The pandemic has definitely left its mark on the scale of the fraud we’re witnessing in the insurance industry. The key reason behind this is the economic recession. Whenever we observed a decline in a country’s GDP, an increase in fraud rates followed. When GDP fell by an average of around 2% during the 2008 financial crisis, fraud increased by more than 7%. During the COVID-19 pandemic, the decline in GDP was much greater, so crime growth expectations are also higher.
Who commits fraud in the insurance sector?
In the insurance industry, we are talking especially about opportunistic crimes that might be committed by both clients and agents. Agents are currently under increased economic pressure from reduced sales to new customers and declining retention of existing customers. This pressure is one of the three elements of the fraud triangle. The other two are opportunity and rationalization. We are now dealing with remote work, that is, the change of processes and organization of work. Add to this the digitization of sales, and you get a set of factors that constitutes an opportunity for abuse.
Luckily, insurance companies have specialized tools to fight fraud
Today, the market standard is the use of analytical models supporting the claims handling process in terms of fraud or detection of more complex phenomena. On the other hand, there are also more advanced methods, such as social network analytics, that facilitate the detection of suspicious relationships or patterns and support the operational work of investigators.
What's more, insurers are developing more innovative ideas on how to use analytics in insurance processes. In particular, these are techniques of image recognition, and text or voice analysis, that can prove very helpful in confirming the customer's identity in an entirely remote process. And let’s not forget supervisory institutions that impose an obligation to counteract abuses and scams on insurers. Analytical tools are also very helpful in ensuring compliance with regulations.
Fraud-related regulations every insurer needs to meet
The hottest regulatory area that affects the entire financial market is anti-money laundering. Regulators are constantly increasing the requirements in terms of risk assessment of the client with whom we establish business relations. In principle, this area focuses on understanding who the customer is and what is the true purpose of our economic interaction but, in particular, it requires a more complex analysis of their connections and the identification of the beneficial owner. The insurer needs to know to whom funds traded by the company or entity are sent. One of the requirements that appear in the latest regulations is the ability to quickly respond to identified risks. Therefore, insurers need system solutions that support the full automation of risk identification processes.
As the pandemic fosters the creativity and ingenuity of criminals, new schemes of extortion or money laundering are emerging that financial institutions must follow and include in their security systems. By using machine learning, we can react quickly and detect these new trends, criminal patterns and anomalies as they appear in the data.
The Association of Certified Fraud Examiners publishes a regular report on the consequences of the pandemic on fraud indicators. The latest report, from December 2020, indicated that the market expectations for the increase in the level of fraud are as high as 90%. That is, 90% of the organizations that took part in this survey expect the fraud level to increase in the next 12 months. So insurers are likely to face these serious challenges soon, and constantly.