Stephen Applebaum, the author of the Aite report, based his findings on interviews with 22 p&c insurance industry stakeholders and fraud-prevention organizations conducted from July 2012 to March 2013.

"The growth in both cost and type of fraud show no sign of easing, even as claims frequency and premiums written have remained relatively flat," explains Applebaum. "What puzzles and strikes me more than anything is that [fraud] keeps growing in spite of the significant efforts expended in traditional detection and deterrence processes.

"More potentially effective solutions are available, both technological and in the areas of industry and public agency information exchange and cooperation," he continues. "[These solutions] are proven to work, but need to be more aggressively adopted."

Bigger Cheese, More Mice

Applebaum cautions that insurers that fail to "up their game" could will not only become competitively disadvantaged but also adversely selected by enterprising fraudsters. Therefore, carriers should revisit and update their enterprise fraud strategies and actively review new and more effective solutions in the marketplace. "Simple rules-based scoring and workflow solutions, while still effective, are now just table stakes," says Applebaum. "Insurers must focus on solutions that enable detection as early as possible in the process—preferably in underwriting or at least during the claims reporting process—before payments are made and valuable investigative opportunities are lost. This capability will not only yield the highest financial results but will also encourage fraudsters to seek softer targets."

Sizing Up The Rats

Last year, claims fraud costs averaged about 14 percent of the total net premium written in the U.S. P&C industry. When breaking down the cost by product line, Aite finds private passenger auto suffered by far the greatest hit, accounting for $26 billion of the total $64 billion in 2012. After that, homeowners' multi-peril ($14 billion) and workers' comp ($8 billion) were the only other two lines to suffer costs more than $4 billion.

Numbers released earlier this year by the National Insurance Crime Bureau (NICB) reaffirm the magnitude and scope of this pervasive crime. Questionable claims (QCs) are piling up, as NICB notes a 27-percent increase in QCs over the last three years. In 2010, the agency logged 91,652 QCs from member insurers, with 100,201 in 2011 and 116,171 in 2012.

There is compelling evidence that U.S. p&c insurers are not exactly resting on their laurels. The sector spent $271 million last year on fraud analytics and scoring products and is expected to spend $291 million this year.

Aite anticipates spending to annually rise $20 million per year, on average. This means that by 2016, insurer spending could top $360 million, split evenly between scoring and analytics investments.

Applebaum emphasizes the importance of text mining, case management, visual link/social networks analytics, and more-evolved instances of identity management and verification in early detection and fraud deterrence. Increasingly, cyber defenses and outlier detection, along with fresh investigative techniques, such as behavioral analytics and speech biometrics, will be key to strengthen insurers' holistic, proactive solutions as well.

Better Claims Service, Less Fraud

Michael A. Costonis, managing director in Accenture Property and Casualty Insurance Services, wrote that a recent European survey indicated that 76 percent of p&c carrier respondents planned to implement advanced fraud-detection techniques, such as predictive modeling tools and enhanced data collection, to assess historical fraudulent claims and identify predictors of fraud. Unfortunately, these measures alone may not be enough to significantly reduce losses. Without a modern core claims system, insurers will remain a step (or two) behind the fraudsters.

According to Costonis, a core claims system should be able to support better claims service, not just fraud detection and prevention. Earlier research has indicated a strong correlation between poor claims service and the propensity of customers to commit fraud. Thus, a claims system should embody these four core capabilities:

1. Flexibility. The system should address policyholders' evolving needs, such as their desire to obtain information on the progress of their claims, when and where they want it. The vast majority (84 percent) of European respondents said their systems were not flexible and modern enough to do this.
2. Independence. Nearly half (47 percent) of our European survey respondents said their systems don't allow changes in system behaviors and business processes without intervention from the IT department. This prevents claims handlers from more quickly and easily configuring these applications to their needs.
3. Data capacity. The growing volume of data includes insights about consumers from social media, usage data collected from telemetry and GPS technology, and a host of other information. The claims system should have the capacity to collect and analyze this data to help refine and improve claims management.
4. Multi-channel access. It's evident that this is a big challenge in both Europe and theU.S., with three-quarters of European respondents saying the ability to integrate new technologies to support multi-channel access is a top priority. This capability not only addresses policyholders' concerns but also helps streamline the entire claims reporting process, from first notice of loss (FNOL) notification to documentation of damage sustained.

Claims processing remain a central function—if not the central function—for p&c insurers, and more effective fraud prevention can offer big benefits. Getting the most out of predictive analytics, business rules for stopping known fraud types and linkages to external databases, however, depends on having a core system that can support these and other advances while providing steady improvements in the speed and quality of service.