It's no surprise that insurers of all sizes consider fraud a serious problem. And according to insurers, private passenger auto and workers' compensation are subject to the most fraud, say insurers.
More than one-third of insurers believe that the amount of fraud has increased over the past three years, in contrast to six percent of insurers who believe the amount of fraud has decreased, according to a survey conducted by the Insurance Research Council (IRC) and Insurance Services Office Inc. (ISO).
More than 40 percent of insurers report spending more to fight fraud during the past three years, in contrast to three percent who report spending less. However, insurers rate their efforts in the war on fraud as only "moderately effective".
Designed to ascertain the scope and nature of insurance fraud, what insurance companies are doing to combat it, and the support they receive from federal, state and local authorities, the study analyzes survey responses from 353 large, medium and small insurance companies. The companies represent 73 percent of the property-casualty market.
Survey respondents also indicated that "soft fraud" - exaggeration of otherwise legitimate claims, often committed by individuals acting alone - is far more frequent than "hard fraud" - deliberate attempts to stage losses, often committed by organized rings. Because of the frequency of soft fraud, it adds more to overall claim costs than hard fraud does.
"Insights into the lines most affected by fraud and the nature of the fraud being committed can be extremely valuable to insurers, who must determine what resources to use in the war on fraud and how to allocate those resources," said Elizabeth A. Sprinkel, senior vice president of the IRC.
"Information about the tools and techniques being used by others and their effectiveness can also help insurers enhance their own efforts to prevent fraud," she added.
All companies in the study actively fight fraud, with 82 percent of survey respondents indicating their companies have formal fraud-fighting programs. While more than two-thirds (68 percent) say their companies' programs address claims fraud "thoroughly," only 25 percent say they address application fraud "thoroughly," and 19 percent say they address premium fraud "thoroughly."
"The relative lack of attention to application and premium fraud presents insurers with an opportunity to do more to hold down the cost of insurance," said Richard Boehning, senior vice president of ISO. "Both insurance companies and their honest policyholders would benefit from increased efforts to stop cheats who obtain policies under false pretenses and pay less than they should for insurance. Such fraudulent behavior shifts costs to honest policyholders."
To detect fraudulent claims, at least four out of five companies use internal fraud recognition training, manual red flags or indicator cards, and external databases. At least two-thirds of companies use internal audits, video or audio tape surveillance, information from agents, and internal database searches. No more than one in four use some of the newer mathematical or analytical techniques, but higher percentages use external databases.
"The use of external databases reflects the central role information plays in the war on fraud," commented Boehning. "To determine whether a claimant's loss history suggests the possibility of fraud, an insurer needs access to the complete history, not just the information in its own archives."
Insurers agree on the importance of mobilizing public opinion to fight fraud, but only 48 percent of survey respondents report that their companies have tried to educate their policyholders or the general public about how fraud affects them. Insurers also overwhelmingly agree on the need for tough enforcement of existing laws at the federal, state and local levels.
On a list of 30 items that insurers rated in terms of their importance to anti-fraud efforts, eight of the top 15 relate to the critical nature of support from law enforcement, prosecutors and judges; tough civil and criminal penalties for committing insurance fraud; and statutes that support insurers in the war on fraud. On a scale from one (not important) to five (very important), 95 percent of respondents rated enforcement of existing penalties either four or five, with 94 percent rating support of prosecutors and judges similarly.
"Insurers cannot prosecute criminal claim fraud on their own. Only law enforcement officers and prosecutors can do that," noted Boehning. "Without the right laws, vigorous enforcement, and judges who impose stiff sentences, the deterrents to committing insurance fraud may never be strong enough to shield honest policyholders from the costs imposed by those who cheat the system."
edited by Sandy Smith ([email protected])