Fraud costs the insurance industry billions of dollars every year. The Coalition Against Insurance Fraud estimates that U.S. insurers lose $80 billion annually to fraud, across all lines of business.1 However, the true cost of fraud is not quantifiable – it extends beyond payment of inappropriate claims and costs to establish fraud prevention and detection units; fraud stifles innovation and fraud costs consumers money and convenience.
To better understand the challenges fraud presents, RGA has reached out to life insurers: We surveyed insurance companies,2 conducted informational interviews, held discussions at the 2016 RGA Annual Fraud Conference,3 and conducted our own internal research of claims experience.
TypesAn important first step in understanding fraud is to define it. In this analysis, we are using a broad definition4. Fraud in this context is not limited to criminal activity, but is expanded to include misrepresentations and omissions, whether malicious or less than complete disclosure.
We discussed the types of fraud with insurers and the associated costs and challenges in detection. Although there was a wide range in responses, medical misrepresentation, agent fraud and criminal fraud were identified as the most concerning types of fraud. Paramed fraud and rebating were identified as the most difficult types of fraud to detect.
Survey respondents were asked to rate their level of concern, difficulty to detect and cost to detect various types of fraud on a scale from 1 to 5, with 5 representing a high level. While insurers indicated the highest level of concern with medical misrepresentation, agent fraud and criminal fraud, there was considerable variation in responses.
Fraud Prevention and DetectionInsurers have practices in place to detect and limit the impact of fraud, often with dedicated teams in place that take advantage of fraud prevention tools and technological advances.
TeamLife insurers tend to have small special investigation units in addition to underwriters and claims staff dedicated to fraud prevention and detection. However, there is significant variation in the size and sophistication of these internal investigation units. The most common response from insurers we surveyed was to have a single person dedicated to fraud investigation and prevention.
Q: Does your company have designated individuals to investigate and prevent fraud?
- “We have individuals who investigate...this is often only a portion of what they do – not a full-time activity.”
- “We use a multi-tiered approach to investigations.”
- “We have less than a handful of people in our Special Investigation Unit.”
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