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Written by Christopher Andrews
In July last year the ABI reported that the cost of undetected fraudulent general insurance claims was £1.9bn a year, up 24 per cent from £1.6bn two years previous. Christopher Andrews charts the rise and rise of fraudulent insurance claim activity
A claims investigator visits an independent convenience store; it has been robbed and the owner is looking to recover his loss through insurance. The store's record is perfect, having never made a claim on its insurance before. Upon arriving the investigator sees that the shelves are smashed and there is general dishevelment. The door has been forced, but oddly, notices the investigator, from the inside. Something here is odd. The owner is loath to turn over his CCTV tapes, but when he is finally compelled to they clearly show that he has carried out this fake robbery himself: cash strapped and business failing, it seemed the best option.
This is but one among the myriad of fraudulent claims presented to insurance companies, and in tough economic times these claims have been steadily rising. The investigator mentioned above is Will Gaskell, director of Robertson & Co, who says he's definitely seen an increase in fraudulent commercial claims on burglary or fire for small and medium companies. Motor insurance, home contents, credit, these have all seen recent rises as well, with travel insurance being the exception; people can't afford to go abroad.
Indeed, in the past 12 months investigation instructions from insurers to Gaskell's firm alone have increased in the region of 30 to 35 per cent, and more general figures would appear to bear out that we are riding the crest of a fraud wave.
Even a year ago, a survey by RSA found that 4.7 million Britons didn't believe making a false insurance claim was wrong, a million more than had believed this the year before. Fast forward through 2009 and this attitude seems to be becoming increasingly manifest.
In July last year the ABI reported that the cost of undetected fraudulent general insurance claims was £1.9bn a year, up 24 per cent from £1.6bn two years previous. There was £730m in fraud that had been detected and prevented, a 30 per cent increase on 2007.
And moving into 2010, in March LV reported that 57 per cent of solicitors had noticed an increase in the number of prospective clients faking their injuries in order to make a claim in the past ten years, with four in ten reporting a surge in spurious cases since the recession began.
Meanwhile Experian reported that general insurance fraud losses could reach £2.5bn during 2010 according to its estimates, saying that financially stressed consumers were increasingly claiming on home insurance to gain goods which they could no longer afford to replace.
A good, perhaps perceived as 'low level', example of this type of fraud would be the number of mobile phone claims that coincide with the release of a new phone. As Neil Daniel, counter fraud and investigation manager at GAB Robins says: "When Apple brings out a new iPhone, the figures almost double. And if you look at commercial claims we're dealing with, for example, there's no coincidence between the number of pubs closing down and the number going up in flames."
Daniel believes we are indeed in the midst of a surge of fraudulent claims. "I wouldn't say it's a peak, you can't tell. If the economy worsens it could increase further."
There are, of course, the organised fraudsters, most notably engaged in some high profile 'crash for cash' cases and similar. But, asks Tony Jones, client services director at TCF, are these cases recessional or simply a sign of the times? "The opportunist fraud that we're targeting is much more recessional, or can be seen to be, because you're looking at people who have to take out insurance, so motor for example. They're looking at their purse strings and their budgets, and looking to reduce spend, and one of the ways to do that is by reducing the money you spend on insurance at the outset, or actually using your insurance to fund other areas of your life."
Jones says he has seen increases in several areas, including so called fronting scams, listing an experienced driver as the main driver of a car to bring down premiums for the new driver who's actually driving it, or underinsuring home contents to save on those premiums. This isn't huge prison sentence stuff, but it is illegal, and costs everyone in the long-run.
"They view insurance as a way to get themselves out of financial difficulty. A common quote you see is 'I paid into it for years and now it's my turn to take out of it' treating it like a fund. Our job is to make sure the genuine people are paid and the fraudulent ones are stopped in their tracks."
What is the insurance industry to do? Well it comes down to identification, measurement and action, which may be easier said than done in some cases. A good starting point is to embed a fraud strategy as part of the institutionalised behaviour of an organisation. "So if you look at education, everyone from the office junior to the chief executive needs to be given some sort of fraud awareness training," says Bobby Gracey, vice president, global counter fraud solutions at Crawfords.
This doesn't mean that everyone should become Sherlock Holmes, he says, but rather it is giving people the awareness to flag up potential risks and pass these on to appropriate investigators.
There are also IT solutions to help here, using data matching and mining, particularly in the low value/high frequency environment where the industry can't afford the cost of detailed investigations.
"My concern with data mining is the number of false positives that these can produce," says Gracey. "While it's important to be committed to technology, it's also important to have the employed staff interpreting the red flags that those systems produce. Around 50 or 60 per cent of them will be false, so this isn't the silver bullet. It helps, but you still need the brains to interpret what the computer is saying."
There is also a great need for data sharing between insurance companies, which in past was a no-go zone, but things do seem to be improving. And with talk of a centralised database to bring all of this information together, despite privacy concerns, this will probably improve still.
"I think the biggest message for me is still that the insurance industry operates in silos, and the more we stand as one, the more success we're going to have," says Daniel. "You have people who make fraudulent creditor insurance claims. If they're making a claim in the creditor arena, they may well be making a claim in another arena, perhaps a commercial claim, or house insurance. These people don't stop at one arena if they are successful in a claim. Opportunities are there and they are boundless because there are so many insurance products out there.
"Fraudsters exploit the cracks in anything. And the more we can narrow them the less risk there is, the less exposure. That exchange of information is possible, and the ability to do that within the Data Protection Act is there."
Insurance companies need to be working together, adds Jones, feeding back the types of risk that they are experiencing, and working with underwriters to ensure their policies protect them in case of fraudulent activity.
"There are two key things," he says. "The industry is working together but we can always improve on that, and we need to raise public awareness that people committing these acts are actually costing individuals money."
Yes, this is not a victimless crime. The ABI survey, in fact, found that insurance fraud now adds, on average, an extra £44 a year to every household's general insurance costs. Added up across all the insurance products a person may own, this can equate to hundreds of pounds a year. The FSA is pushing the industry to improve on this figure, and perhaps greater public awareness can go some way towards helping.
Another area of concern, says Gracey, is the disconnect between the crime of fraud and the legislation to deal with it, whether that is police priority or court priority, in terms of what is done to people when they are caught.
"It's easy to commit insurance fraud, but similarly there's no real deterrent when you're caught, and that's a failure in the system, and we need to have a top down strategy," he says.
Daniel agrees: "There are the police, local authorities, trading standards, customs and excise, they are all very different, and it's a very slow response to applications for information where we've got evidence to suspect crime. And that slow response kills us. It gives the fraudster a weapon to beat us over the head."
Daniel says the key to putting a stop to fraudsters is speed and accuracy, with information exchanged as quickly as possible. Problems with certain police forces, he says, often makes this difficult.
"The police want to cooperate," counters Robertson & Co's Gaskell. "But they want industry to get its act together presenting completed cases to them. They don't want to spend investigation time, and they are expecting us to do the legwork. I have no qualms with that. I was a police officer and I have some sympathy with the police. They have a lot of problems to deal with."
So the insurance industry is going to have to keep its own house in order, ensuring fraud strategies are in place, red flags are being followed up, and hopefully, that information is being shared between them. While those fraud numbers are going up, we are in extraordinary times (and better investigation and reporting methods could explain some of the rise). Across the board, though, it is difficult to argue that there has been a lot of improvement.
"When I got into the industry back in 2000 it was only in isolated pockets in which collaboration and data sharing was happening," says Gaskell. "Now it is industry wide. We've got the IFB, looking at motor claims but it will extend into other areas, that's guaranteed. They're joining up the dots now which wasn't done before. "It's still got some way to go and the industry itself would be the first to acknowledge that, but it's making all the right steps, it's not just talk it's real action."