There is no doubt that natural disasters made headlines more last year than in any other year. The final exposure is in and experts estimate that 2017 was the costliest on record for disasters, coming in at a whopping $306 billion; you read that correctly, billion, not million. One of my favorite mantras that has been passed down to me from insightful leaders is to control what you can control. If I attempt to adopt this mantra to the mega-disasters of 2017, what can insurance companies control? From the California wildfires, Hurricane Harvey, Hurricane Maria, to Hurricane Irma, can carriers take any action to prevent these natural occurrences from happening? Of course not, BUT, there are steps that can be taken to mitigate losses from these unfortunate, and extremely costly incidents.
I witnessed the devastation that the earthquake in Central Mexico had during September 2017. It was extremely enlightening to witness people putting themselves before others and risking their lives during the rescue efforts. It was refreshing on a very profound level when I was at ground zero and witnessed relief coming from all over the world in support of the communities that were ruined. Yet, despite all of this positive energy, there were those waiting in the background, looking to capitalize on the vulnerabilities of others. This unfortunately, is the world we live in, and accordingly, as counter fraud professionals, we need to make sure we do our part to address these vulnerable areas within our companies.
Having worked Catastrophe (CAT) duty dozens of times during my insurance career and also having served as a member of the Insurance Emergency Operations Command, I can attest to the fact that during a catastrophe, carriers, in a desire to take care of their policyholder victims, expedite the claims process in order to assist with getting the insured back to their pre-disaster state. As carriers speed up this claim process, the normal counter fraud safeguards are often circumvented in order to expedite payment. This is a huge risk as catastrophe claims are ripe with fraud. There are several key areas that counter fraud professionals should be mindful of when faced with a catastrophe. The first is contractor or vendor fraud, this occurs when an unlicensed vendor or contractor poses as a legitimate business and sells services to the insured. In cases of a purely fabricated business, the owner will write up a contract, collect a deposit, and then disappear. In more elaborate schemes, the owner is legitimate and does actually perform the repair, but the quality is poor and/or dangerous as sub-par materials and techniques are used in order to cut costs. In a second and more common scenario, the insured exaggerates a legitimate loss. As one of the main themes of my book, The Psychology of Fraud, I argue that opportunity is the number one driver of fraud, that is, when opportunity presents itself, those that would never think about fraud, may be tempted. Unfortunately, these policyholders suffered a legitimate loss, but they see an opportunity and make a rational decision to attempt to recoup additional loss by inflating losses, claiming lost services, and fabricating repairs.
As mentioned earlier, the opportunity that is created by these disasters, coupled with the high volume of claims being processed in an expedited manner is a recipe for disaster for fraud. So what can carriers control? First, utilize and leverage countermeasures to ensure these cases do not go un-detected. Leverage software fraud systems that serve as a gatekeeper and help to identify outliers in data. For example, it would be beneficial to know that an estimate that an insured submitted for property damage was 10x more than the average repair cost in their area, or that the insured is known to submit claims without adequate proof of loss, such as receipts. Both of these scenarios could be identified through an analytical system. Another tactic is to utilize external data sources and link them to your analytical system; for example, what if an insured files a claim for hail damage and the weather radar showed no hail in the area? This sounds simple, but these are the cases that fall through the cracks and cause significant losses.
As we roll the catastrophic dice for 2018, let’s hope luck is in our favor!
-Dr. Fraud