Tony Boobier is IBM Software Solutions Group InsuranceLeader for EMEA.

As insurers and adjusters increase their focus on claims fraud,costing the U.S. insurance P&C industry as much as in the $30billion annually, according to the Insurance Information Institute,it is perhaps easy to forget that fraud is a global problem.

Fraud is thought to be in the range of $10 to $15 billion forthe European p&c insurance industry, and the Insurance Councilof Australia reports that 10 percent to 15 percent of p&cclaims reported in that country have fraud indicators. Of course,we often think of fraud as being an issue of whether an event iscovered by the policy or not, but a significant amount of fraudemerges through excessive claims.

Increasingly the use of technology has increased, with insurersusing analytics not only to predict which claims are likely tomerit special attention. This has not always been the case, and theclaims industry has constantly sought innovative ways to catch boththe crooks and the opportunists.

One significant change first emerged in the UK over 20 yearsago, where insurers attempted to reduce claims leakage andfraudulent 'scope creep' by directly repairing damaged buildings orreplacing lost goods, rather than allowing the policyholder to havecontrol over the fulfillment process. This new model replaced thetraditional approach of the policyholder providing three estimatesfor repair (often provided by the same building contractor, usingdifferent letterheads).

The approach also had the secondary benefit of providingadditional customer service at a time of extreme anxiety. Thisapproach remains in place, and as a result the UK P & Cinsurance industry has evolved to develop new capabilitiesespecially in procurement and supply chain management.

The model is best described by example. In the event of apolicyholders home being damaged (or even destroyed) by fire, theinsurer will directly appoint the restoration company to do thecleaning and debris removal; the insurer will directly appoint asurveyor or engineer to design and supervise the repairs inaccordance with local and national standards; and also directlyappoint the contactor to carry out the work itself. The restorationcompany, surveyor, and contractor are retained all by the insurerunder a term contract—perhaps 12 or 24 months—to carry out the workusually at discounted rates.

If the house is uninhabitable, the insurer will often havedirect arrangements with removal companies and national lettingagencies.   

In this approach, the policyholder has littleor no say in the parties involved in repairing their home, and theadjuster's role is reduced to commenting on policy liability andacting as a project manager. Smarter adjusting firms combined theinsurance and surveyor functions to maximize the revenueopportunity, going as far as setting up new building repairdivisions. With many UK property adjusters having professionalsurveying qualifications as well as insurance qualifications, thiswas a natural evolution.

The legacy for this step change in approach emerged from twodifferent directions. First, an increasing trend for auto insurersto assume responsibility for repairs following vehicle damage (ifit could be done for vehicles, then why not for buildings), andsecondly a recognition that social landlords such as housingassociations used framework agreements with builders to carry outfire and flood work to the property of tenants, and insurers coulduse a similar approach. In fact, in the early stages, similarcontracts and processes to those of housing associations wereused.

Restoring properties in this way was to become a marketer'sdelight, firmly establishing the insurer as the trusted advisor whowas able to restore the property to its pre-event condition. Butthe method also brought problems , in that delays in starting andfinishing the work rested firmly at the insurers door, as did allissues of quality and responsibility for payment (other than wherethere was agreed betterment).

Claims savings costs were (and remain) significant, but arepartly offset by the need for the insurer to have a procurement andsupply chain management function. Indeed, procurement and supplychain became new key competences for insurers, with C-levelrepresentation.

One key issue of supply chain management for insurers is themanagement of the supply/demand imbalance, typically in the case ofa major weather incident such as flooding or storm. While not ofthe scale of the U.S. market, UK flooding in 2007 cost insurers$5.0 billion and created immense strain on the UK constructionindustry. Catastrophe or surge planning is a critical considerationamongst insurance supplier managers, but with some much dependenceon subcontract labor, even the best plans have theirvulnerability.

Of course, this did not completely remove fraud; in fact itmoved it away from the policyholder and towards the repairer whowould take the opportunity to use cheaper materials than specified,and shortcuts in the repair process which would reveal themselveswell after the event. Supplier audit heightened in intensity, withanalytics increasingly being used to identify outliers.

Against this backdrop, the claims market in Europe continues toevolve, with U.S. claims software companies gradually gaining afoothold, but it has been a long journey for them. Part of theirlearning has been more than the challenge of different currency andmeasurements, but also the greater variety of building types, andthe localized practices of the marketplace. Overall, with no signthat the problem of insurance fraud inEurope(or anywhere else) islikely to disappear, the claims industry inevitably awaits the nextstep change.