Fighting insurance fraud and the value of investigation outsourcing

Fighting insurance fraud and the value of

Special Investigative Unit outsourcing

 

Insurance fraud has likely existed from the time the first insurance company, the

Friendly Society, opened its doors in 1732 in Charles Town (now Charleston), South Carolina.

Today, however, the problem has escalated to an alarming magnitude. Insurance fraud is the

second largest economic crime in the U.S. after tax evasion, according to the National

Insurance Crime Bureau (NICB).1

While some perceive insurance fraud as a "victimless" crime, its impact on society is far

reaching, costing not only insurers but also consumers billions of dollars every year.

According to research firm Conning & Company, insurance fraud cost consumers $96.2 billion

in higher premiums in 1999 and more than $530 million in higher prices for good and

services.2 It estimates that all types of insurance fraud cost the average American household

nearly $5,000 a year in the form of higher premiums and higher cost of goods and services.3

Insurance fraud has proliferated in the U.S. because of the myriad challenges insurers face in

fighting it. Despite these challenges, however, insurers have become increasingly proactive

in implementing anti-fraud programs. Many of these programs involve the establishment of

Special Investigative Units (SIUs) to detect and investigate fraudulent claims. How these

units are run varies—some insurers keep them in house while others outsource them. This

paper explores the benefits of outsourcing SIU functions in terms of both preventing fraud

and improving bottom line performance.

Challenges in fighting fraud

Combating fraud is an uphill battle. Stung by staggering fraud-related losses, insurers

readily acknowledge the seriousness of fraud and their responsibility to take the offensive in

eradicating it. Their anti-fraud efforts, however, are often stymied by enormous challenges

on all battlefronts.

Public tolerance.

Research shows that a high percentage of people believe some forms of insurance fraud are

acceptable. Surveys, for example, reveal that as many as one in four adults think it is okay to

exaggerate a claim. Common justifications include making up for a deductible or making up

for paid premiums when no claims were filed. A negative perception of insurance companies

is partly to blame for the public's tolerance of fraud. According to the Coalition Against

Fraud, two out of five people blame unfair insurers for the fraud crisis and two out of three

believe premiums would continue to increase regardless of fraud.4

Costs and risks of fighting.

Fighting fraud is a very expensive proposition for insurers. Trained investigators are required

to properly identify and investigate suspicious claims, resulting in high costs for salaries,

benefits and job-related expenses. Insurers must also invest in fraud investigation tools and

technologies, which are rapidly evolving. From a cost-benefit perspective, many insurers,

especially small to mid-size companies, take the view that it is cheaper to pay fraudulent

claims than to investigate them. Insurers also run the risk of liability for bad-faith lawsuits

for failing to pay suspicious claims.

Elusive and sophisticated criminals.

Fraud perpetrators vary widely in age, income, occupation, race, religion and other

demographic and psychological attributes, making them difficult to categorize. In addition,

their profiles closely mirror those of honest citizens: they hold jobs (many in highly

respected professions), are married with children, have higher educations, volunteer in the

community, regularly attend church, etc. These criminals are also becoming increasingly

sophisticated in their methods, devising more complicated fraud schemes and taking

Insurance companies began to lobby for stronger anti-fraud legislation and tougher law

enforcement. They also invested in their own anti-fraud initiatives, including SIUs to

investigate and crack down on fraud. Before the 80s, few insurers had SIUs but, by the 90s,

a majority of companies had them.

Increasing awareness of the high cost of fraud to the public also motivated state legislators

to get involved in the fight against fraud. Today, most states have passed laws that

specifically define insurance fraud as a crime and make it a felony as opposed to a

misdemeanor. Laws have also been enacted to increase monetary penalties and set prison

sentences. In addition, most states have established fraud bureaus and imposed anti-fraud

requirements on insurers. In general, these requirements cover fraud plans, mandatory

reporting, fraud warnings, auto inspections and SIUs. SIUs are no longer an option for most

insurers: they are now a legal mandate in 38 states.

Today, insurers cite fraud deterrence as their number one priority and SIUs are the key

weapon in their anti-fraud arsenals. Most P&C insurers have an SIU program in place and 40

percent of all insurance companies have increased their SIU spending over the last three

years.5 Several studies reflect an average return of $3 for every SIU dollar spent while others

indicate a much higher rate of return.

The types of SIU programs vary. Some insurers handle the job in house while others contract

with an outside vendor. In-house SIU functions are typically managed in one of three ways:

by a small team of SIU advisors that guide claims adjustors on how to detect and investigate

fraud (advisory SIUs), by claims adjustors who have received additional fraud investigation

training and handle investigations in addition to their adjusting responsibilities (adjusting

SIUs), or by a large team of specially trained SIU investigators who concentrate solely on

investigating suspicious claims (investigative SIUs).