Reducing the cost of fraudulent auto claims

The old adage goes, “A picture is worth a thousand words,” and that is especially true when it comes to filing insurance claims. Proof of loss, photos of a damaged vehicle or property are critical to determining the loss and value of a claim.

New York Regulation 79 is helping to fight auto insurance fraud by documenting a vehicle’s existence and physical condition, plus vehicle options and accessories to detect and deter fraud, which targets approximately 8% of the heavily fraud-prone segment of used cars.

Preventing fraudulent claims

Photo inspections continue to have a strong anti-fraud impact. Inspections identified about $1.8 billion in pre-existing vehicle damage from 2014 to 2018 in New York, based on research by the Carco Group.

The discoveries saved insurers from paying $128 million in false claims on these vehicles. The ROI is compelling: $34 of false claim payouts are avoided for every $1 invested in fraud prevention through pre-insurance inspections, and consumers are equal beneficiaries of downward pressure on the auto premiums they pay.

Many consumers find insurance fraud a convenient and easily rationalized crime as revealed through attitude research conducted by the Coalition Against Insurance Fraud:

• 24% of consumers say it is acceptable to pad insurance claims to make up for the out-of-pocket deductible.
• More than 66% of consumers believe insurance fraud happens because people believe they can get away with it.

Yet an effort is underway by some auto insurers to water down photo inspections in New York — even though Regulation 79 targets only 8% of highly profiled fraudsters.

Diminishing the impact of Regulation 79 would allow fraud losses to rise. Fraudsters would be emboldened to step up their criminal activities in the face of diluted detection and deterrence. In turn, drivers could face premium increases thanks to mounting fraud losses against auto insurers.

So what is driving this movement? We believe certain automobile insurers and allies want to simplify their customer pipelines in a rapidly tightening auto marketplace that is seeing unprecedented competitive challenges for policyholder acquisition and retention.

Diluting Regulation 79 would backfire and sacrifice vital anti-fraud consumer protections and large dollar savings for small gains in efficiency and policy sales.

Weakening or removing vehicle photo inspections will embolden fraudsters to step up vehicle scams. Mounting fraud losses will place more upward pressure on auto premiums for honest consumers. This is especially true when more auto insurers are forced to increase loss reserves to account for growing fraud losses.

Success in watering down Reg 79 could also weaken vehicle photo inspections and anti-fraud protections in the three other states that require them: Florida, Massachusetts and New Jersey. Combined, they form a large segment to the U.S. auto market.

Regulatory modernization through new technology will maximize carrier and consumer protection, while retaining focus on high-cost fraud targets. Such collaborative efforts would benefit all stakeholders both in New York and across the U.S.

The optimum strategy will entail continued development of mobile technology — including artificial intelligence — to enrich fraud detection. AI and machine learning will support the efforts of adjusters and others are critical to the success of combatting auto scammers.

William Pagan is senior vice president of CARCO Group, Inc. Contact him at wpagan@carcogroup.com.