LatAm Reunión 2012: The challenges of the Panama insurance market

Panama, with its 3.5 million people, has the second-highest insurance premiums per capita in Latin America, second only to Chile. In 2011, Panama’s insurance policyholders paid $1bn in premiums, or 3.6% of the gross domestic product (GDP), which meant a 15% increase over the year before, or five points above the Latin American average of 10%.

In the past five years, the country has also seen a significant expansion of incoming insurance companies. Panama is now home to 32 insurance companies, making it the largest insurance market in Central America. Many foreign groups - such as Italy’s Generali, HSBC, Zurich-based ACE and others - are present in Panama, and more are poised to enter the market in coming years.

This has meant some changes for the market including increased competition. The largest insurance companies only have 17% of the overall market share. Some global companies imported their own procedures to Panama. While some of them obtained good results, others are still struggling with the local market and searching for updated solutions in fields like fraud prevention, underwriting and pricing.

One of the main challenges for insurance companies is convincing people to buy insurance, which is still considered expensive based on the local income. This is expected to change, however. The country’s stable and fast-growing economy makes it attractive for insurers from Europe and other developed regions where insurance markets are mature and economies are slow-growing. In fact, Panama has been one of the fastest-growing countries in the world during the past decade with an annual growth rate ranging from 7.2% to 12.1% since 2004 - the only exception was 2009 when growth slowed sharply to 3.9% due to the global financial crisis.

The growing market has led to a need to rebuild its legal framework, established 17 years ago, to give insurers more protection. Since last April, Panama has a brand new insurance law that meets international norms of supervision. The new law grants the Superintendencia de Seguros y Reaseguros de Panamá the facility to regulate the correct application of international norms of financial information for reserves and investments of insurance and reinsurance companies. The purpose of the law is to help make Panama a regional hub for insurance and reinsurance companies.

Now that the country has a solid legal framework, the path is clear for insurance companies to invest in Panama. Health insurance, car insurance and life insurance are the first offerings from the industry, but many more can be developed.

Fraud prevention should be a priority

According to a research conducted by INIF (Instituto Nacional de Investigación y Prevención de Fraude) in Colombia, for every $1 invested in fraud prevention, another $74 was recovered. While there have not been studies conducted in Panama, there are no indications that the outcome would be different.

Many insurers continue to accept fraud loss as part of the cost of doing business, and are able to absorb these costs due to an expanding market. They seem more comfortable with dated technology than with more advanced methodologies incorporating predictive analytics. However, more advanced methodologies that incorporate predictive analytics are being successfully used in other industries. For example, the adoption of advanced analytics and increased use of sophisticated fraud management solutions has reduced losses for US credit card companies by two thirds over a 10-year period.

In Latin America, a decision to adopt more technology to detect fraud, waste and abuse, often is limited to a rules-only based detection solution, which is effective to capture known fraudulent activities. Such solutions leave a large gap open to new threats, since fraud perpetrators take advantage of the static nature of rule-based fraud detection systems. The evolving nature of fraud will inherently test new ways and alternatives to circumvent defined, stagnant rules.

As an example, many insurers have a rule stating that whenever a claim is filed less than 30 days after the policy is issued; this claim must be identified and investigated. This may seem obvious but in reality this is the exact rule sophisticated criminals easily anticipate and circumvent. In fact, FICO has identified evidence of examples in which these early claims are paid to prevent complaints for a certain period of time. In these cases, some accounts will be masked and considered to be “good,” before further review can be conducted, which could point to even more fraud. However, a stronger enforcement of this rule may penalise good customers who have legitimate claims and not identify fraudsters.

Predictive analytics is capable of identifying and highlighting claims and service providers that may have unusual or deviating behaviour so further investigation can be conducted. This is how systematic patterns of abuse and expensive events are identified before a rules-only based tool could possibly detect a problem.

Many insurers have reported a 20% to 50% reduction in fraud losses, and a 20% to 25% reduction in financial provisions for fraud losses by using analytics-based fraud protection. This is what makes the system attractive for individual customers as well as most established firms in several other industries.

A major health insurer in the US has adopted a combination of predictive analysis and business rules to process more than 200m claims annually in health, dental, eye care and prescription drug insurance products. By including additional model sets to score and rate claims, this insurance company was able to quickly identify more than 250 new cases that required further investigation, which had not been previously detected by other methods, including 43 cases that impacted several providers.

With a combination of both analytic models and business rules, insurance claim fraud, waste and abuse can be detected in multiple stages of claim processing and evolve rapidly for different fraud schemes and attacks for more overall effectiveness.

Russ Schreiber is insurance vice-president and Scott Horwitz is insurance director at FICO.