Mitigating the Risk of Insurance Fraud With AI

Posted in Legal Alerts on November 9, 2022

The United States insurance industry is worth over $1 trillion spread across thousands of companies. Each year, insurance fraud conservatively costs these companies over $80 billion. These costs are ultimately passed along to consumers in the form of higher premiums. Insurance companies must stay one step ahead of those who seek to defraud them, and it is not easy to do so given the sophisticated methods fraudsters may use. One way that insurance companies can enhance their own anti-fraud capabilities is through the burgeoning technology of artificial intelligence.

An increasing number of companies are turning to this technology. The proportion of insurance companies using some form of artificial intelligence has more than doubled in the last five years. One recent survey showed that four of every five insurance companies are using some sort of predictive methodology to detect fraud.

How Fraudsters Victimize Insurance Companies and Policyholders

In the claims process, insurance fraud can take several forms, including:

  • Inflating and exaggerating the value of a claim
  • False claims about an incident that never occurred
  • Submitting duplicate claims
  • Fraudsters stealing personal information and using it to open accounts where they make fraudulent claims

Applicants can also commit insurance fraud by lying on their applications for coverage.

Insurance companies have come to use artificial intelligence to both improve their processes and to detect fraud. One study showed the use of artificial intelligence just to automate processes can save insurance companies $7 billion over 18 months. Increasing the use of artificial intelligence can also save money by keeping insurance companies from paying fraudulent claims.

Artificial Intelligence Helps Insurance Companies Detect Fraud More Quickly

Insurance companies do not have the resources to investigate all potential fraudulent claims. On one hand, an insurer has an obligation to deal with claimants in good faith, and it cannot unreasonably delay the investigation and payment of claims. On the other hand, working under time constraints can lead to losses from paying fraudulent claims. The key is for insurance companies to be able to process and pay claims in a timely manner while still detecting potential fraud.

In the past, a claims adjuster would have to manually review a claim and decide whether it was legitimate. Even after an adjuster spotted signs of potential fraud, they would need to refer the matter for a complete investigation. As fraudsters began to rely on more advanced technology, adjusters simply became overwhelmed. Now, a bot can perform the first level of review on an insurance claim before an adjuster even sees it, saving time and giving the insurance company a crucial leg up on would-be fraudsters.

How Insurance Companies Can Design an Effective Anti-Fraud Program

Much of an insurance company's anti-fraud firepower comes from its database. The ability to be able to cross-reference large volumes of data within minutes is what makes artificial intelligence so powerful. The technology allows insurance companies to cross-check various claimants, both against each other and against law enforcement databases. In addition, artificial intelligence allows an insurance company to compare various elements of certain claims. There are literally millions of data points that insurance companies can scan practically instantaneously.

The effectiveness of an insurance company’s artificial intelligence algorithm depends on three things:

  • The quality and depth of the data to which an insurance company has access
  • The speed at which it can process this data
  • The ability to devise the right algorithms to properly detect trends in the data

Artificial intelligence can help insurance companies predict which claims may be fraudulent. Not only would an insurance company know where to focus its anti-fraud efforts, but the technology can also score an individual claim based on the probability it could be fraudulent using a complex algorithm. The technology can replace human effort.

Insurance companies need to get out ahead of the curve and be proactive when it comes to fighting fraud. Otherwise, they will be left operating from a reactionary position, dealing with the damage caused by fraudulent activities after they occur.

Artificial intelligence can help insurance companies monitor claims on a real-time basis, enabling them to detect potential patterns of fraud. The AI algorithm can score each individual claim, alerting insurance companies to claims that may need further investigation. An insurance company could also analyze an individual claim against a policyholder’s own history.

The benefit of artificial intelligence is that it can provide alerts to insurance companies on a real-time basis. The AI algorithms are running around the clock, even when employees are not working at their jobs. The hope is that insurance companies can be alerted to anything that seems suspicious. The fact that an algorithm detects the activity would free up employees to actually investigate claims, speeding up the claims resolution process.

Increased Investment in Artificial Intelligence Benefits Both Insurance Companies and Policyholders

Insurance companies have annual investment budgets that they use on new technologies. Chances are they are already devoting a large portion to improving their fraud-detection technology. Carriers should consider increasing the amount they invest in artificial intelligence. It is beyond question that artificial intelligence is here to stay; the only open questions are how far insurance companies can advance the technology and which capabilities they can build into it.

The benefits of artificial intelligence can reach both insurance companies and their customers. When insurance companies are paying out less in fraudulent claims, they could issue more competitively priced policies. Everyone suffers as a result of insurance fraud, because much of the losses are passed on to customers in the form of higher premiums. Plus, by being able to automate more anti-fraud efforts, insurance companies may even be able to provide better customer service because employees could be freed up to deal with policyholders’ questions and issues.