The 8 Biggest Fraud Challenges for Insurers

The insurance industry is modernizing fast in numerous ways. Hot topics such as insurtech, mobile adoption, blockchain, and predictive analytics are just a number of improvements that change the way insurers work. However, insurers face a number of challenges in effectively responding to fraud. Our recent study on insurance fraud revealed the biggest challenges for insurance carriers.

1. Issues with Data Protection and Privacy

Emerged digitization and the increase in data in recent years mean that insurers have an even greater responsibility to keep customer data secure and confidential. The industry is built on trust between insurers and their customers, so the security and privacy of the data that companies receive is treated very carefully. Whether or not the use of data is allowed and to what extent varies per country or region. European Union has GDPR, the US state of California has CCPA, while POPIA is in force in South Africa.

But there are differences even within the same region. In Scandinavian countries, a credit check is fairly simple, in Norway and Sweden tax returns are even public. In those countries, transparency stands above privacy. On the other hand, in Central and Middle Europe protection of the consumer is stricter.

2. Inadequate Access to External Data

When a person or a business applies for an insurance policy or submits a claim, they expect to do it themselves, via the internet, from the comfort of their home, and in a matter of minutes. An insurance company needs to verify the risk almost instantly. Without access to external data to verify an applicant’s identity and credibility, the risk of making a wrong judgment is high.

Some data, like company information, is public and easily accessible on the official government websites, while other is provided only by specialized vendors like Web-IQ or Legentic. The availability and costs of accessing external data vary per country. However, the information from external sources presents a more comprehensive picture and provides strong and sound arguments for acceptance, rejection, or revised conditions.

Moreover, one of the biggest advantages of having access to external data is not just the information itself, but the automated process that comes with it. Underwriters and investigators no longer need to waste time manually searching for information to leverage the risk.

In 2023 one of the biggest challenges carriers face is deciding which external data sources to use to minimize risks and optimize the lifecycle process.

 3. Problems with Internal Data Quality

Differences in culture, accuracy and consistency make it difficult to compare the content of administrative systems. To top it off, human errors can have a negative influence on data quality. The most seen pitfalls are:

• The lack of international uniformity in how we record information

Although carriers need to follow regulatory data quality requirements like EIOPA and Solvency II to make sure that the data they gather is accurate, complete and appropriate, there is still a lot of space left for interpretation of what exactly is accurate, complete, and appropriate data. Moreover, different countries use different formats to record addresses, dates of birth, and family names which can be a source of potential confusion and misunderstandings.

• Changing the manner in which registration systems are used

Over the years a decision may have been made to record certain information in a specific way. Often the knowledge of what and why changes were made is still available within an organization, but usually little is recorded and documented. For outsiders, there is insufficient knowledge on the background of certain data.

• Core system changes

Some systems are modernized, via acquisitions or mergers, or because solutions are implemented for new lines of business. Transitioning from a legacy system to a new solution is a big and complex project. Data transfers and equalization are not always completed, which means that data gets scattered. Composing a complete picture of a customer will then be a cumbersome task.

Learn more about the biggest challenges for insurers in this eBook.

4. Cooperation with Other Insurers

In order to identify fraud at an early stage it is of vital importance to share intelligence. Sharing of data between public and private sectors could help prevent, detect, and investigate insurance fraud. In a number of countries, privacy laws are currently prohibiting the public sector from setting up such constructions. Insurers can join forces by sharing data, working together on investigations, and learning together about the latest fraud schemes.

Some companies might also worry about giving out business information, as it feels this will harm their competitive advantage. Information that is shared at this moment mostly comprises claim history and fraud cases. Insurers that are not afraid of sharing selected information with other carriers will have an advantage in 2023.

5. Keeping up with Modern Fraudster Modus Operandi

Fraudsters are always looking for a weak spot. They are smart and make sure that they do not walk in the spotlight. They use different fraud methods, different insurers, and fake identities, just to make sure that they do not get caught. If they have found a way to leverage new technologies that are not yet fraud-proof, they will make use of it. Fraudsters move fast and most companies can only follow their trends.

Successfully detecting organized fraud also differs per culture and often is a sensitive occasion. However, the more effort a fraudster needs to put in to commit fraud, the less attractive fraud becomes, so staying up to date with the latest developments is crucial in detecting fraud early. Investing in automation, continuous training, and information sharing are the most effective ways to overcome this challenge.

6. Challenging Fraud Is Not a Priority for IT

The majority of insurers indicate that they have a project planned to better fight fraud. However, looking at the priorities from an IT perspective, numerous projects may end up higher on the list of priorities than fighting fraud.

Common themes for IT projects are digitization and the replacement of core insurance systems. However, these projects can go hand in hand as most solutions are easy to integrate into any core system and should complement each other. But it is up to the business to translate their pain into IT priority.

 7. Insufficient Commitment from the Organization

A mature organization needs overall support to effectively prevent fraud, from C-level to customer support. By using proactive monitoring of current customers and risk profiles, preventive measures can be taken in time, in case of changing risks. Looking at the levels of awareness and maturity of the organizations, fraud awareness usually is the highest in the claims department. Underwriting is the runner-up. The gap with other departments is significant.

In order to fight fraud effectively, it is critical to establish fraud awareness throughout the entire organization. More engagement and higher fraud-detecting skills contribute to an approach in which fraud can be prevented rather than cured within insurance portfolios.

Training is an important part to help raise awareness. Of course, having people trained will need initial investments. Those will pay out as personnel is more aware; resulting in fewer incoming risks, better fraud detection capabilities, lower costs, and more efficient processes.

8. Outdated Internal Fraud Systems

If data is processed by software that is able to quickly perform analyses and comparisons, insurers can fully automate underwriting and make better pricing decisions. Moreover, an automated screening process supports an objective and uniform risk assessment. This results in healthy portfolios and allows insurers to keep their pricing competitive without compromising their profit margin. Unfortunately, a great number of insurance companies use outdated internal systems or still rely on manual processes such as knowledge workers or business rules for fraud detection in Excel sheets.

The follow-up and investigation of possible fraud cases are most efficient if all related information is available in one system. It would instantly be clear what cases require attention, whilst the majority could probably be processed straight-through. Investigating false positives will be reduced to a minimum as objective risk assessment can be applied whilst following corporate guidelines. Such an integrated experience makes working on and sharing cases less error-prone as well.

Continuous process

The above challenges are just the tip of the iceberg. In a world where consumers adapt to new ways of communication and technologies every day, it can be hard to follow. But with ongoing adaption and optimization, insurance companies can stay on top of these challenges.