A Firm Stand

Fraud has been an ongoing issue for the property and casualty insurance industry. Realistically, it will continue to be a source of frustration for individual insurers and the sector as a whole. But that does not mean the insurance industry cannot do a better job of detection, prevention and deterrence.

Fraud is not just the “cost of doing business” – openly deceitful, deliberate and criminal activity is, in fact, costing all stakeholders in terms of money, trust and public safety.

STEPS TO COMBATTING FRAUD

Anti-fraud philosophy

At an individual insurance company level, several things can be done to enhance fraud-fighting capabilities.

The first and arguably most important step is a visible corporate anti-fraud philosophy. Many insurers have generic policies to fight fraud, but these are usually not well-publicized to employees or business partners, such as brokers. How can they respond if they do not know the rules of the game?

A specific anti-fraud philosophy could contain various sections and declarations about a company’s approach. For example, it should define the fraud environment (types of fraud, cost and perpetrators).

This is not always as simple or straightforward as it sounds. What the p&c industry has defined as “insurance fraud” in the past 20 years has largely been claim fraud.

What Aviva has seen in the past few years is a more integrated model of fraud that involves underwriting, claims and suppliers. The company defines insurance fraud as exhibiting any or all of these three fraud classifications.

Anti-fraud management

In addition to defining the scope of the problem, a public anti-fraud statement should outline a corporate strategy that extends to responsibility, level of tolerance, intervention and deterrence. This can be spelled out in an anti-fraud management program that, preferably, establishes dedicated teams to the multi-pronged issue of fraud. At Aviva Canada, in actual cases of claims fraud involving a full or partial denial of that claim, more than 50% were found to also involve underwriting fraud.

Corporate responsibility pledge

“Zero tolerance” is a term thrown around a lot these days, but what does it really mean? It should involve a specific pledge of corporate responsibility and duty to report crimes to the police or other investigatory bodies.

This is not a “nice-to-have,” but a “must-have” for all employees, especially those in underwriting and claims management. It instills a culture of awareness and reporting obligation, while demonstrating corporate leadership in the fight against fraud. That culture of awareness should also extend to other business partners, including brokers.

It is important in an anti-fraud philosophy to iterate a sound approach to customer relations. Clarity is vital when it comes to acknowledging that the vast majority of policyholders and suppliers are honest and legitimate. Fraud only pertains to a relatively small proportion of policyholders or suppliers.

There is a potential danger of overzealous techniques that tar all clients with the same brush of suspicion.

One cannot overemphasize key concepts, such as that claims are initially treated with a full “presumption of validity” and that customers or suppliers are “innocent unless proven guilty.”

EMBRACING TECHNOLOGY

Technology tools are becoming increasingly prevalent in fraud prevention among insurance companies. In the last five years, insurance companies have embraced a wide range of data analytics for fraud detection, including among others, anomaly detection, predictive modelling and fraud network analysis. The next wave of resource allocation by insurers has been bringing in analysts to sift through the massive data output of these technology tools.

How an insurance company uses technology should be clear in any corporate anti-fraud policy. While sophisticated, technology should never be used as the only source of fraud detection. It is not a substitute for sound underwriting and claims judgment.

An anti-fraud philosophy should also spell out guidelines for co-operation with insurance companies and other groups, including law enforcement agencies, regulators and professional supervisory bodies. This is critical given the frequency of co-ordinated, ring-type activity endemic to insurance fraud.

With the formation of CANATICS set to go live in early 2015, the pooling of industry-wide data for the purpose of fraud detection will become a new way of doing business.

CANATICS now has nine member insurance companies representing 70% of all auto insurance direct written premiums (DWP) in Ontario, or about 40% of market share on a national basis. As a consortium for industry-wide fraud network analysis, it will provide “alerts” of suspicious patterns or activity to insurance companies.

These technology tools come with a certain proviso. As more data around suspicious activity becomes available, there is a corresponding need for investigation, meaning investment in investigative resources must keep pace with the data analytics and alerts generated of potential fraud.

FOSTERING CO-ORDINATION

When it comes to notification of law enforcement agencies, the unfortunate aspect of past insurer anti-fraud efforts is that they have occurred on an ad hoc basis – sometimes cases get reported, sometimes they do not.

A well-crafted anti-fraud philosophy should contain a responsibility to report every potential criminal activity that an insurer comes across during its course of business. Reporting to police or other agencies has to become a pillar of any real deterrent strategy, especially when it involves supplier fraud.

A key component of notifying law enforcement is the follow-up stage of accountability. Once an insurance company suspects criminal action and responds with a formal report to police, there is an obligation to pursue any action that particular agency has taken.

The response from police agencies and chiefs across the country to insurance fraud has been excellent in recent years. However, there are occasions when specific agencies must be held accountable through the solicitor-general or other authorities when they are not taking insurance fraud seriously.

Insurance companies do not just report to police, but also to regulators (or self-regulators) such as the Financial Services Commission of Ontario and the Registered Insurance Brokers of Ontario and supervisory governing bodies, such as health colleges.

Again, a specific anti-fraud policy has to involve transparent practices for reporting complaints and procedures for follow-up and accountability. A complaint is not picking up the phone and calling the relevant body; all cases should be recorded and documented, accompanied by evidence.

When it comes to fraud deterrence, there is no penalty without publicity. For far too long, fraudsters have operated under a cloak of silence.

Insurers must be committed to putting convictions in the public domain if they want to see true results in deterrence. The more fraudsters are appropriately punished, the more the industry as a whole will see a decline in fraudulent activity. Jail terms, restitution payments and other hefty penalties are critical to deterring future staged thefts and accidents.

ADVANCING EFFORTS

While a clear philosophy and industry co-operation are prime parts of an anti-fraud strategy, there are big-picture issues that also must be considered. Ontario’s recently passed Bill 15 auto insurance legislation contains helpful provisions for fighting fraud, but these alone do not fully address the enormity of the task.

The insurance industry must seriously examine funding of police resources or a provincial agency that has the authority to act on fraud cases. This type of funding for specialized detectives and/or prosecutors exists in certain jurisdictions in the Uni
ted States and in England. It is the most effective means of stopping the biggest leaks in the insurance industry when it comes to underwriting, claims and supplier fraud. While not a new idea, it has taken on a higher profile in recent months.

The insurance industry is making progress in the fight against fraud, but it cannot be fought in isolation or with good intentions. It has to be documented in an accessible anti-fraud policy, with attention to detail and a commitment to action when it comes to investigation, reporting and deterrence. If not, fraudsters will continue to hit the insurance industry – and its customers.

When people talk about insurance fraud, they often cite numbers in the billions of dollars or fraud comprising 5% to 10% of premiums. But there is another more important number: home and car insurance amounts to roughly 5% of peoples’ disposable income. If fraud starts to run rampant, that increases the amount legitimate customers must pay for insurance.

In any similar set of circumstances – or in any other industry – there would be a harsh deterrent in place.