Identity fraud’s impact on the insurance sector

The insurance industry is currently facing an increasingly large fraud problem, estimated at about $40 billion per year (excluding medical insurance), according to the FBI.  Within the Property & Casualty (P&C) sector alone, the Coalition Against Insurance Fraud estimates almost 10% of business losses are the result of fraudulent claims.  Criminals who perpetrate insurance fraud are extremely intelligent, well organized, and constantly evolving their techniques.  This results in a variety of complex schemes including staged accidents, disaster relief falsifications, premium diversion by agents, workers compensation fraud, and more. 

At the heart of these crimes is identity fraud and the insurance industry’s failure to reject illegitimate customers or activities.  This is a problem all industries are currently facing; identity fraud in the aggregate reached record levels in 2017 as over $17 billion was stolen directly from U.S. consumers per Javelin’s most recent fraud report.  The insurance industry’s shift to digital business channels, both for customer onboarding and claims submissions, has further exacerbated the problem by making it easier for criminals to create fake identities and perpetrate these crimes.

The Criminal Element

Dennis Lormel, Former FBI Financial Crimes Section Chief, has investigated a variety of insurance fraud case over the years involving highly organized crime syndicates.  He points out insurance fraud is a crime of opportunity resulting in many types of imaginative claims.  Criminals prey on the fact that insurance companies are often reactive to dealing with fraudulent activity and have a hard time keeping up with the adaptability of criminal schemes.   

One popular plot is to orchestrate a staged automotive accident between two cars where the actors involved claim fake injuries.  The actors visit a complicit medical center for “treatment” where falsified medical billings attached to fake identities will be submitted as an insurance claim. At the same time, a complicit auto body shop which will create false property damage claims.  As a result of this fake accident, the P&C company pays out false claims related to both the property damage to the car and expensive medical claims.  The criminals might also use the same injuries to purport a workers compensation claim and submit to the same insurance company, a rarely detected move given each claim is reviewed by separate business lines.

Combating Fraud

To fight the rise in insurance fraud, companies need to ensure they are interacting with legitimate stakeholders across the entire customer and claim lifecycle.  Historically, insurance firms relied on post-mortem investigations to uncover fraud trends, but these practices no longer keep up with rapidly evolving criminal activity. Companies instead should prioritize investment in real-time identity verification software solutions across the entire enterprise, focusing first on digital channels which are more at risk.   

In implementing identity verification solutions, firms should focus on verifying the stakeholders involved in the insurance claim process, including verifying the identities of claimants, witnesses and businesses who submit information into the claims process.  Finally, companies should host their fraud prevention solutions as an enterprise platform cutting across business lines to eliminate data silos and prevent duplicative fraudulent claims.  A comprehensive solution approach will reduce fraud losses by proactively preventing bad actors from the ecosystem before a false claim is paid.