Weak Economic Times? A Good Time to Bolster Fraud Detection

By Diana Kelly
Senior Consultant

Tumultuous economic times bring about an increased incidence of fraudulent activity. Personal financial crises cause otherwise honest people to justify decisions that result in exaggerated or clearly fraudulent actions. Increases in auto and workers’ comp fraud are the most prevalent, although fraud in all lines is increasing. In auto, vehicle owners are fraudulently dumping or destroying their vehicles in order to obtain the insurance money. In workers’ comp, claims are exaggerated in terms of extent of injury, duration of the condition, and medical services rendered.

Companies continue to invest in the fight against fraud. Some companies find that, in times of flat premium growth and heightened competition, effective fraud handling can positively impact the bottom line.

In its most recent analysis, the National Insurance Crime Bureau reported that the largest percentage increase in questionable claims reported by member companies is in the areas of hail damage, catastrophe claims, and slip-and-fall injuries. The largest number of questionable claims continue to be in the areas of suspicious thefts for both property and auto, inflated damage, fire/arson for property, and faked or exaggerated injuries.

The first line of defense in all fraud investigation is the work done by the front-line claims adjuster. Well-trained adjusters recognize indicators that, individually or in combination, might be signs of fraud. Information concerning these indicators should immediately be passed to a specialized unit for further, more detailed investigation.

While larger companies are more likely to have established anti-fraud programs, companies of all sizes are recognizing the need to join the fraud-fighting campaign. The most common investments include fraud awareness training, manual red flag indicators, and external database searches. However, more companies are looking into or are already using automated tools, such as automated red flags, data mapping, and predictive analytics.

Effective metrics should be put in place to make sure that results are cost-effective and meaningful. Specific metrics include: percentage of claims referred to the specialized unit, percentage of claims actually investigated, the number and percentage of claims that are mitigated as a result of investigation, and some measure of financial impact.

Industry-wide potential fraud referral rates are between 2% and 3% of reported claims, and they’re rising. Other potential problem areas—such as applicant, agent, and employee fraud—usually don’t get the same attention as claim-related fraud, but they are areas companies should include in their fraud-fighting efforts.

Every company must recognize and aggressively pursue potentially fraudulent claims, balancing that offensive with excellent customer service and timely claim handling for meritorious claims. If your company does not have a well-established, effective fraud-fighting program, now is the time to develop and implement one. Without it, your company is, or will be, actively targeted by organized fraud rings that use new and increasingly effective schemes as well as otherwise honest individuals who see an opportunity for financial gain. Ignoring fraud wastes your company’s financial resources.