Marc Thompson is a Chicago native who seemed to have it all. His job earned him a million dollars annually. He had great connections as a member of the city’s trade board.
Then he got divorced, and it left him with almost nothing. Besides borrowing plenty of money from friends and associates, he orchestrated an elaborate insurance fraud scheme.
First, he falsely reported a burglary in his house that allowed him to claim $50,000. Then he became desperate. He burned down his home with his elderly mother in it so he could blame the fire on his mother’s supposed suicide.
Today, Thompson is spending 190 years in prison—but he’s not alone. In the United States, thousands commit insurance fraud in different ways. The Federal Bureau of Investigation (FBI) even estimates that the industry loses $40 billion annually. This amount doesn’t include false health insurance claims yet.
Why do people commit fraud, and what are its effects on the industry? How can tools like claims analytics help curb it?
Why People Lie
Insurance fraud can fall into two categories: providing false information or exaggerating data. Either way, the motivations for committing it can vary.
1. Greed
Greed is a strong negative emotion that drives many to obsession and compulsion. It might have compelled Thompson to commit a heinous crime or for 72-year-old Isabel Parker to become the slip-and-fall scam queen.
2. High Insurance Premium
Some may not want to collect their policy but like to spend less on insurance. After all, auto insurance alone can cost over $2,000 annually, according to Value Penguin.
To avoid high auto insurance coverage, for example, the policyholder may conceal:
- The complete number of drivers in the house
- The exact purpose of the vehicle
- The real value of the vehicle
- Tickets and accidents
3. Overconfidence
Others may claim fraudulent insurance because they can. Think of Thompson or Parker, for example. They believe they can get away with it—and some do—over and over. Along the way, they can also become more adept and start to create more elaborate schemes.
What’s the Effect of Insurance Fraud
Insurance Europe said that insurance fraud is not a victimless crime. Its implications are broad:
- It can further tighten insurance regulations and may eventually deny specific demographics from getting one.
- The fraudster becomes a victim as well. They will not only lose the insurance policy but also spend time on their crime and lose the chance to apply again. It may also restrict their access to other services, such as a mortgage.
- It can hurt small insurance companies that they may go bankrupt, and employees lose their jobs.
- It destroys the brand or reputation of the insurance firm.
- It places many lives at risk, especially as fraudsters commit an actual crime. It may delay other claims too.
How to Prevent Fraud with Predictive Analytics
Insurance fraud hurts the firm and the people who depend on it, including honest insurance policyholders. How can companies prevent it? Today, one of the tools they can use is predictive analytics. It’s a system that performs many functions:
- Create a forecasting model
- Monitor insurance claims of clusters or individual policyholders
- Generate data in real-time
These tools, such as claims analytics, can predict customer behavior and identify patterns of claims. Both of these can help spot insurance fraud. Companies can also use it to determine products prone to such a crime. From the data, they can design better safeguards without compromising the quality of service.
Insurance fraud is less likely to disappear in the future, but companies can do something to be one step ahead and reduce losses and impact.