These are trying times for insurance companies. In addition to tumbling stock markets and a credit crunch, premium growth is down, investments are lagging badly and the cost of doing business continues to climb. Property-casualty insurers have come a long way since record profits just three years ago.
The economy hasn’t been kind to insurance consumers, either. People have been dumping their low-mileage, high-premium cars; there’s a record number of abandoned properties; the worker pool is shrinking; and fewer people can buy health insurance on their own. All of this creates less demand for insurance products.
So it’s natural that stories abound about cost reductions within insurance companies — including their anti-fraud operations. There are plenty of stories on the street about companies that have downsized their investigative staffs, outsourced more anti-fraud activities, and delayed investment in new technology.
Interestingly, we hear just as many stories about insurers that have increased budgets over last year and plan to spend even more in 2009. In fact, a recent survey we conducted of 41 major insurers in the U.S. found that nearly half have increased resources for anti-fraud activities from last year either moderately or substantially. Only about 12 percent say resources have declined.
Insurers aren’t outsourcing anti-fraud activities in greater numbers either. Only 10 percent report more outsourcing in the last year, with the same percentage reporting less. The rest say there was no change. Looking ahead, 45 percent say they expect larger outlays for fraud in 2009 while only 13 percent indicate they’ll work with smaller budgets next year.
So what’s going on here?
There are likely two factors at work here. An enlightened insurer executive recently explained to me that the current economic conditions call for more investment in anti-fraud activities. He said he continually reviews his operation to see where increased investment would produce the greatest return. With declining policy counts, investing in sales and marketing likely won’t produce the returns they did just a couple of years ago.
Same goes for other insurer operations. Smart insurers are beefing up their ability to stop money flowing out the door needlessly, either through enhanced training of claims handlers or better use of technology. Same also goes for strengthening their underwriting. Getting the appropriate premium for the true risk exposure is more important than ever when profit margins are slim.
The second factor is the sense that today’s economic downturn fosters more fraud. During desperate times, decent people often commit desperate acts. The increases in auto giveups, home arsons and people stealing health benefits correlate with the downturn in the economy. A recent study by the coalition in 10 regions of the country found a record number of frauds involving car fires.
Add in the higher public acceptance of unethical behavior the coalition documented last year, and you can understand why more insurers are concerned about losses from opportunistic fraud.
So savvy insurers are investing in anti-fraud infrastructure, from tightening existing systems, to investing in predictive modeling technology to adding ground troops in hot area across the country.
Financial advisers stress that a troubled economy is the best time to buy depressed stocks and real estate. Years from now you’ll benefit handsomely. Same with insurers, except their investments in fraud will pay dividends almost immediately.