Insurance fraud prevention across the policy lifecycle

Digital applications, online claims, and electronic payments have made insurance processes faster and more convenient for consumers—but, they have also created new opportunities for fraud. Synthetic identities, account takeover, and payment misdirection schemes can now be executed at scale, contributing to the $308.6 billion in annual losses due to insurance fraud. 

Yet organized fraud is only part of the story. A significant share of losses stems from soft fraud—when otherwise legitimate applicants or policyholders misrepresent information to lower premiums, inflate claim values, or add expenses that aren't fully covered. These cases can be particularly difficult to detect because the customer has a legitimate relationship with the insurer and the underlying application or claim may be valid.

For carriers, that means fraud prevention can't be limited to post-claim investigations. Effective insurance fraud prevention starts earlier and surfaces inconsistencies before they turn into losses.

Insurance fraud happens across the full lifecycle

Insurance fraud appears at every stage of the policy lifecycle, and issues that go undetected during onboarding or underwriting often become far more costly by the time a claim is filed.

Fraud may appear during: 

• Onboarding and underwriting: Fraudsters may use synthetic identities, stolen credentials, or manipulated application data to obtain coverage. Legitimate applicants may also misrepresent income, assets, mileage, or the number of household drivers to qualify for lower premiums or different coverage terms.

• Premium billing and payments: Fraud can take the form of account takeover, unauthorized bank account usage, ACH fraud, or policy stacking using invalid payment credentials. These schemes can lead to payment failures, operational costs, and increased risk exposure.

• Claims intake: Insurers must evaluate whether a claim is legitimate and whether the reported losses are accurate. Fraud risks include fabricated receipts, inflated repair costs, staged accidents, and claims for losses that never occurred.

• Claims payouts: Once a claim is approved, fraud can shift to the payment itself. Misdirected payments, stolen identities, and check interception schemes can prevent funds from reaching the intended recipient while exposing sensitive customer information.

Detecting all types of fraud—including soft fraud—requires visibility across the entire policy lifecycle. And when fraud goes undetected, the impact extends far beyond a single claim.

The real cost of insurance fraud

The true cost of fraud isn’t limited to direct financial losses. Understanding the impact of insurance fraud requires considering how it impacts both carriers and customers:  

• Financial losses: Fraudulent claims, payment fraud, ACH returns, and claims payment errors all increase costs and reduce profitability.

• Premium leakage: Misrepresented risk factors like mileage, vehicle usage, or financial information during underwriting can cause carriers to underprice risk. Unlike claims fraud, premium leakage often remains hidden until a claim forces a closer look. 

• Operational costs: Fraud investigations require time, staffing, and manual review. Even legitimate claims become more expensive when insurers must verify documentation, resolve payment issues, or respond to customer inquiries.  

• Customer experience and retention: Claims experiences are among the strongest drivers of customer retention. When fraud prevention measures slow legitimate claims or delay payouts, carriers risk undermining trust at the moment customers expect support most.

Fraud can also create ripple effects throughout the policy lifecycle. An applicant who misrepresents information during underwriting may receive a policy priced below the true level of risk. That mispricing can affect premium collection, claims outcomes, and loss ratios months or even years later.

How to prevent insurance fraud—strategies and solutions

Because fraud can occur at every stage of the insurance lifecycle, preventing it requires more than a single point solution. Effective fraud programs combine multiple verification and risk-assessment tools to spot suspicious activity early while minimizing friction for legitimate customers. Here is what it looks like in practice: 

• Verify identity during onboarding: Confirming applicants are who they claim to be is one of the most effective ways to stop fraud before a policy is issued. Real-time identity verification can help detect synthetic identities, stolen credentials, and other forms of application fraud before they enter the system.

• Verify account ownership before moving money: Premium collections and claims payouts both rely on accurate bank account information. Verifying account ownership before initiating payments helps prevent misdirected funds and minimize ACH returns.

• Use behavioral and device signals: Fraudsters can often bypass static identity checks using stolen or fabricated information. Behavioral patterns, device fingerprinting, and account activity signals provide context that can help identify coordinated fraud activity.

• Validate reported information with transaction data: For claims involving reimbursable expenses, insurers can compare reported purchases against permissioned transaction data rather than relying solely on receipts or manual review. The same approach can strengthen underwriting by validating income, cash flow, and other financial information used to assess risk.

• Leverage network-level fraud signals: Individual carriers only see a fraction of the fraud landscape. Network-based intelligence can help identify devices, accounts, and behaviors associated with fraud across a broader ecosystem, making coordinated fraud rings easier to detect.

• Apply dynamic risk scoring: Risk scoring allows insurers to apply additional verification only when needed, reducing friction for low-risk customers while routing higher-risk applications, payments, and claims for additional review.

When evaluating insurance fraud prevention software, carriers should look for solutions that provide real-time signals, support the full policy lifecycle, and integrate with existing policy administration, claims, and payment systems. The strongest solutions help insurers address both organized fraud and soft fraud without creating unnecessary friction for legitimate customers.

How Plaid helps insurers fight fraud

The goal of modern insurance fraud prevention isn't just about stopping fraud—it's about doing so without slowing down legitimate customers. Plaid helps insurers do both by verifying identities, validating account ownership, and detecting suspicious activity throughout the policy lifecycle.

Because fraud doesn't exist in a vacuum, neither should fraud defenses. Plaid's network spans more than 8,000 apps, 12,000 financial institutions, and over 1 billion devices, providing signals that individual carriers cannot generate on their own.  

Here are a few ways Plaid helps insurers reduce fraud risk: 

• Verify identity before claims processing begins: Plaid Identity Verification helps carriers confirm that customers are who they claim to be during the onboarding process.

• Detect premium leakage and soft fraud with transaction signals: Permissioned financial data helps insurers validate information provided during underwriting and claims. Comparing reported information against real financial activity can highlight inconsistencies that point to premium leakage, inflated expenses, or other forms of soft fraud.

• Secure claims payout: Plaid Auth helps insurers verify and connect bank accounts in real time, reducing misdirected funds. Connecting to a bank account at first notice of loss (FNOL) allows insurers to validate the account is owned by the claimant and provides an account to remit a digital payment to instead of a check.  

• Frequently verify reimbursable expenses: For claims involving out-of-pocket costs, Plaid can pull permissioned transaction data to confirm reported expenses against bank records, reducing reliance on receipts and manual review while flagging inflated or fabricated claims.  

• Identify emerging fraud threats: Plaid Protect combines identity, device, account, and network intelligence to help insurers identify suspicious activity that may not be visible through traditional fraud controls alone.

• Safer claims payments: Plaid Transfer enables insurers to send claim payments via ACH or instant payment rails (FedNow or RTP), removing paper checks as a fraud vector

By combining identity, account, transaction, and network intelligence, insurers can catch more fraud without adding unnecessary friction for legitimate customers. Early testing of Plaid Protect found organizations could reduce fraud by up to 50% within six months and identify 40% more fraud. Plaid customers have seen a 25% boost in onboarding conversions, showing that stronger fraud controls don’t have to come at the expense of the customer experience.

Build a fraud defense that works for everyone

Effective insurance fraud prevention requires catching threats across the full lifecycle without penalizing good customers. That includes the organized fraud rings that make headlines and the soft fraud that quietly erodes profit margins. 

As insurers continue to digitize customer experiences, fraud prevention is shifting from a reactive process to a proactive one. Real-time verification and financial data help carriers validate information earlier, reduce manual reviews, and make more informed decisions throughout the policy lifecycle.

The best fraud defense is one claimants never have to see: fast, secure, and frictionless for the people who deserve their payout. Learn how Plaid can help insurance companies.