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Solomon Philip is Shift Technology’s Head of Market Intelligence

Conventional wisdom has long held that in times of economic uncertainty episodes of insurance fraud increase. Job loss, under-employment, or simply a rising cost of living that outpaces earnings can all lead to normally honest people looking for opportunities to put more money back into their bank accounts. They may view their insurance policies as a “victimless” way to recoup what they view as money lost on a service they regularly pay for but rarely use. This insurance fraud can take the form of exaggerating the extent of damages on claims to outright faking a major loss, to everything in between.

While it might be convenient to think that “simply stopping fraud” is the easiest answer, the reality is quite different. The forces driving economic uncertainty at the personal level are creating significant impacts on insurers and their ability to operate profitably. Take, for example, inflation. 

According to recent reporting from McKinsey, insurers could be facing a nearly $30 billion increase in costs associated with reported losses due to price increases. For auto insurers, this is tied directly to rising prices for motor vehicle parts, which between June 2021 and June 2022 rose by almost 23 percent. This is on top of a reported $9 billion increase in auto parts costs in 2021 alone. 

Operational delays of only a few months, taking place in an environment of rapidly rising prices, could result in millions of dollars in unnecessary additional losses, gradually eroding combined ratios and profitability. Fraud or no fraud, in today’s economy it is simply more expensive to settle a claim, and this directly affects loss ratios. 

In addition to rising costs associated with replacement parts, insurers are also being impacted on several fronts by the labor market. The industry is facing what has been labeled the “Great Resignation” as insurance professionals either reach retirement age or otherwise leave the industry. Faced with an employment pool that shows little interest in joining the industry, insurers are paying more to drive interest in a career in insurance. 

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This wage inflation is also impacting the service providers with whom insurers do business as the body shops facilitating repairs must also pay technicians more to keep them in their positions. Unlike body shop rates, insurers cannot easily raise premiums to cover the rising cost of doing business. Because they operate in a heavily regulated industry, insurers must find other ways to combat the impacts of economic uncertainty on their business.

To maintain profitability, many insurers will pursue severe contraction in underwriting capacity, and tighten underwriting standards. However, these actions can prove to be artificial barriers to growth that are not in the best long-term interest of the carrier.

The good news is that there are a number of ways insurers can positively impact the bottom line that do not rely on increasing premiums for policyholders or making changes to underwriting practices and protocols. Let us take a look at fraud first. 

How AI and Advanced Analytics Protect Insurers from Premium Leakage and Underwriting Risk

Here it is important to remember that fraud not only impacts the claims process, but also the application and underwriting process. In much the same way that individuals may be more inclined to commit fraud when filing a claim, economic pressures may also lead them to misrepresent or falsify information on an application in an effort to obtain the most affordable premiums possible. An increasing appetite among applicants to commit fraudulent applications, combined with the increasing use of digital channels to speed the application process ultimately leads to the potential for significant premium leakage. 

Using technology, especially solutions employing artificial intelligence (AI) and advanced analytics is one of the best ways insurers can mitigate both underwriting risk and traditional claims fraud. The ability to spot suspicious behaviors, know with certainty with whom you are doing business, apply relevant third-party data to your analysis, and be provided with the rationale for the conclusions and recommendations for how to proceed helps to ensure that fraud is not taking a significant bite out of your bottom line.

The benefits of using AI to mitigate the risk of fraud are clear. But how does AI-driven automation help address the other challenges we have outlined? Primarily, it is all about operational efficiency. The “Great Resignation” has not only created a talent gap but also a knowledge gap. 

Maximizing Efficiency and Accuracy with AI 

All too often when talented, experienced professionals leave the industry their knowledge leaves with them leaving the employees who remain feeling overworked and ill-equipped to face the challenges ahead of them. In the case of underwriting, this can lead to delays in writing policies which may lead applicants to feel they should take their business elsewhere. When it comes to claims, the policyholder experience is just one area where inefficiency can lead to issues - every customer wants their claim closed as quickly as possible. 

As we outlined earlier, inflation is hitting the replacement parts market hard. Settling claims sooner rather than later can make a significant difference in the overall cost of the claim and an insurer’s loss ratio. We know AI can help in this situation as well. As good as AI is at spotting suspicious applications and claims, it is equally good at quickly identifying which are legitimate. 

Knowing which claims are legitimate, with a high degree of confidence, is a powerful first step in determining which cases can be referred for straight-through processing. Having that same level of confidence about applicants and applications is just as important. Taken together, this gives insurance professionals using AI a distinct advantage in quickly, efficiently and accurately writing new policies and settling claims.

Yet, we all know that settling a claim is not as simple as knowing whether a claim is “good” or “bad.” Even a good claim may be complex and require an experienced professional’s touch to reach an optimal outcome. In these cases, AI can help claims handlers decide best how and where they spend their time by prioritizing the most financially impactful cases based on historical patterns of settled claims. AI can also be used to detect fraud and flag exaggeration of claims, ensuring fair but prudent settlement without necessarily invoking the dreaded word fraud. 

Unfortunately, bad actors come in all shapes and sizes, and the service provider community is not exempt from trying to take advantage of carriers and policyholders alike. In these situations, AI can flag providers who are known to overcharge or have proven to be more expensive than peers. As such, insurers are equipped to recommend the nearest repair shops with the most optimal track record for fast, fair and cost-effective repair services.  

Insurers are not immune to the conditions driving uncertainty in our economy. They can, however, take real steps to ensure their business is protected from many of those risks. Understanding how AI can be used to bolster key processes, bridge the knowledge and talent gap, and give insurance professionals the tools they need to mitigate underwriting and claims risk can make the difference between merely surviving and thriving.

Solomon Philip is Shift Technology’s Head of Market Intelligence

Special thanks to Grady Behrens, Jesse Filipi, Tom Harrington, Aditi Saraf and James Tesdall for their invaluable contributions to this blog post.

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