As the 2006 hurricane season reaches its peak months, insurers should reflect not only upon the overall impact of storm-related catastrophes on the bottom line, but also on the opportunity these events create for fraud perpetrators. The sheer scale of hurricane-related losses not only increases the difficulty for adjusters to handle claims, it also magnifies the sympathy factor for putative victims. Professional fraudsters are adept at exploiting all of these factors and the greater the catastrophe, the greater the opportunity. The overall fraud impact of Katrina is yet to be officially determined, but the Government Accountability Office estimates that 16 percent of FEMA payouts on 2.5 million hurricane relief claims were for improper or fraudulent claims.

Natural catastrophes also underscore the need for insurers to fight fraud as competently and fairly as today's technologies and techniques permit. False positive identifications of fraud always put insurers in danger of bad-faith judgments. The perceived persecution of the victims of tragedy can result in a public relations debacle. Even lesser failures endanger customer retention.

Round Up Your Posse

State-of-the-art fraud fighting begins with a strategic commitment to the endeavor. That means treating fraud as a specific problem and dedicating resources toward a well-defined future goal. It means re-engineering internal fraud-related processes, including restructuring incentives for adjusters and investigators to reward success, not volume of work. And it means investing in the right technology.

The trend of hiring former law enforcement officers to staff insurers' special investigative units (SIUs) also is a step in the right direction. These professionals bring indispensable experience in conducting in-depth evaluations, surveillance, and investigations to the companies that employ them. But investigators only can be spread so thin; as with most activities in the information-intensive insurance industry, automation is indispensable for fraud detection. Failure to put the right tools in investigators' hands will only limit their successes.

Chief among those tools are rules-based or “smart” systems capable of identifying potential instances of fraud at any time in the claim cycle. Anti-fraud measures ideally are built with configurable business rules that can be established without the IT department's intervention. This permits the monitoring of results and iterative modification of rules to refine procedures toward de-sired outcomes and accommodate differential handling of customers when needed.

Event-based technologies — used successfully in marketing insurance products to existing customers based upon life events, such as the birth of a child or reaching retirement age — can trigger escalation of claims for review whenever the appearance (or change) of significant data points might indicate the possibility of fraud. SIUs can then monitor the flagged claim to gauge whether it is following a course toward becoming an exaggerated or fraudulent loss. Early flagging of suspect claims not only eases an SIU's workload, it also helps avoid redundant processes and anticipate future measures, such as addressing specific questions to claimants when key data elements converge in the case history. In short, companies will continue to depend on the individual skills of SIU adjusters and investigators to execute plans to prove cases of fraud, but technology can deliver the right claims to them at the right times.

Predictive modeling can play a role in casting scenarios corresponding to flagged data patterns, among other applications, but past use counsels some caution. Analyses of cases to predict settlement costs can expose carriers to bad-faith judgments when the individual facts of the claim buck tendencies. Thus, a claim identified by a few stark criteria that typically settles for $30,000 can lead a carrier to a jury award of $1.2 million. Bearing in mind these possibilities, insurers should guide their determinations with the idea that every claim is different and employ technology to reflect those differences as much as possible. The key is populating the relevant databases with a granularity of data sufficient to make significant distinctions between claims.

Available data is, of course, the foundation of any technologically driven fraud-detection effort. It presents perhaps the greatest challenge and the greatest opportunity to gain ground in the battle against fraud. Quality of internal data is a concern with anti-fraud efforts, as with other information-processing tasks within complex insurance organizations. But the most urgent need for insurers is a greater range of external sources of data. Addressing that need will require access to or development of public sources of information, such as law enforcement databases, and an unprecedented degree of information sharing about past claim activity on the part of insurance carriers.

Unfortunately, many insurers are reluctant to reform their internal processes and technologies, let alone work toward a model of vastly improved industry-wide cooperation on fraud. Some companies lack the underlying core systems that provide the capability necessary to build the superstructure of a rules-based, fraud-fighting technology platform. But even the carriers who enjoy such capabilities often balk at making the investment. The reason is that it is hard to make the business case for fraud re-engineering and technology because return on investment is hard to calculate. Everyone knows fraud exists, but it is impossible to know what it is costing any individual company. Furthermore, industry analysts have no way to judge the relative performance of companies. The only meaningful metric is the number of successful hits relative to referrals to the SIU, along with the resulting recoveries. But no one knows how much is missed and how much that costs.

Additionally, even though awareness of newer technologies is widespread, many companies fear the difficulties of integrating them within their current technology environments, which are already complex in terms of the application architecture itself, as well as with regard to the multiplicity of integration points.

Marshaling Resources

Nevertheless, the gap between the current state of fraud fighting at insurance companies and the existing but underutilized technologies and techniques demonstrates clear potential not only for improving a company's bottom line, but also by benefiting end customers through reduced premiums. The potential benefits associated with greater organization and distribution of cross-company and other data not currently leveraged only makes the case stronger.

Companies that lack underlying core systems should consider the fact that improved anti-fraud capability is only one factor in justifying broader system improvements. For example, the core applications necessary to support state-of-the-art fraud fighting are also the basis of competitive levels of service to customers and distributors. Also, the short-term costs of configurable business rules are readily justified by the long-term savings that accrue from eliminating the need to hard code application functionality across an unlimited spectrum of business processes.

But whatever carriers do individually, major leaps in fraud control will be possible only with the advent of greater access to non-industry sources of information, greater attention to the problem on the part of state insurance commissioners, and greater cooperation among insurers, in particular the larger stocks. Existing industry-wide databases are helpful, but they are limited in the range of information they can provide. For example, ISO ClaimSearch is an effective tool to understand prior claim history. However, no central data-bases exist to inform you of prior fraud convictions, fraud investigations/suspicions, or criminal records.

The top-tier P&C companies possess the majority of the available customer data but are reluctant to share it because of a perceived strategic advantage. That perception is sound, but only because of the narrowness of its scope. In the big picture, the industry leaders will gain along with the smaller players on both the bottom line and in terms of improved market image, which itself is priceless in dealing with the legal side of fraud fighting. So far, few of these companies have shown the vision or courage to face up to fraud by broadcasting their willingness to prosecute and publicize convictions, sharing the methods and circumstances of prosecution, and explaining to consumers and investors about the benefits associated with fighting fraud.

Michael Lucarini is senior executive in charge of global claims services in Accenture's Insurance prac-tice. He is based in New Jersey.