Insureds still feel it’s okay
to be dishonest on claims
By Joseph Bracken, Enservio
Hard fraud involves criminal activity and includes scams uch as auto insurance crash rings, arson for profit,
the illegal funneling of insurance company assets, and falsifying medical bills.
However, it is not only this clearly illegal
activity that is costing insurers and policyholders millions of dollars every year.
There is a more insidious form of fraud
about which the general public may have
a more ambivalent view.
Soft fraud, also known as opportunistic fraud, refers to claim exaggeration or
embellishment. It is generally harder to
detect and problematic to investigate. The
perpetrators are often indistinguishable
from honest policyholders, and they usually consider their behavior to be morally
acceptable. A study commissioned by the
Insurance Research Council (IRC) found
that a quarter of respondents thought
padding their insurance claim to cover a
deductible was reasonable. Twenty percent thought padding a claim to recoup
past premiums was acceptable behavior.
Soft fraud can also happen at the out-
set of a policy. The insureds may delib-
erately misrepresent the facts to the un-
derwriter in the hope of reducing their
premiums. They may omit details from
their medical history or underreport the
miles they regularly drive their car. In
2008, Quality Planning estimated that
insurers lost $15.9 billion in auto insurance premiums as a direct result of underwriting rating errors.
A truly victimless crime?
A review of studies into fraud by the
American Risk and Insurance Association (ARIA) in 2011 found that perceived
unfairness by insurers was the most significant factor in influencing aberrant behavior by policyholders. For example, the
higher the deductible in an auto claim,
the higher the propensity of drivers to file
a fraudulent claim. Similarly, the belief
that insurers would “nitpick” and try to
reduce settlements or avoid making payments was used as a justification by policyholders to tell “white lies” when completing claims forms.
Insurers face two major problems
when investigating soft fraud. First, strin-
gent investigation of a claim that may or
may not be fraudulent is costly and the
settlement sums involved are usually
relatively small. Is saving several hundred
dollars really worth involving the Special
Investigative Unit (SIU)? On the other
hand, the combined total of these small
sums of soft fraud can mean significant
losses for a company.
Second, investigations can have a potentially devastating impact on customer
loyalty. Asking insureds too many questions about their claim may prompt them
to choose a new company even if the
claim is genuine and uninflated. Consumer websites such as badfaithinsurance.org
highlight insurers identified as acting in
bad faith, and feed the erroneous notion
that insurers will go to great lengths to
avoid paying reasonable claims. This only
adds to the perception that it is okay for
policyholders to abuse the system. Applying too rigid or intrusive an investigation
process could send the wrong message
about an honorable and fair insurer.
What is the answer?
Commercial tools exist to profile policyholders and highlight those with key risk
factors such as a bad credit history. There
is also software that applies algorithms to
business rules to flag suspicious behavior such as a high frequency of claims,
or claims submitted early in the life of
a policy. It is now possible to examine
fraudulent behavior at the claim line detail to flag suspicious trends or contradictory information like a person living in a
financially depressed area claiming the
loss of expensive art works.
While some analytical methods can result in a large number of false positives,
this can be balanced by a non-confronta-tional and non-intrusive claims management process that delivers large volumes
of valuable data and reduces the impact
of soft fraud.
There is a fine balance between telling
insureds that an insurance company takes
their claims seriously and making them
aware that the company is also taking steps
to reduce fraud. Being proactive lets them
know that the insurer values all claims and
works with insureds to ensure they are
treated fairly — which can help reduce the
temptation to engage in soft fraud.