DECEIT AND DISPUTE
Updated: Oct 14, 2020
The Risk of Insurance Claims Fraud and Disputes Rising During a Pandemic
Insurance is pivotal. It enables individuals and small and large businesses to mitigate not only common occurrences but also financial losses during economic crises. While insurers dutifully protect clients against potential losses and ensure financial stability, the industry is not immune to financial losses, notably those arising from escalating fraudulent claims and disputes bought on by the distress and stress of an economic crunch. In fact, the FBI estimates that the total cost of insurance fraud in the US (excluding health insurance) is more than US$40BN per year – more than the annual profitability of the property & casualty (P&C or non-life) industry. These losses are crippling for the industry and can tip firms into failure if appropriate preventive measures are not taken. Insurance companies are also vulnerable to economic volatility caused by the pandemic as chaos and uncertainty from the crisis can motivate policyholders to rationalize nefarious activities. This means that as valid insurance claims increase, so too can fraudulent ones – in number and impact.
Although suspicious claims have always been a constant factor, claims risk has escalated during the pandemic-led lockdown. Fraud is often most virulent during downturns and crises, and both are happening during the COVID-19 pandemic. For individuals, the pandemic has seen more people face a cash-crunch and struggle to pay bills, while others find themselves victim of pay cuts or, worse, unemployed. For businesses, the reality of today’s financial instability means existing processes are faltering, particularly those ill-designed for remote working. In this scenario, the lines of insurance most vulnerable include business interruption (BI), healthcare, workers’ compensation and motor insurance.
The distance between loss and recovery
The impact, both in scale and complexity, of the COVID-19 pandemic on business is difficult to estimate. Whilst attempting to address today’s unique challenges to meeting financial obligations, corporations are seeking new means to recover from short-term and long-term consequences of the disruption. To recover losses in business income during the crisis, some companies rely on business interruption insurance. But BI has limitations. BI can provide support, but its cover requires physical damage to the insured property to be triggered . And these triggers tend natural interruptions to business operations like fire, flood and earthquake. Unfortunately, the emerging risks from the COVID-19 pandemic, though considerably disruptive (e.g. government directives to curtail and/or cease operations for public health reasons), do not involve physical damage to property and equipment. As such, businesses struggling in the outbreak might be vulnerable to deliberate acts, such as burning or destroying facilities and equipment, or removing property or vehicles as liquidating assets at reduced rates brought on by the economic downturn is not appealing. In fact, internet search queries for "How to set fire" spiked 125% in the last week of March, an alarming sign for insurers that some may be planning to commit insurance fraud. Furthermore, a notice posted by the Washington Department of Insurance stated that BI coverage for coronavirus is "questionable" and depends on specific terms of specific policies. This may create ambiguity regarding the scope and limitations of coverage, and it may even attract false claims and disputes. Policyholders could take advantage of this ambiguity. Conversely, California Insurance Commissioner Ricardo Lara recently directed insurers in the state to investigate every business interruption claim received to ensure that contractual obligations are upheld as well as combat those who might discourage policyholders from filing claims.
As cases of those infected rapidly increase, the risk of healthcare fraud is rising. Insurers Are likely to witness fraud from billing for services not rendered; ‘upcoding services’ (i.e. the provider submits a bill using a code that yields a higher payment than that associated with the service rendered); filing duplicate claims; unbundling (i.e. fragmented billing for tests) and cost associated with the performance of unnecessary services. Cases of fraudsters targeting senior citizens for the sale of PPE or COVID-19 drugs are also escalating as well as those through offering fraudulent healthcare facilities. In some instances, those defrauding insurers ask for victims' Medicare or Medicaid numbers to bill private insurers for illegitimate services – a fraudulent practice termed health or medical identity theft.
Fertile ground for fraud
A crisis is also fertile ground for fraud. And today’s rise in remote working is also fuelling heightened risk in fraud claims through workers’ compensation policies. The United States experienced a 159% increase in COVID-19 related workers’ compensation claims from Q1 to Q2 2020. Though a marked rise, this was not the only complexity. Due to multi-purpose location (working at home) of claims and the isolation of claimants, insurers are wrestling with how to distinguish if injuries and illnesses are covered by workers’ compensation. Remote employees may commit fraud by claiming to suffer an injury "on the job" to benefit from the policy when, in fact, they were incapacitated during personal time. Today, workers' compensation insurance fraud in the United States costs US$6BN a year to insurers and employers, and with more people now laid off due to the virus, the temptation for employees to turn to their insurance policies into a source of quick cash is intensifying. Specifically, fraudsters could look to benefit from the COVID-19 outbreak and current health measures by staging auto accidents and using the fear of contracting coronavirus to go to hospitals where their injuries can be substantiated. In this somewhat extreme example, the current circumstances make it difficult, if not impossible, for insurers to employ set procedures, gather sufficient evidence, verify details and, when fraudulent, detect false claims.
Good, but could be better
Insurance companies are highly attuned to the potential for fraud and its mitigation, but it is too soon to tell how they well they might respond to the increased threat during and after COVID-19. Criminal activity infects multiple business lines and burdens the insurance industry, meaning insurers need a holistic approach to deal with fraud and theft now and tomorrow. An initial step would be to critically evaluate existing fraud detection systems. This includes claims tested fraud detection tools as well as access to recent insights to monitor fraud trends. And this is an excellent time for insurance carriers to start leveraging their rich and available data that, with advanced analytics and AI technology, could advance fraud processes to mitigate and fight disputes as well as anticipate and even prevent insurance claims fraud all together. In fact, now, during a crisis, is the time for insurers to review, replace or renew existing practices and platforms alongside revolutionizing, digitising and energising themselves for future growth and excellence.