Insurance Fraud Detection — all that you need to know - Digital Solutions, IT Services & Consulting - Payoda

Insurance Fraud Detection — all that you need to know

As per the law of Indemnity- one of the basic principles of Insurance states about the claims and by nature of the insurance, it is a vital part of the contract obliged by any insurance provider to compensate the Insured for a covered loss or policy event. Thereby insurer should be very prudent in disposing of the claims especially if any statutory law or regulations prevails in it.

Even though the insurer is very prudent nowadays, sometimes very evident from the matter of fact that there were serious frauds being noticed eventually after the settlement of claims due to the losses manipulated by insured/intermediary firms such as agents /brokers, etc. These cases are very severe as when and where multiple parties involved in a contract also when there is a large risk underwritten.

Frauds can occur at any stage of an insurance transaction — Risk booking, Risk evaluation, Risk transfer, etc.

But Frauds can be caught up by prudent underwriting and stringent scrutinization of risk to be accommodated — by laying good underwriting philosophies and innovative techniques to read the data from past and act upon especially in the stage of claims.

First of all to do the above-mentioned things and to conquer fraud one must know what is insurance. In basic terms, it is a contract between an insurer and an insured. In a contract, the insurer indemnifies the insured against losses, damages, or liability from an unknown event.

Insurance Fraud can be classified as

(i) Soft and Hard Frauds:-

Soft Frauds- Opportunistic frauds this is more common than Hard Frauds

Hard Frauds –Deliberately planned –this can steal more and hefty amount

(ii) Internal and External Frauds:-

Internal Frauds:- Committed by Insiders of an insurance industry such as Insurer, Agents, Brokers, etc

External Frauds:- Committed by Outsiders of an insurance industry such as Policyholder or Insured, Claimants or Beneficiaries

(iii) Underwriting and Claims Frauds

Underwriting Frauds:- fraudulent acts perpetrated at the renewal of the insurance contract, covers

Claims Frauds:- Deliberately inflated, false or fictitious claims

The Cost of Insurance Frauds

The CAIF (2003) estimates that insurance fraud costs Americans at least U.S.$ 80 billion a year, or nearly U.S.$ 950 for each family. Health care fraud alone costs Americans U.S.$ 54 billion a year, the CAIF estimates. The III (2003) estimated P&C claim fraud at the U.S.$ 27 billion in 2001. The Canadian Coalition Against Insurance Fraud (2003) estimates from a study conducted in 1997 that CAN.$ 1.3 billion worth of general insurance claims paid in Canada every year is fraudulent. In its 1996 European Insurance Anti-fraud Guide, the CEA notes that the cost of fraud cannot be less than ECU 8 billion, or approximately 2 percent of the total annual premium income all classes combined for the European insurance industry.

In most European countries claim fraud estimates represent between 5 and 10 percent of the total yearly amount of indemnities paid for non-life insurance. In spite of the flaws identified by the NIFF, the order of magnitude of these estimates leaves no doubt that insurance fraud, using a broad definition, has taken on quite sizeable proportions.


Challenges posed by fraudulent claims mainly lead to the liquidity of the company. Some of the challenges are listed below:

  • Limited IT resources (both Men and Materials)
  • Poor Data quality to analyses and predict
  • Excessive False positive or Negative rates
  • Lack of Cost /benefit analysis
  • Delayed claims adjudication
  • Issues with data Protection and Piracy
  • Inadequate external or global references
  • No interrelationship with other geographical players
  • Frequent identification of weak spots
  • Outdated Internal fraud systems
  • Failure to adopt continuous process improvement measures

Tips to identify some of the frauds in the industry

  • The claim is made by the claimant in a short time after the policy inception, or after an endorsement under which the claim is made.
  • The insured had a series of loss and claim history
  • No receipts for the large purchase and proof of billing is unavailable
  • Claimant claim details are too perfect without any single query.
  • Sequenced receipts and bills from the same store or outlet
  • Long time wait for the claim report to the insured
  • In case of any burglary and loss arises there off, there is no physical evidence of breaking and entering, or burglary could not have occurred unnoticed under the circumstances.
  • Misrepresentation of the questions asked or unanswered any questions

The Outcome

  • By rating each claim by the defined red flags rule and the analytics we have reduced the P&C claim frauds by the rate of 23% and thereby cost saving of 12.38%.
  • Anomaly detection and categorization in real-time helps the operator to justify the nature of claims and such reports enable the management to put forth more rules to stop or red alert before disposing of the claims
  • Data mining on the back end as part of Fraud investigation spotted the fraudulent area of misrepresentation
  • OCR enables to find the bill numbers and other particulars on the real time-based analysis- highlighted the frauds around the fraudulent bills submitted by the claimants

We hope this information has helped you. Please contact us at Payoda if you would like to connect.

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