A sluggish economy is being blamed for the rising cost of insurance fraud. According to a new report, more than half of U.S. personal lines insurers expect to see an increase in the cost of fraud this year, notes the Property Casualty Insurers Association of American (PCI) and predictive analytics and decision making technology provider FICO, which released the results of their survey today.

Typically accounting for up to 10 percent of property and casualty losses, fraud’s prevalence is evident, based on the following information culled from the Insurance Fraud Survey report, which included responses from 143 insurers throughout the U.S., who were surveyed in August 2012. According to the survey results, 45 percent of insurers estimated that insurance fraud costs represent 5-10 percent of their claims volume, while 32 percent said the ratio is as high as 20 percent. More than half (54 percent) of insurers expect to see an increase in the cost of fraud this year on personal insurance lines – policies designed to protect individuals and families – while less than three percent of insurers expect to see a decline in the cost of fraud on personal lines.

According to insurers’ responses to the survey, the most significant increase in the cost of fraud will affect personal property, workers' compensation and auto insurance. Specifically, 67 percent of respondents said they expect to see an increase in personal property fraud, 65 percent expect to see an increase in workers' compensation fraud, and 60 percent expect to see a rise in personal auto fraud. Approximately 61 percent of insurers credited the increases in fraud to sustained economic difficulties experienced by policyholders.

While only 17 percent of insurers attributed the expected increase in fraud to a rise in the sophistication of criminal gangs, 60 percent expect a rise in workers compensation fraud rings, and 61 percent expect a rise in auto fraud rings, said the report. Among survey respondents, 76 percent of insurers believe there is increased risk of fraud in no-fault states compared to states with tort systems; 45 percent see the risk as significantly higher, while 31 percent see it as somewhat higher.

The report authors said that insurers have placed emphasis in recent years on implementing meaningful reforms to no-fault insurance systems in several large states due to spiraling medical costs (40 percent more than in states with tort systems) and rampant fraud. “Much of this fraud is attributable to sophisticated fraud rings such as the $279 million no-fault insurance scam involving more than 30 individuals brought down in New York City this year,” said the authors.

"The insurance fraud problem is estimated to exceed $40 billion globally and is showing no signs of abatement," said Russ Schreiber, who leads FICO's insurance practice. "The findings of the FICO PCI Insurance Survey demonstrate that insurers recognize the problem and are looking to improve ways to detect and prevent fraud earlier in the claims process."

Robert Passmore, senior director of personal lines policy at PCI, agrees that it’s clear that insurers understand the scope of the insurance fraud problem, and are taking steps to reduce it. "However,” he said, “we also want that the public and policymakers to recognize that consumers are paying what amounts to a ‘fraud tax’ that is far too expensive for hard-working citizens."

Not surprising, insurers fighting fraud are relying on predictive analytics; which was identified as the most effective by 45 percent of respondents. Insurers also included the use of anti-fraud teams for specific books of business (37 percent), link analysis for detecting fraud (31 percent), business rules for stopping known fraud types (29 percent), and external databases (29 percent) as other useful fraud-fighting approaches.

"Early detection is the key to mitigating fraud losses for insurers," Schreiber continued. "Solutions like the FICO Insurance Fraud Manager not only help detect outright fraud, but also combat abuse and waste, the gray area of insurance claims."

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