Insurers globally are increasingly looking to analytics and predictive modelling in a bid to reduce the $80 million problem of insurance fraud.

However, the looming issue of Solvency II (a European Union initiative that requires insurers to calculate the amount of capital they need to cover their risks) is worrying Australian insurers that operate internationally.

According to a major insurance study from Deloitte, while improved data analytics can be applied to a number of areas, the biggest potential for impact is on insurance fraud. Traditionally, predictive modelling has been used in underwriting, but claims and fraud are an emerging focus.

The Deloitte report said analytics are ideal for dealing with ‘soft’ fraud, where policyholders inflate claims, rather than the high profile, large-scale frauds perpetrated by criminal individuals and organisations.

“Today’s advanced analytic tools and data transformation techniques can help insurance companies predict future behaviours and events better, manage claims more efficiently, and reach and retain customers more effectively,” said Anthony Viel, data analytics partner at Deloitte. “These tools have traditionally been used by most players in underwriting, however they are increasingly proving successful in improving loss control, more accurate pricing and servicing, managing claim loss exposure, the control of fraud and the identification of the most profitable and effective channels to market and marketing activity.”

In Australia, meanwhile, Solvency II – seen as the insurance industry’s Basel II – is beginning to cause concern for insurers with international exposure. The draft framework for the initiative is set to be released this month. “The Solvency II proposals require the ability to calculate capital and use innovative capital instruments to manage capital,” said Deloitte actuarial and general insurance lead partner Elaine Collins. “The regulations will ultimately benefit the industry but there are some significant risk and data management systems which need to put in place to do so. The issues to avoid are the financial and reputational risks of non-compliance,” she said

Research presented at a Reserve Bank of Australia G20 conference last year identified the rise of Solvency II as key to improving risk management within insurance, particularly in reference to ageing population-related insurance risks.

General insurers are facing an array of significant risk exposures, not least from natural disasters and terrorism. “The recent storms in Newcastle, Sydney and the Illawarra region are expected to equal the $350 million residential costs of Cyclone Larry last year,” Collins said. That is close to the costs of the 2003 bushfires in Canberra ($373 million) and at this point, due to the mainly vehicle damage of the hailstorms in Sydney in 1999, less than the estimated $2.1 billion worth of damage.”