Extended Warranty Fraud Prevention With TechnologyExtended Warranty Fraud Prevention With Technology

All insurance including extended warranty is a easy target for insurance fraud. The FBI at https://www.fbi.gov/stats-services/publications/insurance-fraud states the following : “ The total cost of insurance fraud (non-health insurance) is estimated to be more than $40 billion per year. That means Insurance Fraud costs the average U.S. family between $400 and $700 per year in the form of increased premiums.” While you can’t prevent all warranty fraud you can use technology to reduce it. Warranty companies that don’t use technology to prevent insurancefraud payout millions of extra dollars in fraudulent claims every year.

In the 1990’s warranty companies used a 3 part carbon paper warranty agreement form at auto dealerships to sell extended warranties. After completing the warranty agreement form that captured make, model, warranty purchased, premium, and customer information. The customer, the dealer, and warranty company would get 1 of the 3 copies of the extended warranty sold. Every week the dealership would be required to submit the warranties sold copy to the warranty company by mail. The warranty company would then enter the new warranty agreements into their warranty platform and bill the auto dealership for the premium for the warranties they sold.

What dealers figured out over time was that they could sell warranty agreements and hide a few warranty agreements each week into a drawer and not send to the warranty company. The hope was that if the customer never made a claim they were able to keep the warranty premium committing insurance fraud. In the event if the customer made a claim that warranty company would not have a active agreement for them to open a claim. The warranty company would then call the selling dealers to inquire or ask the customer to make a copy of their warranty agreement. Most of the time a few days later the dealer would call back to say the found the lost agreement . The warranty company would get a copy of this lost agreement, enter into their warranty application, bill the dealership and honor the claim for the warranty holder.

With the invent of the internet and internet technology were were able to reduce the above claims fraud by doing what we called back then Home Office Issued. We created a eCommerce website that allowed the dealership to enter warranties over the internet. Now every warranty agreement sold was accounted for and were were able to reduce warranty fraud.

People who commit insurance fraud over time follow a certain patterns they feel will go unnoticed. For instance their firsts claims fraud can be adding additional labor or parts that were not needed. Over time as their fraud goes unnoticed their fraud increases over time with a increase of their average claims severity (claims cost). Other patterns can include a major increase in claims frequency (number of claims), increase in number claims approved by specific claims adjusters, claims under a dollar amount that won’t be audited, claims being dispatched to certain service providers, claims being made to warranties sold by specific dealers. These are some of the most basic claims fraud methods.

Machine Learning (ML) as defined by Wikipedia at https://en.wikipedia.org/wiki/Machine_learning states the following : “is the scientific study of algorithms and statistical models that computer systems use to perform a specific task without using explicit instructions, relying on patterns and inference instead. It is seen as a subset of artificial intelligence. Machine learning algorithms build a mathematical model based on sample data, known as "training data", in order to make predictions or decisions without being explicitly programmed to perform the task. ” With the use of Machine Learning you can take your existing premium and claims data and have it analyzed through a machine learning process to help uncover premium and claims fraud. You can even develop a process to give a fraud level rating and attache it to every agreement, dealer, service providers, etc to provide you real-time fraud prevention when new claims are reported. DRK Resources Tech LLC can help you utilize Machine Learnig to help you reducewarranty fraud cost.