Reinsurance Industry’s Greatest Challenge: Claims Fraud DetectionBy Tom Johansmeyer | June 3, 2015
Somewhat to my surprise, insurance fraud came up during my deep dive into the greatest challenges the reinsurance industry faces. Mostly, it caught my attention because of the other hat I wear here at Verisk/ISO (head of marketing for the organization that includes ISO ClaimSearch).
So, if you haven’t read the previous posts in this series, let me bring you up to speed. We launched a new reinsurance initiative at the beginning of the year with some market research, getting around a hundred responses and conducting dozens of one-on-one interviews on top of that. While there were some interesting nuggets, the overwhelming majority of responses focused on soft market conditions – some combination of reinsurance rates being down and the availability of “excess” capital in the market.
I was planning to write a report recapping the research but didn’t want to contribute yet another piece on low rates and abundant capital – there are plenty of people beating that drum already. So, I just decided to write about something else, specifically, the underlying problems that could become opportunities for reinsurers. Yesterday, it was centralized data aggregation, and before that, it was primary insurance distribution. Today, it’s claims fraud.
Claims fraud plagues local insurance industries around the world. In the United States, as many as 10 percent of claims have some element of fraud, according to various industry estimates. In the United Kingdom, “whiplash” has almost become synonymous with “combined ratio above 100.” And while emerging markets are as yet untested – by definition – one can fathom how fraud could compromise a new insurance program from its earliest days.
When claims fraud came up during my interviews, it really got my attention. I’ve always wondered about the impact of fraud on reinsurance. If the 10 percent estimate is accurate, then I’d be willing to bet the global reinsurance industry is picking up at least part of the tab. As the effects of fraud seep into the global risk and capital supply chain, reinsurers stand to suffer tangibly. Unnecessary payments deplete capital which constraints strategic alternatives and erodes shareholder value. Consequently, mitigating primary insurance claims fraud risk should be a priority for reinsurers. When every basis point is important, 10 percent is a staggering number.
I can’t go into too much detail about how the claims fraud issue arose during my research, as it came from client conversations. However, I can reveal that we weren’t talking about mature markets, which means the potential for reinsurers to help make a difference is quite high.
Solutions are in place around the world, generally in mature markets. In the United States, for example, ISO ClaimSearch, which is currently undergoing an exciting transformation, has served the property/casualty industry effectively for more than 15 years, with predecessor systems going back more than 40 years. The combination of ISO ClaimSearch, along with additional analytical services on the platform, has helped insurance special investigation units (SIUs) investigate suspicious claims and fast-track those that are meritorious. As a result, primary insurers have been able to protect their capital, customers, and shareholders from an ongoing threat.
In developing markets, though, industrywide fraud detection solutions have yet to be implemented, so there’s plenty of upside for both primary insurers and reinsurers. For relatively new markets, other activities have taken priority, particularly distribution, which is fundamental to the creation of a robust market. As developing insurance industries mature, fraud detection becomes much more important. As an industry scales, fraud has the potential to do so, as well. And the threat to an insurer’s capital in those early days could cause an industry to collapse before it becomes large enough to absorb the effects of improper claims.
Doubtless, implementing an industrywide database for fraud detection is pretty far outside a reinsurer’s existing expertise and operations, let alone such tools as predictive analytics for organized fraud. However, there is one leverage point reinsurers do have: long-standing client relationships. Working with an organization like ISO, reinsurers could bring even a subset of clients in a local market together to collaborate on a cross-company solution, using our platform and expertise as an accelerator to reduce cost and complexity while bringing the benefits to market faster. Primary insurers would note the reinsurer’s role in getting the process started, which could have powerful brand implications going forward.
As collaboration drivers, reinsurers could stimulate innovation around the world. Although the direct benefits would be realized by their clients, the reinsurers themselves would still see some returns – in this case through less fraud creeping into their books. And this approach wouldn’t require a heavy investment in new capabilities. Rather, it would take only a new type of client conversation that would help transform how cedents see them, moving from protection seller to strategic partner.
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