Fraud rates will rise as insurers automate their claims systems, a Harvard University expert has warned.

“Fraudsters like a system that pays quickly,” Kennedy School Professor of Practice of Public Management Malcolm Sparrow told a conference in Melbourne last week.

“They also like a system that is computerised, because it responds only to what has been programmed.”

He says fraudsters also appreciate the quick turnaround of claims, because it reduces the period in which they are exposed to detection.

“People who commit fraud are good at finding government websites and corporate schemes where online payments are being offered,” Professor Sparrow said.

“Criminals in jail sit at computers looking for sites to hit, then they work the target for a short period of time.”

They will keep hitting a site if the fraud is not being detected, he says.

After the US Internal Revenue Services (IRS) introduced electronic lodgement of tax returns, banks began offering loans against potential rebates. Professor Sparrow says that was when the fraudsters moved in.

They paid people to hand over their tax file numbers, then lodged returns and went to the banks for loans.

“People were offered $US500 ($484) for their details and the fraudsters went and got $US5000 ($4839) immediately from the banks.”

When Professor Sparrow was asked by the IRS to investigate returns, he found one in 25 was fraudulent, with 38.8% inflated.

“There was $US3 billion ($2.9 billion) going to outright fraud,” he said.

In another example, after the 2010 Gulf of Mexico oil spill “people were offering money to fishermen to sign forms saying the fraudster had worked in the industry so they could make a claim”.

Professor Sparrow says a return to manual processing is now impossible.

“But insurers will have to look at how they distinguish between the people making the genuine claims and those acting fraudulently.

“If a company is losing 20% of claims to fraud it has a problem… if it costs 10% more to process claims but it reduces the loss rate to 2%, that is money well spent.”