It is no secret that insurance providers are losing large amounts of money to fraudulent claims. It is also widely acknowledged that fraud pushes up the cost of insurance cover, and has a damaging effect on the economy, costing the UK about GBP1.6 billion annually. However, if insurers needed reminding of the seriousness of this issue, it has recently been claimed that the defrauding of financial services providers is so widespread that the trading of class A narcotics is the only activity which generates more revenue illegally.
In recognition of the fact that this is a very serious and costly issue, the Insurance Times organized a conference on November 6, 2006, to provide an open forum for debate over what can be done to counter insurance fraud. However, it quickly became apparent that insurers face a real battle if they are going to be successful at fighting fraud in their industry.
The most obvious problem is that the police are largely unable to offer any help to insurers. The one police force in the country that has a dedicated fraud team has 150 detectives investigating an average of 350 cases at any one time. Understandably, the message being sent to the insurance industry is that it has to deal with fraud itself. However, as is to be expected, views differ over how insurers should protect themselves against fraud, and reprimand those who try to commit it against them.
One suggested approach has been the creation of a database to allow insurers to share data on fraudsters across the industry. There are obvious benefits to this – if prolific fraudsters could be identified and excluded from the industry, insurers would have a way of reprimanding them and saving money.
However, while this approach sounds practical, the reality is that setting up a system like this presents huge problems. In particular, the issue of who to include is particularly difficult. For example, insurers sometimes find that claimants genuinely believe that they were acting lawfully, and this creates a dilemma over whether or not they deserve to have any further action taken against them if their claim has been thrown out. Even including people who have been criminally convicted of fraud is arguably prejudiced, as it assumes that they have not been reformed by the criminal process.
On top of this, there are concerns over cost (an estimated GBP28 million), data protection, and reliability. If you were to construct a fraud database, you would need to be confident that everything on it was correct, which is difficult when dealing with people who have not been proven guilty in court. Even if you are sure that they belong there, experience teaches insurers and the police that many fraudsters use false names, so whoever you included, you might find that the data was unreliable.
As a result of this, the Association of British Insurers (ABI) and leading figures in the industry have increasingly gone off the idea of constructing any sort of cross-market database, and instead, in 2006, they settled upon the idea of establishing the Insurance Fraud Bureau (IFB) as an alternative. The IFB has only been going for 11 weeks, but in that time it has spent quite heavily on analytics, and is focusing on serious and organized crime in the major markets – motor and household.
The only trouble with this is that serious and organized fraud only accounts for around 10% of cases, with small opportunistic fraud accounting for the vast majority of losses. As a result, it is still going to be up to individual insurers to manage the majority of their insurance fraud. In response to this, some are asking whether it might help to try a more broad-brush approach. The main idea here is to try and ‘prevent’ fraud by changing the public’s attitude to insurance, and appealing for their co-operation. However, this seems a long way off, and the ABI is reluctant to try this method at present, as it is feared that it could just make people more conscious of the possibility of committing insurance fraud, and encourage them to go out and try it.
Going forward, there is an ever-increasing range of technological aides to assist insurers in identifying suspicious claims, but, ultimately, these can only act as guides, highlighting potential frauds and flagging them up for claims staff to look at. In a sense, therefore, little has changed and the only way for insurers to reduce their losses is to have staff conduct cognitive interviews with claimants, and look for inconsistencies in their stories.
Nonetheless, the general feeling among members of the panel at the conference was that significant progress is being made. Over the last couple of years, as providers have focused on reducing leakage from fraud, detected cases have roughly doubled annually. Substantial savings are being made, and it is hoped that this will continue into 2007.
