May 22, 2018

Dax Craig: Get a Handle on Premium Fraud and Payroll Errors

By Dax Craig, CEO and President of Valen Analytics

Dax CraigA lot is changing in work comp and P/C insurance overall, but one nagging reality remains the same – the threat of premium fraud. The consistent stream of cases pours in, like the $1.6 million case in California earlier this year. The combination of fraud and other payroll errors equates to $22B lost for the entire work comp industry.

As big a problem as this is, it is easier to solve than it once was – particularly for small-to-midsized carriers. It can feel like going down a rabbit hole to locate problematic policies, as it’s both impractical and unprofitable to physically audit every policy. Many issues of fraud and other errors that cause payroll misclassification are distributed across both large and small policies. However, large companies are more likely targets for audits – and they know it. Finding the needle in the haystack with small policies requires more sophistication. Armed with data, carriers can make significant strides in driving down premium fraud and payroll misclassification.

Measure the Portfolio Impact and Scope of Premium Fraud

Advances in analytics within work comp now makes it is possible to find patterns of misclassification in a portfolio and predict its likelihood on individual policies. The first step is to understand the size of the misclassified exposure problem on a book by analyzing that specific carriers’ data. There are a few questions to answer in order to create a baseline view.

  • Does that carrier have more or less misclassified exposure compared to last year?
  • Are there particular hazard or industry groups performing noticeably different than others?
  • What about differences in premium size or geography?
  • Are there other dimensions that could make a difference?

Understanding the answers to these key questions will set the stage for a more in depth look into the portfolio, such as identifying how much each governing class faces misclassified exposure and a deeper understanding of class code exposure at the policy level. After establishing this reference point, carriers can map out how to improve the portfolio overtime, document success goals, and focus on a particular segment of policies in a geographic region or premium band that is top of mind. One of the biggest mistakes is attempting to fix the entire portfolio all at once, instead of focusing on a portion of it and tackling a specific problem area. Start small and build on early wins to keep the problem from being overwhelming and unwieldy to solve.

Evaluate the Audit Strategy
Having a clear idea of where the most misclassified exposure is on a book only solves one part of the problem. The next area of focus is the audit strategy. Answer two key questions: how do I know whom to audit, and how do I know that audit is providing the appropriate ROI? Developing a strict codified audit strategy is critical in order to avoid wasting resources and causing unnecessary friction with valued policyholders. Review the historical results of audits types (physical, mail, phone, etc.) to determine the audit dollar efficiency in terms of the overall percent of exposure, and the net result of either additional or return premium.

One good way to break out results is by premium size. For example, identify the percentage of post-audited policies between $10,000 and $25,000 that are getting physical audits. Then compare the additional or return premium of those policies against $25,000 to $50,000 policies to determine where the current auditing strategy is effective or not – and adjust audit rules accordingly.

These steps illustrate how to begin leveraging and analyzing data for patterns. It will help carriers realize early gains, and identify where new sources of data and advanced analytics can be holistically applied to prevent these problems from occurring in advance.

While staying on top of premium fraud and payroll misclassification can seem like a daunting task, it’s imperative to begin immediately. Using the strategies listed above and understanding that it is very much a test and learn process, is a big step toward tightening up underwriting and remaining profitable.

About Dax Craig
Dax Craig is the co-founder, president, and chief executive officer of Valen Analytics. Based in Denver, Colorado, Valen is an advanced data and analytics provider for the property and casualty insurance industry. The company leverages its large consortium data assets to help carriers price insurance policies more accurately and achieve lower loss ratios.

Prior to founding Valen in 2004, Dax was founder and CEO of Xertex Technologies, which was acquired by global leader in the wireless antenna industry, Centurion Wireless. Dax proceeded to serve as vice president of global business development at Centurion, where he was directly responsible for global business development including sales, market definition, market segmentation, market research, strategic planning, and market development.

Dax graduated from the University of Tulsa with a bachelor’s degree in business administration and marketing. He earned his MBA in finance from the University of Colorado at Boulder.

About Valen Analytics
valen analyticsValen Analytics is an advanced data and analytics provider for property and casualty insurance companies. We work with insurers who are actively looking to improve underwriting profits by driving growth and/or lowering their loss ratio. Our customers are focused on increasing competitive pressures, fighting adverse selection with innovative solutions, and raising awareness for the impending “experience gap” in underwriting with initiatives such as Tomorrow’s Talent Challenge. Our customers span many lines of business including Homeowners, Workers’ Compensation, Commercial Auto and Telematics, Commercial Package, Commercial Property, and BOP. Learn more about Valen at

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