Fraud in Insurance Industry
Fraud has been a significant cost drain for many organizations across industries and Insurance is no different.
“Forty-five percent of insurers estimated that insurance fraud costs represent 5-10 percent of their claims volume, while 32 percent said the ratio is as high as 20 percent.”1
“Auto insurers lost $15.9 billion due to premium rating errors in private-passenger premiums in 2009”2
The fraud can be initiated by employee of an insurer, broker & agent, and customers (perspective and existing).
Two common types fraud in Insurance are Application Fraud and Claim Fraud
Application or Underwriting Fraud
An applicant furnishes incorrect or false information to lower premium to the policy being applied for. For example, a driver, Manu, applies for auto insurance and fills up the application. The insurance application form requires him to provide his drinking habits and age. He provides false information, so that his premium is low. In other scenario, he provides incorrect information about previous policy. This is an example of Application Fraud.
Insurance provider requires building mechanism to tag some of the applications as fraudulent based on information provided by the applicant. An accurate predictive or machine learning model can calculate probability of an application fraud.
Some of the customers misuse systems and processes by providing incorrect information for financial gain. Claim Fraud occurs when customers applies for reimbursement or claim without eligibility for claim. They forged documents to justify their claim. And in some case the claimants exaggerate the claim amount.
For example: A health insurance holder, Romney, got admitted to a local hospital. He incurred medical expense of $3700 but colluded with hospital personal in getting medical expense receipt of $5723. He has applied for claiming the amount to his health insurance provider.