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Life and Health Insurance Fraud: An Industry Overview

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Insurance fraud today is both global and rampant. 

Conservative estimates from the Coalition Against Insurance Fraud place the dollar amount of annual insurance fraud losses at $80 billion, yet the actual figure could be much higher. With new technologies emerging, insurance fraud is evolving. Fraudsters have become quite sophisticated and creative, and only through constant vigilance can carriers expect to keep pace.

Current State of Insurance Fraud

Fraud in life and health insurance – whether low-tech or high-tech, hard or soft – can occur at every customer touchpoint, from application to claims. Soft frauds tend to be unplanned or opportunistic. They are generally acts of misrepresentation or falsification of health or finances that are committed by consumers and sometimes abetted by accessories. For the most part, these involve no or low-level deliberate criminal acts.

Hard frauds, whether committed by consumers, organized crime rings, or providers, are more likely the result of intentional criminal behavior. Hard consumer-perpetrated frauds include intentional medical and financial misrepresentations, money-laundering schemes, health insurance mills, and falsified injury or death, with dishonest funeral homes, agents, physicians, and attorneys abetting the schemes. Hard provider-perpetrated frauds generally involve health insurance cost inflation, falsification and/or upcoding of services provided, and the provision of unnecessary medical services. On the life side, well-organized community frauds have been perpetrated for decades by itinerant clans. These involve customer misrepresentation and falsified information, and are frequently abetted by agents and physicians.

Fighting fraud has never been more complex. Anyone – applicant, agent, insured, beneficiary, funeral director, government official, or medical provider – can be a perpetrator. Fraud risk may be exacerbated by efforts to speed and simplify insurance applications and underwriting and to improve the customer claims experience. Less stringent claims investigations, fewer proof-of-loss requirements, and inadequate authentication of documents in hopes of turning beneficiaries and their families into new customers, can increase opportunities for fraud.

Data privacy concerns and regulations also complicate efforts to identify fraud. Innovations such as wearables, affordable genetic tests, and in-home diagnostic kits increase the risk that consumers will discover an impairment or seeds of a future health condition and, only then, purchase coverage. At the same time, personal information theft abounds. Stolen information can be used to supply false identities in insurance applications and as part of claims submissions.

Tolerance of insurance fraud among consumers may be rising as well. A 2014 study from Equifax and YouGov found that people do not believe they are committing insurance fraud when they provide slightly incorrect information (either exaggerated or omitted) when applying or filing a claim. The study also suggests a generational divide: Consumers under age 35 reported that they are more likely to stretch the truth at the application and claim stages, and yet fail to identify this behavior as fraudulent.

 An additional compounding factor is technology. As the industry digitizes, insurers gain access to new tools in the fight against fraud, and also face additional dangers. Larger data pools and improved predictive analytic capabilities enhance fraud prevention and detection. Meanwhile, increased consumer access to powerful data-based technologies, coupled with back-office process automation, can also simplify scams. As fast as new technologies and systems are developed and implemented, fraudsters develop workaround tactics and strategies to exploit them.

Steps to Insurance Fraud Prevention

Many insurers already have anti-fraud units in place. However, these teams need to be the first line of defense against fraud rather than the sum of fraud-fighting efforts. Strategies such as fostering a zero-tolerance culture for fraud and providing anti-fraud training to employees and agents can be effective means to identify fraud both before or after it comes on the books.

 More frequent reporting and prosecution of fraud might also be worthwhile. RGA’s Global Claims Fraud survey reported that less than 2% of identified incidents of insurance fraud resulted in prosecution. Fraudsters are aware that insurers are reluctant to prosecute, both due to the high cost of litigation and the uncertain outcomes. Even though expensive, making prosecution a credible threat can be a deterrent.

 Behavioral science offers yet another path to prevention. For example, the way a question is phrased and the context in which it is asked can significantly impact the accuracy of responses. Research suggests there are three key principles for increasing the accuracy of applicant disclosures: Make it easier to be accurate, easier to be truthful, and harder to lie. These can be accomplished through a variety of strategies: using simple language, prompting memory by listing possible answers, assuming the behavior exists (e.g., “When did you last…”), and increasing the applicant’s sense that answers are being monitored (sentinel effect), to name just a few.

Predictive analytics and artificial intelligence are being applied to fraud detection and mitigation as well. The enormous amounts of data now available can be sifted to detect patterns indicative of fraud that even a few years ago might have been undetectable. Algorithms can be trained to identify information applicable to fraud cases, and as data is added, these algorithms can become more accurate. Advances in computing and data science could allow more agile insurers to stay one jump ahead of some of the more ingenious fraudsters.

Bottom line: Fraud safeguards, no matter how sophisticated, cannot fully protect any company. Yet that reality should only embolden insurers’ fraud prevention efforts. As an industry, we must ensure our fraud prevention tools and technologies are broad and well-integrated, and we must be both proactive and willing to adapt nimbly, just like the fraudsters.

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BASELINE FRAUD-FIGHTING FOR INSURERS

• Flag anomalous patterns; have procedures in place to escalate as needed

• Monitor chat rooms, message boards, and information sites where fraud may be discussed, new/old schemes shared, or to investigate suspicious claims (hiring a service can help)

• Proactively conduct periodic analyses of sales, underwriting, and new and in-force business; flag suspicious policies

• Create an anti-fraud culture where every employee is responsible for fraud prevention and detection

• Implement and regularly update anti-fraud and fraud detection tools and training

• Use data analytics/predictive modeling in fraud detection/prevention

• Design applications, policies, claim forms and other documents intelligently to deter fraud by applying behavioral science strategies (e.g., wording of questions, placement of fraud warnings, etc.)

• Join forces with law enforcement and industry watchdogs to maximize fraud protection

• Implement link analysis (frauds can be connected!) and leverage social media

• Maintain open communication among claims, underwriting, and reinsurers as trends are identified; provide continuous feedback

Download "RGA Fraud Whitepaper"

Summary

There is no single tool capable of defeating insurance fraud. In a wide-ranging paper and guide, RGA shares insights into fraud detection and prevention trends, techniques, and technologies at the RGA Fraud Conference. Insurers must be proactive and prepared to adapt nimbly, to keep pace with fraudsters. Find simple steps all insurers can take here.  

Download "RGA Fraud Whitepaper"
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