“If we can reduce fraud, companies will be more profitable and then they can scale, and even offer micro-insurance products to capture a better part of the market.” – Henry Mascot, Cofounder, Curacel
What is Insurance Fraud?
Insurance fraud is the deliberate attempt to deceive any party tied to an insurance contract for the purpose of financial gain. It can be perpetrated by an insurance company, an agent, a policyholder, or anyone else that could potentially benefit from exploiting an insurance contract, and it is considered a criminal offence in many nations.
These false insurance claims are filed with fraudulent intention towards an insurance provider. It occurs when a claimant attempts to obtain some benefit they are not entitled to. It also happens when an insurer knowingly denies some benefit that is due.
Fraudulent claims account for a significant portion of all claims received by insurers and cost billions of dollars annually.
At the moment, in Africa, insurers lose more than $700m to fraud annually despite insurance penetration in the continent being less than 3%. Insurance crimes also range in severity, from slightly exaggerating claims to deliberately causing accidents or damage. Common frauds include “padding,” or claims inflation; facts misrepresentation; false claims submissions of injuries/damages; and staging accidents.
Types of Insurance Fraud
Insurance fraud can be classified as either hard fraud or soft fraud.
Hard fraud occurs when someone deliberately plans or invents a loss, such as a collision, auto theft, or fire that is covered by their insurance policy in order to claim payment for damages.
Soft fraud sometimes referred to as opportunistic fraud, is a type of fraud that consists of policyholders exaggerating otherwise legitimate claims. For instance, when involved in an automotive collision an insured person might claim more damage than actually occurred.
Soft insurance fraud can also occur when, while obtaining a new health insurance policy, an individual misreports any previous or existing conditions to obtain a lower premium on the insurance policy.
How technology can help to prevent insurance fraud
Over the years, there has been a rise in the deployment of technological solutions in the global insurance industry aimed at tackling fraud, ‘soft fraud’ especially, which is the type that is committed as a result of an arisen opportunity.
Health insurance and auto insurance frauds are the most popular in the insurance industry and in Africa, health and auto insurance are the most available types of insurance. So, many of these fraud detection technologies have been geared towards these insurance types.
“Fighting fraud is not a strategic competitive advantage. It’s the right thing to do. And you should start it today.” – Marty Ellingsworth, Senior Analyst, Celent
Artificial intelligence and machine learning technologies are developments that many insurers are leaning towards to help solve this problem. In the health insurance space, a popular form of machine learning applied is called Anomaly Detection.
This (Anomaly Detection) works by analyzing normal, genuine claims made by the customer and forming a model of what a typical claim looks like. This model is then applied to large data sets.
For example, when a claim is submitted by a policyholder for a particular procedure done, with anomaly detection, the system can tell when there are inconsistencies that are typically not associated with the specific procedure being done, thereby reducing the likelihood of the insurer being overbilled.
According to this survey report; “More than anything else, carriers believe the use of automated fraud detection tools is the key to improving their fraud-fighting efforts.”
Auto-insurance fraud is a little more complicated, and thus, a lot more technology is invested into hardware, like dash cams, and telematics devices. To curb the rate of false claims and inflated claims from vehicle owners, some insurers give significant discounts to policyholders who opt-in to use such devices.
With Auto and Health insurance being the most available types of insurance in Africa, the low insurance penetration could be considered a diamond in the rough as it gives more insurers the possibility to establish less flawed technologically driven products, services, and processes as the market for insurance continues to grow.