Just like any other business, an insurer is only profitable if its revenue is not outpaced by costs. However, this relatively simple equation becomes much more complicated when we factor in the nuances associated with the insurance industry. Where other businesses may be able to raise prices to offset higher costs, insurers must abide by rules and regulations that stipulate not only how much, but also when premiums can be raised and when those increases can take effect. As such, even when permitted to raise premiums, insurers can find themselves paying out for claims that are covered under a lower premium.
As important, claims losses, which make up a significant portion of combined ratios, are impacted by a variety of factors outside the control of insurers. For example, the technology found in today’s automobiles adds greatly to the cost of repairs. Inflation and supply chain issues can make it more expensive to repair a home or apartment following an incident. And as we see play out time and time again, weather events are becoming more frequent, and more severe, increasing claims frequency and severity.
There are steps that insurers can take to positively impact combined ratios that are unrelated to increasing premiums. One of these strategies is to avoid paying out on fraudulent claims. And while this may sound simple in theory, it is much more complicated in practice. Organizations like the National Insurance Crime Bureau (NICB) and the Coalition Against Insurance Fraud report that up to 10 percent of all insurance claims include some element of fraud, representing billions of dollars in losses a year. These losses attributed to fraud are a significant contributor to the combined ratio problem. Shift’s own research has indicated that 2-3% of an insurer’s combined ratio can come from fraudulent claims. Yet, when suspicious claims are mixed in among legitimate claims, all of which are being handled by different claims handlers, the suspicious claims can be incredibly difficult to spot.
And it’s not only the volume of fraud being perpetrated against insurers that makes it difficult to spot and stop. Bad actors are constantly evolving their methods. They are adopting new technologies to commit fraud. They are inventing new schemes and recruiting new accomplices. The fight against claims fraud may seem daunting. It may feel like fraud is simply a cost of doing business. The truth is quite different from the perception.
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