SIU Today Fall 2021 - 16

Education Update
By Michael Skiba, MBA, PhD
CATs and Fraud
There is no doubt that natural disasters are always on our radar as they
can wreak havoc within an organization on many levels. Catastrophes
(CATs) are extremely costly. In 2020, it was estimated that $74.4 billion
was lost; yes, that is a " b " ! As we ponder how to handle CAT claims,
one of my favorite mantras comes to mind that was passed down
to me from an insightful manager: " control what you can control " .
If I apply this mantra to the disasters of 2020, what can insurance
companies' control? From wildfires, hurricanes, mud slides and more,
can carriers take any action to prevent these natural occurrences from
happening? Of course not, but there are steps that can be taken to
mitigate losses from these unfortunate and extremely costly incidents.
I witnessed the devastation that the earthquake in Central Mexico
caused in September 2017. It was extremely enlightening to witness
people risking their lives to help others during the rescue efforts. It
was refreshing on a very profound level for me to witness the relief
coming from all over the world in support of the communities that
were ruined. Yet, despite all this positive energy, there were those
waiting in the background, looking to capitalize on the vulnerabilities
of others. This, unfortunately, is the world we live in. As counter fraud
professionals, we need to make sure we do our part to support these
vulnerable areas through our companies.
Having worked CAT duty dozens of times during my insurance career
and also having served as a member of the Insurance Emergency
Operations Command, I can attest to the fact that during a catastrophe,
carriers expedite the claims process in order to assist with getting the
insured back to their pre-disaster state. As carriers speed up this claim
process, the normal counter-fraud safeguards are often circumvented
in order to expedite payment. This is a huge risk since catastrophe
claims are ripe for fraud.
There are several key areas that counter fraud professionals should be
mindful of when faced with a catastrophe. The first is contractor or
vendor fraud. This occurs when an unlicensed vendor or contractor
poses as a legitimate business and sells services to the insured. In
cases of a purely fabricated business, the fictitious owner writes up a
contract, collects a deposit, and then disappears. In more elaborate
16 SIU TODAY | FALL 2021
schemes, the owner is legitimate and does perform repair work,
but the quality is poor and/or dangerous as sub-par materials and
techniques are used to cut the owner's costs.
In a second and more common scenario, the insured exaggerates a
legitimate loss. As one of the main themes of my book, The Psychology
of Fraud, I argue that opportunity is the number one driver of fraud.
When opportunity presents itself, those that would never otherwise
think about committing fraud, may be tempted. Unfortunately, these
policyholders do suffer a legitimate loss. However, they also see an
opportunity and then rationalize a decision to inflate losses, claim
lost services, and fabricate repairs.
As mentioned earlier, the opportunity that is created by these disasters,
coupled with the high volume of claims being processed in an expedited
manner is a recipe for fraud. So, what can carriers control? First,
utilize and leverage countermeasures to ensure these cases do not go
un-detected. Leverage software fraud systems that serve as a gatekeepers
and help identify outliers through data analysis. For example, it would
be beneficial to know that an estimate submitted by the insured for
property damage was 10 times more than the average repair cost in their
area. Or, that the insured is known to submit claims without adequate
proof of loss, such as receipts. Both scenarios could be identified
through an analytical system. Another tactic is to utilize external data
sources and link them to your analytical system. For example, what if
an insured files a claim for hail damage and the weather radar showed
no hail in the insured's area? This sounds simple, but these are the cases
that fall through the cracks and may cause significant losses.
As we roll the catastrophic dice for the remainder of 2021, let's hope
luck is in our favor!
-Dr. Fraud
J. Michael Skiba, Dr. Fraud, is an international counter fraud consultant/trainer who
is currently consulting with a IASIU supporting partner. Prior to consulting, he worked
for Allstate and Interboro claims and SIU for 22 years. He has been a college professor
for 15 years and is currently Department Chair of Criminal Justice at Colorado State
University Global. He holds an MBA and a PhD with a concentration on economic
crime. He can be reached at jmichaelskiba@gmail.com or through www.drfraud.org.
http://www.drfraud.org

SIU Today Fall 2021

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