A changing attitude to a growing problem

Bogus and inflated insurance claims are a £1.6bn a year headache for the UK insurance industry, an alarmingly high figure which adds 5% to policyholder premiums.

With Britain in the early throes of what seems likely to be a prolonged and perhaps painful economic downturn, fraud levels are set to get even worse, unless insurers can find new ways to stay ahead of the game.

Given the somewhat gloomy outlook, it was no surprise that the Insurance Times Question Time debate on insurance fraud was fully subscribed, with more than 100 delegates – and even a national television station – in attendance.

From the discussions that took place, it was clear that while the industry had taken massive strides over the past five years in tackling both opportunistic and organised general insurance fraud, the current economic cycle, coupled with the rise of the unidentifiable internet policyholder, will provide ongoing challenges.

Will fraud levels increase as the economic environment deteriorates, and is the industry doing enough to tackle the problem?

Simon Chandler, a partner at law firm CMS Cameron McKenna, said that since last July/August it had become very difficult to commit mortgage fraud for profit, although many claims coming through dated from 2000 to July 2007, before the latest controls were introduced. “In a falling property market, manipulation of the value of a property sticks out like a sore thumb, whereas previously, in the rising market, if organised gangs marked up a property by 20%, 30% or 40%, it would often get overlooked,” he said.

“We have seen an increase in fraudulent applications by individuals desperate to remortgage, but on the organised side it has become much more difficult, and I think that this trend will continue for two to three years depending on how the market and economy moves generally.”

John Beadle, chairman of the Insurance Fraud Bureau and counter fraud manager at RSA, said one of the motivators of fraud was financial stress, and this had increased for individuals and for the corporate world in the present economic cycle. He said: “Insurers are wise to the increased risk, but certain parts of the market are more vulnerable than others. Organised fraud is not necessarily motivated by a downturn in the economy.”

Richard Davies, fraud risk manager at AXA UK, said general insurance was relatively mature. Controls were moving from predominantly manual, to being more and more automated. “We are developing a skills pool that is achieving professional qualifications, but too often fraud units sit outside the normal business units,” he said.

The rest of the market had some catching up to do. In healthcare, for example, there was the emergence of low cost products, many of which would be paid for in cash. “If I were looking to relieve a bit of financial stress at the moment, then I would be looking for a cash payment of one sort or another. So we have to consider how we can manage these risks proactively before products are rolled out for sale,” Davies added.

When times are good do we forget the lessons of the past? Is the general insurance market better than other sectors at fighting fraud?

Beadle recalled the previous mortgage fraud crisis, saying the current situation was not new and lessons should have been learned. He said discussions were taking place about how the mortgage industry could learn from collaboration and data sharing with, for instance, the IFB, and whether long term solutions could be put in place for the next boom.

Chandler said: “Lessons that were learned in the 1989/1991 crash and the guidance of the Law Society in particular – recognising the flags for mortgage fraud – are just as appropriate now as they were then.” But fraud now was becoming more web-based. Meanwhile, he said, there were more automated mortgage processing centres, and claims processing centres overseas, which raised the question of adequate identity checking. “Insurers have to target the high risk areas, and concentrate their countermeasures in these high risk areas,” he said.

“In a falling property market, manipulation of the value of a property sticks out like a sore thumb.

Simon Chandler, CMS Cameron McKenna

With more applications being completed online, how easy is it to verify customers at the application stage?

In the last economic downturn there weren’t the levels of web-based sales, and even that market had changed substantially in the past year or so with the advent of the aggregator, Beadle said, adding: “There is a higher propensity for fraud in online sales compared to the traditional routes to market. Insurers in general have recognised the increased risk, but it is going to get even scarier. By 2011, 80% of business will be virtual, so the ability to check someone out is going to get harder, not easier. We need to be more sophisticated in the methods we use.”

Peter ter Haar, director of products at Ordnance Survey, said it was important to be able to detect fraud both up front and in the analysis of claims. The importance of location-based information could not be stressed enough, he said. “It’s not a magic golden bullet, but it may help to reduce fraud by a few per cent.”

Beadle agreed there was a place for mapping technology.

Davies wanted a complete change in customers’ attitudes to having their identity verified. They would have to prove their identity on a regular basis to gain access to financial products. He said: “In the same way we have no problem with passing through airport security checks, low-level security checks – properly implemented in a way that is fair to the customer – will have to become accepted if we are to manage this properly.”

Are the police doing enough to help tackle insurance fraud?

Police priorities are determined by the budgets they are allocated, and by the policing policies of the Home Office, said CMS Cameron McKenna’s Chandler. “Financial crime is difficult and expensive to investigate, and police forces are going to get far more arrests and hit more targets for a limited budget by concentrating on street crime, or burglaries, or car crime, than by blowing a huge portion of their budget on the investigation of a complex financial fraud.” Even with all the evidence for a criminal prosecution, the response of the police was patchy. “It depends on who you go to, what resources they have available, their skill sets and their priorities at that time.”

Beadle pointed out that insurance fraud did not appear anywhere on the national police objectives, so it was easy to see why they were less than keen to tackle it. He added: “It is not unusual for an insurer to walk into a police station with an ill-prepared case, and then wonder why he gets turfed out the door very quickly.” He said the IFB had managed to add a real level of professionalism by gathering evidence and then going to the police with a well prepared package on behalf of the industry as a whole.

How can we address the scale of the problem?

Ter Haar believed some co-operation would help, because fraudsters were not trying to claim everything through the same company. It was important to look for patterns.

Davies thought the police had a role to play in the prosecution of the most serious offences, but insurers needed to do much more about public awareness. He said: “I don’t think we are pushing the message about the cost of fraud in the right way. I think we are boiling it down to a relatively low figure, £40 per policy, which for most people in the insurance-buying market isn’t a lot of money, but only makes sense when you multiply that figure by the number of policies that are out there.”

Beadle said the single biggest deterrent would be to exclude those people from obtaining insurance or other financial services in the future.

He went further: “You need to make it a reality that they are actually going to get detected, taken to court, receive a term of imprisonment, and be stripped of their ill-gotten gains. If you do that enough times then fraudsters would have to be thick not to get the message.”

“The industry needs to run a properly structured pilot exercise to establish that attitudes can be changed.

Richard Davies, AXA UK

Would increased data sharing help to combat insurance fraud?

Davies said more data sharing was a way forward, but the industry must bring the majority of the market along from day one for it to work. But Chandler thought one of the main barriers was competition – particularly in fraud cases where there was a limited asset pool to go after.

Davies said the solution had been demonstrated in the mortgage lending sector which has been plagued by ID theft.

Chandler agreed but pointed out the real problem. “They can run these mortgage processing centres, lend huge amounts of money and make a big profit, and when they have fraud perpetrated against them, sue the professionals who advised them on valuations and did the conveyancing and get 80% to 90% of their money back.

“What financial incentive is there for them to employ fraud managers or investigators at high cost? Why not just carry on and use the insurance industry as a whole as a safety net, which is what happened for 10 years in that particular sector?”

What is being done to change public perception towards the morality and acceptability of insurance fraud?

Davies said to change public attitude would cost not thousands of pounds, but millions. “The industry needs to run a properly structured pilot exercise to establish that attitudes can actually be changed. We need some marketing and some academic input rather than just assuming it is something we can do on our own as a sector.”

Beadle said publicity could have a positive effect, but the research should come first.

Chandler wanted more prosecutions and publicity for them.

Will the fraud landscape change in the next five years?

Chandler did not see any great change coming. “The market mechanisms and barriers will not fundamentally change. There will be growing sophistication of online fraud, and mixed patchy attempts to combat that, with some throwing more resources at it than others.”

Ter Haar thought the tools used to investigate insurance fraud would get smarter, and Beadle joked that he would probably still be doing the same job in five years’ time.

Davies could see fraud controls becoming a fundamental part of business controls. “We have done that at AXA and the results have increased exponentially. Also, I am very optimistic about the future of data sharing. Bogus and inflated insurance claims are a £1.6bn a year headache for the UK insurance industry, an alarmingly high figure which adds 5% to policyholder premiums.”