FICO and the Property Casualty Insurers Association of America (PCI) have released the results of a survey of US insurers showing the high cost of insurance claims fraud. 45% of insurers estimated that insurance fraud costs represent 5-10% of their claims volume, while 32% said the ratio is as high as 20%. More than half (54%) of insurers expect to see an increase in the cost of fraud this year on personal insurance lines while less than 3% of insurers expect to see a decline in the cost of fraud on personal lines.
While it has commonly been estimated that insurance fraud accounts for up to 10% of property and casualty insurance industry losses, this new survey indicates that some in the industry believe that fraud could be much more prevalent. It also highlights areas such as application fraud where insurance companies see opportunities to improve ways to detect fraud and keep costs low for consumers.
Insurers responding to the survey said they expect the most significant increase in the cost of fraud will affect personal property, workers' compensation and auto insurance. In terms of fraud by individual policyholders, 67% of insurers expect to see an increase in personal property fraud, 65% expect to see an increase in workers' compensation fraud, and 60% expect to see a rise in personal auto fraud. The majority of insurers (61%) attributed the increases in fraud to sustained economic hardship by policyholders.
While only 17% of insurers attributed the expected increase in fraud to a rise in the sophistication of criminal gangs, 60% expect a rise in workers compensation fraud rings, and 61% expect a rise in auto fraud rings. The survey also found that 76% of insurers believe there is increased risk of fraud in no-fault states compared to states with tort systems; 45% see the risk as significantly higher, while 31% see it as somewhat higher. Insurers have placed emphasis in recent years on implementing meaningful reforms to no-fault insurance systems in several large states due to spiraling medical costs (40% more than in states with tort systems) and rampant fraud. Much of this fraud is attributable to sophisticated fraud rings such as the $279m no-fault insurance scam involving more than 30 individuals that was brought down in New York City this year.
"The insurance fraud problem is estimated to exceed $40bn globally and is showing no signs of abatement," said Russ Schreiber, who leads FICO's insurance practice. "The findings of the FICO PCI Insurance Survey demonstrate that insurers recognize the problem and are looking to improve ways to detect and prevent fraud earlier in the claims process."
"It is clear insurers understand the scope of the insurance fraud problem, and are taking steps to reduce it," said Robert Passmore, senior director of personal lines policy at PCI. "However, we also want that the public and policymakers to recognize that consumers are paying what amounts to a "fraud tax" that is far too expensive for hard-working citizens."
When insurers were asked about fraud-fighting initiatives that can have the greatest impact on insurance fraud, predictive analytics was identified as the most effective by 45% of respondents. Insurers also included the use of anti-fraud teams for specific books of business (37%), link analysis for detecting fraud (31%), business rules for stopping known fraud types (29%), and external databases (29%) as other useful fraud-fighting approaches.
The Insurance Fraud Survey included responses from 143 insurers throughout the US, who were surveyed in August.
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