While fraud has been around since the
beginning of car insurance a recent survey has found that it is far more
prevalent than most industry experts suspected.
A study by FICO and the Property
Casualty Insurers Association of America (PCI) found that found that 32 percent
of insurers claim that fraud costs may make up to 20 percent of their losses.
This is much higher than the 10 percent of casualty and property losses that
has been the conventional wisdom in the industry. In addition, 54 percent of
insurers surveyed are expecting the cost of fraud to rise.
Fraud Comes in Many Forms
Insurance fraud comes in many forms,
from the small cases where a consumer pads their claim to extremely
sophisticated crime rings who stage accidents and then file phony injury
claims. When it comes to individual fraud by consumers, 60 percent of insurers
are expecting a rise in their auto insurance sectors. They are also expecting
fraud to rise in both personal-property claims and workers compensation.
According to the survey, 61 percent of insurers feel that the tough economy is
The same percentage of insurers are
expecting that fraud perpetrated by crime rings will also increase, especially
in the area of automotive claims fraud.
Insurance Companies Using Data
Insurers are going after fraud in a
number of different ways. According to the insurers surveyed, one of the most effective
methods is predictive analytics. Over forty-five percent of the insurers in the
study claim that it will have the biggest impact in fighting fraud.
Predictive analytics uses algorithms
and computing power to sort through huge amounts of data to detect patterns.
Insurers use it to price policies more accurately and to detect claims that are
fraudulent. They are also using it to weed out lies on car insurance
FICO’s Insurance Fraud Manager software
sorts through millions of data points from both applications and insurance
claims. It flags anything that seems suspicious and those will get a second,
more thorough look. As an example, if one person was named as a witness or
claimant in multiple claims this could point to a fraud ring and the software
would flag those claims.
Credit card companies have been using
this type of technology since the 1990’s and now insurance companies are
catching on to how effective it can be in fighting fraud. When you receive a
call from your credit card company in regards to irregular activity on your
credit card this is due to predictive analytics.
The industry is also hoping to change
no-fault insurance systems that are operating in states like New York, Michigan
and Florida. A whopping 76 percent of the surveyed insurers claim that fraud is
higher in no-fault states when compared to tort system states. In no-fault
states the majority of fraud comes from crime rings.
Insurance fraud is much more common
than insurers and industry experts assumed. Insurers are fighting fraud using a
variety of tools including predictive analytics. This tool sorts through tons
of data looking for red flags which might indicate insurance fraud.