Role of Artificial Intelligence in Claims Processing and Fraud Detection

Introduction

“Artificial Intelligence (AI) has permeated various aspects of the insurance sector, spanning
from claims processing to fraud detection and facial recognition. While insurance companies
have been exploring AI tools for the past decade, it has gained substantial traction in recent
years. AI is now integral to decision-making, risk reduction, expedited customer onboarding,
and quicker claim resolutions—all while reducing costs.

Aegon Life, a digital life insurance company, is currently conducting a pilot test of facial
recognition technology. This technology identifies gender, age, and general well-being, aiding
in the validation of customer-provided information. Cholamandalam MS General Insurance
Company Ltd employs AI in their motor claims servicing through an application for motor
damage assessment and claims settlement, settling 94% of motor claims through this
application.

Shriram Life Insurance Company (SLIC), with a significant portion of its retail premium
sourced from rural areas, employs AI and digital technology for retail claims management.
SLIC utilizes technology to analyze historical claim data, identifying patterns for effective
claims management. AI-based predictive models enable the anticipation of claim trends and
proactive service to policyholders and nominees.

These initiatives have led to rapid claim settlements, including the resolution of non-
investigated claims within 12 hours, even in remote regions. The company began integrating
AI tools into its processes over the past five years, now utilizing them in approximately 30-
40% of its operations.

Star Health and Allied Insurance Company Limited, a leading standalone private health
insurer, emphasizes the use of AI and machine learning for the auto adjudication of claims.
This digitization and automation have significantly improved turnaround times, with 65% of
cashless claims evaluations now processed using automated tools.

SBI General Insurance underscores the transformative potential of AI in the insurance

industry, enhancing efficiency, effectiveness, and customer-centricity. The implementation of
AI has led to improved operations, reduced costs, and enhanced customer service.
On the other hand, K V Dipu, Senior President & Head of Operations and Customer Service
at Bajaj Allianz General Insurance, emphasizes the continued importance of the human
element in the Indian insurance industry, particularly in areas like customer relationships and
claims assessment. While AI and automation have streamlined processes and enhanced
efficiency, human involvement remains essential. Over 95% of the company's policies are
issued digitally with the aid of AI and related tools.
Companies such as Exponentia, Fedo, Monk.ai, Arya, Pentation analytics, Actyv.ai, Aureus,
Artivatic, BUSINESSNEXT, Lightmetrics are startups that are providing AI-enabled
solutions to insurance businesses. This essay will walk you through why and how AI is
necessary and implemented in insurance and how it might be able to help even more.” –
Yogesh Kabirdoss. (2023, May 19). Insurance companies turn to AI tools to process claims. Retrieved October 27, 2023,
from The Times of India website: https://timesofindia.indiatimes.com/city/chennai/insurance-companies-turn-to-ai-
tools-to-process-claims/articleshow/100342714.cms?from=mdr

Problem Statement
While AI promises immense opportunities to optimize operations and enhance customer
experience, its full-scale adoption in the insurance industry also presents significant
challenges that need careful consideration. As AI systems start permeating critical and
complex functions like risk assessment, underwriting and claims processing, insurers will
face compliance issues, ethical dilemmas and business trade-offs that require nuanced
decision making. If not addressed appropriately, these challenges have the potential to
seriously undermine the benefits of an AI strategy and damage customer trust.
One of the primary concerns with AI is the risk of algorithmic bias stemming from
prejudiced, unfair or non-representative data used to train machine learning models. Since
insurance inherently involves making predictions based on individual risk profiles, even
inadvertent biases during model development could lead to discriminatory outcomes
impacting customer segments unfairly. This threatens legal compliance with equal treatment
regulations. Biases may also creep in via the choice of variables, design of training
methodology or underlying assumptions within AI algorithms. Constant auditing and impact
assessments are necessary to proactively mitigate these dynamics.

Availability and access to relevant data are prerequisites for building robust AI systems.
However, in reality, data is often incomplete or imbalanced. This may skew predictive models
toward certain outcomes. Similarly, a lack of high-quality historical data for newer areas like
cyber-risk poses challenges. Bias may also emerge from inadequate distribution of loss
scenarios in the training dataset. Insurers need strategies to handle data limitations to ensure
model reliability and fairness.

The key challenge hence lies in leveraging AI's capabilities judiciously while upholding
principles of ethical AI such as fairness, accountability, and transparency. This forms the core
problem addressed in this paper. By analyzing risks proactively and outlining mitigating
measures, insurers can reap AI's benefits responsibly.

The Why, The How and the questions that follow.

Insurers worldwide are deploying AI-powered solutions to streamline claims processing

functions and improve efficiency. One of the areas seeing massive transformation is
document intake and form extraction using optical character recognition (OCR) techniques.
Traditional manual data entry from paper records was resource-intensive and error-prone.
Through deep learning algorithms, AI systems can now seamlessly convert documents of any
format like PDF, images, scans into structured machine-readable text with high accuracy.
Once digitized, natural language processing (NLP) capabilities are utilized to automatically
extract key information fields like policy details, claimant particulars, incident descriptions
from the policy documents or claims forms. Sophisticated NLP models comprise linguistic
analyses, annotators, tokenizers and syntactic parsers to glean necessary facts while handling
variations in terminology. For unstructured data sources such as doctor's notes or assessment
reports, AI deciphers clinical codes and medical terminology through semantic frameworks
and ontologies.

The congregated data undergoesvalidation checks using predictive models and reference
databases. Any discrepancies in the details furnished by customers against actual records are
flagged for investigation. Simultaneously, the core data fields serve as inputs for complexity
algorithms that gauge the intricacy of individual cases. Based on pre-defined rules, claims are
automatically classified under simple or complex categories with the former requiring
minimal human intervention.

For straightforward liability determinations or low value cases, settlement amounts and
outcomes are directly proposed by AI regressors after assimilating policy conditions and
average past payout stats. Customers receive real-time claim status updates and need not
interact with claims executives repeatedly. More nuanced injury or coverage claims still
involve human assessors but they can leverage AI recommendations and templates to
standardize analyses. Natural language generation comes handy in drafting boilerplate letters,
queries and reports.

Imbuing intelligence in document processing, data extraction, complexity classification and

portions of settlement has allowed insurers to achieve up to 40% higher throughput while
curtailing average handling cycle to a fraction. The focus now shifts to redeploying claims
handlers from routine paperwork to high-stakes judgment work. This combined human-AI
approach delivers a far superior claims experience.
Insurance fraud poses significant monetary losses to the industry amounting to billions
annually. Detecting fraudulent cases early requires thoroughly analyzing claims patterns,
inconsistencies and anomalies. AI has emerged as a powerful tool to augment fraud
investigators' capabilities through techniques like supervised learning, association rule
mining and clustering.

When a new claim is filed, AI instantly runs hundreds of checks in the background including
verifying claimant credentials, scanning documents for red-flag keywords, matching details
with third-party databases and evaluating filed incidents based on fraud schemas learned from
past cases. Any suspicious files are automatically prioritized and flagged for manual review.

Deep neural networks also examine audio-visual records like recorded statements,
surveillance footage and medical scans and extract subtle cues like Facial expressions, speech
patterns and injury inconsistencies beyond human capacity. AI readouts draw attention to the
necessary evidence clips with timestamp tags.

As investigations progress, natural language processing tools keep track of all

correspondence and interaction points. They analyze language patterns and sentiment to
detect evolving deceit, inconsistencies in applicant responses over time and contradiction of
facts already provided.

AI assimilates each case outcome into its training data, continuously improving fraud risk
scores and expanding instances of known fraud techniques. This helps proactively detect the
organized criminal schemes and rings behind many insurance scams. Over time, through
federated learning across databases of different firms, AI models achieve unprecedented
accuracy scores of over 90% in pinpointing truly questionable claims. Fraud detection using
traditional manual methods typically yields a dismal accuracy of less than 50%.

The aforementioned capabilities have enabled insurers to crack down on fraud rings with
billions in illicit payouts. AI is proving invaluable for the sectors in their endeavors to
strengthen policyholder trust while mitigating losses arising out of non-genuine claims.
While AI promises significant benefits, its use also introduces compliance, ethical and risk-
related complexities that warrant careful consideration. One of the most pressing issues is
ensuring algorithmic fairness and preventing discrimination especially in underwriting and
risk assessment models. Researchers have shown AI systems can inadvertently pick up and
even amplify societal biases present in the historic data.

To address this, insurers must continuously audit models for disparate treatment of
protectedclasses like gender or ethnicity. They involve stakeholder feedback and consult
domain experts during framework design and variable selection. Training data also needs
examination for biases and inappropriate correlations. Techniques such as pre-processing, fair
representation learning and debiasing algorithms can be leveraged to mitigate biases.

Even with such measures, lack of transparency in AI decisions remains a barrier. Explaining
how 'black-box’ deep learning models arrive at specific outcomes is tremendously difficult.
To provide accountability, insurers have to invest in model explanation techniques using
simulations, prototypes and partial dependencies. Interactive tools help visualize factor
influences under controlled conditions.

However, completely exposing proprietary technical details can enable model replication
defeating intellectual property. Conversely, nondisclosure also hampers dispute resolution.
Striking the right information disclosure balance is an ongoing challenge. Additionally, as AI
systems operate at massive scales, unconventional edge cases may trigger unpredictable
outcomes necessitating human fallback arrangements.

Governance-related issues too require consideration. Ensuring qualified workforce with

multidisciplinary AI skills, defining robust data management practices, conducting
proportionate impact and risk assessments, establishing performance metrics and model drift
monitoring procedures are essential management processes but resource-intensive.

Addressing privacy concerns throughout the AI lifecycle from data collection to system
updates is another important responsibility. Enacting legal and technological safeguards to
restrict data sharing to legitimate insurance purposes and de-identifying customer records can
boost trust and compliance.

Overall, cultivating AI responsibly necessitates acknowledging risks proactively rather than

reactively through multi-stakeholder collaborations and human-centered solutioning. With
prudent strategies, insurers can manifest AI's full potential while assuaging any negative
implications.
Conclusion
In conclusion, AI is fundamentally transforming core insurance operations by automating
repetitive tasks, generating actionable insights from vast troves of customer data, and
augmenting the skills of human workers. Its application in key areas such as document
processing, extraction of critical policy and claims information, claims processing etc. has
demonstrated the capability to streamline workflows and significantly boost productivity
multi-fold.

However, for insurers to realize AI's full potential responsibly and sustainably, many
challenges pertaining to fairness, accountability, transparency, privacy, model governance and
management of potential risks need to be addressed astutely. A balanced approach is required
where strategic AI adoption is carefully complemented by establishing stringent safeguard
measures, oversight protocols, review committees and governance frameworks.

This involves diligently conducting ongoing and iterative evaluations of algorithms for
biases, inaccuracies and unfair outcomes. It also necessitates prototyping of model cards and
explanation interfaces to satisfy regulatory audits without compromising intellectual property.
Edge cases may still require human-in-the-loop reviews by specialized teams. Similarly,
synthesizing more nuanced and disparate representative training datasets can enhance model
reliability over time.

Co-developing equitable, robust and adaptive AI solutions in the insurance domain will also
require cultivating dedicated interdisciplinary AI centers of excellence. These should
comprise experts from fields such as statistics, analytics, ethics, law, risk management and
customer experience who can provide a holistic multi-stakeholder perspective throughout the
entire AI product development lifecycle.

Periodic third-party audits and certifications will further strengthen institutional

accountability and assure customers of prudent data governance standards. However, over-
engineering compliance protocols without agility could impede innovation. An optimal
collaborative governance model would involve proactive community engagements, policy
formulation focused on inclusive consumer interests, piloting of emerging applications, and
continuous upgrades based on global guidelines.

If addressed judiciously through diligent planning, implementation and management of AI

investments, the capabilities can help insurers harvest truly impactful benefits. This includes
maximizing operational efficiencies, optimizing resource allocation, delivering customized
risk propositions and digital claims services, and staying ahead of competition. Most
importantly, it allows sharing prosperity with customers and society equitably. With
responsible and transparent practices, AI portends an exciting future for the insurance
industry as a whole.