Digitisation Improves Insurance Fraud Detection
Insurance fraud is an evergreen issue in insurance. It constantly evolves as the types of deception become more diverse. Additionally, a certain degree of uncertainty has always clouded the data of insurance fraud. We know almost exactly how the number of detected fraud cases and the saved value evolve. However, can we correctly interpret this data to draw real fraud trends? I would say only partially.
For example, in the Czech Republic in 2019, the total annual value of proven insurance fraud decreased on a year-on-year basis. However, from this data it is difficult to infer a decrease in total fraudulent activity.
Recently, insurance companies are considering other emerging factors when it comes to identifying fraud.
The first is the increasing pressure of the customer experience. The modern customer expects everything to be quick, digital and completely carefree. Some clients are even obsessed with perfect service.
This trend is illustrated by the Deloitte study, A Demanding Future: The Four Trends that Define Insurance in 2020, which is based on the responses of 200 CEOs, CFOs, CROs and CTOs of insurance companies in the EMEA region. A total of 45% of those surveyed in this study admit that although legal and regulatory challenges have been the main drag on growth over the last three years, now clients’ rapidly evolving demands will be the biggest problem.
The pressure of the customer experience goes directly against insurance companies’ fraud interests. The American Coalition Against Insurance Fraud warns of the risk of digitisation in the area of liquidation. In one of its studies, it says that with the onset of automatic liquidation (Straight Through Processing), it expects the increase in insurance fraud to double. When a human is not involved with the process, it potentially is easier for fraudsters to discover new opportunities for fraudulent activity.
Also affected is the price of premiums – an equally important factor for the customer. Technological advances in the automotive industry have increased the average auto insurance coverage. Although carmakers argue that new technologies reduce the accident rate, data from some insurance companies show that while accident rate may actually decrease (especially in case of small accidents in cities), the average insurance benefits rapidly increase for new cars. This puts pressure on the price of premiums. The topic of insurance fraud is increasingly associated with fair pricing because of this trend. Simply put, the more successful the market is in fighting fraudsters, the fairer it is to its honest clients.
Another emerging factor to consider when detecting insurance fraud is the increasing potential of insurance companies’ cooperation within the insurance market. This is happening only in a small part of the region. In different forms, we see shared databases in Central and Eastern European markets. Often they are only “blacklists.” Alternatively, in some cases where a database is out of the question, individual investigators have developed an email-based community. However, there are examples of countries that are effectively cooperating at the market level. President of the Latvian Association of Insurance Companies Jānis Abāšins says: “In addition to the common database that we operate for insurance companies, there is also a central MTPL database in Latvia containing, among other things, image documentation on damage. We also expect greater use of data from camera systems across Latvia. We can already see the value of these instruments, and we know that it will grow in the future.”
However, cooperation among insurance companies is not only about available technologies, the legal framework and the willingness to cooperate are also key topics.
Insufficient care to legal aspects when insurance companies and suppliers are developing solutions was a recurring concern in our conversations with associations across the region. Another result from the Deloitte study found that 51% of respondents still see data regulation and cybersecurity as the main challenge in adopting new technologies.
Going a step further than the mere shared “blacklist” depends on the willingness of the insurance companies. Cooperation is often hampered by fear. Insurance companies worry about possible misuse of the market platform by some participants, or that such a platform could give one insurance company valuable insight into the business of another company.
The ability of the market to cooperate will have a major impact on our fight against fraud. Our success depends on cooperation not only at the level of interconnectivity between individual experts and trend sharing, but cooperation above all at the level of use of advanced technologies. Representatives of associations and the management of insurance companies within the region have told us that they fully agree.
In this context, I see a suitable parallel in the field of information security. The vast majority of tools that detect cyber threats at the individual and corporate levels currently operate on the principle of collective (global) knowledge of threats and attackers. Sooner or later, I believe that this principle will become a cornerstone for insurance fraud too.
In addition to the technologies themselves (such as data analytics and artificial intelligence), use of data sources (such as voice or image), so-called “open-source data sources” (such as satellite imagery or the above-mentioned Latvian central camera system), the ability and will of individual players in the market to cooperate will play an equally important role. The greatest potential for digitisation of most fields has long been in so-called platforming – a concept that in Czech is quite new, but that the rest of the world has been using for some time. In many fields, we now see that this is not just a concept, but a new status quo. It is only a matter of time before the commercial insurance market takes on this approach.
I am an optimist, therefore I do believe that the darkest scenarios of the Covid-19 economic downturn, which can include an increase in fraudulent activity, will not happen. I am equally optimistic about the increasing cooperation of insurance companies within the countries of Central and Eastern Europe.
This article was published in Czech Insurance Association Magazine.