Using Six Sigma to Prevent Insurance Fraud

People commit insurance fraud, which costs the industry millions. While insurance fraud is hard to detect, with the right tools in place, insurance companies can stay vigilant. This can allow them to be proactive and recognize when fraud is about to happen and stop it before the damage is done. One of the tools that can help insurance companies prevent fraud is Six Sigma.

What is insurance fraud and how is it detected?

Insurance fraud is any activity that is aimed at fraudulently benefiting from the insurance claims process. Basically, a claimant files an insurance claim they know is fraudulent (for example, filled with wrong information) in order to receive some positive gain – usually money –  they aren’t entitled to. Insurance fraud is a crime.

To prevent insurance fraud from happening, it first needs to be detected. Fraud detection is a powerful business analysis tool that organizations use to cross-reference computerized data against consumer behavior to identify cases of fraud.

According to a research analysis the global insurance fraud detection market was accounted at US$ 3.29 Bn in 2018 and is projected to witness significant growth, growing with a CAGR of 15.2% across the forecast period from 2019 to 2027.

During fraud detection, large amounts of insurance claims data are analyzed using classical statistical methods. This is also called data mining and it need not be done manually since software like Minitab can greatly speed up the process and make it more accurate. The goal is to look for outliers; cases that significantly deviate from the expected norm. These can be marked as red flags, indicating fraud.

Further analysis of the outliers will reveal what to pay attention to when looking for fraud. This is because it is reasonable to assume that future fraud cases will follow similar patterns. This is just a basic overview of how fraud detection works.

Early Fraud Detection with DMAIC

In Six Sigma, the DMAIC methodology can help insurance companies create a standardized approach to their fraud detection process. DMAIC is an acronym that stands for define, measure, analyze, improve and control. By following the steps of this methodology, the insurance fraud detection process can be made to be more efficient.

Here is how DMAIC can be used for early fraud detection in a nutshell:

• Define: Sources of fraud can be identified from the insurance claims data based on known patterns from outliers. It is essential that every source be clearly defined.
• Measure: From looking at the defined sources, the levels of fraud should be measured. This will reveal the weaknesses inherent in the fraud detection process.
• Analyze: The data is then analyzed to figure out how the fraud actually happened. Furthermore, the insurance company can determine how long it took for the fraud to be detected.
• Improve: This involves using the insights gained from analyzing the data to improve current procedures in the fraud detection process.
• Control: Monitor improvements to see if they are effective at detecting fraud early. Also, update them should new trends emerge on fraudulent activities.

Conclusion

Much of insurance fraud detection happens after the deed has already been done. This makes it extremely difficult for insurance companies to get their money back. With Six Sigma, insurance firms can use the DMAIC methodology to detect fraud early and prevent it from happening. This can save them a significant amount of time and money in the long run.

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