Financially stressed policyholders are a ‘moral hazard’ leading to increased claims

According to The 2020 UK workplace stress survey, produced by Perkbox, 60% of respondents experience monetary or financial stress.

The firm’s 2019 UK financial wellbeing survey, published in November 2019, concurred with these future findings, revealing that for 61% of respondents, money causes them the greatest stress; 27% of the 1,139 adults surveyed added that they experienced financial stress on a daily basis.

These money worries can act as a driver for increased claims activity, as Richard Tomlinson, managing director at insurance specific data enrichment company Percayso Inform, noted that policyholders undergoing financial stress are more likely to make a claim, thereby increasing overall claims volumes.

He said: “Financial stress is very linked to claim outcome and claim risk, either through fraud or exaggerating claims. The connection is obviously the higher the financial stress, the higher the claim risk.

“Some people don’t claim because they’ve got busy lives and they’re affluent enough – [they] can’t be bothered basically.

”Whereas if you’re financially stressed, you’re going to do the calculation and think ‘even if I get £50, £75 out of it, then I’ll do that’.

“It’s not just about hardcore fraud; there’s a lot of greys in between that.”

Patrick Hayward, consultant at Altus, agreed. He said: “From a risk perspective, there is an increase in the moral hazard presented by customers that are financially stressed.

“Ultimately, there is a greater chance that someone suffering financial difficulties will fabricate or exaggerate a claim where the opportunity arises.

”Proving this opportunistic fraud can be difficult, particularly where losses are exaggerated, as there is often a genuine loss and [an] insured event.”

In terms of the types of claims that could be affected here, Hayward added “it is reasonable to assume that claims with a link to the upkeep of property may increase, such as escape of water”.

He also thought that individuals who have lost their job may use legal expenses insurance (LEI) in order to pursue claims, such as unfair dismissal or unlawful deduction of wages, against their former employers.

Low value claims could also be an area of focus for policyholders who are counting every penny.

Hayward explained: “Across lines of business, there may be a perception that pursuing claims for low value items will be easier than for larger losses.

”This is broadly true, to an extent - for lower value claims where there is a suspicion of fraud, there is always a balance to be struck between the value of the claim and the level of effort, and therefore expense, to investigate and challenge the customers.

“Insurers may also adopt a strategy of settling lower value, simpler claims quickly and with reduced validation requirements; the thresholds for this may be raised when there are significant operational pressures – this could apply in surge events, [for example] if the coronavirus pandemic were to have a significant impact on staff sickness.

“For insurers, it is important to establish appropriate controls to reduce fraudulent activity, where there is a more light-touch approach to claims handling.”

Commercial insureds may also seek to commit fraud due to financial pressures, Hayward continued, but this will need to be carefully dealt with by insurers due to the recent negative industry reputation surrounding business interruption (BI) claims and associated pay outs.

Aside from fraud motivations driven by financial hardship, Hayward noted that financial stress could, in turn, lead to a decrease in claims across some lines of business, such as motor insurance.

“Looking at motor, for example, someone who is financially stressed due to unemployment may have a reduced mileage and [are] therefore less likely to be involved in an accident,” he explained.

“Claims with a large excess, such as subsidence, may be avoided by customers, although this could lead to more severe damage in the longer term.”

Data collection

In terms of how to measure financial stress, Tomlinson said tracking credit bureau information is a good start in order to see whether policyholders have started to miss payments on bills, credit card payments, their mortgage, mobile phone bills or car finance arrangements.

He added that Percayso Inform has also started to collate data from open banking too, providing “a whole other lens into your financial life”.

The key lies in monitoring these metrics for trends, analysing whether policyholders’ behaviour improves or deteriorates when it comes to missing payments.

“All of those key data metrics amalgamate into a financial stress score and if somebody’s missing many, many payments for month on month [across] lots of different areas, then they’re going to be very high up on that score,” he said.

Mitigating the risk

But how can insurers combat this potentially escalating claims trend?

For Tomlinson, the answer lies in “data enrichment from many different sources”.

For example, Tomlinson’s firm Percayso Inform derives its data enrichment product from sources such as public bureaus, as well as collating vehicle, household and geographical information centred around the policyholder.

This type of data enrichment is designed to provide a 360-degree view of the policyholder and helps determine what influences their behaviour, for example their propensity to claim or their likelihood of retention.

Hayward agreed that “the use of data enrichment from third party providers and [artificial intelligence] fraud solutions can provide insights on whether individuals are facing such difficulties and the fraud risk this may create in individual claims”.

Alongside this, however, Hayward said that being able to earmark and respond to financially stressed policyholders should form part of insurers’ and brokers’ vulnerable customers strategy – this ensures that front-line staff have the correct training and toolkit to identify customers who are financially stressed.

This approach needs to supported by technology “so that concerns around financial issues are captured once and automatically updated in other systems”.

”In large, complex organisations, it is all too easy for characteristics to be raised in one part of the business but missed elsewhere,” Hayward added.

He continued: “The key thing is for insurance businesses to have mechanisms in place to support customers that become vulnerable due to their financial circumstances, alongside internal best practice to support fair and consistent decision-making.

“Behavioural analytics and design can play a significant role in understanding fraudulent behaviours, and in developing claims processes to help guide those tempted to commit fraud to make better decisions.

“At a more direct level, insurers can potentially alleviate the pressure on customers, by offering payment holidays in some circumstances and by adjusting cover to fit changes to their circumstances without additional charges.”

Furthermore, Tomlinson warned against buying off-the-shelf products from data providers to help with these processes. “There’s a lot of generic models out there built for credit risk, not insurance claim risk,” he explained.

Covid-19 knock-on effect

Unfortunately, the ongoing Covid-19 pandemic has made financial stress and hardship a much more common conversation, as employees are furloughed or even made redundant in the aftermath of the national lockdown.

According to the Personal and economic wellbeing in Great Britain: June 2020 report, published by the Office for National Statistics (ONS), 12.5m people said their households have been financially affected by the impact of Covid-19.

This raises the question of a new type of vulnerable customer, one who is experiencing temporary financial difficulties as a result of the coronavirus crisis.

James Hillon, insurance director at KPMG, therefore predicts “a further rise in the number of vulnerable customers needing extra support from their insurers”.

He said: “In difficult economic times, the nature of risks faced by insurers can change and it is inevitable that we will see a significant impact on claims experience. It is also clear that, unfortunately, we’re not yet seeing the full impact of this.

“For now, financially stressed individuals and businesses are being supported by the Job Retention Scheme and various other necessary government measures.

”But, we anticipate that there will be a spike in job losses and business failures when those support systems are taken away and this is when we’ll likely see a further rise in the number of vulnerable customers needing extra support from their insurers.

“For the most part, the issue of identifying and supporting vulnerable customers revolves around the intelligent use of data.

”Insurers, like many other financial institutions, have data about their policyholders, and, used appropriately, this data can be combined to identify potentially vulnerable customers and indicate where intervention may be necessary.

“Over the next few months, regulatory attention may well turn to how insurers managed risks over this time and the support provided to vulnerable customers during the pandemic will feature heavily.

“Insurers should focus now on revisiting the decisions they initially made and assess whether they remain appropriate.

”The key finding from this will likely be that tailoring and prioritising support rather than a one-size-fits-all approach is more effective in the long run and whilst there’s no guarantees to this, data will be an invaluable part of this process.

“More needs to be done to recognise and protect financially stressed policyholders.”

Hayward added that the economic fallout from Covid-19 is a driver for opportunistic fraud, especially as many policyholders view insurance fraud as a “victimless crime”.

He said: “Insurers should be looking at the impact to customers right now, to determine what steps can be taken to reduce additional stress for customers that become vulnerable as a result of this.

“They need to be alive to the fact that opportunistic fraud is likely to increase with financially stressed customers.

”This is not helped by the fact that fraud committed against insurers continues to be seen as a victimless crime, despite robust efforts by the industry to educate people about this.

”By responding to the current pandemic in the right way, and improving the industry’s reputation where possible, this may go some way to discouraging this mindset.

“The reality is financial desperation will cause people to do things they would not otherwise consider and insurers will have to maintain and continuously evolve their fraud detection and prevention measures to protect innocent policyholders from this activity.”