Is pet insurance fraud the new 'cash for crash'?

Pet insurance has become big business. For as little as £2 a month, policyholders can cover their furry loved-ones whose bills can be so expensive: treating a cat in an oxygen tank with steroid injections and an intravenous drip should they suffer from smoke inhalation, for example, can easily cost £120 a day.

This week Aviva committed itself to the pet insurance market when it announced it has begun underwriting its own policies. The latest available data from the Association of British Insurers (ABI) shows that gross written premiums for cats and dogs topped £500m for the first time in 2010. That was an increase of 20% since 2007, meaning that well over half of the UK’s estimated 8.3 million dogs are now covered in some form.

That year, of course, was when the credit crunch first struck. Its effects passed on to the real economy when Lehman Brothers collapsed in autumn 2008, after which some struggling Brits turned to duplicitous means to salvage their finances.

Sadly, this has seen a surge in pet insurance fraud that mirrors the “cash for crash” claims that have become so worryingly prevalent in motor claims. Deliberately maiming an animal to make a claim or even inventing a four-legged pal are not uncommon: dishonest pet claims is believed to be the fastest-growing area of insurance fraud, which has helped push about 10 major insurers out of the market in recent years.

The ABI only started collecting data on pet insurance fraud in 2009 and, while the sums involved are relatively small, given that false claims is a £2bn market, the increase is staggering. In 2010, pet insurance fraud cost nearly £2m, up from just £420,000 the year before.

The likelihood is that as the ABI starts improving the quality of this nascent information, the figure will be shown to be understating the problem.

An ABI spokeswoman says: “An important caveat around these numbers is that it takes time for insurers’ reporting systems to give a complete picture as they refine their definitions and recording methods, so the statistics will take a few years to stabilise and portray reliable trends.”

Not just for Christmas …

Certainly, the industry-funded Insurance Fraud Enforcement Department, based within the City of London Police, has found enough shocking instances of pet insurance fraud since it was set up at the start of the year to suggest that the problem is getting worse.

Earlier this summer, for example, it arrested a 30-year-old woman in Walsall for as many as 50 suspected frauds, which included a number of allegedly bogus pet claims.

The ABI will now run a dedicated session on pets at its fraud conference in September. Its spokeswoman says that the introduction of a Fraud Register later this year “will bring further pressure to bear” on those willing to cross to the wrong side of the law.

Such developments have not always calmed the nerves of insurers - some have pulled out of the market, while others have come close to doing so.
Lloyds TSB and Halifax have only recently reinstated its pet cover after public outcry and industry ombudsman criticism that this would leave 4,000 policyholders facing exorbitant bills when they cancelled their relatively cheap schemes last year.

Customers would not have been able to replace this with comprehensive cover for animals with pre-existing conditions elsewhere, as insurers typically do not take on pets with pre-existing long-term health problems.

There were reports of a four-year-old Rottweiler named Bertie who suffered from a rare condition known as eosinophilic gastroenteritis, which cost £6,000 a year to treat. Once the cover was due to be withdrawn, Bertie’s owner could not afford to pay that, leading to fears that he would have to be put down, despite being expected to live another six years.

Privately, Lloyds insiders told newspapers that the FSA had warned them that the situation was unacceptable, while numerous case studies did little for the reputation of the companies’ part-nationalised owner, Lloyds Banking Group.

Emotional ties

This example demonstrates the emotional element of pet insurance - something that does not exist to the same extent in other parts of the non-life market.

Heath Alexander-Bew, an associate director at Norwich-based Alan Boswell Insurance Brokers, explains that the group only has a “white label”, so is essentially outsourced. He says that the policy “isn’t promoted”, and is really just a link on the website to make sure that customers who buy their cover through the group can meet all their insurance needs in one go.

The company pulled back from pet insurance more than five years ago because disputes over payouts in this area can take on a more personal tone than usual, and therefore can be more damaging to a business’ relationship with its customers.

Alexander-Bew argues: “Sometimes people are more emotionally attached to things that are living and breathing. Sometimes insurers aren’t going to pay because the pet is, say, a year too old [for a particular treatment] under the terms of the policy, which can cause an unnecessary relationship problem with people who buy multiple policies. If you’ve got a client who is paying you £20,000, you don’t want to upset them.”

RSA brand More Than believes that it is the biggest insurer of cats and dogs in the UK, and product director Matt Poll claims that the pet sector has been “a real growth area for us over the last five years”.

He also insists that the group has not witnessed evidence of the deliberate harm to pets that have taken up so many column inches over the past couple of years.

Poll says: “We haven’t seen the extreme cases, but it is a strange world, pet insurance. We are seeing a slight increase in fraud in the last 18 months, so we’re keeping a watchful eye on that. I don’t think we fully understand the reasons yet, but pet insurance could be seen by some as a light touch.”

Certainly, as the country records a third consecutive quarter of negative economic growth, few insurers would expect the situation with pet insurance fraud to improve. This will, in turn, put pressure on premiums, meaning that peace of mind over man’s best friend, which once cost just a few pounds every month, might have to be sacrificed so people can make ends meet.