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. These topics may play a role already when it comes to fraud prevention and detection. However, insurers face a number of challenges in effectively responding to fraud. A recent study revealed the biggest challenges for insurance carriers regarding fraud. In order of appearance, these are:
1. Issues with data protection and privacy
Emerged digitization and the increase of 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 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 extend varies per country. The European insurance industry is heavily regulated in relation to data protection, both at a national level as well as by the 1995 EU Data Protection Directive.
Generally, one can say that in Europe, from north to south, privacy laws are becoming less lenient and the use of external data is becoming a more sensitive issue. 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. In Central and Middle Europe protection of the consumer is stricter. In an international setting insurers will have to deal with such differences. The detection of fraud would improve if insurers strive for an optimal effort per situation and naturally abide the current laws and legislation of each country.
2. Inadequate access to external data
Insurance processes often have become a distant affair: insurance brokers rarely visit a client’s home and many consumers prefer to handle their business via internet. But if there is no personal contact with clients applying for a policy, how can one still make a good assessment of the risk that is taken on?
Of course, risks are an inherent part of any insurance, but risks need to be valued as thoroughly as possible for a healthy return on an insurance portfolio. Information from external sources may present a more comprehensive picture, and provide strong and sound arguments for acceptance, rejection or revised conditions. External data improves the health of insurance portfolios by seeking the right balance in risk coverage.
The availability of external data sources varies per country. Costs and usability vary as well. Sources that hold company information, such as Chamber of Commerce and credit data providers, are widely used. Companies that can screen social media such as Facebook and Twitter are on the rise; especially, to complement geographical information of a claimant at a certain time, or to complete an applicant’s profile.
3. Problems with internal data quality
Differences in culture, accuracy and consistency make it difficult to compare the content of administrative systems. And to top it off, the human factor can have both a positive and a negative influence on data quality. There is plenty of space and opportunity for improvement. Most seen pitfalls are:
- The lack of international uniformity in how we record information
Addresses, dates of birth and family names are also an ongoing source of potential confusion and misunderstandings between countries.
- 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. This leads to outcomes that are difficult to explain.
- Core system changes
Over the years, core systems change. Because systems are modernized, via acquisitions or mergers, or because solutions are implemented for new lines of businesses. 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.
4. Cooperation with other insurers
The insurance industry possesses huge amounts of data. This data can not only benefit fraud management during the claim process. It is also valuable for preventive measures, such as risk assessment at underwriting. The collected information on the insured persons and objects, the claims, and detected fraud helps in making accurate and objective judgements about risks, trends, and the value of policies and portfolios. Insurers can greatly benefit from having access to more data. Ultimately, this could result in healthy portfolios and allow insurers to keep pricing competitive without compromising on profit margin.
In order to identify fraud at an early stage it is of vital importance to share intelligence. The sharing of data between public and private sectors could help to 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, by working together on investigations and to learn 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 do so to improve on fraud and risk detection.
5. Keeping up with modern fraudster modus operandi
Fraudsters are always looking for the weak spot. They are smart and make sure that they do not walk in the spotlight. They use different modus operandi, 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.
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, there are numerous projects that may well end up higher on the list of priorities than fighting fraud.
Common themes for IT projects are digitization and replacement of core insurance systems. So, it is up to the business to translate their pain into IT priority. Moreover, why should insurers wait with implementing a fraud solution? These projects can go hand in hand as most solutions are easy to integrate in any core system and should complement each other.
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 maturities 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 it needs to be 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 less incoming risks, better fraud detection capabilities, lower costs and more efficient processes.
8. Outdated internal fraud systems
All in all, insurers can really take advantage from having access to more data. If data is processed by software that is able to quickly perform analyses and comparisons, insurers can fully automate underwriting make better and 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 is 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 of cases less error prone as well.
The above challenges are just the tip of the iceberg. In a world where consumers adapt to new ways of communications and technologies every single day, it can be hard to follow. However, developments on rules, regulations and modernization are widely spread. All in all, effectively fighting fraud is an ongoing process of adaption and optimization.