Insurers have a tough job ahead: improving loss ratios and their return on risk. Insurers know that improving (or reducing) loss ratios can happen by increasing rates, and/or by reducing losses and loss adjustment expenses.
The majority of property & casualty insurers also know that simply increasing rates is a huge turnoff to policyholders, who will think nothing of abandoning their current carrier in favor of a better deal. So, their efforts will be placed on reducing frequency and severity of losses, as well as loss adjustment expenses.
The applied calculation is simple: Improved loss control efforts centered around enhanced education and communication with the customer will have a measurable impact on loss adjustment expenses, and certainly improve the overall customer experience. But for those claims that occur anyway, so will fast and accurate claims resolution… and, so will fraud detection.
Our 2019 Insurance Fraud survey bears this out, citing loss ratios at 73% in the United States. Leading up to that statistic, we discovered that on average, 10% of the incurred losses were related to fraud, resulting in losses in excess of $80 billion per year. Innocent families pay $400-$700 more per year, on average, to support the cost of fraud.
Investing in fighting fraud makes sense, but it’s how you do it that matters. Many insurers following the same processes will get the same results, which means loss adjustment expenses remain unchanged. It follows that insurers with more modern technologies, such as automated fraud solutions as well as a fraud-fighting culture, will see different results.
By modern technologies, we’re talking about a hybrid detection model that uses predictive analytics, network analysis, text mining and instant feedback tools to deliver efficient and accurate results. It also includes integration of contributory, proprietary data and third-party data. And it must include seamless core systems integration and workflow capabilities. These mechanical pieces can improve a carrier’s back office efficiencies and enable a carrier to differentiate themselves as supporting honesty and accuracy in claims resolution—another piece to improving the customer experience.
Fraud has a Huge Impact
Why is fraud detection and resolution such an important part of improving loss ratios? Our research shows that fraud has increased more than 60% over the last three years, and we predict that fraudsters will only increase their efforts at short-changing honest policyholders. Meanwhile, the total savings of proven fraud cases exceeded $116 million.
From a corporate culture standpoint, many insurers are working from the outside-in, seeking guidance from regulators on anti-fraud plans and campaigns, joining forces with industry associations to help craft guidelines and preventive measures to help the industry track and tackle fraud. From the inside-out, insurers’ internal SIU teams are improving communications with claims business units, and the entire organization is rallying around the cause.
The good news is that insurers are beginning to understand this formula for success. For example, in 2016, 7 out of 10 insurance professionals rated fraud a top priority, according to our fraud report. Now, the majority of insurers, 72%, have a proactive fraud-fighting culture. By actively fighting fraud, insurers can improve their loss ratios and their customers’ experience.
About the author
Jim Murphy has a specialized Master’s degree in Economic Crime Management and is a 30-year veteran of the insurance industry. After serving as a police officer in New England and spending years running a Special Investigations Unit analyst team, he’s now the Vice President of Products for FRISS, helping insurers fight insurance fraud and making insurance more honest.