Counting the cost

Like it or not, downturns are a catalyst for a significant risk in insurance fraud, but are a insurance companies doing enough to tackle it? Helen Yates investigates

More needs to be done to reduce the incidence of claims fraud, the main cause for escalating motor insurance premiums. This is one of the findings of the UK Transport Select Committee, which published its report on the cost of motor cover in March. It recommended putting together a dedicated police force, paid for by insurers, to tackle the issue. With the Association of British Insurers (ABI) estimating insurance fraud adds an average of £44 to each household’s general insurance costs, is the industry doing enough to tackle the problem?

The impact of the tough economic climate and growing involvement of organised gangs has seen the incidence of fraud rise in recent years. But the insurance sector has not been sitting on its laurels. More collaborative efforts and pooling of data have taken place in the last five years alongside the use of new technology and specialist anti-fraud investigation teams. Claims staff are also being trained to better spot fraudulent claims and empowered to make tough decisions.

The industry is getting better at detecting and preventing fraud, thinks Malcolm Tarling,
a spokesman for the ABI. “Fraud is always going to be with us in some form or another – the industry’s approach is paying dividends and the fraud we’re detecting is at a higher proportion of the claims being made, so we’re making inroads.”

But the cost of insurance fraud is now estimated at £2.1bn a year, up from £860mn in 2000. And this is just an estimate. Other experts cite figures that are double or triple that amount. “We’re certainly not complacent and we recognise that fraud tends to move with the times,” says Tarling. “As soon as you crack down on one area of fraudulent activity your criminal is going to look for another weak spot. It’s a bit like an iceberg. We’re seeing more and more of the fraud above the surface but there’s always that unquantifiable amount that lies beneath it.”

There is a broad spectrum of insurance fraudsters ranging from an otherwise honest individual who is tempted to inflate a genuine claim, perhaps because times are hard, through to organised criminal gangs seeking to exploit the system. Of the former, there is plenty of anecdotal evidence to suggest that claims fraud is generally not considered to be a serious crime.

According to an RSA survey in 2009, at least 1.4 million people in the UK thought it was more acceptable to commit insurance fraud because of the economic downturn. It also found that 4.7 million Britons did not think it was wrong to lie on an insurance claim. In another survey, people admitted they saw committing insurance fraud as akin to stealing towels from a hotel.

Rightly or wrongly, many people see insurance fraud as a victimless crime. The financial crisis is unlikely to have helped, with insurance companies put in a similar category to banks, with their “fat cat” bosses and massive profits. “Previous ABI research has shown a perception among fraudsters that insurers don’t care about small frauds and that the industry makes billions of pounds of profits every year,” says Tarling. “Which actually it doesn’t – motor insurers haven’t made a profit since 1994 so the industry is certainly not awash with profits.”

While a serious issue, the public attitude is starting to change with people recognising fraudulent activity will inevitably lead to higher premiums. An individual’s ability to access other financial products is also threatened if they commit insurance fraud. Non-for-profit anti-fraud association CIFAS shares information across sectors including banking, credit cards, mail order, insurance and telecommunications.

The risk of prosecution is an even bigger deterrent – one that insurance companies are now using to fight back at the rising tide of organised crime. Motor insurance has witnessed the growing involvement of criminal gangs with staged accidents a signature of how these criminals operate. “There’s a view by the police that the organised gangs have turned their attention towards the insurance industry because they believe it to be an easier target,” says Will Gaskell, director at surveillance, claim validation and fraud investigation firm Robertson & Co.

“There are those whose alarm clock goes off in the morning because they’re going to commit crime,” he continues. “There are gangs which set up their own accident management companies and get others involved – lawyers and doctors – to add additional weight to their operation all with a view to ripping off you and me.”

In a typical scam, a vehicle’s brake lights are disabled and the driver will stop suddenly at
a roundabout, often causing the vehicle behind to crash into the back. When a claim is then made against the innocent party it typically involves several phantom whiplash victims and seemingly credible witnesses able to add credence to the accident. Lawyers and claims management firms have been known to be involved. Unravelling such a complex criminal web is beyond the means of a typical insurance firm.

The insurance industry’s growing concern over staged accidents prompted it to set up the Insurance Fraud Bureau (IFB) in 2006 with a view to better identifying, investigating and convicting the perpetrators of organised motor insurance crime. It works in partnership with police forces across the UK and shares intelligence with other counter-fraud groups.
Through the IFB the industry consolidates its claims data, using sophisticated technology to spot suspicious patterns in the datasets.

So far its work has resulted in 464 arrests and 99 convictions. “The insurance industry has made phenomenal strides in the last ten years,” says Gaskell. “I was in the police service and we were looking at the insurance industry back then and thinking how antiquated their systems were – they weren’t joined up, they weren’t talking to each other and they weren’t collating their data as the industry. Now they do.”

Gaskell is also part of the industry’s effort to take fraudsters to task. He is called in to investigate where the IFB or others suspect a claim may not be genuine. It is his task to then find the evidence that could lead to a conviction. “We do that through investigation,” he explains.

“In the main we employ ex-police officers and high grade insurance claims staff and we go out and look for evidence, interview people, take photographs, seize documents – do whatever we have to do and then report back to our clients.”

Power to the people

Claims professionals are another key weapon in the fight against fraud. At insurance giant AXA, a group of claims staff became some of the first in the industry to receive the new Accredited Counter Fraud Technician qualification. While the industry relies heavily on software to detect fraud, Richard Davies, group fraud risk manager at AXA UK thinks claims staff are a crucial component in chain.

“What the industry did from the early 1980s was deskill and automate processes and it did that for all the right reasons because it wanted to make sure customers were paid quickly and accurately,” he explains. “But what we lost along the way was the expertise to be able to detect fraud and financial crime and in the last five to seven years, all insurers invested heavily to restore that expertise to their firms. Across the industry we’re now detecting £840mn worth of fraud each year and the figure four years ago was half of that.”

“We use a variety of automated and semi-automated systems which will actually give us a pretty good idea whether or not a claim is suspicious, but fundamentally what we train our people to do is to use and trust their common sense,” continues Davies. “Because if something appears to be strange then often it is strange. So we ask them to apply their experience to the claim in front of them and if it just doesn’t add up that’s one of our key referral mechanisms.”

Part of that common sense is assessing which claims warrant further investigation. But claims fraud is not easy to prove and insurers need to be selective in order to best deploy their resources. Experience tells claims staff where they are most likely to find the evidence they need to corroborate their suspicions. “The training gives them the skills and expertise to plan the investigation that needs to be carried out quickly and efficiently so if we have a genuine customer in front of us, we can get to the answer as quickly as we can,” says Davies.

The challenge for insurance companies in the fight against fraud is to find a balance between tackling fraudsters and using their resources to provide a good experience for honest customers. It is also important to keep an open mind and to avoid making customers feel they are under suspicion. “Our starting point is that every claim is genuine and every customer who interacts with AXA is honest,” says Davies.

Whether the industry has gone far enough in its fight against fraud remains to be seen with organised crime a continuing concern. If the recommendations of the Transport Select Committee are endorsed by the industry it will mean a dedicated police force to hunt down the perpetrators of staged motor accidents.

But fraud is only part of the equation when it comes to rising motor premiums, argues the ABI. The UK’s compensation culture is also to blame, with rising whiplash claims a testament to the growing popularity of “no win, no fee” lawyers and a populous increasingly willing to sue for damages. With this adding £40 to the average motor policy, premiums are unlikely to go down even if the incidence of claims fraud does.

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