Using Cybersecurity in Insurance Fraud Investigations

Posted in Legal Alerts on May 12, 2023

In the past, insurance fraud detection consisted of employees manually poring over data and investigating potentially fraudulent claims. While the human element was sometimes effective, many instances of fraud got past gatekeepers and cost insurance companies large amounts of money. As insurance fraudsters have gotten more sophisticated, insurance companies have needed to stay one step ahead of them. At the very minimum, they need to keep pace with modern criminality.

Insurance companies have increasingly turned to both artificial intelligence and cybersecurity to weed out fraudulent claims. Hackers and fraudsters have certainly been able to leverage advancing technology to become more effective at what they do. Insurance companies have learned to successfully invest in technology, so they can predict, respond, and react to scams that cost them money.

Insurance Fraud Is a Growing Problem for the Industry

In the aggregate, insurance fraud likely costs the U.S. economy over $300 billion each year, and this loss estimate has grown faster than the rate of inflation. When fraudsters succeed, the consumer pays the price. Insurance companies are forced to pass the costs of fraud off to consumers in the form of higher premiums. This can cause a domino effect throughout various aspects of the economy. For example, if an employer is required to pay higher insurance premiums because of fraud, the increased costs could put pressure on their bottom line and curtail the raises they give employees. Raising premiums is something insurance companies often do to remain financially solvent in the face of escalating costs, such as the costs of insurance fraud.

The fact that insurance companies are required to respond to claims within a certain time period would ordinarily make it even more difficult to root out fraud in a timely manner. Insurers must scale up their ability to fight fraud, and technology helps them do so.

Artificial Intelligence Is Helping the Industry in Many Ways

Insurance companies are turning to a number of innovative methods to detect fraud. Artificial intelligence now stands on the front lines of fraud prevention. Insurance companies can use technology like AI to screen claims and avoid the inefficient manual effort that takes too much time and is not always effective. When processing claims, insurance companies are under some time pressure because delays could open them up to legal liability.

Artificial intelligence can help by detecting anomalies. Most legitimate customers will file their insurance claims a certain way. Insurance companies use machine learning to establish a baseline for claims. The baseline could then be used to compare newly filed claims against all existing claims. The insurance company would then soon know about outliers, so it can promptly launch an investigation. The insurance company would still pay legitimate claims, but at least it would know when it needs to further screen questionable ones.

Technology Allows for Predictive Analytics

Fraudulent insurance claims often follow common patterns. An insurance company has likely seen particular types of claims in the past that are higher risk and have led to greater fraud losses. Even though fraudsters are continuously employing new schemes, they often return to ones that have a track record of success in getting an insurance company to pay.

Predictive analytics allows insurance companies to forecast future fraudulent claims based on AI and machine learning algorithms that have been trained on historical data. This helps insurers take a proactive approach to weeding out fraudulent claims. While predictive analytics can be effective in spotting instances of fraudulent conduct that people have previously attempted, it may not be effective in detecting schemes that are so new or rare that an insurance company has not yet been able to train its AI models to spot those schemes.

Chatbots Can Help Get Claimants on the Record Early

In the past, fraudsters could take advantage of the slower speed of claims processing to manipulate the data that they presented to an insurance company. They may have had time to change pictures or estimates to take advantage of an insurance company’s slow-moving procedures. Technology may now allow an insurance company to get a claimant on the record early, making it more difficult for them to change the data later.

Insurance companies may no longer need to have a human directing the claimant to submit certain information. The use of a chatbot can speed up the process, requiring the claimant to submit pictures and other evidence of the losses early. Once the claimant is on the record, it would be more difficult for them to manipulate or change the data. An insurance company would know that the claimant is up to something improper thanks to any changed data, and could use the new data as a basis to deny a fraudulent claim.

The Use of Blockchain in Claims Processing

In addition, an insurance company can also use blockchain to help prevent fraudsters from changing claims data. The blockchain will record transactions as they occur and information as it is submitted. There would be a hard timestamp that is synced with a third party. Once there is a timestamp, a hacker would have difficulty breaking into the system and changing information because it would be rejected as contradictory.

However, electronic databases could be vulnerable to large-scale hacking. The data can be corrupted by hackers in a cyberattack when they load contradictory information onto the system. When that happens, an insurance company may not be able to use any of the data it has stored until it can either find a way to correct the problem or it pays a cyber ransom.

People and Technology Can Together Combat Insurance Fraud

While human input into the claims process is needed, there are many cases where too much of it can lead to increased losses. Technology can help an insurance company’s employees in the crucial task of identifying and combating fraud, but insurers should integrate technology as opposed to completely replacing human input. The hope is that the two, working together, can minimize losses so insurance companies can pass savings along to policyholders.