Fraud is a unique crime with many distinctive features. Its complexity is worthy of deep exploration; its high costs require this effort. Yet there is limited research to assist with preventative strategies. At the core is the lack of research on the psychology of insurance fraudsters: knowing what motivates — and de-motivates — them to commit this crime.
Psychological research hones in, with more precision, on the core reasons criminals behave in deviant ways. Understanding this is key to developing anti-fraud strategies that focus directly on the problem’s nucleus — the fraudster’s mind and motivations.
As an international consultant for a software fraud solutions company, my world revolves around technology and digitalization. Insurers need advanced anti-fraud technology to stay ahead of criminal minds. Insurers also need keen insight into the human element of fraud, the core inner drivers of fraudulent behavior. Marrying technology, internal claims processes, and understanding of fraudster behavior creates an optimal environment for deterring would-be fraud criminals.
It all starts with this core question: Why do fraudsters cheat? Because they can — or at least think they can. Reversing this internalized assumption is key to preventing many fraud crimes.
Insurers should focus especially on reducing opportunity to commit fraud. They should look for gaps and vulnerabilities where fraudsters can penetrate, and develop focused defenses in these areas. This is what I call Opportunity Theory. It stems from the sociological school of criminology. Opportunity Theory states that people will exploit a crime opportunity only if it is presented to them, and falls into their lap. They will not actively seek out deviance. Opportunity Theory has been proven credible on other areas, such as studies of road rage. There is a direct relationship between road rage and increased opportunity while driving.1
Environment can shape behavior
Sociological theories are well-established, and show how environmental factors such as opportunity help shape one’s behavior. Sociological theories of crime differ from biological and psychological theories. The latter two propose inborn factors as the main contributors to bad behavior. Biological theories claim that one is born with certain biological factors such as chemical imbalances and genetic deficiencies. They are rooted in chemical structure and genetics, and are the main drivers of criminal behavior.2
Psychological theories claim that mental or emotional flaws shape deviant behavior and push individuals to criminality. The sociological school of criminology, however, says that social or environmental factors shape behavior.3 I contend that environmental, or social, factors are the primary drivers of fraudulent behavior. Sociological theories more accurately explain the motivations of fraudsters. Insurers should research how to reduce fraud opportunity by defining what environmental factors contribute to scams.
“They take an active, organized approach to committing fraud instead of simply waiting for an opportunity to come their way.
One can counter that organized, hard fraudsters fall outside of Opportunity Theory. They take an active, organized approach to committing fraud instead of simply waiting for an opportunity to come their way. Complex staged-crash and Medicare rings that steal millions of insurance dollars with thousands of well-disguised claims over several years are prime examples. This is a valid point. There is a significant gap in our knowledge of the psychology of fraudsters. Thus researchers can only draw upon other studies for relevant parallels.
Organized and proactive fraudsters also may set out to commit fraud, but they have a proclivity to seek out soft targets, or targets that offer more opportunity than hard targets. Thus, Opportunity Theory would apply, though on a different level.
Opportunity Theory also is especially relevant to the large majority of insurance fraudsters. These are, by and large, the average consumers who exploit an opportunity to defraud an insurer. Their claims may be smaller than, say, Medicare rings that steal $20 million or more. Yet numerically and in aggregate insurance dollars stolen, false claims by average citizens may be among the largest sources of theft in the insurance-fraud world. Claiming an expensive sound and video system was stolen from one’s home when only a small TV actually was taken is an example of seizing an opportunity when presented. Insurers contend with myriad variations of such claims continuously, and in high volume.
Deterrent: high odds of getting caught
So let us delve into this deeper: “Why do fraudsters cheat”?
Dishonest behavior is driven by two factors. First, increases or decreases in one’s likelihood to cheat vary with the odds that the person will get caught. This is called the Deterrent Effect in academic circles. That is, what deters an individual from dishonest behavior? Studies show that even people who never cheat and score high on ethics tests are more likely to cheat if the chances of detection are low to non-existent. These individuals don’t “think” about it, until an opportunity is presented to them.
Second is the risk-reward scale. People will make a conscious decision and weigh the relative risks and rewards of an activity, then act according to their personal risk threshold. If the reward is high and risks low, individuals are more likely to engage in dishonest behavior. This also assumes our subjects are higher-cognitive individuals with the mental capacity to decide right from wrong, and yet still make the wrong choice. That insurance fraudsters are more-cognitive is consistent with other research that shows white-collar criminals differ from other criminals cognitively in that they have higher mental functioning and IQ levels.
So how can we consider a claimant who stole a car and left his driver license at the theft location to be highly cognitive (this was a case I worked)? I also struggle with this. However, academic research shows that economic criminals have higher cognitive functioning than other criminals.
“News stories of fraud arrests and convictions send a conscious message about high risk-low reward.
Let’s borrow from Social Learning Theory to reach a deeper understanding of why people commit insurance fraud. Social Learning Theory posits that individuals go through an operant conditioning when engaging in activity. People who are rewarded will continue with a certain activity until it finally is punished. Social Learning Theory (SLT) is a credible theory that is successfully applied in many different areas. Studies of smokers’ success in quitting are directly linked to its tenets. Smokers are more likely to quit if they perceive punishment or pain from smoking.4 Studies of increase in aggression in girls have been directly linked to SLT. Girls “learn” to be more-aggressive because our culture is promoting this behavior.5 This is classic stimulus and response.
Fraud fighting has advanced considerably in recent years, including earning supportive news coverage that lauds many successes in arresting and convicting fraudsters, and breaking up large crime rings. Nonetheless, insurance fraud still appears significantly under-represented in the news media. This lack of public punishment sends an incorrect message to the fraudsters, and helps encourage more crime under Social Learning Theory. People do not see insurance fraud as being punished. News stories of fraud arrests and convictions send a conscious message about high risk-low reward. Such stories also send a subliminal message: Fraud is deviant, abhorrent behavior instead of an exciting and victimless opportunity to gain revenge on insurers and brighten one’s own bank account.
Prevention: alter environment
Opportunity Theory proposes prevention strategies that reduce opportunity by altering environmental factors. A related area of growing exploration involves honesty statements on an insurance document. A highly visible sentence or paragraph on an insurance policy or other document can trigger honesty in the individual reading the document. Adding this to a document would fall under Opportunity Theory because it modifies an environmental factor.
Seminal studies are still underway. But in the interim, I have seen smaller-scale academic research showing convincing evidence that placing an honesty statement on an initial insurance form. Examples would be a loss report, medical form or property damage statement. This prompts the insured or claimant to “check in” to their ethical beliefs. So what should an honesty declaration include? To trigger morality, studies show, the statement can be short, simple and prominent. The word “honesty”should be a key component.
A simple declaration could be as follows:
“Honesty Declaration: I hereby affirm that the information provided in this policy application is an honest and true representation to the best of my knowledge.”
Honesty statements are included in almost all seminal academic documents in the online teaching environment, such as tests and activities.6 Studies in the fraud context indicate that an individual could be less likely to cheat if an honesty statement is located at the beginning of an insurance document, and insureds or claimants are required to sign the document. Tax returns in the UK have honesty statements at the top of the forms. Studies reveal a 10-percent “increase” in honesty when the statement is placed at the beginning of a form instead of the end.7
This would be an intriguing area of further research for insurance fraud: Conduct a pilot study experimenting with the insertion and placement of these triggers.
Can automation increase fraud?
When we look at the insurance industry from a global perspective, it is clear that current trends in claims and SIU strategy create increased opportunity to commit fraud. This occurs primarily in the area of automation.
The insurance industry’s current climate, in fact the entire financial-services sector, is one of extreme competition. Thus to be competitive, insurance companies have been forced to focus on profitability and combined ratios. As a result, more insurers are streamlining and optimizing processes to reduce loss costs and expenses. These optimization projects are effective when implemented in a strategic and well-contrived manner. However, what often still must be realized is that these projects create increased opportunities for fraud, mainly because the “human” is taken out of the process. And the driver is based on Opportunity Theory.
“Latently, insurers are creating more opportunity to defraud these internal processes.
When insurers optimize internal processes and use technology to process claims more efficiently and effectively, we reduce human touches. Latently, insurers are creating more opportunity to defraud these internal processes. A technologically based optimization or fraud-detection solution without keen human intervention is similar to 2nd grade teachers leaving their classroom unattended: chaos.
Optimization programs focus on streamlining some aspect of the claims process, such as automating workflow, claim payments, information exchange with policyholders and claimants. Automation thus can still miss many fraudulent claims. Insurers that embark on claims-optimization and fraud-detection solutions should ensure there is still a human component to manage this process. Magic happens when both work in synergy.
All is not lost however, because insurance companies can realize significant return on even the most simple solutions. Consider how carriers can control environmental factors to reduce opportunity. Here are several preventative strategies and tactics based on Opportunity and Social Learning Theory:
• Reduce opportunity by using environmental or social tactics such as honesty statements, increasing risk and reducing reward, and making it harder for fraudsters. Basically, whatever reduces the opportunities that are available.;
• Make it publicly known that your insurer has a low threshold for fraud, and that fraudsters will be investigated and prosecuted. Insurers want to make this crime more risky and less rewarding — and visibly promote that fact.;
• Educate consumers by publicly branding insurance fraud as deviant, high-risk behavior.;
• Identify fraud as soon as possible in the claims or underwriting processes. A simple show of resistance at this early stage can reduce fraud significantly.;
• Fraud detection often focuses on middle to end segments of the claim process. Insurers should focus on the earliest contact — the point of sale.; and
• Deploy data and software solutions to identify gaps and vulnerabilities that humans alone may not discover.
Insurers must understand their opponents to develop effective counter-fraud procedures and policies. There is a significant gap in our knowledge of motivators and de-motivators of insurance fraudsters. Researchers must draw upon parallel studies in the larger body of research into white-collar criminals.
Knowing the psychological and emotional underpinnings of fraudsters will help frame strategies to help close gaps and vulnerabilities in insurer systems. This will reduce the all-important opportunity to commit insurance fraud. These strategies and theories are not hard to integrate. They just require dedication to the cause, and a well-contrived strategy. Fraudsters cheat only because we let them.
About the author: J. Michael Skiba, MBA, PhD has more than 22 years of experience with insurer-claims and investigative experience. He currently is an international consultant with Inform. Skiba also has been a professor of criminal justice for 12 years, and is currently program chair of criminal justice at Colorado State University, global campus.