on critical claims. Below is a diagram of a typical fraud detection process.
2. Manage fraud potential – the likelihood of fraud often depends on certain key factors. For instance, a theft claim involving the suspicious disappearance of an expensive piece of fine art has a higher potential for being fraudulent than a stolen computer. Insurers must consider these factors in order to lead claim specialists to focus on the most likely fraudulent cases.
3. Use data analytics – similar to AI, data analytics helps detect fraud by examining past fraud and implementing predictive modeling to establish what insurers call a “suspicion score.” This value quantifies the likelihood that fraud occurred in a given claim. After a claim adjuster enters claim data into the system, data analytics generates the suspicion score, which the adjusters use to triage potential fraud claims for further investigation. Whether through AI or data analytics, effective employee interaction with data is critical to effectively mitigating property insurance fraud. The below chart illustrates how data analytics allows an enhanced analysis of claims in order to predict potential fraud by analyzing various factors.
4. Monitor claims and update systems – analytics and predictive modeling are only as good as the historical data used to support the system algorithms. Therefore, insurance companies must continually monitor claims and update the predictive scores based on their accuracy or lack thereof. Vigilance in managing accurate data ultimately leads to future success in managing fraud.
5. Consider outside expertise – insurance companies must know their limitations. Effective fraud risk management involves outside experts in fraud investigations and even in fraud detection. Using expects, particularly in complex fraud cases, helps to generate good data related to the facts involved in a claim. This could mean engaging the FBI, an independent investigator or a forensics expert.
6. Stay one step ahead – professional criminals understand the fraud detection and mitigation efforts that insurers use. Therefore, criminals are always pushing the limits to find new and innovative ways to perpetrate fraud. Therefore, insurers cannot become complacent, but must continuously improve and evolve their fraud detection systems.
Ultimately, insurance companies must invest in their people in order to design an effective mitigation strategy. Sadly, fraud will likely always exist. However, by understanding the common schemes as well as the mitigation tools available, insurance companies can minimize the impact of fraud on their business and on the homeowner insurance market as a whole.