Among the myriad risks faced by life insurers are those to their reputations and balance sheets when affiliated advisors prey on seniors through investment fraud and financial exploitation, as when they improperly steer elderly clients into life settlements, for example.
The industry is also vulnerable to potential losses resulting from fraudulent insurance claims made by customers. And, it turns out, a large number of them are feeling exposed.
Word of this comes from FICO, a provider of predictive analytics and decision management software. In a new survey of 260 U.S. and Canadian insurers, the application developer discloses that insurers feel most vulnerable to “premium leakage” resulting from deliberately falsified or missing information on policy applications.
More than one-third (35 percent) of the survey respondents estimate that insurance fraud costs represent 5-10 percent of their total claims, while 31 percent say the cost is as high as 20 percent. More than half (57 percent) of insurers expect to see an increase in fraud losses this year on personal insurance lines — policies designed to protect individuals and families — while only 5 percent of insurers expect to see a decline in dollar fraud losses on personal lines.
In the U.S., 42 percent of insurers foresee the Mid-Atlantic States (New York, Pennsylvania and New Jersey) as being hardest hit by personal lines fraud. In Canada, an equal percentage of insurers flag Quebec as hardest hit by personal lines fraud, followed by Ontario at 39 percent.
Additionally, more than six in ten (63 percent) of insurers believe there is increased risk of fraud in no-fault states compared to states with tort systems. No-fault insurance has come under fire in recent years due to spiraling medical costs (40 percent more than in states with tort systems) and rampant fraud.
"Conventional industry wisdom has held that fraud losses average around 10 percent of claims volume, but according to our survey, the actual number is significantly higher,” says Russ Schreiber, vice president of the insurance and health care practice at FICO. "Insurance claims fraud is big business — and it's getting bigger.
“With more people resorting to fraudulent activities, and fraud rings becoming more sophisticated, insurers must step up efforts to protect good customers, uncover organized fraud and improve the effectiveness of specialized investigative units,” he adds.
When asked about how to fight the rise in fraud, one in five respondents (20 percent) cites predictive analytics. Insurers also included the use of anti-fraud teams for specific books of business (17 percent), link analysis for detecting fraud (8 percent), and business rules for stopping known fraud types (7 percent) as useful fraud-fighting approaches.