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Insurance fraud is costing you big bucks

Insurance fraud has been around since companies began issuing policies, but a new survey shows it may be more prevalent today than many in the industry even suspected.

The industry's conventional wisdom holds that fraud accounts for up to 10 percent of property and casualty insurance company claims costs. That’s bad enough, and leads to bigger insurance bills for consumers.

But 32 percent of insurers say fraud costs may be as high as 20 percent of losses, according to a survey by FICO and the Property Casualty Insurers Association of America (PCI).

"That surprised us," says Robert Passmore, spokesperson for PCI.

costs of insurance fraudThe bad news doesn't end there -- 54 percent of insurers expect fraud costs to rise this year.

No one is able to pinpoint the exact cost of insurance fraud. Forty-five percent of insurers estimate insurance fraud represents just 5 to 10 percent of their claims costs.

From little lies to organized crime

Fraud runs the gamut -- from consumers who pad insurance claims to sophisticated criminal rings that stage car accidents and file bogus injury claims.

As far as fraud by individual consumers goes, 60 percent of insurers expect a rise in auto insurance fraud, 65 percent anticipate an increase in workers compensation fraud, and 67 percent project an increase in personal-property claims fraud. Sixty-one percent of insurers say the tough economy is to blame.

Roughly the same percentage of insurers expect a rise in fraud by criminal rings. Sixty percent expect more activity from workers compensation fraud rings, and 61 percent expect a rise in activity among auto fraud rings.

Insurance companies sort through data

Insurers are tackling fraud on a number of fronts. Among the most promising, according to insurers, is something called predictive analytics. Forty-five percent of the recently surveyed insurers say it has the potential to have the greatest impact on fraud.

Predictive analytics applies computing power and algorithms to massive amounts of data to find patterns. Insurers are using it to more accurately price policies as well as to detect fraudulent claims and lies on applications. Here’s more on how they’re on to you.

FICO, for instance, markets software to insurers called the Insurance Fraud Manager. The program sifts through millions of pieces of data from insurance claims and policy applications and flags those that look suspicious. For instance, the program might flag claims in which one person served as a witness and as a claimant in multiple cases -- a potential sign of an auto insurance fraud ring at work.

"It allows normal claims to get paid very fast, while also culling out those things that need a second look," says Russ Schreiber, vice president of global insurance and health care practice at FICO.

Nipping insurance fraud in the bud

Schreiber says credit card companies have been using predictive analytics to fight fraud since the early 1990s. Ever gotten a call from your credit card company because of irregular activity on your account? That's a result of predictive analytics.

Insurers have used the technique to fight fraud in health insurance and workers compensation for at least 10 years, he says, but the practice didn't catch on with property and casualty insurers until the last five years or so.

"The real holy grail we're after is to stop the fraud before the money leaves the insurer," Schreiber says.

Meanwhile, the industry is working to change no-fault auto insurance systems in some states, such as Florida, New York and Michigan. Seventy-six percent of insurers say the risk of fraud is higher in no-fault states compared to states with tort systems, according to the PCI and FICO survey. Much of the fraud in no-fault states, such as New York and Florida, stems from fraud rings, PCI says.

"It is clear insurers understand the scope of the insurance fraud problem, and are taking steps to reduce it," Passmore said in a prepared statement. "However, we also want 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."

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