False or inflated insurance claims constitute a universal problem, and they are as old as insurance itself. Yet if there is a key difference between the U.S. and European markets, it is that the magnitude of claims is significantly higher in the U.S. than in Europe. Put another way, any innovation that would allow for the detection of fraudulent claims makes good sense in Europe. But it would make even better sense in the American market because the sums at stake are much greater, as is the consequent financial impact on the insurer.
This is particularly the case with regard to false claims in the auto-insurance sector, notably those connected with whiplash-related injuries. The fact that there is a problem in the U.S. market is beyond doubt.
The Issue
In February 2016, the Insurance Research Council (IRC) published these findings: “[We estimate] that claims fraud and buildup [the inflation of otherwise-legitimate claims] added between $5.6 billion and $7.7 billion in excess payments to auto injury claims paid in the United States in 2012. The excess payments represented between 13 percent and 17 percent of total payments under the five main private passenger auto injury coverages.”
Within those figures, the IRC found that 21 percent of bodily injury claims and 18 percent of personal injury protection claims that had been settled with a payment to the claimant “had the appearance of fraud and/or buildup in 2012” when scrutinised by in-house reviewers. The IRC went on to add, “Claims with the appearance of fraud and/or buildup were more likely than other claims to involve chiropractic treatment, physical therapy, alternative medicine, and the use of pain clinics.”
Some may suspect that Hollywood movies have helped make fraudulent neck injury claims popular, with a number of films depicting characters in neck collars sitting in front of their insurers and looking for easy money. But there are more constructive ways to help tackle the problem than blaming the nation’s filmmakers.
Making Use of Technology
Telematics is a technology that can provide analytical tools for the insurance industry; it’s all about giving more context to a claim. Many would argue that, when it comes to assessing a claim accurately, context is all-important.
Let us look again at the whiplash problem—a perennial thorn in the insurance industry’s side for two main reasons. One, the consequences of a genuine injury of this type can be recurring, thus making it worthwhile to pursue a false claim. Two, people who have incurred genuine injuries of this type away from their vehicle have a financial incentive to “move” the scene of the accident to the inside of a car.
Telematics helps to address the difficulty faced by companies in reconstructing the circumstances of a neck injury. Its innovative approach is to dig into massive survey data to analyze the context of a very great number of neck injuries. Using these huge amounts of data, an analyst can gauge whether a reported injury “almost certainly” happened, “maybe” happened, or is “extremely unlikely” to have occurred.
Telematics already can provide useful assessment tools to insurer claims departments since, when there is an accident, the vehicle is taken to a garage, the garage takes photographs, and the photographs—along with an estimate for the cost of repair—are sent to the insurance company.
At this point, deprived of the all-important context that telematics can provide, the insurance company has two options. The first would be simply to accept the documentation that has been sent and approve the claim. The second, perhaps in cases where there is cause for suspicion, would be to pursue the only alternative and send an expert to look at the vehicle. By definition that would mean time and expense.
Contrast that with the tools that telematics can provide. One analogy that suggests itself is the use of aircraft black boxes. Of the two black boxes—the cockpit voice recorder and the flight data recorder—it is the flight data recorder that, if asked, most expert accident investigators would say has the greater value.
Telematics provides a service similar to the recording of telemetric information by the flight data recorder. It allows for the creation of an accident reconstruction report, using details such as the G-force at the time of the reported accident, to give as accurate a picture as possible of what happened.
What Does It Mean for the Insurer?
Armed with this information, the insurance company can study the report and compare it with the documentation from the repair garage. This saves money, and it saves time. It also potentially can mean an improved experience for the insured because the vehicle will be repaired more quickly and the injury claim, when it appears genuine, also will be settled more rapidly.
Let us say that the probability of a neck injury in a particular accident seems to be very high based on the telematics information. In that case, the insurance company can save itself money by not digging into the accident. Instead, it can recognize that the probability is very high and settle the claim.
By contrast, when the accident reconstruction report suggests that the probability of injury is extremely low, then it may be worth the insurance company digging a little and investigating further on the basis that something doesn’t look quite right.
Again, it is worth remembering the sums that can be at stake. In the U.S., claims can take on crazy proportions, which means that any tool of this type is of benefit to an insurance company, especially if a case goes before a court.
Additionally, it’s important to remember that jurors are human beings. They will be influenced when they hear, for example, that the chances of the claimed injury actually happening are one in 15,000. Everything that helps the insurance company plead its case can save money. Furthermore, instead of saving tens of thousands of dollars, as could have been the case in Europe, it could mean saving millions in the U.S. Put simply, if it makes sense in Europe, it makes “super sense” in the U.S.
This disparity in the size of claims might help explain some other apparent differences between the two markets. One example of this can be found in attitudes toward what may be called the value chain in the world of usage-based insurance (UBI), the world that telematics has made possible.
When insurance companies move into UBI, they usually start with a mileage program where pay per mile (PPM) is the chief consideration—how much the insured party drives determines how much they pay in premiums, regardless of when, where, or how they are driving.
With contextualized PPM, insurers can start to look beyond traditional PPMs and examine where and when a person is driving—at night versus daytime or on weekdays as opposed to weekends. Finally, they move on to the question of how the insured is driving the vehicle (pay how you drive or PHYD). All this provides a much richer and more rounded picture of the real risk represented by the third party than that supplied by a simple tally of the miles driven.
In Europe, an insurance company often will have reached the “how” stage before looking at UBI’s potential in terms of claims management. By contrast, in the U.S., it is not unusual for claims management to come right after traditional PPM, perhaps because insurance companies are more focused on confronting what has been described as a “claims culture.”
Looking into the future, there is good reason to believe that telematics will help to eliminate a lot of insurance fraud for the simple reason that such abuses will no longer be attempted because people will assume their misbehavior will be discovered. There will be a deterrent effect.
We see evidence of this in other fields. The so-called “chip and pin” system has greatly reduced the opportunities for credit-card fraud, and the near-universal spread of automatic ticket barriers in many countries has curbed the loss of rail revenue through free riding.
Away from confronting outright criminality, telematics also can encourage responsibility among law-abiding people. There are statistics showing that, when drivers have a fleet management solution in the vehicle, even if it is not monitoring their conduct behind the wheel, their driving behavior improves and there is a meaningful decrease in accidents.
This is a useful reminder that telematics is ultimately about a lot more than fighting insurance fraud, vital though that is. Its potential to enhance the lives of all users is coming into focus, not least in the U.S.
Items up for discussion at the Telematics Insurance North America 2016 conference and exhibition in Chicago tell the tale. Along with looking at industry developments, such as the entry of larger players and the convergence of different types of hardware, there are discussions on the ways in which the connected car of the future will fit with the connected home and UBI from an executive viewpoint to “create services to enhance the user experience and ease of life.”
It may seem a long way from identifying bogus whiplash claims, but both aspects of telematics are concerned with improving the lives of honest policyholders and the companies that insure them.