Uncovering fraud in auto extended warranty insuranceBy Sharon Markovsky | October 16, 2018
For most drivers, purchasing an extended automotive warranty for their vehicle means peace of mind in the event their vehicle malfunctions and needs critical repairs. For others, the intent is different—fraud. These individuals try to pass off preexisting vehicle issues as a covered warranty claim.
While warranty companies likely mine their own data for fraud, they often lack the “hidden” data not available to them when considering only their experience with the customer. And these hidden issues can directly affect a company’s bottom line. Organizations that don’t take preventive action can end up paying millions of dollars in fraudulent claims.
The high price of warranty claims
The auto extended warranty market is worth roughly $18 billion and is expected to grow over the next five years. But with the growth come factors that increase expenses. Modern vehicles’ increasingly complex systems and designs make diagnostics and repairs more expensive. Consider this: auto repairs are 61 percent higher today than in 2000. Warranty companies’ profitability is also strained by the competitive nature of the market, partially attributed to a trend in undercutting prices to drive consumer demand.
Some common schemes that deceive insurers
Eliminating losses due to fraud starts by identifying the scope of the problem and the patterns and trends of fraudulent claims. We recently evaluated warranty claims and found that fraudulent claims could cost warranty providers upwards of 1 percent of their revenue. In particular, we found three common scenarios that led to potentially erroneous warranty payments: preexisting flood damage, undisclosed salvage and total losses, and significant accident histories that likely caused mechanical failures.
For example, in one incident, we identified what appears to be a husband-and-wife fraud team. In this scenario, the husband submitted a flood claim to his insurer for his car; once the car was salvaged, his wife took out an extended warranty policy on the vehicle and submitted a warranty claim for it one month later. Thousands were paid to this claimant for her warranty claim. But based on a comparison of the odometer at the time of the flood and at the time of the warranty claim, the car was inoperable—it had not moved even a mile!
In another instance, a car was totaled in a rollover accident and then sold to a salvager. A short time later, the owner filed a warranty claim. This was not an isolated incident. In fact, paying claims on previously salvaged vehicles could be costing the industry millions in potentially unnecessary claim payments.
Some of these incidents might have been avoided with an in-person physical inspection, but not if the claimant and the third party were in cahoots. The industry needs a more effective and efficient alternative to detect fraud.
Detecting fraud at point of claim
Many insurers and warranty providers are unknowingly paying these same types of fraudulent claims because they lack an effective system for spotting suspicious activity.
Detecting questionable claims requires insurers to have access to a large database of claims so they can research a vehicle’s accident history as well as a claimant’s loss history. When insurers have a detailed loss history on both the owner and the vehicle, they can identify undisclosed preexisting conditions of the vehicle along with red flags about a claimant, that may include an unusually large number of claims or previous SIU investigations.
When this data is combined with technology that automatically matches claims and alerts insurers of potential fraud, it not only saves warranty claims staff time, it also provides significant savings for the company by eliminating unwarranted payments that could cost millions of dollars.
ISO ClaimSearch® can help uncover fraud at the point of claim, matching an insurer’s auto extended warranty claim to 1.3 billion claim records. The solution immediately renders the claimant and vehicle’s claim history for the past five years, so insurers can spot questionable claims early and easily.
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