How many fraudulent claims would you guess were made against your organization in the past year? Just a few? None? The fact is, across all industries, 10% of P&C losses are due to insurance fraud.1 It’s an $80 billion-a-year2 problem that continues to plague companies of all sizes and types.
This first article in our series, “Combating Fraud,” looks at why fraud matters to every organization, discusses how you can evaluate your organization’s effectiveness at combating fraud, and provides advice on creating an action plan to help reduce your losses due to fraud.
Why are YOU having claims?
According to Kate Gordon, National Coordinating Counsel for Liberty Mutual Insurance’s Special Investigations Unit, one way to assess your organization’s effectiveness at combating fraud is to review your past claims to see whether you can spot any weaknesses in the way they were investigated and otherwise managed. “You may find you’ve overlooked certain parts of the claim management chain that could have exposed potential fraud,” she says. Your insurance carrier should be able to assist you with such a review. Gordon says your review should include the following questions:
- What were your most common types of claims? For instance, if “substance in food” claims were a large source of claims, that may be a red flag.
- Do you see any patterns? For example, is there a pattern to the geographic locations where a specific type of claim originated? “There was one case where we saw a certain type of retail slip-and-fall claim migrate from one region to another over time,” says Mike Butler, Director of the Commercial Insurance Special Investigations Unit for Liberty Mutual Insurance. “That helped us identify and successfully prosecute a group of nomadic claimants.”
- How were your claims investigated? “Be honest with yourself,” Gordon advises. “If you’re confident you fully investigated the claim, then you can feel secure that it was a valid claim.”
When reviewing your effectiveness at combating fraud, you’ll also want to re-evaluate your internal structure. Do you have someone in charge of investigating claims? Is it a team or an individual? If it’s your risk manager, is it realistic to charge someone who’s already overseeing a wide range of issues with investigating or even overseeing such investigations? Perhaps the best person to lead the investigative function is someone well-versed in the area where most of your fraudulent claims originate, e.g., product liability or transportation.
You should also consider working with your broker and carrier. “If you don’t believe you have the resources in house,” Gordon says, “then turn to your carrier, third-party administrator, or broker for assistance. By approaching the problem as a team, you’ll get the benefit of their experience in investigating claims similar to those you confront most often.”
Create your action plan now
Whether you have a current action plan for combating fraud or want to create one from scratch, Gordon and Butler advise taking these steps first:
- Give the investigation a head start. Ask yourself (and your carrier) these questions: What information would be most helpful to our insurance carrier when it investigates the claim? What type of information do we need in order to file our first report as soon as possible?
- Know the red flags! The red flags listed below are for fraud in general; we’ll cover industry-specific flags in future articles:
- No one witnessed the accident.
- You receive an anonymous phone call or letter alleging possible fraud.
- You receive a law enforcement inquiry regarding the validity of any part of the claim.
- The first letter or phone call you receive from an attorney is on the day of the accident.
- The claimant has been involved in three or more similar claims in the past two years, according to the database of the Insurance Services Organization (ISO).
- The claimant has serious financial difficulties.
- The claimant uses and is unusually familiar with insurance terminology.
- The claimant uses a post office box or hotel as an address and states that no permanent address exists.
- The claimant or attorney makes a demand for early settlement before all medical information is received.
- Train your employees. There’s no better time to train employees on the topic of claim fraud than during orientation. But whether they’re new or current employees, they should all know and learn the following:
- Every employee is responsible for fighting fraud
- The areas of the company where fraud is most likely to occur
- Red flags—for fraud in general and for your industry in particular
- Fraud is not a victimless crime. Innocent people can and do get hurt and killed.
- Fraud leads to increases in premiums for companies, increases that can affect workers’ salaries, bonuses, job security, etc.
Be sure to maintain consistent communication with employees regarding the internal and external risks of fraud and the steps management is taking to combat fraud.
- Create a set of best practices to respond to potential fraud—and make sure they’re followed. It’s important to create a set of guidelines and best practices for combating fraud and to make it easily accessible to all. “Sharing and enforcing the use of best practices are essential to an organized, consistent response to suspected fraud,” Gordon says. Having a set of documented procedures can also assist when defending legitimate claims, she adds.
Even if you have considerable antifraud resources in-house, there’s much to be gained from working with your carrier to combat fraud. After all, investigating claims is a core part of every insurer’s business. Questions you’ll want to ask your carrier include:
- Do you have a Special Investigations Unit (SIU)? If so, is it in-house?
- Does your SIU use data analytics to proactively detect potential fraud?
- Do you have counsel that specializes in fraud?
Finally, be sure to get in-depth information on the approach your carrier takes toward combating fraud. For example, you’ll want to verify that your carrier has a zero-tolerance policy toward fraud. And beyond the issue of fraud, it’s important to know whether your carrier takes a holistic approach to controlling loss, as is the case with Liberty Mutual Insurance. Our Loss Control Advisory Services unit works with customers to determine where their exposures lie, analyzes systems to find out what causes those exposures, makes practical recommendations for reducing them, and then measures each recommendation’s effectiveness. It all adds up to reducing a customer’s total cost of risk.
Be sure to watch for our next article in our “Combating Fraud” series in the next issue of Liberty Directions.