Insurance companies are under constant assault by illicit actors to gain benefits they otherwise are not entitled just like weather is constantly exposing one’s home to deterioration. It is essential your company’s processes are protecting company assets and margins just as preventive maintenance protects your home against the effects of the elements.

The assaults on insurance companies are most evident at time of underwriting and claim. The claim and underwriting functions are charged with, among other things, protecting the company against unwarranted risks and liability costs. While investments in technology are making great strides in processing efficiencies, just as putting in a new, energy efficient furnace helps reduce home energy consumption, it is still critical to make sure one’s infrastructure is properly protecting against the continued exposure from those that would exploit technology for their own self-serving and illicit purposes. Just like keeping one’s home properly painted protects against more costly repairs, the expenditures used to validate claim and underwriting data will offset larger expenses of paying fraudulent death or disability benefits. These investigation costs are “contra-expenses” and protect the company and stakeholders from eroding profits. These contra-expenses can realize a protection ratio of 10 to 20 times their cost.

Unfortunately, expenses that are budgeted, such as claim and underwriting investigation expenses, often come under pressures to be reduced. This is inevitable and part of a healthy budget process; however, the effects of reducing these costs are not immediate and may not be evident until a much later date or worse, not identified at all as these illicit payments get swept into the much larger pool of legitimate liability costs. It is akin to stopping a small stream of investigation expenses which could prevent a river of illicit claim payments, and then trying to identify that river of illicit payments once the river hits the ocean. Reducing investigation expenses can certainly be done, but is the reduced investigation quality allowing a river to form?

The question for the budget manager is how to identify the value derived from investigation expenses since often illicit benefit payments are mis-identified as pricing issues or short-term volatility. Budget and expense processes will capture the first piece of information – the investigation expenditures to validate data. The second and most critical piece needed to understand the value of these expenditures is often not collected, and that is the amount of liability avoided by such expenditures, i.e. the river. Collection mechanisms need to be in place to capture this information to fully appreciate the value added. For underwriting, the amount can be found in the applications either rated or declined due to the information discovered. For claims, it is the amount of payments avoided, but keeping in mind that the objective of claims is not to increase denials; rather, claims is responsible for paying all legitimate claims without paying illicit ones. In short, management should simply ask whether the “savings” created by reduced investigative expenses offset the erosion of margins due to the increase in illicit benefit payments.

We have seen first-hand insurers who have foregone critical investments in investigative costs only to become the target of sophisticated fraudsters. In our experience, once the fraud has been identified by management, the results are two-fold: 1. the fraudulent payouts have far exceeded the cost that would have been incurred initially to investigate the applications and claims, and 2. their business contains scores of illicit policies remaining on the books that cannot be resolved without expending significant resources on legal costs - if at all.

Another metric is more difficult to measure and often overlooked entirely. This metric involves reviewing claim liability expenditures made within early policy durations. Most companies do not attempt to rescind policies outside of the contestable period except for egregious fraud, hence illicit payments unquestionably get made; however, these early duration claims hold valuable information concerning the effectiveness of underwriting processes. If these claims are not being genuinely examined in this light, important information is being overlooked.

More now than ever, it is important to know the true benefits of validating data which means measuring the costs of the investigation against the much larger saving realized through fewer payments of unjust benefit expenses. That isn’t to say every case will result in finding unjust claims – quite to the contrary. Most claims and applications are legitimate. But overall, the reduction in illicit payments should far outweigh the cost of the investigations. Even if the impact isn’t as dramatic, there is a sentinel value to validating data. Fraudsters will track company practices to find those processes with gaps. If one is not finding fraud on its books, then it may already have good fraud practices in place preventing these attempts – it is keeping its house maintained and in good order. However, it is more likely that one is not looking in the right places.

At Diligence, we are passionate about finding the truth. Whether it is validating an underwriting application or conducting a claim investigation domestically or internationally, we have a highly trained and dedicated staff of investigation professionals ready to assist you with your fraud detection and deterrence processes. We do not simply “check a box” so one can feel good about accepting a liability. Our results are prepared to withstand the scrutiny needed to defend your cases. For those that wish, we have processes in place to connect your systems with ours for simplicity of referrals. Let us know if you have any cases where we can be of assistance, or if you have processes you would like us to review. Diligence is ready to assist you.

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Diligence in Underwriting
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