According to John DAlusio, senior vice president of HNC Software in San Diego, “intelligent” software that can sift through transactions to discern where there is high probability of fraud can be installed at a carrier for under $250,000.

While the initial cost for search software may seem substantial, it could be a bargain in light of the estimate by Tommy Short, president of the International Association of Special Investigation Units in Baltimore, that fraud adds 10- to 20 percent to the cost of every policy.

When it comes to insurance cyber-fraud–the use of computers and the Internet to perpetrate insurance crimes–Mr. Short said: “I dont see a lot of concern on [insurers] part. Fraud is a cost of doing business, so you set your rates accordingly.” In cases where insurance is being sold online or on the phone, insurers often dont need to pay agents, so those savings can help cover the costs of fraud, he added.

In a direct-selling insurance company he worked for previously, Mr. Short said, “we documented a large level of fraud, but the company was still profitable.” He cautioned, however, that fraud “will catch up with you. The crooks are going to know youre not looking for it.”

According to Mr. DAlusio, “Internet-based commerce provides would-be fraudsters with another portal into the insurance industry. It doesnt enlarge the number of cases; it just provides another way in.”

“I dont think theres anything new in the world of crime. [Lawbreakers] are using the new technology to do the old crimes,” added Mr. Short. While scammers used to do their nefarious business via the telephone–ensuring that companies never actually saw what they were insuring–they are now doing it over the Internet, he noted.

The Internet has the added advantage (for the criminal) of more anonymity. “On the Internet, you dont actually have to talk to a person, and identifying the person typing in information is next to impossible,” he said.

Among the popular scams are those involving bogus car thefts and/or accidents, Mr. Short explained. Criminals secure insurance online for a car that is already damaged, counting on the fact that they can get coverage without anyone actually seeing the car.

Their next step is to claim an accident, then to claim the car has been stolen, said Mr. Short. “That way, you dont have to worry about anyone seeing the damage,” he noted. “You can make $20,000 to $40,000 on a junk car,” depending on the state youre in and the amount of medical claims the insurance company will accept, he added.

Where such frauds are perpetrated online, according to Mr. DAlusio, the advantage goes to the criminal, “because theyre going to get paid quicker.” Its not uncommon for criminals to create a phony name, make up a Social Security number, then open a bank account where they can store their “profits,” he added.

Insurers are unlikely to closely scrutinize claims involving only a few thousand dollars, according to Mr. DAlusio. “Insurers think its cheaper to send you a check for $2,200 than to investigate it and deny it,” he said.

According to Mr. Short, however, such crimes can “easily” add $100 over six months to the auto premiums of Texas drivers.

How can insurers stop the online leaks in the financial dam? “Sometimes, carriers refer Internet policies to agents, so the agent is responsible to see that the person exists and to go and look at the car,” Mr. Short observed.

He added that there are software packages available that are designed to look at incoming information and match that information with “red flags.” Such warning signs include inability to verify prior insurance, or using a Post Office box instead of a street address.

The software flags such applications so that the company can examine them more closely, said Mr. Short.

“We really need to have some high-tech system to detect such low-level crime,” said Mr. DAlusio. Automated software systems use “intelligent decision-making capacity” to study patterns of fraud and “score” transactions based on likelihood of fraud, he noted.

He added that the old computer saying–”garbage in, garbage out”–also applies to such security software. “If youre not documenting cases well, it wont give you accurate scores,” he said.

The scores serve as a bellwether as to whether an SIU should get involved, Mr. DAlusio explained. Many of the software programs that yield such scores allow insurers to set their own event horizon in terms of what score level will trigger an investigation, he noted.

In 1999, fewer than 90,000 claims out of more than 114 million filed were investigated by SIUs, according to Mr. DAlusio. “The majority of perpetrated fraud is probably not being detected. Companies are not going to go out there and hire 50,000 investigators,” he said. “Instead, they need to use technology to detect certain fraudulent patterns.”

While “technology cant replace SIUs,” he said, “it can help identify areas of potential fraud better.”

Mr. Short sees the long-term solution as a combination of better technology and additional investigators. “Right now, we depend on claims people to find the fraud and turn information over to the SIU, but the average claims adjuster doesnt have enough experience, so you need some technology to enhance that finding ability,” he observed.

“I dont know that well ever solve the problem of insurance fraud,” he concluded. “Its like police work; the best you can do is to contain it to the best of your ability.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

Contact Webmaster