As fraudsters continue to refine their methods and pose new challenges for the industry, motor insurers are driven to improve their processes using the latest technologies to combat the increasingly sophisticated threats.
Fraud is a constant challenge facing the insurance industry regardless of region, and according to a market survey, more than 50% of insurers globally view fraud as their utmost threat.
No insurance company, no matter how big or small, is spared from fraud. But it seems to hit the motor insurance segment particularly hard, costing the industry across the world tons of money – ranging from millions to billions of dollars – each year. This is unsurprising as perpetrators of fraud are growing bolder, becoming more well organised and constantly evolving their techniques.
Within the personal lines of insurance, the majority of fraud is due to moral hazard – committed by otherwise law-abiding people who think there is nothing wrong with overstating their losses or materially altering crucial facts.
In other words, fraud is generally perceived to be a victimless crime. On the contrary, fraudulent claims not only impact motor insurers, they also affect all the involved parties through increased premium costs, trust deficit during the claims process and impacts on process efficiency and innovation.
One of the biggest misconceptions is that motor claims fraud is almost impossible to pull off because all accidents require a detailed police report, said Mr Shahzad Alam, head of anti-fraud and investigative unit at Oman Insurance Company (OIC). “However, a fraudster can easily manipulate the system and report the same incident in multiple reports. Also, the over-insurance of vehicles gives the insured a relatively easy mechanism to commit fraud. Finally, fraud could also be committed by collusion between two or more parties involved in the same accident,” he said.
Motor fraud is committed by both the opportunistic common man and organised criminals, said Mr Sajith Kumar, CEO of Howden Insurance Brokers LLC. “There are two very common misconceptions about motor-related fraud – it does not cause any serious harm to anybody and it does not warrant any consequences to the person causing it.”
While motor fraud generally involves conspiring to make false or exaggerated claims involving vehicle damage, theft or personal injuries as a result of an accident, Mr Vivek Sethia, director and co-founder, Beyontec Solutions DMCC said, “it has mostly evolved from the lapses of the process and systems of various insurers. In some cases, it is also based on collusion of various entities involved in underwriting and claims processes. In extreme cases, it is also the replication of some international fraud practices done at a regional level.”
Challenges to overcome
With increasing fraudulent motor claims and fraudsters continuing to refine their methods, insurers need to get tough on fraud to deter potential schemes and attacks. However, in reality, managing motor claims fraud is no simple feat and has always proved challenging.
The common challenges faced by insurers today are twofold, said Mr Sethia. “First, on the system side, the core insurance solutions used by insurers today do not offer the flexibility to configure newer business rules based on the evolving fraudulent practices in the market.
“And second, there is a need for a more comprehensive audit process on both underwriting and claims sides to identify proactively the abnormality based on available historical data. Such an audit will help to define new business rules within the core solution to identify fraudulent quotations before they are issued and to stop fraudulent claims before they are settled,” he said.
Cyber security threats are also top concerns for insurers when managing motor insurance fraud, said Mr Anay Srivastava, director at KPMG Lower Gulf. He said, “The increase of data in recent years means insurers have an even greater responsibility to keep customer data secure and confidential. At the same time, the online filing of the claims may be prone to fraud risk as some organisations may be operating on an old fraud-management system which could be vulnerable to new ways of conducting fraud.”
He added, “Other challenges include issues with internal data quality and changes with core systems over the years due to modernisation, M&A, or because solutions are implemented for new lines of business.”
To combat these threats, the insurance industry and its partners need to take a proactive approach to tackle motor fraud using a range of investigative techniques to verify claim legitimacy.
For insurers, Mr Srivastava said claims management should be mainly driven by a new strategic pattern, for instance, through cooperation with car companies, own-repair networks, telematics tariffs or garage management.
Economic levers for claims management can also be used, such as fraud fighting: savings of claims payments due to better fraudulent network detection and efficient fraud processes; and claims procurement: savings of claims payments due to optimisation of supply chains and supplier management, according to Mr Srivastava.
“At OIC, we have fraud triggers based on various factors to indicate risk of fraud,” said Mr Alam. “These include proximity of date of accident to policy start or end dates, involvement of third parties, location and timing of accidents, vehicle value, the nature of a claim (eg, total loss) and cash claims. When we encounter a high-risk claim, we get independent loss adjusters involved, and our anti-fraud & investigation department deals with it appropriately.”
While efforts are being made to detect and deter fraud, he cautioned that “there could be significantly more undetected motor claims fraud, especially via the recovery channel, ie, larger proportion of fraudulent motor claims potentially being made by third-party claims”.
Tapping on tech
In today’s digitally connected world, most of these challenges can be overcome by using automation and sharing intelligence data electronically among insurers using platform solutions, said Mr Sethia.
He said there are specific software bots available to proactively identify fraudulent transactions by defining and continuously fine-tuning the business rules, noting that these bots, when used, can be deployed within two to four weeks.
As for sharing of intelligence data, there are several platforms available to maintain a central repository of all fraudsters and to share them with all insurers in the region on a real-time basis so that insurers can proactively block these transactions before they become a liability, he added.
Investment by governments and insurers in analytics, technology and AI is certainly playing a key role in combating fraud in the region, said Mr Kumar. Some very good measures include: connectivity of insurance to vehicle registration; automated claims / incident reporting to police and insurance companies; limiting the number of workshops authorised to repair the vehicles; sophisticated screening methods of accidents; and increasing the intelligence capability and analytical personnel in the insurance companies.
Mr Srivastava said insurers should also be using blockchain technology for strengthening fraud detection capabilities. He said, “Blockchain can help eliminate fraud by validating authenticity, ownership and provisioning of goods as well as the authenticity of documents. It can enable scanning of police theft reports by connecting to external databases and can detect patterns of fraudulent behaviour related to a specific identity. It can also provide insurers a permanent audit trail that can be used to evaluate claims and identify suspicious behaviour.”
While insurers strive to mitigate fraud, fraudsters continue to look for new ways to exploit insurers’ claims process for maximum gain. Ultimately, these fraudulent claims have a negative effect on loss ratios, insurance premiums, and customers’ experiences. Therefore, an effective industry-wide fraud approach will help clamp down on fraudulent activity.
As an industry, Mr Alam said motor insurers should share fraud-related information in a database modelled after the UK Insurance Fraud Register (IFR), where the details of all fraudulent claimants are available to insurers exclusively. In addition, “access to Road Transport Authority and Abu Dhabi Police database of police reports would help us identify suspicious patterns of claims,” he said.
He also suggested setting up an anti-fraud forum such as the one organised by Association of British Insurers, where insurers meet periodically to share their fraud experiences.
In this regard, there are potential opportunities to increase industry and regulatory support for stronger fraud measures in motor insurance, said Mr Srivastava. Historically, insurers fought fraud in silos using small investigation teams and their own limited data to prevent repeat cases. There is still capacity for fraud data to take a larger role in preventing fraud. Fraudsters may target different insurers simultaneously or consecutively. Therefore, insurers would do well to share information about fraudsters with each other.
He said, “This may be achieved, within the limits of the privacy law and the data protection law of the insurer’s jurisdiction, by timely communication and shared databases. Cooperation with organisations involved with combating fraud in the insurance sector – such as organisations for chartered accountants, forensic auditors, claims adjusters, law enforcement agencies, supervisors and possibly consumer organisations – should be encouraged.
“This may include enhancing consumer/policyholder awareness on insurance fraud and its effects through education and media campaigns. Industry and trade associations can play an important role in this process. When data and intelligence is shared, the industry is able to make connections more intelligently to flag potential fraud and conduct further investigations. This means better use of resources and a greater chance of catching those involved in organised networks.”
The regulator can also look at creating a centralised bureau for insurance fraud which can be used for detection, coordination and prevention. “It can work with insurers, regulators and law enforcement agencies to use this insight to investigate and prosecute. The centralised bureau for insurance fraud can also act as a data and intelligence hub, enabling regulators and law enforcers to share data through a single source. Regulators should look to ensure that the anti-fraud message is targeted and hard-hitting,” said Mr Srivastava.
The MENA fight against fraud
Within the MENA region, the Moroccan Federation of Insurance and Reinsurance Companies (FMSAR) has launched in 2Q2019 an information and control system for insurers to share the records of drivers, in response to increasing motor claims and growing fears of fraud. The losses incurred by Moroccan insurers due to fraud in traffic accidents amounted to MAD2.23bn ($230.4m) in 2016, and the fraud rate stood at 21% of all processed motor accident claims, according to media reports.
Saudi Arabia has also reported significant high rates of motor fraud, accounting for 15-20% of claims costs, compared to the global average of 9-10%. With around 26,000 suspected cases since 2017, fraud has caused huge financial losses that have reached SAR245m ($66.7m) over the past three years.
In an effort to overcome fraud, the Media and Insurance Awareness Committee in Saudi Arabia has collaborated with local insurers to roll out a fraud awareness campaign in early 2019, which aims to develop transparency and educate policyholders about the risks involved in the event of forgery of documents. The Saudi law punishes insurance fraud by imprisonment of up to five years and a fine of SAR400,000.
On the industry level, Saudi Arabia-based leading traffic support and accident-related service provider Najm has launched the Comprehensive Auto Insurance Management Solutions Center (CAMS) for vehicles, which collects, records, and exchanges insurance data necessary to develop the capabilities of insurers, analyse insurance risks, improve the quality of insurance services, and reduce insurance fraud.
With fraudulent claims accounting for a big portion of all claims received by motor insurers and costing the industry millions of dollars, it is important that the industry keeps working to spot fraud trends early and combat new techniques. The work is worth the potential reward, as for insurers who are faced with massive claims, even a 10% reduction in fraudulent claims can translate into considerable improvements to the bottom line. M