Insurance fraud detection: Why prevention beats detection

The fraud detection paradox in traditional claims settlement

Bank transfers with receipt-based validation have created a structural vulnerability that UK insurers struggle to overcome. The model operates on "trust then verify" principles: issue payment quickly to satisfy customer expectations, validate receipts afterwards to detect fraud. This sequence makes fraud prevention fundamentally impossible.

Consider a typical home emergency claim. A policyholder reports a boiler breakdown requiring immediate repair. The insurer, conscious of FCA Consumer Duty obligations to deliver good outcomes and process claims promptly, authorises a bank transfer within 24 hours. The payment provides immediate financial relief, meeting service standards. Three weeks later, the policyholder submits repair receipts for validation.

This is where the problems start. The claims handler reviewing receipts spots inconsistencies. The quoted repair cost seems high for the work described. The supplier's invoice lacks standard detail. Further investigation suggests the repair may not have occurred as claimed, or costs were inflated beyond the actual work completed. By this point, the bank transfer has been spent. The funds cannot be recalled. Recovery proceedings begin, but success is unlikely.

In practice, suspected fraud is often identified only weeks after claims have been paid, once receipts and supporting documentation are reviewed by investigation teams. By that point, payments made by bank transfer have usually been spent or moved, which helps explain why recovery success rates remain below 12% for confirmed fraud cases.

The structural weaknesses of bank transfer fraud control:

• Irreversibility - Once funds clear, they cannot be recalled regardless of subsequent fraud discovery
• No spending visibility - Insurers have no insight into how transferred funds are actually used
• Time lag vulnerability - Weeks pass between payment and receipt validation, allowing fraud to succeed
• Binary trust decisions - Claims must be either paid or declined at approval, with no middle ground for controlled disbursement
• Recovery failure rates - Less than 12% of detected fraud is successfully recovered after a bank transfer

This dynamic creates a false choice between operational priorities. Process claims quickly to satisfy customers and regulators, accepting higher fraud leakage. Or implement rigorous validation that delays genuine claims, frustrating policyholders and potentially breaching Consumer Duty obligations. Most insurers navigate this tension by setting investigation thresholds. Claims below certain values receive minimal validation. Claims above thresholds trigger detailed review. Fraudsters, increasingly sophisticated, structure their activities just below these tripwires.

The operational burden compounds the problem. Manual receipt validation across thousands of monthly claims creates capacity constraints. Claims handlers spend significant time matching bank transfers to submitted receipts, verifying supplier legitimacy, and cross-referencing amounts. This reconciliation work is administratively intensive and error-prone. When validation processes become overwhelmed, fraud detection rates decline. Speed and thoroughness cannot coexist under current infrastructure.

The Financial Conduct Authority's Consumer Duty standards have intensified this tension. The FCA's 2025 Consumer Duty Outcomes Review emphasised the duty to embed financial crime controls into digital service journeys, confirming that rapid claims processing and robust fraud prevention are jointly measurable indicators of good outcomes. Simultaneously, firms must maintain robust financial crime controls under FCA expectations and comply with fraud prevention obligations under the Fraud Act 2006 and the Economic Crime and Corporate Transparency Act 2024. These parallel requirements pull in opposite directions when payment infrastructure offers only binary choices: pay quickly or validate thoroughly.

Prevention vs detection: Why payment controls matter

Sophisticated fraud analytics identify high-risk claims before payment. Pattern recognition flags unusual claim frequencies. Behavioural models spot inconsistencies. Risk scoring ranks cases by fraud probability. These tools have improved detection rates significantly over the past decade.

But detection capabilities mean little if the payment method cannot enforce the restrictions they identify. A risk model that flags a claim as 60% likely to involve inflated costs cannot prevent the policyholder from receiving a bank transfer and spending funds inappropriately. Analytics without enforcement mechanisms simply provide earlier visibility into losses that still occur.

This is where prevention-first payment infrastructure changes the equation. Instead of detecting fraud after disbursement, modern payment technology enables control at the point of payment itself. Virtual cards with configurable spend parameters create a control layer that bank transfers fundamentally lack.

The three fraud intervention points

Fraud intervention happens at three points: before payment (pre-approval analytics), during payment (point-of-disbursement controls), and after payment (post-detection investigation). Most insurers excel at the first and third but lack the middle layer entirely. Bank transfers offer no mechanism to control how funds are used once transferred. Virtual cards fill this gap by building prevention directly into the payment infrastructure.

Virtual cards with embedded spend controls change this. When issuing a Mastercard virtual card for a home emergency repair, insurers can configure multiple prevention parameters simultaneously:

• Amount limits - Set the card limit to the approved repair estimate, preventing cost inflation
• Merchant category filtering - Restrict usage to building suppliers and approved contractors through MCC controls
• Geographic restrictions - Limit card use to specific regions if applicable to the claim
• Temporal controls - Configure expiry dates that match claim resolution timeframes
• Real-time authorisation - Enable transaction review and blocking capability for suspicious activity

These controls operate invisibly to legitimate policyholders whilst preventing common fraud tactics. A cardholder attempting to use funds at an inappropriate merchant receives a declined transaction. Someone trying to spend beyond the approved amount hits the configured limit. The card automatically expires if unused beyond the claim timeframe, preventing delayed fraudulent usage.

Each virtual card can be customised with the insurer's branding and logo, ensuring the payment method itself reinforces brand presence during a critical customer interaction. Rather than receiving generic bank transfers that sever the connection between insurer and policyholder during claims settlement, branded virtual cards maintain that relationship throughout the repair process. When a policyholder adds their branded claim card to their mobile wallet, they see their insurer's name and branding every time they use it, creating continuous engagement during a moment that significantly influences renewal decisions.

The Financial Conduct Authority expects firms to implement proportionate financial crime controls whilst delivering good customer outcomes. Virtual card technology achieves both requirements simultaneously. Controls operate in real-time without creating customer friction or processing delays. Legitimate claims proceed seamlessly whilst fraud attempts are blocked at the transaction level.

Perhaps most significantly, virtual cards enable a capability that bank transfers cannot replicate: delegated authorisation for real-time transaction intervention. When unusual spending patterns occur, claims handlers can review transactions in progress and make immediate blocking or approval decisions. This transforms fraud prevention from a retrospective investigation exercise into an active control process that operates at the moment of attempted misuse.

Prevention vs detection control matrix

The reconciliation fraud challenge

Manual reconciliation processes create a less-discussed fraud vulnerability that compounds detection difficulties. When claims teams match receipts to bank transfers across hundreds or thousands of monthly claims, administrative complexity introduces error opportunities and coverage gaps.

The process works like this. Bank transfers are issued based on approved claim amounts. Policyholders submit receipts days or weeks later for validation. Claims handlers manually match each receipt to its corresponding transfer, verify amounts align, check supplier details, and confirm expenditure matches claim purpose. This reconciliation happens in parallel with ongoing claims processing, creating workload pressure that affects thoroughness.

The administrative burden itself creates fraud opportunities. When claims handlers process high volumes under time pressure, thoroughness suffers. A motor claim receipt showing £1,850 for repairs gets matched to a £2,000 bank transfer. The £150 difference could represent an error, a partial refund that wasn't reported, or inflated original approval. Investigating every minor discrepancy is impractical. Setting thresholds for investigation creates gaps that fraud exploits through duplicate submissions, altered amounts, mismatched dates, supplier identity fraud, and strategic threshold gaming.

Staff capacity constraints worsen the problem. Claims operations typically experience volume fluctuations based on seasonal factors and weather events. When volumes spike, reconciliation backlogs develop. Receipts undergo cursory review rather than detailed validation. Error rates increase. Fraud detection rates decline proportionally.

Industry benchmarks suggest manual reconciliation costs UK insurers between £18-26 per claim when factoring handler time, error correction, and investigation expenses. For insurers processing 50,000 home and motor claims annually, this represents £900,000-£1.3 million in pure reconciliation costs before accounting for fraud losses.

How unique virtual card numbers eliminate reconciliation

Virtual cards with unique card numbers per claim eliminate manual reconciliation entirely. Each claim receives a distinct virtual card number (VCN). Transaction data flows directly from the card network, showing precisely what was purchased, where, when, and for how much. This data integrates automatically with claims management systems, removing the manual matching process.

The fraud prevention benefit operates at multiple levels:

• Authoritative data - Transaction information comes directly from payment networks, not policyholder-submitted receipts
• Real-time visibility - Spending patterns are visible immediately, not weeks later when receipts arrive
• Automatic alerts - Unusual transactions trigger immediate notifications rather than retrospective analysis
• Zero administrative burden - Claims handlers focus on genuine exceptions rather than routine matching
• Tamper-proof records - Transaction data cannot be altered or fabricated by policyholders

For a home emergency claim, this means claims teams know immediately whether the policyholder used funds at an approved contractor, what specific services were purchased, and whether the amount aligns with the approved estimate. No receipt submission required. No manual matching needed. No reconciliation delays. Fraud opportunities that rely on receipt manipulation or submission timing simply cease to exist.

"With unique identifiers for every transaction, virtual cards simplify reconciliation and auditing, cutting down on errors and boosting transparency.”

Rehana Mitha
Managing Director
Edenred Payment Solutions

Real-time intervention: The delegated authorisation advantage

Traditional bank transfers create a commitment point that cannot be reversed. Once funds leave the insurer's account, control transfers entirely to the recipient. Suspicious activity identified later becomes an investigation and recovery challenge, not a prevention opportunity.

Virtual cards with delegated authorisation transform fraud prevention from retrospective investigation to active intervention. When a policyholder attempts a transaction outside configured parameters, the system alerts claims handlers in real-time. Within seconds, handlers can review merchant details, contact the policyholder, and approve or decline the transaction. Suspicious activity becomes a conversation, not a recovery challenge.

Real-world intervention scenarios

Home emergency cost inflation

• Situation: £2,000 claim for boiler repairs, card restricted to plumbing suppliers and heating engineers
• Trigger: £1,200 attempted purchase at general building supplier
• Handler action: Quick call reveals policyholder purchasing materials for unrelated home improvements
• Outcome: Transaction declined, fraud prevented, boundaries clarified

Motor repair diversion

• Situation: £3,000 repair estimate, card restricted to automotive repair facilities
• Trigger: Transaction attempt at automotive parts retailer
• Handler action: Investigation reveals policyholder attempting DIY repairs rather than using approved garage
• Outcome: Transaction blocked, claim flagged, potential receipt fraud prevented before occurrence

The operational benefit extends beyond fraud prevention to team empowerment and efficiency. Dashboard access enables frontline claims handlers to create virtual cards and intervene on transactions without navigating multiple approval processes that slow traditional payment authorisation. This delegated authority shifts fraud intervention from specialist investigation teams operating weeks after payment to empowered claims handlers making real-time decisions with appropriate escalation protocols for complex situations. Investigation capacity focuses on sophisticated fraud schemes rather than routine validation. Claims operations become more efficient whilst fraud controls become more effective.

Importantly, delegated authorisation doesn't mean claims handlers become transaction gatekeepers for every payment. The vast majority of virtual card usage proceeds without intervention. Controls operate invisibly in the background. Only genuinely suspicious transactions trigger handler review.

Fraud prevention without friction: Balancing control and experience

“It’s not about making things harder for consumers. It’s about making them impossible for fraudsters.”
- Rich Logan (Client Solutions Director, Edenred Payment Solutions).

The traditional view holds that fraud prevention and customer experience exist in tension. Implement rigorous controls and claims processing slows, creating policyholder frustration. Process claims quickly and fraud controls weaken, increasing losses.

Virtual card technology rejects this assumption. Speed and control can coexist when prevention mechanisms operate at the infrastructure level rather than through process barriers. More significantly, modern payment methods can actually enhance customer experience whilst simultaneously strengthening security controls.

Traditional claims journey vs virtual card journey

Traditional bank transfer claims require upfront validation to prevent overpayment, creating potential for delays whilst quotes are gathered and transfers clear. Policyholders remain out of pocket, dealing with emergency stress whilst waiting for reimbursement. These delays exist specifically because bank transfers cannot be controlled once issued - validation must happen upfront.

Virtual cards eliminate this sequence. Claims handlers issue configured cards within minutes, immediately available via mobile wallet integration including Apple Pay. Policyholders pay contractors directly with no out-of-pocket period. Fraud controls operate invisibly through MCC restrictions, spending limits, and expiry dates - preventing inappropriate usage without creating delays.

Branded payments that strengthen customer relationships

Virtual cards offer a strategic advantage that extends beyond operational efficiency: the ability to maintain brand presence throughout claims settlement. Traditional bank transfers are anonymous transactions, creating a disconnect between the insurer and policyholder during the repair process. For insurers investing heavily in customer acquisition and retention, this represents a missed opportunity during one of the most significant customer interactions.

Customisable virtual cards display the insurer's branding and logo, appearing in the policyholder's mobile wallet alongside the insurer's name. This transforms a functional payment into a branded touchpoint that reinforces the insurer's role in delivering financial relief. When a policyholder uses their branded claim card at a repair centre, they're reminded that their insurer is actively supporting them through the process, not just processing paperwork in the background.

This brand continuity contributes to customer loyalty during moments that matter. Claims experiences significantly influence renewal decisions and recommendation likelihood. Research consistently shows that policyholders remember how insurers treat them during stressful situations far more vividly than annual premium interactions. A seamless, branded payment experience that delivers instant relief positions the insurer as modern and customer-focused, creating competitive differentiation in a market where claims service increasingly drives retention.

Building a prevention-first infrastructure

Moving from detection-focused fraud management to prevention-enabled claims settlement requires operational and technical considerations beyond simply adopting new payment technology. Virtual card adoption represents a practical digital transformation step that delivers immediate operational benefits without requiring wholesale systems replacement. This approach enables insurers to modernise critical claims settlement processes whilst preserving existing claims management infrastructure, accelerating digital maturity without the risk and disruption of comprehensive transformation programs.

Implementation approach

Most claims platforms integrate with virtual card systems through API connections, enabling automated card creation with spending parameters drawn directly from claim data. Configuration requires understanding typical claim patterns - home emergencies need plumbing and heating merchant restrictions, motor claims need body shop and parts supplier access. Finding the right parameter balance involves piloting different configurations and adjusting based on decline patterns and handler feedback.

Handler training represents a fundamental shift from post-payment validation to real-time intervention. Clear escalation protocols determine when handlers make independent decisions (clear parameter violations) versus consulting fraud specialists (complex patterns requiring broader analysis). Starting with specific claim types like home emergency repairs allows refinement before expanding across the full claims portfolio.

Unlike traditional card programs requiring individual card pre-funding that ties up capital across multiple balances, Edenred Payment Solutions' lean funding model centralises funds in a single account that all virtual cards draw from. This eliminates locked-up capital, removes the need to fund and collect from individual cards, and enables immediate card issuance without restructuring treasury operations.

Multi-dimensional return on investment

For UK insurers facing increasing fraud sophistication, regulatory pressure to process claims quickly, and customer expectations for seamless digital experiences, prevention-first payment infrastructure addresses multiple operational priorities simultaneously. Virtual cards represent an evolution in claims settlement technology that makes fraud control and customer experience complementary rather than competing objectives.

Final thoughts

Detection identifies losses after they occur. Prevention stops them before they happen. But perhaps most importantly, modern payment infrastructure transforms claims settlement from a cost centre into a competitive differentiator that influences customer retention.

Traditional fraud management operates through detection and investigation - capabilities that have improved significantly but act only after payment has occurred. Virtual cards with configurable spend parameters, merchant filtering, and real-time intervention create a prevention layer that stops fraud at the point of attempted misuse. This isn't about replacing fraud analytics. It's about adding the control mechanism those detection tools need to prevent fraud rather than merely identifying it.

For UK insurers processing thousands of claims monthly, the implications extend beyond fraud reduction. Claims processing accelerates without compromising validation. Customer experience improves through technology that delivers both security and speed. In a market where policy features and pricing converge, claims experience has emerged as critical differentiation. Policyholders remember how insurers treat them during stressful moments. Virtual card technology that delivers instant financial relief and seamless repair processes creates positive experiences that influence renewal decisions and generate recommendations.

The question facing claims directors is whether payment infrastructure represents a strategic tool for competitive advantage or simply a disbursement mechanism. As fraud techniques evolve and customer expectations increase, insurers need payment methods that prevent fraud whilst creating branded touchpoints that strengthen customer relationships. Virtual cards with embedded spend controls, real-time intervention, and customisable branding represent that evolution - transforming claims settlement from operational necessity into strategic asset that drives both fraud reduction and customer retention.

Discover more about how virtual cards can work for you

Discover how Edenred Payment Solutions enables prevention-first fraud controls in insurance claims settlement. Our virtual card solution gives UK insurers real-time spending visibility, configurable payment parameters, and instant intervention capabilities whilst accelerating claims processing speed.