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.

This is according to a survey of U.S. insurers showing the high cost of insurance claims fraud conducted by FICO, a provider of predictive analytics and decision management technology, and the Property Casualty Insurers Association of America (PCI).

More than half (54 percent) of insurers expect to see an increase in the cost of fraud this year on personal insurance lines – policies designed to protect individuals and families – while less than three percent of insurers expect to see a decline in the cost of fraud on personal lines.

While it has commonly been estimated that insurance fraud accounts for up to 10 percent of property and casualty insurance industry losses, this new survey indicates that some in the industry believe that fraud could be much more prevalent. It also highlights areas such as application fraud where insurance companies see opportunities to improve ways to detect fraud and keep costs low for consumers.

Areas of fraudAreas Identified As Most Exposed to fraud
New ApplicationsClaimsInaccurate Disclosures
Personal auto fraud74%67%82%
Personal property fraud72%71%78%
Commercial auto fraud80%71%82%
Commercial property fraud74%66%80%
Workers compensation fraud77%76%86%
Areas of fraudAreas Identified As Well protected against fraud
New ApplicationsClaimsInaccurate Disclosures
Personal auto fraud26%33%18%
Personal property fraud28%29%23%
Commercial auto fraud20%30%18%
Commercial property fraud25%34%20%
Workers compensation fraud23%24%16%

The most significant increase in the cost of fraud will affect personal property, workers’ compensation and auto insurance, according to the survey respondents.

The survey also found 67 percent of insurers expect to see an increase in personal property fraud, 65 percent expect to see an increase in workers’ compensation fraud, and 60 percent expect to see a rise in personal auto fraud. The majority of insurers -61 percent- attributed the increases in fraud to sustained economic hardship by policyholders.

While only 17 percent of insurers attributed the expected increase in fraud to a rise in the sophistication of criminal gangs, 60 percent expect a rise in workers compensation fraud rings and 61 percent expect a rise in auto fraud rings.

The survey also found that 76 percent of insurers believe there is increased risk of fraud in no-fault states compared to states with tort systems; 45 percent see the risk as significantly higher, while 31 percent see it as somewhat higher.

Insurers have placed emphasis in recent years on implementing meaningful reforms to no-fault insurance systems in several large states due to spiraling medical costs (40 percent more than in states with tort systems) and rampant fraud. Much of this fraud is attributable to sophisticated fraud rings such as the $279 million no-fault insurance scam involving more than 30 individuals that was brought down in New York City this year.

“The insurance fraud problem is estimated to exceed US$40 billion globally and is showing no signs of abatement,” said Russ Schreiber, who leads FICO’s insurance practice. “The findings of the FICO PCI Insurance Survey demonstrate that insurers recognize the problem and are looking to improve ways to detect and prevent fraud earlier in the claims process.”

“It is clear insurers understand the scope of the insurance fraud problem, and are taking steps to reduce it,” said Robert Passmore, senior director of personal lines policy at PCI. “However, we also want that the public and policymakers to recognize that consumers are paying what amounts to a “fraud tax” that is far too expensive for hard-working citizens.”

When insurers were asked about fraud-fighting initiatives that can have the greatest impact on insurance fraud, predictive analytics was identified as the most effective by 45 percent of respondents. Insurers also included the use of anti-fraud teams for specific books of business (37 percent), link analysis for detecting fraud (31 percent), business rules for stopping known fraud types (29 percent), and external databases (29 percent) as other useful fraud-fighting approaches.

“Early detection is the key to mitigating fraud losses for insurers,” Schreiber continued. “Solutions like the FICO Insurance Fraud Manager not only help detect outright fraud, but also combat abuse and waste, the gray area of insurance claims.”

The Insurance Fraud Survey included responses from 143 insurers throughout the U.S., who were surveyed in August 2012.

Source: PCI and FICO