Thursday, November 29, 2007

Real-Time Fraud Detection

Analytics vs. CEP

Alan Lundberg (TIBCO) notes the growing use of Complex Event Processing within the insurance industry, but is surprised not to find examples of CEP in real-time fraud detection.

Fraud detection is often quoted by CEP vendors (including BEA, Progress and TIBCO itself) as one of the obvious applications of CEP. Although according to CEP evangelist Tim Bass, risk management experts in the banking sector remain sceptical about the benefits of CEP.

Nevertheless, there do seem to be some interesting examples of CEP for real-time fraud detection, in the financial markets and in retail.
  • FSA sharpens up Sabre II fraud-detection system. The Financial Services Authority (FSA) is updating its fraud-detection system with complex event processing (CEP) software to monitor transactions and detect insider trading and other market abuses as they occur. [Computer Weekly, June 22nd 2007] [Apama blog]
  • CEP is also being promoted within retail systems, to protect against card fraud [SeeWhy]. Indeed, long before CEP became fashionable, Microsoft had an example of real-time fraud detection at Marks and Spencer, which I mentioned in my June 2003 article for CBDI on Service-Oriented Business Intelligence.

Fraud Detection in Insurance?


So why not insurance? I can think of several possible explanations for this.

Firstly, insurance is not a particularly real-time business, and fraud detection within insurance does not need to be a real-time process. The insurance company generally takes the customer's money first, and then asks lots of questions before it pays any money back. If some elapsed time is needed to detect and investigate fraud, this may not be as critical in the insurance sector as it is in some other sectors.

Secondly the identification of fraud in the insurance may be a matter of interpretation (semantics). Insurance experts worry about various types of moral hazard, and look for ways to reduce overall liability.

Thirdly, insurance companies may wish to be secretive about how they define and detect fraud, to avoid giving ammunition to those they regard as potentially hostile.

Future opportunities for CEP in insurance

In the longer term, these explanations may well go away, as the insurance industry becomes more agile, open and collaborative. I think there are some really interesting opportunities for collaborative CEP in particular, but these will require a lot of work on the shared semantics and pragmatics of events.

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