How to Evaluate the Price of Fraud?

There is no doubt that fraud is expensive. Besides money losses for innocent policyholders, it ruins companies’ reputation and causes irreversible damage for owners and investors. The negative economic impact of fraud is not easy to evaluate since intangible company assets are also at risk. Fraud prevention and detection efforts have to be carefully adjusted and planned, since an effective fraud management strategy is becoming a necessity.

Identifying and defining the list of potential factors that are influencing the overall price of fraud is not an easy task, but knowing the challenges we are facing might help us when measuring the economic impacts of fraud. Leafing through of the Fraud magazine (Vol. 30, No. 3) articles during this summer we came across an interesting list of factors that must be considered in this process (article by Jared A. Funk, CFE, CPA, CGMA / 2015):

  • Fraudulent scams are usually pre-planned and they occur over an extended period of time. According to Funk (2015) and ACFE’s statistics the median duration for fraud cases reported, from commencement to detection, was 18 months. The magnitude of the financial risk might become unimaginable if not stopped in time, since the visible part (the one that is easy to quantify) might be only the “tip of the iceberg”. Looking for suspicious patterns by relaying on advanced statistical tolls (like predictive statisticsor social network analysis) should be taken under serious consideration.
  • Knowing the fraudsters scams (like Crash-for-Cash scams) and tactics in advance is essential when we are looking for suspicious patterns, since the more elaborate the cover-up the more difficult it might be to evaluate the economic impact of fraudulent activities.
  • According to Funk (2015) and ACFE’s statistics, a “strong correlation exists between a fraudster’s level of authority and the financial impact of the fraud”, so look out for potential risks that might harm from the inside.
  • The type of harm can be difficult (even impossible) to accurately measure. Funk (2015) is proposing the following example: “If a fraud is highly publicized it’s extremely difficult if not impossible to measure the impact the fraud might have on current and future profits of a company”.
  • Finally, cost and time constrains might impact and even limit the fraud investigators’ work. Dealing with complex fraud cases manually is almost impossible nowadays.

The negative economic impact of fraud, of course, is not a matter of discussion anymore. In order to consistently manage the negative impact of fraud, fraud prevention technology must be accompanied by adequately trained staff. Read more also about the Employee Competencies in Managing Insurance Fraud.


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