6 Pillars for Fighting Fraud

In today’s social and economic climate, insurance companies walk a fine line between customer service and contesting suspicious losses.

Traditionally, the primarily role of an insurance company’s Special Investigations Unit (SIU) has been to react to a specific loss and investigate the circumstances that surround that loss.

For many years now, I have seen a significant reduction of the number of in-house SIU investigators. This downturn has primarily been a response to limited returns on the insurer’s SIU investment. Consequently, I firmly believe a multi-layered risk management approach is required to reduce an insurer’s risk and fraud exposure.

Make no mistake: insurers face significant fraud exposures from many different sources. These exposures include claimants, vendors, organized crime, medical providers, brokers, service providers and internal employees. Without a focused and concerted effort by insurers to prevent, detect and investigate, how can anyone really know how bad their fraud exposure really is?

Many Canadian insurance companies now outsource their claims investigations to third-party vendors. This is not an ideal situation, although I can certainly see the fiscal benefits of taking this course of action. Nonetheless, in my opinion, outsourcing all SIU functions completely would be a mistake. It will result in a net trade-off of short-term gain for long-term pain.

How I can justify such a statement? Simply put, an outsourced SIU investigation deals only with the immediate issues of the claim. They don’t see the claim patterns, trends or interconnected names or entities that emerge. They don’t recognize potential underwriting or broker issues. They will likely not comment on inappropriate or unethical behaviour from an adjuster, particularly if they receive assignments from this adjuster. Also, they will not recommend risk mitigation strategies or provide training and provide value to the front-end claims service.

So how do we meet the financial goals of an insurance company to reduce claims costs, lower operational costs, maintain high levels of customer service, maintain an effective loss control program and still remain competitive in the marketplace? The answer is simply to apply a risk management approach to risk and fraud exposures.

SIX PILLARS TO RISK MANAGING FRAUD

There are six main pillars to risk managing fraud.

These six pillars encompass many of the principles considered in a gap analysis (i. e. identifying the space between where an organization is and where it should be or wants to be).These six pillars bring focus to the business of insurance and the effective delivery of a quality product. Only through the constant measuring, assessing and improving of a broad spectrum of risks can an insurer ultimately deliver a quality, cost-effective product to the consumer.

Identify the potential risk

Conduct a review of all business operations and identify areas that present potential risk to the operation of the business. This includes analyzing those external costs that still need to be managed effectively.

Assess the risk and fraud potential

Examine all aspects of the claims process, the underwriting process, the broker process, employee protocols and procedures and vendor management. Review a selection of denied claims to determine what procedures were successful and what procedures, if any, facilitated the fraudulent claim to be submitted.

Prevent the fraud or risk exposure

The review of all processes and policies allows for the development and improvement of new procedures. This would include training and education as well.

Detect the fraud

Processes are usually designed to ensure the fair, equitable and prompt settlement of a claim. The detection of fraudulent claims is usually triggered by a procedure or the ability of an adjuster to identify a potential issue. Evaluate various fraud analysis tools and triggers to improve and evolve the process.

Investigate the fraud

The decision to further investigate any suspicious loss should be taken on a case-by-case basis. The decision to investigate should be governed primarily by established policies and procedures, thereby eliminating any suggestion of bias or bad faith.

Improve and develop protocols and procedures

The entire process should be reviewed constantly to reflect new trends, new technology, new legislation and any additional changes in an insurers’ business model.

In many jurisdictions in the United States, insurers are legally required to report fraudulent claims to their Sate Fraud Bureaus. In addition, they are required to submit mandatory self-audit reports identifying their compliance with the fraud reporting requirements. Without demonstrating compliance, insurers cannot obtain rate increases. I hope Canada adopts similar measures.

Currently in Canada, the business decision to investigate fraud is left up to each insurer. As a result, it might be argued aggressive claims handling could lead to a competitive disadvantage in the Canadian marketplace. How so? Insurance companies are in the business of making money. It follows that claims must be handled promptly and fair settlements reached expeditiously. In an effort to win customer satisfaction, increase market share and profits, insurers need to reign in their costs. A claims manager once told me that a good claim was a closed claim. Granted, a closed claim might reduce an insurer’s costs. But what happens if that closed file requires further investigation (thus leaving the claim open longer)? Without a mandatory anti-fraud reporting program, an insurer’s appetite to properly manage risk and fraud will always be an individual one. Canada should also adopt mandatory fraud reporting legislation.

EXECUTING A RISK MANAGEMENT FRAUD PROGRAM

Now that we have identified six pillars to risk managing fraud, we need to discuss further how an insurer should initiate and execute an effective risk management fraud program — a program that delivers a cost effective return on investment.

Insurance companies should dedicate a risk manager to handle the program. This risk manager would be a key link between all business lines, departments and vendors. Insurers can still outsource their investigations, but the risk manager would provide essential oversight and a vital link to manage the organizations overall exposure to fraud.

The risk manager should conduct and direct an assessment of potential areas for fraud within the organization. Existing fraud and risk mitigation procedures should be examined; where necessary, they should be updated. Policies and procedures dealing with the identification and handling of potential frauds should also be examined. Recommendations should be made to improve and reduce potential fraud exposure. The investigation process would be monitored. The oversight, audits and compliance of vendors and adjusters should be done in conjunction with the claims management team.

Finally, the risk manager should review the trends, patterns and data analysis of all investigated claims to determine if company procedures and protocols provided an environment that contributed to the potentially fraudulent claims being submitted. New software and technology tools should be evaluated. Where necessary, training programs should be developed or updated to reflect new protocols and procedures.

A risk manager will need to have the qualities of an investigator, an adjuster, a trainer and an auditor. He or she must be capable of interacting with all levels management and have a proficient understanding of all lines of business.