It is 7:30pm on an unseasonably cold Friday evening in early September. George Azelby places a call to his insurance company to report a new claim. The insurer’s 24-hour answering service receives the call and completes an initial claim report.
Someone has burglarized Mr. Azelby’s residence and made off with a small quantity of electronics and jewelry. He has contacted the police and filed a report over the telephone. The family was not home at the time of the burglary, but there is damage to the side door of the home. The call-center pages a local contractor to repair the damaged door that evening. Mr. Azelby is advised that an adjuster will be in contact with him on Monday to begin processing his claim.
The adjuster telephones Mr. Azelby on Monday to obtain more details about the loss. The list of stolen property has expanded from the one provided to police. It now includes cash, CDs, sporting equipment, and jewelry totaling $16,500. The insured can describe the stolen property but doubts he will be able to provide receipts for most of it. This claim is becoming increasingly suspicious. This example is typical of thousands of claims Canadian insurers receive each year – a seemingly straightforward personal lines loss suddenly grows into a substantial claim displaying multiple red flags. This claim may be one of thousands of fraudulent claims that cost Canadian insurers an estimated $1.3 billion each year, or it may be an honest policyholder making a legitimate claim.
Insurance company executives are not the only ones concerned with detecting fraud, risk managers face many of the same challenges in their organizations. It does not matter if it is a first-party claim against a personal lines insurer like the example above, or a third-party liability claim against the operator of a self-insured fast food restaurant: fraud has an enormous impact on an organization’s bottom-line.
There are two major types of fraud: opportunistic fraud and planned fraud (see sidebar: Two Major Types of Fraud). Industry groups and associations have been created to help combat fraud. Their focus is on planned fraud, especially as it relates to organized crime rings. However, few industry wide strategies are in place for detecting and combating opportunistic fraud. There remains a large opportunity for the industry to collaborate in developing best practices for combating this costly crime.
Previous fraud detection efforts in Canada and other countries have focused on establishing information exchanges. These database tools allow insurers to share information about claims where suspicious or fraudulent activity was found. They have been designed to help insurers scrutinize the claims submitted more thoroughly and identify patterns among repeat offenders. Although the databases have produced successful results, their successes have been in identifying planned fraud versus opportunistic fraud.
Some insurers and risk managers have developed their own proprietary fraud indicator tools. These tools range from simple checklists to complex computer software that identifies irregularities to flag suspicious claims. As the power of computers increased, so did the sophistication of the software applications that were developed. The software’s ability to cross reference schedules of loss with pricing databases and manufacturers’ product information led some to believe that this technology would be a key component in an insurer’s strategy to fight fraud. Although these applications have helped with fraud detection, they haven’t had the large impact that was predicted.
The critical weakness with information exchanges and fraud detection software is their focus on providing generic fraud indicators based on past behaviors. They are tools that assist the claims handler in developing an opinion about the validity of a claim. However, insurer’s need more than an opinion to resist a claim. They need fraud detection tools that allow them to uncover facts that can prove to the courts that a claim is fraudulent.
Although fraud detection is crucial for insurers, it must not transform the claims process into adversarial or negative one. Policyholders that present legitimate claims must be compensated promptly and fairly. Insurers and risk managers understand that they must balance the need to combat fraud with the necessity to maintain a positive public image for their organizations. At first glance, this dilemma seems almost impossible to resolve.
A major breakthrough came a few years ago when a firm in the U.K. conducted a review of its claims process for travelers’ cheques that were allegedly lost or stolen. They designed and implemented a unique distance interviewing and conversation management system. The results, tested under laboratory conditions, were startling:
The claims denial rate increased from 4% to over 25%;
There was no increase in the rate of customer dissatisfaction;
The firm only rejected defensibly deniable claims; and
Annual savings against fraud increased five-fold.
Most amazingly, 50% of the claims were withdrawn shortly after the policyholder met any kind of resistance, which in many cases was as simple as an offer of help to progress the claim. This is a skills based solution that has been devised for the telephone-based claims environment. More specifically, it brings together several academic disciplines, public sector skills and practical devices to enable a more accurate assessment of fraud risk. Applied psychology techniques, behavioral analysis tools, and effective conversation management skills, enable the claims handler to:
More accurately assess the claims as being genuine or not, and discourage the fraudulent claimant;
Identify useable evidence of fraud; and
Expose liability issues otherwise missed, such as policy conditions not being met.
A number of insurers in the U.K. have tested a variation of this system on household and vehicle theft claims. They were able to move their repudiation rates from less than 0.5% to double-digit levels. These strategies have been proven to combat fraud without eroding high levels of customer service. The techniques employed are remarkably effective in the dual role of helping policyholders deal with the personal trauma that results from genuine claims and to spot elements of fraud in others.
For example, in the case of Mr. Azelby’s claim described above, the insurer could have used the first call from the policyholder to probe for more details surrounding the loss, establish a timeline of events, collect contact information about potential witnesses, and document the schedule of loss. In the case of a legitimate loss, this immediate attention helps the policyholder cope with the trauma of a burglary while documenting facts that are still fresh in mind.
In the case of a fraudulent claim, this first phone call will probe for more information than the policyholder is prepared to provide. It prevents them from thinking through a logical sequence of events leading up to the reported claim and reduces the amount of time they have to embellish the amount of their claim. The claims handlers are trained to ask questions that will subtly challenge the policyholder and then carefully observe their attitude and behavior for indicators of fraud.
While these techniques will allow the claims handler to collect evidence of fraud that can be used for a formal denial, it is not even necessary to go that far. Often when an opportunistic fraudster is faced with mild levels of resistance they will determine it is not worth the risk of pursing the claim.
The implementation of these fraud prevention techniques is not an easy task. It requires a great deal of experience and training to ensure claims handlers are employing them properly. It is an evolutionary process that must be carefully managed, but once implemented, they provide a strong defense against insurance fraud that does not compromise ability to deliver excellent service to their policyholders.
THE TWO MAJOR TYPE
S OF FRAUD:
Most industry insiders classify insurance fraud into two distinct groups, each requiring a different strategy to combat.
Opportunistic Fraud. Is thought to be the most common type of fraud that occurs in the industry, generally committed by policyholders for small dollar amounts. This is fraud that occurs when an individual uses the occurrence of a legitimate insurance claim as an opportunity to commit fraud. Examples of opportunistic fraud include:
Genuine loss overstated – often seen in claims for repair of pre-existing damage or claiming for property that is more expensive than the item lost;
Genuine loss excluded but made to fit the policy, often seen in claims where security warranties exist; and
Loss where goods claimed were not owned by the insured.
Planned Fraud. Is described as orchestrating events for the purpose of committing insurance fraud. Sometimes committed by policyholders but increasingly committed by organized crime rings for large sums of money. Examples of planned fraud include:
The loss that did not happen – often seen with theft or mysterious disappearance claims;
The contrived loss – often seen as a staged car accident; and
The deliberate loss – often seen as arson.
Source: Canadian Coalition Against Insurance Fraud: “General Insurance Claims Fraud.”