Insurers Turn to Outsourcing, Technology in Combating Fraud

Insurance fraud has reached epidemic proportions in the U.S., costing Americans billions of dollars every year in the form of higher premiums and higher prices for goods and services. Industry estimates on the out-of-pocket costs of fraud for the average American household range from nearly $1,000 to $5,000 a year.

Stung by staggering fraud-related losses, insurers readily acknowledge the gravity of the problem and their responsibility to take the offense in dealing with it. A number of serious challenges, however, stand in their way.

One of the biggest obstacles is public tolerance of fraud. Research shows that a high percentage of people believe some forms of insurance fraud are acceptable. Surveys, for example, reveal that 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.

Insurance fraud is also hard to detect and prosecute. Fraud perpetrators vary widely in age, income, occupation, race and other demographic attributes, making them difficult to categorize. In addition, they are becoming increasingly sophisticated in their methods, using the Internet, for example, to devise more complicated fraud schemes.

Insurance fraud is also a low priority for many prosecutors because it is difficult to prove and competes for attention and resources with violent crimes, as well as with higher profile white-collar crimes. As a result, crooks often view the risk of being caught and facing hard jail time for insurance fraud as minimal.

Another major challenge is the enormous costs of fighting fraud. Insurers must invest in trained investigators, as well as in fraud investigation tools and technologies, which are constantly 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.

Special investigative units: trends and types

Insurance fraud took a back seat to other pressing business issues in the insurance industry until the 1980s. Prior to then, insurers were preoccupied with the threat of inflation, the rising cost of personal injury claims and skyrocketing operating expenses due to inefficiencies and productivity lags. Higher premiums and the resulting public backlash coupled with the growth in organized fraud rings, however, moved the problem of insurance fraud up on the list of insurers’ priorities.

Insurance companies began to lobby for stronger anti-fraud legislation and tougher law enforcement. They also invested in their own anti-fraud initiatives, including Special Investigative Units (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.

Today, insurers cite fraud deterrence as their number one priority and SIUs are the key weapon in their anti-fraud arsenals. SIUs are no longer an option for most insurers: they are now a legal mandate in 38 states.

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).

In recent years, there has been a growing trend toward SIU outsourcing. A number of major insurers in the U.S. have turned their SIU activities over to outside service providers. Insurers are finding that SIU outsourcing delivers impressive results when it comes to tackling fraud along with considerable cost savings and other bottom line benefits.

SIU outsourcing drivers

The key driver behind SIU outsourcing, like other types of outsourcing, is economics. Managing SIU functions in house requires staffing, training and technology, all of which are very expensive to acquire and maintain.

Regardless of which SIU type an insurer implements (advisory, adjusting or investigative), staff must be devoted to fraud detection and investigation, resulting in high costs for salaries, benefits, training and job-related expenses. Training is also a major expenditure for insurers that handle SIUs in house. As with other insurance professionals, continuing education is a mandate for SIU personnel. SIU investigators are also responsible for training other company staff, including claims adjustors, underwriters and, in some cases, agents. In addition, the technology required to fight fraud continues to increase in sophistication and cost, imposing a major financial burden on insurers.

SIU outsourcing not only reduces these costs, but can also limit an insurer’s risk for bad-faith lawsuits. If a claims adjustor or in-house investigator steps out of line in investigating a claim, the insurer is liable for the legal consequences. However, if a service provider does the same, the insurer can point to its contract with the vendor and make the case that the vendor breached its contractual duty, potentially protecting itself from a bad-faith claim.

Greater expertise. The collective expertise and experience of an outsourcer’s investigative staff typically exceeds what an insurer could acquire in house. A good service provider offers a large staff of experts with law enforcement experience involving fraud and criminal investigation, along with extensive insurance fraud investigation experience.

These experts know the insurance industry, know how claims are processed and paid, know the various fraud schemes, and know the processes and technology required to detect, investigate and prevent fraud. In addition, they know the prosecutorial process and what is required for a successful prosecution.

Best practice implementation is a key advantage offered by this level of expertise. Outsourcing experts can recommend and implement processes covering all aspects of fraud investigation-from claim referral to resolution-that lead to more impressive results than with a less experienced in-house SIU. Having worked extensively in law enforcement, they can also more effectively liaison with the National Insurance Crime Bureau, police departments, fraud bureaus and other government agencies.

Cutting-edge technology. Technology is critical to the effectiveness of any anti-fraud program. In recent years, there has been an explosion in fraud-detecting technology.

Increasingly sophisticated databases and data mining software continue to emerge to assist insurers in identifying fraudulent claims. With these technologies, insurers can collect and analyze volumes of claims information to flag suspicious claims based on specific characteristics and detect fraudulent trends.

Web-based fraud detection technologies are also becoming more important in the battle against fraud. Online policy applications, claims filing and underwriting have created new insurance processes and workflows, opening the door to new fraud schemes. The e-commerce world has made traditional fraud detection techniques obsolete, forcing insurers to develop new solutions to combat online fraud.

The proliferation of technology in insurance fraud investigation has imposed on insurance companies the enormous burden of keeping up with the latest technologies and choosing, implementing and maintaining the right technology solutions for their organizations. Outsourcing can relieve this burden by placing an insurer’s technology requirements in the hands of technology experts who can lead the insurer down the right technology path and ensure it benefits from the best possible solutions.

While combating fraud remains an uphill battle for insurers, SIU outsourcing delivers the expertise, skills, processes and technologies required to effectively address the problem. All of this, in combination with the cost savings generated by outsourcing, will likely lead to an increasing reliance on SIU outsourcing in the insurance sector and hopefully a significant downturn in the prevalence and cost of fraud in the U.S.

About the Author

Eric Lundby, Vice President of Insurance Operations for CGI, is responsible for managing insurance claims and policy processing operations within the BPO sector for CGI. He has more than 30 years of experience in the property and casualty sector, serving in a variety of management positions, including President and member of the Board of Directors for a Midwestern insurance carrier. Over the past eight years, Eric has focused exclusively on outsourcing services for the property and casualty sector. For more information on CGI s insurance outsourcing services, visit www.cgi.com.