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Microinsurance and Claims: Fraud Prevention and Detection

In developed markets, it’s no secret that insurance fraud is an enormous problem. In the United States alone, according to data from the Aite Group, property/casualty insurance fraud costs the industry as much as $64 billion a year. In the United Kingdom, according to the Association of British Insurers, insurance fraud amounts to more than £1.6 billion per year. While substantial, even those levels of fraud do not threaten the viability of two of the world’s largest systems, thanks in large part to the efforts of SIU professionals and the tools they use (such as complicated fraud schemes), savvy and experienced investigators put their talent and skills to work to distinguish between honest claims and those involving some degree of impropriety.

In new markets, however, insurance fraud could jeopardize the viability of an entire emerging industry, preventing the protection of millions of people and their assets. Undetected, microinsurance fraud could make premiums unaffordable to a price-sensitive market. And as a result, fraud could cost insurers the prospect of future profitable growth.

Fraud risk in an emerging market is similar to what exists in countries with mature industries. At the low end, there’s the potential for claim padding and other forms of soft fraud. At the other end of the spectrum, there’s the risk of organized fraud activity — heightened by the paucity of opportunities for legitimate wealth creation. As claims come in, insurers will need to identify those that warrant further investigation.

Insurance fraud prevention and detection start and end with people: There’s no substitute for a well-trained, knowledgeable professional. The first step for any given claim is the frontline adjuster, who needs to know the attributes to spot, the questions to ask a claimant, and the indicators that should prompt a referral for deeper investigation. In the event of complicated fraud schemes, savvy and experienced investigators put their talent and skills to work to distinguish between honest claims and those involving some degree of impropriety.

Even the most seasoned professionals, however, need help. In the United States, for example, ISO ClaimSearch provides an important starting point for an investigation, as well as the data needed to determine the likelihood of fraud. A central all-claims database also provides a platform for further analysis to streamline referrals to SIU and investigative activity. Without such a resource, investigators have to spend more time to find suspicious activity, and the odds of a successful result shrink significantly.

Without the ability to harness data for investigations, fraud can slip through the cracks. Left undetected, fraud can grow rapidly. Once a fraudster realizes that it’s possible to exploit a system, he or she will continue to do so until the revenue stream dries up.

Doubtless, insurance fraud can affect an insurer’s ability to operate a microinsurance program profitably. It can also make the system unsustainable from the customer point of view. Fraud can lead to higher premiums, and in a price-sensitive market where insurance is still a new idea, that could cause the community to lose faith in it. When prospective policyholders have to make difficult financial choices, a premium payment pushed higher by the effects of fraud becomes a less likely personal investment.

From the start, insurers implementing a microinsurance program should have a plan for fighting fraud. With the right mix of people and technology, a carrier can protect its insureds and the program as a whole.

Thomas Mulvey

Thomas Mulvey has been in the business of insurance investigations for more than 27 years. In his current position, he serves ISO as assistant vice president of SIU and claim services. He is also the coordinator of ISO’s Insurance Fraud Management Conference.

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