The Soft Fraud Problem: It’s Bigger Than You Think

Jason Kozlowski: Hello, welcome to the Sapiens Insurance 360 podcast! I’m your host, Jason Kozlowski, Manager of New Business and Product Strategy here at Sapiens, and I’m so glad that you’re out there listening. This is where we discuss the latest news, trends, and issues across the insurance solutions and technology spectrum.

Let’s talk about a problematic but potentially avoidable issue in insurance: fraud, specifically, soft fraud. What it is, why it’s often discovered in P&C and Life and Annuity lines of insurance, and most importantly, how can insurers detect it and prevent it? Here today to answer these questions and more about soft fraud is Woody Klemmer, Head of Growth for ForMotiv. ForMotiv is a Sapiens partner and behavioral science platform that helps insurance carriers predict user intent by analyzing digital body language while users engage with digital forms and applications.

Woody, welcome back to the show! You were here a little bit earlier in the season. And here we are, now already in the spring of 2025. Time flies!

Woody Klemmer: It sure does. Thank you for having me back, I appreciate it.

Jason Kozlowski: Absolutely. So, Woody, for our listeners, could you maybe define the current soft fraud problem that we’ve been talking about and maybe kind of discuss how it differs from hard fraud? And what makes it difficult to detect?

Woody Klemmer: Yeah. No problem. So just to level set and it’s, you know, we talk a lot about soft fraud. It’s a term that we’ve, for lack of a better term, stolen from other industry members, because fraud in general is just so broad. So many things fall under fraud.

And what we’re doing at ForMotiv, isn’t looking at fraud rings and life insurance, things like coercion or scam. So, you know, really hard-core fraud, the things that we’re looking at and why we think soft fraud is so interesting and important is and where we sort of draw the line in and differentiate is, is the hard fraud is more so, there’s no genuine intent. And with soft fraud, what we mean by that really is, when somebody is trying to get a policy, whether it’s, you know, an auto policy or a home policy or a life policy, they’re genuine about getting the policy. They’re just not genuine about their responses in order to get it. So, you know, take, again, life insurance, for example, when people are filling out a life insurance application and they get to some of the harder, you know, higher impact questions around smoking or alcohol or, you know, how much they weigh, if there’s been any weight fluctuations. What we’ve seen and what we’re really looking at is, is how truthful are people being when they’re answering those questions. It’s the same thing in auto insurance. You know, how many miles do you drive a year? Where are you garaging your car? You know, do you live in the city like I did? And maybe your address for insurance is at your parents’ house in the driveway because the premiums are going to be a little bit cheaper. Or how many drivers are on the policy, things like that.

Jason Kozlowski: Right.

Woody Klemmer: So when we’re looking at, again, the difference between the hard fraud and the soft fraud, we are very focused on the soft front portion. And it’s just becoming an increasing, increasingly costly problem for carriers today.

Jason Kozlowski: Gotcha. Yeah. That’s interesting. You know, you talked a lot about, the difference between soft fraud and hard fraud. What are you seeing is the real kind of financial impact that soft fraud is having on insurers and policyholders? Are there, as a result of that, are there better ways of detecting that soft fraud? You know, using some of the more advanced technologies that have maybe kind of come into place in the more recent years?

Woody Klemmer: Yeah. So I’ll, I’ll try to answer those in pieces. So, kind of starting at the beginning, yeah, the financial impact is enormous. Tens of billions of dollars, it doesn’t matter what line of business you’re talking about, if it’s auto insurance or home or life, whatever it is, it’s we’re talking tens and tens of billions of dollars. I believe the problem has gotten significantly worse because of the digital transformation. So it’s sort of the counter effect to everybody moving online. Covid obviously accelerated that. But when you have this whole digital distribution, you are no longer face to face with somebody. And I, you know, when you are face to face and it’s just it’s a fact, it is easier to lie, for lack of a better term, when you are behind a computer screen, when it’s just you and the computer. People are much more prone to misrepresent themselves, and the problem has only gotten worse. So the trends are terrible. I was recently speaking at a fraud conference. We talked a lot about the demographics, and because one of the questions from the audience was do you think this problem is getting better or worse? And the answer, unfortunately, is worse when you’re looking at younger demographics. The statistics there are pretty staggering. So we asked this question, and we read this survey that Verisk had done and it was do you think insurance fraud is a crime? And if you’re 55 and older, less than 5% said no. If you are 18 to 44, so call it the Millennials, over 30% said no. So basically 1 in 3 people do not think that insurance fraud is a crime. Well, you know, again, 44 or younger. And they asked another question, this is just another slide that we had around, are you using deceptive tactics to lower your premium? 40% of Millennials said yes. 3% of baby boomers said yes. So you’re seeing this hockey stick curve up until the right as far as, how likely it is that the younger demographics are going to be manipulating their policies to try to get a better rate. And there’s a lot of reasons why we could get into that. I won’t, because I know we’ve we don’t have a ton of time here, but that is creating a massive problem. It’s getting worse every single year. And carriers are looking for new ways to try to combat and fight back. You know, the digital policies. The toothpaste is out of the bottle. There’s no way they’re going to go back to just selling purely face to face and an agent distribution. And one of the ways that carriers are starting to push back and figure out how they can fight back against this is with companies like us. So, what we’re doing is looking at how people actually physically fill out their digital applications, we call it digital body language. But essentially, how does the user actually, how do they type? Where are they hesitating? Are they saying, yes, I’m a smoker and then going back and saying, okay, I smoke 10 cigarettes and then maybe five cigarettes, and then, you know what, forget it, I’m not a smoker. Smokers amnesia. We’re tracking that digital behavior and feeding it to carriers so that they can make better underwriting decisions. They can make decisions in real time. They can do it based on the individual. So as opposed to how they traditionally do it, which is, you know, post-issue audits or random holdouts, what we’re doing is looking at it in the actual application and underwriting flow, [in] real time, and then giving them the ability to triage those applications. And, you know, obviously, I’m sure you’ll have a little bit to say here too, given this is what we’re doing with you guys.

Jason Kozlowski: Right, absolutely. And you know, what you said is kind of spot on. And it’s what we’ve seen within the industry as well, working with our carrier customers. You know, it’s kind of really eye-opening what you said about the surveys and getting the different responses based on different age brackets. And, of course, as carriers start to move more and more toward that direct-to-consumer, kind of slowly but surely, especially on the life side, carriers are starting to make that, that shift more and more over time. And they have to appeal to that younger demographic who doesn’t necessarily, you know, isn’t used to purchasing things in a face-to-face environment, right? So I think that that’s really where we’re starting to see a lot of the focus, too. With our carrier customers is, how do we, determine any of that kind of, fraud or misrepresentation? And that’s been a kind of big shift over the last few years. And carriers are kind of desperate to get any of the information that they have available to them, to kind of help, assess, all the different ways that fraud might represent itself from anything from a nondisclosure to other information that, you know, there’s, of course, a lot of gray areas and a lot of different evidence, types and whatnot that come into play. And, during the underwriting process and, I think the kind of carriers, if they started to maybe shift a little bit, the pendulum maybe at one point went a little bit too far in the one direction where they were kind of starting to shift away from the way that they were doing business to, now it’s kind of shifting a little bit back. And they’re finding that happy balance of looking at and having all the information that’s available to them, and, and taking it all into account.  And absolutely, as you said, I think, what you’re doing at ForMotiv is fantastic, is really cool. And, and there’s a lot of carriers that are, that we’ve talked to in, in the last year or so, that are really interested in, just having that is another piece of the puzzle, right? In some instances, I think where, a good example would be we’ve had carriers that it was maybe a low face amount case, lower-risk case, and they didn’t need a paramedical exam, based on their agent amount requirements. But when you have the ability to flag something that’s potentially fraud, not necessarily, but based on their behaviors during the application, as you said, that may trigger the additional requirements that might need to be ordered, such as a paramedical exam and blood work to do that deeper dive to determine, is there, is there potentially some non-disclosure here, or did they legitimately, you know, click the wrong button during the application process and then correct their answer?

Woody Klemmer: Yeah. I totally agree. And you know, one thing I was just thinking about is you’re thinking click the wrong button. And things like that is, is I think, you know, we’re giving as an industry the customers a lot of grace. And you know, we’ve heard from carriers, you know, we trust the customers or we trust the agents. And you know, we do, too. I just think it’s a trust but verify-type situation. Another crazy stat I just thought of is, it’s nearly 50% of smokers don’t disclose it during an on-line application. That’s doubled in the last five years, a quarter, you know, almost a quarter of people don’t disclose how much they drank. They lie about their BMI, you know. So just using some life-specific examples, there’s, I think it’s 2% or 3% of all accelerated policies should have been declined. Which means carriers are taking on just a lot more risk than they were anticipating. There’s all these mortality slippage studies. I just came out from a bunch of the reinsurers. So I think it’s top of mind now, are becoming top of mind for a lot of the carriers. That’s the trend that you’re seeing. The realizing this problem is, is different than or bigger than they initially thought. And, you know, to your point, they’re starting to figure out new tools, new solutions and, you know, ways to try to push back and save their bottom line.

Jason Kozlowski: Absolutely. So one of the things I did want to ask you, too, is, you talked a little bit, you’ve used some good examples with the smoking nondisclosure in the smokers amnesia, as you called it. I think, you mentioned, changes to their weight during the application process. I’m just kind of wondering, what additional in digital behaviors, if you will, kind of signal that potential misrepresentation? Like what other types of things are, are carriers looking at, using your tools, to help them determine that?

Woody Klemmer: Yeah. So they’re really looking at, you know, we call them the hips, the high impact premium questions, the ones that really make a difference. I’ve listed a couple, you know, alcohol, smoking, BMI, but family history, medical history, avocation. You know, there’s a lot of questions that can result in, you know, different class codes or, you know, outright eligibility for a policy. And we’re looking at, you know, the behavior, we’re capturing a lot of behavior. So it’s really not as simple as just saying, you know, did they change their answer from yes to no? There’s a ton that goes into it. How much time are they spending? There’s like a whole concept of hesitation in cognitive load and all these different data points that all, feed into overall, you know, what the signal is for the carrier. And what we’re doing is, is and one other interesting thing is, and I’ll just use the smoking example, we might have a signal just oversimplifying that says did they click yes and then click no. What we have seen is that it’s not a lot of the carriers think, okay, I want to set up a smoking signal and only look at, you know, if it fires, only look at the smoking, you know, do the lab test or the coding test or whatever for smoking. And what we’ve learned is, it’s not always apples to apples. Like if somebody manipulates their BMI, it isn’t always necessarily correlated to the fact that they’re lying about their weight. But what we’ve seen is, is it’s much more likely they are lying about something on the application.

Jason Kozlowski: Interesting.

Woody Klemmer: What we typically do with carriers is say, don’t look at it again one to one, where if it’s an alcohol, do alcohol, or smoking, do smoking. Further qualification, it’s really passing them through. And the way that carriers are using us is more of a triage tool to say, we’re going to further qualify this person or take them through full underwriting. And what we try to do is find it, tune it so finely that there’s really no, we’re not hurting their accelerated rate. We’re actually helping improve it. We’re just helping them pull the people out of line that, you know, deserve it, sort of speak. And what they’re finding, again, is, is that there’s just a higher chance of something flagging. You know, the analogy I use a lot of time is like going through the airport at TSA. Right now, they’re doing it where, you know, you go through the metal detector in, like every sixth or seventh person gets randomly selected and pulled out of line. And we operate a lot more like the bag scanner, where we’re looking at every single application under an x-ray and saying, we think there’s a higher chance that there’s something funny going on with this one. Pull it out line so you’re not doing it randomly. You know, you’re doing it really more prescriptively, and we’ve found that the success rate there is a lot higher.

Jason Kozlowski: Gotcha. Now that’s, that’s really interesting. I like what you said about how they’re you know, not necessarily 1 to 1 it, you know, if you’ve lied about, potentially lied about something, and then, you know, there was some nondisclosure that there’s, the higher likelihood that something else, you may have not been 100% truthful about as well.

So that’s, that’s good. So one other thing I wanted to kind of ask before we wrap up, is, you talked about, kind of the customer experience, how are insurers leveraging, all of these insights and helping improve that fraud detection, and making it seamless, you know, without adding any of that friction to that customer experience?

Woody Klemmer: Yeah, well, I guess, the way that we always think about the holy grail of these digital experiences is removing friction and creating a better experience without increasing risk. And I think forever, that’s been a seesaw. They’re really inversely proportional, like the way that you improve the UX is you add or you remove friction, which inherently increases risk. It works the same way in reverse, where you know, if you want to tighten up your risk and fraud measures, you add friction, which lowers the customer experience. We want to try to help carriers create a, you can have your cake and eat it too, like you can provide a better digital experience, but also tighten up your risk and fraud at the same time. And that’s super important because, you know, like just beating the other analogy to death, you’ve, who hasn’t been at an airport and been randomly pulled out of line and you’re like, it’s the worst, you know, I’m running late for my flight, I needed to get a coffee. It’s just a bad experience.

Jason Kozlowski: Right!

Woody Klemmer: And it’s the same thing for insurance applications, where you started filling out an application and all of a sudden, you get that technical error screen and it says, oh, you have to go speak to an agent. You’re like, I just spent all this time filling out the application, and now you’re telling me I can’t buy? It’s a, it’s a bad user experience.

Jason Kozlowski: Sure!

Woody Klemmer: [It] leaves a poor taste in customers’ mouths. So the best way to do it is, again, you can’t, you can’t remove friction for everybody. Otherwise, you will have a really poor business. But if you can selectively pick the people that deserve the further qualification or that you have a higher chance of, you know, finding something versus the ones that are your genuine low-risk applicants, like accelerate those users and then do the full underwriting on the others. That’s what we’re really, that’s our main goal. That’s the ultimate goal that we’re trying to help carriers accomplish.

Jason Kozlowski: That makes perfect sense. Well, I just wanted to thank you, Woody. I know we’re about out of time here. Really been great having you on. I think I can speak for myself, you know, and hopefully our audience, when I say that, we’re definitely starting to look at fraud differently than we have in the past. And just from what I’ve learned talking to you, today and in the past, it’s really interesting, to learn about how that data can really provide [those] necessary clues and, you know, insight, for, for our carriers. And I do think that carriers are really starting to make a lot of strides in that area, you know, in largely in part to what ForMotiv is doing. It’s kind of like putting that puzzle together when all those clues are starting to come in and, it can really help carriers, especially as they start to move away from maybe the traditional ways that they used to do things where, you had a, a very static, agent amount table that would drive things like their requirements that, that they would order. Now they can be kind of, very dynamic based on the signals and the things that are coming in. So I think, it’s really exciting to see some of those changes that you’re helping [to] facilitate in the space.

To our listeners, I just wanted to thank everyone for tuning in. It’s hard to believe that we’re already, moving into Q2 2025, but we do have a lot of exciting content, and more, podcasts and blogs and webinars and everything coming your way. And we do love hearing from you. If you have any comments, and we’d love for you to follow us on social media. Please don’t hesitate to reach out through any of our channels. And please don’t forget to subscribe to the podcast! Stay tuned for the next episode of Sapiens Insurance 360. Bye for now!