Challenges of Claims and Frauds in Insurance (I)

Insurance sector is normally seen as one of vital pillar in today's world economy as it offers protection to individuals. corporates and businesses against any type of unforeseen risks: accidents, illness, damages, retirement etc. It also provides in a way financial security to those in need.

With time. insurance industry has evolved multi-folds to cater to wider range of needs along with adapting itself to changing ecosytems, technological advancements and regulatory and compliance requirements. As a result, there are various products are being offered like life, health, auto, PnC, compensation etc.

Because of the range of products and benefits being offered by insurance companies, this sector is also not without its own fare of challenges and concerns, most significantly in efficiency in claims processing and settlements which involves a series of tasks starting from policy procurement to claim submission, assessment, investigation and settlement.

Also, insurance industry in very susceptible to frauds as well as there are people who try to take the benefits of vulnerabilities and find loopholes in the system. Together these cause a loss to insurance companies and put a financial burden on the,.

The objective of this series is to analyze the landscape of claims processing in the insurance industry together with the some of the core challenges/ concerns that insurers face in claims processing and settlements. it would also try to mention some of the frauds prevalent in insurance industry and explore the implications of these fraudulent activities to insurers, consumers and overall insurance industry. With that, it would also aim to stress the usage of AI tools and technologies to counter those problems and challenges in claims processing and to detect frauds.

Challenges for Insurance Companies

Fraudulent Claims

Fraudulent claims have resulted in significant financial losses to insurance companies. These types of claims have, in fact, led to increased premiums because of payout done by companies and hence incurring cost to them. Because of cost overrun, companies need to employ additional resources to investigate and detect frauds which again lead to operational costs.

Insurance companies are suffering because of frauds as:

1. It results in direct financial losses to them, reduce their profits

2. To minimize the impact, companies are forced to increase the premiums which impact the consumers which in turn start looking for other alternatives

3. On an average insurance premiums of a family gets increased between $400-$700 a year because of frauds

4. It is causing the operational costs as well since companies are forced to invest into tools and techs to investigate and identify frauds and fraudulent activities

5. They suffer from regulatory issues and penalties

6. Extra utilization of resources and time to investigate the frauds

Some of scenarios of insurance frauds which companies have noticed and identified:

1. Forged documents

2. Policies in the name of dead person or with terminal illness

3. Staged accidents

4. Fake claims with false reasons

5. Manipulation of documents including health check records

6. Employees falsely claiming work related injuries to receive worker's compensation benefits

It has been estimated that fraud claims have costed billions of dollars to insurers each year and without any definitive and concrete mechanism to find out the frauds, this cost might keep on increasing:

• It was estimated that around $308 billion worth of damage occurred to insurance companies in US alone in 2022 because of insurance fraud

• Frauds are costing insurers more than $80 billion every year

• Only Auto insurers suffer damage of approx. $29 billions of damage annually

• In UK, 577 million pounds worth of damages were caused by auto insurance frauds in 2021 (Association of British Insurers)

• UK insurance companies have registered 89K fraudulent claims in 2021

• It was reported by US insurance fraud stats that some or the other form of fraud was there in 20% of total insurance claims in 2021

• An average detected fraudulent insurance claims in UK in 2021 was of 12,283 pounds (Association of British Insurers)

(CAIF-2022 study on Insurance Fraud estimates cost to US Consumers)