Our article on Understanding Insurance Fraud discussed how insurance fraud is criminal activity, the different types of fraud, who commits fraud and why. But what are the impacts of insurance fraud? Who is impacted and how do insurance companies compensate for insurance fraud in their business models? Following the recent results of the Insurance Council NZ UMR Survey (April 2020), we have some New Zealand-based insights to share with you.
If you’re an insurance policyholder, are you concerned about insurance fraud? Unfortunately, all insurance policyholders are impacted by insurance fraud, not just the perpetrators. Insurance fraud typically means an increase in the number and value of claims, and therefore an increase in insurance premiums too.
57% of respondents are not concerned about the impact of insurance fraudInsurance Council NZ UMR Survey (April 2020)
How does insurance work?
Insurance is essentially risk transfer, whereby ‘many’ people pay insurance premiums, to pay for the ‘few’ who make an insurance claim.
New Zealand insurance companies collect premiums from people and invest those premiums. Alongside general business expenses, a core expense is to pay insurance claims. This means that if the cost of people’s claims goes up due to fraudulent activity that pushes up costs, premiums are likely to also go up – meaning that everyone ends up paying more.
67% of respondents agreed that insurance fraud meant higher premiumsInsurance Council NZ UMR Survey (April 2020)
How are consumers impacted by fraud?
These additional operating expenses need to be covered. In New Zealand it is suspected that “If you have an insurance policy, there is a good chance that somewhere along the way, you have paid for someone else to claim for something they haven’t lost. There’s a good chance your premiums are higher as a result of it. And there’s a good chance it will happen again,” says Tim Grafton Chief Executive Insurance Council of New Zealand. But what are some of the other ways consumers are impacted by insurance fraud?
Slower claims processing
A surge in insurance fraud, or a suspicion about a claim type, can put pressure on claims processing teams and result in slower claims processing. For consumers with genuine claims and a need for an insurance payout as quickly as possible, this can really add to an already stressful situation.
three out of five respondents thought fraud would mean longer approval times for genuine claimsInsurance Council NZ UMR Survey (April 2020)
Fraud caused by economic uncertainty
When people are under significant financial pressure, opportunistic fraud can increase. In times of recession, insurers look out for this type fraud, particularly car insurance fraud and arson attempts.
Insurers have processes in place to support their customers who are under financial pressure, so it’s important to talk with your insurer if you’re feeling under financial stress.
How are insurers impacted by fraud?
The cost of insurance fraud isn’t just limited to an increase in claims or an increase in claim values. There are a number of other ways that insurers can be impacted by insurance fraud.
More time needed to process claims
If insurers experience an increase in claims, some of which prove to be fraudulent or they suspect to be fraudulent, this will result in extra care being needed to process every insurance claim, even the genuine claims. Insurers need to check for discrepancies and look for common fraud trends.
More staff needed to process claims
If claim processing times increase, often staff costs can increase too, with more staff needed, or more specialty staff needed to review claims. Even as more functions of the claims process become automated, when fraud is suspected, this is often a manual task that requires a human to intervene and review a claim.
More investigation hours needed
Insurance investigators are used regularly by insurers, for suspected fraudulent claims, or to review particular claim behaviour or patterns of behaviour. If there is a spike in insurance claims, then more specialty investigation hours are needed to understand the scope of the fraud.
How is insurance fraud being tackled?
Technology will help with the battle against insurance fraud and online tools are continuing to be developed to tackle fraud and its consequences for the industry and consumers. Of course, new technology relies on insurers having the IT budgets available to implement and maintain digital technology and keep ahead of insurance fraud trends.
Blockchain technology may also help to play a role in combating insurance fraud, and streamlining related back-office functions, such as claim form processing, fraud management and prompt claim payments on approval of a claim. Blockchain technology has the potential to detect fraud when it occurs, but also to pre-empt fraud by instituting new claim processes.
It will be interesting to see how technology is used to combat fraud in the New Zealand insurance market over the next few years.