How to find and mitigate underwriting fraud
Fraud accounts for a roughly $80 billion annual loss for U.S. consumers, according to the Coalition Against Insurance Fraud.
As a $777 billion industry, the property and casualty market continues to grow in 2022.
As the industry progresses, some less scrupulous activities have created opportunities for fraud in the underwriting process.
Fraud accounts for a roughly $80 billion annual loss for U.S. consumers, according to the Coalition Against Insurance Fraud.
As a result, underwriters should be vigilant. It’s not pervasive, but if you look, you can find elements of fraud that can, in the aggregate, cost the insurance industry billions of dollars.
According to the National Association of Insurance Commissioners, non-medical insurance fraud costs approximately $40 billion per year. And that fraud not only impacts insurers; it can also cost consumers on average between $400 and $700 per year in premiums.
Most often, this type of fraud is unintentional and occurs due to neglect. But occasionally, this fraud stems from an intentional misrepresentation of facts on the part of a homeowner, property owner or contractor.
Prevention starts with spotting the signs, performing due diligence and knowing the right steps to take if fraud is suspected.
Four common sources of underwriting fraud
- A change in the status of the insured property. Let’s say a couple decides to purchase a second home. They then choose to turn their first home into a rental property, but they don’t tell the insurance company. Maybe they knew it would cost more to insure a rental property. Maybe it was an oversight. Regardless, this type of fraud undermines the underwriting process because the insurer is still rating it as if it was an owner-occupied dwelling.
- A meaningful change to a home structure that affects its level of risk. Throughout the pandemic homeowners across the U.S. modified their homes to accommodate a new way of living. However, what if they failed to notify their insurance company of a significant change to the home’s structure? The improvement is an underwriting risk because many policies dictate that homeowners must notify their insurer of any changes in a property that affects more than 5% of its structure. When a homeowner crosses the 5% threshold, it typically triggers a change in risk. This means the homeowner will likely need to purchase more coverage to protect against potential repair or replacement costs.
- A change in the risk mitigation systems inside a property. Items like cameras and home security systems that automatically notify the authorities in case of a break-in often provide insurance discounts to homeowners. However, if a homeowner disables the system those discounts should not apply. While this doesn’t exactly meet the textbook definition of fraud, it does represent a form of premium leakage, as the property owner isn’t paying the appropriate rate for their coverage.
- Unscrupulous and opportunistic contractors. The sad reality is that, after a storm, some contractors and repair businesses see an opportunity to defraud insurers and homeowners. They go door-to-door looking to take advantage of vulnerable homeowners, some even go to the trouble of damaging a homeowners’ roof to make it look like hail damage so they can provide the repairs, often at an inflated price. A strong storm blew through my neighborhood late last year. Within days, I had three or four roofing contractors pounding on my door to see if I had hail damage from the storm. Because of my experience in the industry, I knew I didn’t, so I sent them away, but not all homeowners can spot this type of devious behavior, especially if they are in crisis mode after a devastating storm.
Tips for mitigating underwriting fraud
While underwriting fraud isn’t always easy to spot, paying attention to the details can help underwriters protect themselves and their insureds. Here are six ways to reduce the risk of fraud:
- Validate the details of occupancy. Ask for proof that the property owner lives at their address. Inquire about their long-term plans for the property. If an insured is purchasing a second home, for example, ask them what they are doing with the first home and validate their answers.
- Don’t gloss over application questions. Make sure a property owner reads the application and can attest to answering all questions accurately. Be sure to ask key questions such as “Do you operate a business from your home?”
- Look for potential red flags. Consider:
- Is a homeowner’s new property a considerable distance from his or her current property?
- Does the property have a walkout basement or other space that could be finished and rented out?
- Does the mail your company sends to an insured’s address get returned?
- Rely on third-party data. Falling credit scores for an insured could signal the start of foreclosure actions.
- Focus on risk mitigation, not exclusively low-cost coverage. An inexpensive premium will close the sale, but if the policy is rated improperly due to intentional or unintentional underwriting fraud, it will not only adversely affect the policies of others, but it can also cost an agent his or her license.
The real-world realities of underwriting fraud
In every state, intentional underwriting fraud is grounds for policy cancellation. In addition, agents may need to work with their insureds to revise a policy that carries acceptable exposure limits. In extreme cases, underwriting fraud may be criminal. Check your state laws if you have any questions.
As the industry continues to grow, opportunities for fraud will become more creative. Rooting out underwriting fraud and undertaking a thoughtful review of each client’s true risk will ensure clients can have their American dream uninterrupted in the event of a loss.
Sandy Belcourt (Sandra.Belcourt@SageSure.com) is the vice president of product and underwriting for SageSure, a company that provides homeowners and business owner policies across 14 states. She has more than 38 years of underwriting and claims experience.
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