The war against insurance fraud is proving difficult to win, so could it be lost? | Wolters Kluwer Financial Services
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  • The war against insurance fraud is proving difficult to win, so could it be lost?

    By Martyn Oughton

    Published July 08, 2016

    The recent events surrounding the EU referendum in the UK have revealed one thing in particular, which is just how easy it can be to present a set of facts in different ways – especially when those facts are taken in isolation from the full details of the story.

    The current situation with regard to insurance fraud is another excellent example of how this can be done. One recent report has stated that the value of insurance fraud detected amounted to about £1.3 billion in 2014, whilst another report has put this figure closer to £2billion.

    Take a look at these two headlines which I have made up, and you will see what I mean. Here is the first one:

    Insurance fraud soars to new high as insurers pass failure to cope on to customers

    The level of insurance fraud in the UK has rocketed up to above the £1 billion mark, with the insurers’ representative body admitting to a steep rise over the last few years. This figure is despite various initiatives being taken to reduce fraud, but increasing amounts of fraud means higher premiums in future.

    And then here is the second one:

    Rise in figures shows insurance companies finding more cases of fraud, due to greater detection success

    Latest figures published on the amount of insurance fraud committed in the UK show a rise to approximately £1.3billion. Insurers are uncovering more and more instances, due to a continued crackdown by an industry determined to provide better value for its honest policyholders.

    As you can see, there is an obvious difference between the two headlines, presenting completely different pictures.

    The problem for a topic such as insurance fraud, is which headline do you believe? Do you believe the first one, that because the amount of detected fraud is increasing, that the problem is getting out of hand? Or do you believe the latter, that this is all part of the process of increasing fraud intelligence and detection?

    This is why the question has been asked in the headline of this article, “Is the battle against insurance fraud being won or lost?” This is a complicated subject and therefore not an easy question to answer. But it does deserve some scrutiny.

    The figures in detail

    The figures that I am referring to come from two sources. Firstly, back in 2015, the Association of British Insurers (ABI) published data suggesting that the value of detected frauds during 2014 equated to £1.32billion.

    Separately, a report commissioned by Axa has stated that an estimated one in three people have submitted such a claim. These claims are estimated to be worth about £2billion a year.

    In light of such headline-grabbing statistics, it would be easy to conclude that this is a problem now getting out of hand, but the problem with jumping to that conclusion is that insurance fraud is a complicated beast – and the devil is in the detail.

    Insurance fraud – an overview

    If you think that insurance fraud is a simple concept then think again. It takes many forms, but one of the ways that you can group them is like this:

    Claims fraud and application fraud.

    The former takes on a number of different forms, including falsifying or exaggerating claims to get a bigger payout, being economical with the truth when making claims, and falsifying or forging records to support a claim. The latter is more to do with false disclosures that are given to insurers when applications for insurance are made, in the hope of getting a lower premium or a higher level of cover.

    Individual fraud and organised fraud.

    Individual fraud covers fraudulent acts carried out by members of the public, quite often motivated by the belief that it is justified to try and get more money from an insurer – more on that later. Organised fraud is the type that gets carried out by criminal gangs; co-ordinated setups against members of the public, known as “crash for cash” schemes are a good example of this.

    Fraud exacerbated by third parties.

    This is a more recent development, but the rise in solicitors and claims management companies (CMCs) acting for individuals, particularly in case of personal injury claims, has led to instances where individuals are encouraged to exaggerate claims in the hope of obtaining a larger payout (and a bigger commission for the third party).

    General insurance and life insurance fraud.

    Whilst general insurance by far sees the highest number of instances of fraud, in terms of both number and value (understandable given the nature of the contracts), life insurance and pensions are not immune either. Fraud types include application fraud described earlier, particularly where individuals are applying for life or income protection cover. You also have takeover fraud where someone impersonating a policyholder manages to obtain details of policies and then registers him or herself as the policyholder, in order to withdraw the policy proceeds. Lastly, you have pension fraud, which is an increasing problem as more and more scams are being set up to encourage pension scheme members to transfer to bogus schemes in the hope of receiving an immediate benefit.

    There are therefore many sides to insurance fraud, and many ways in which it can be committed; which means that the industry has to have a significant degree of commitment to be able to fight fraud where it occurs and to take measures to prevent it.

    Prevention – the story so far

    This is the first point where it is hard to say that the war is definitely being lost. Contrary to what the first of my two fictitious headlines states, the insurance industry has already worked very hard to put in place measures to counter fraud. Firstly there is the Insurance Fraud Bureau, which is an organisation dedicated to the detection and prevention of fraud. Second you have the Insurance Fraud Enforcement Division (IFED) of the City of London Police, a unit dedicated to tracking down and catching insurance fraudsters. On top of this, there is also the Insurance Fraud Register, a database of all fraud occurrences and suspicions which the industry both contributes to and uses in order to identify cases of possible and actual fraud. Additionally there is the MyLicence initiative which is designed to share details of individual drivers’ history in order to reduce the potential for application fraud.

    The industry has support from other bodies too. The Financial Ombudsman Service (FOS) has demonstrated that where complaints are referred to them in cases where policyholders are suspected of committing fraud, they have not always found in favour of the policyholder. The FOS applies the basic principle that if a policyholder cannot demonstrate actions in utmost good faith, then they will find in favour of the insurer, supporting the belief that fraud was either committed or attempted.

    Also, the efforts of the Police in this area are coming to fruition. Between its inception in 2012 and the end of 2014, IFED had managed to arrest 1,000 people on suspicion of fraud – and that number keeps on climbing.

    This story is not over yet, however.

    The future

    Insurance fraud is still considered a serious issue. So much so that the government set up a special Insurance Fraud Taskforce during 2015, to look at ways that the issue can further be tackled. This was set up against a backdrop of the rising amount of fraud that was being detected, and an estimate that this was costing each household £50 a year in extra insurance costs.

    The Taskforce issued its final report in January 2016 and its findings consisted of a mixture of calls for the industry to, in effect, continue what it was already doing; but in addition, there were some new areas where efforts had to be directed.

    This investigation had revealed another nuance of insurance fraud that needs to be considered. Like other types of crime, it is not something that stands still. Criminals tend to move on to other areas where there is a crackdown on specific types of fraud, only to find new avenues of opportunity. This is what the Taskforce refers to as “following the money” and at the moment, the new money areas appear to be claims for whiplash injury arising from road traffic accidents, the rise in CMCs making exaggerated or fraudulent claims on behalf of their clients (often as a result of speculative or nuisance phone calls to generate leads), and claims for noise-induced hearing loss (NIHL).

    However, the industry has not been standing still and letting these areas of fraud grow. The Taskforce reports that whilst there has been a rise in the number of NIHL claims, the rejection rate has reached 85%, a measure which suggests to a certain extent that fraudulent activity is being contained.

    So what does the Taskforce want the industry to do? Some of the recommendations are for insurers to keep doing what they are already doing; to try and educate people on the reasons why fraud should not be committed, to continue to look for better ways to share data, to work together to share best practice and to crack down hard on fraudulent claims. But the most important improvement that the industry can make is to look more closely at ways it can identify and anticipate new and emerging areas of fraudulent activity and take proactive steps to prevent it. Also, the industry needs to highlight where legislative change is needed to make life more difficult for fraudsters. This is happening, for example, with whiplash claims, where changes to the law are being proposed to make it harder for claims for whiplash to be accepted, especially those which are submitted significantly later than when the incident took place.

    So, is the war won or lost?

    The simple answer is neither at the moment. But this is not a cop-out or sitting on the fence; it is a statement of fact. The root cause is not insurers and their failure to implement tough enough controls. It is not the fault of government for not passing tough enough laws. And it is not the fault of the Police for not catching enough criminals.

    The primary reason for the continuation of fraud is the continuance of insurance policyholders and organised gangs who both have one thing in mind – to commit a criminal act. For many years now, we have heard that insurance fraud is considered by many to be a victimless crime, and that it is justifiable to defraud an insurer because of the premiums they charge, or because they put up barriers which make it difficult for people to claim. Also, insurers as an industry are apparently not trusted and respected by the public, seen as using complicated terms to get out of paying claims so they can make more profits. Exaggerating claims is seen as a way as getting one’s own back on a greedy industry.

    This is a far from ideal situation. The Taskforce is right that the insurance industry needs to look at ways in which it can educate its customers and try and break down these barriers; in fact the level of conduct regulation for insurers is such that it will have already driven a number of improvements in this area. However, there needs to be an element of realism. As long as insurers need to make profits to satisfy their shareholders, they will need keep pricing their products according to the risks they are taking, and they will need to continue placing conditions and restrictions on the types of claim that can be made. If the public are still not satisfied, then the two sides may never be able to meet in the middle. On top of which, organised crime will always be attempted, no matter what the industry does.

    But against this backdrop, it is quite clear that insurers, government and law enforcers are not taking this issue lying down and are working very hard to uncover and prevent as many instances of fraud as they possibly can. The increase in numbers of declared fraud cases tell the story of an industry that is increasingly laying bare the activities of fraudsters. That does not mean the war is being won just yet – but if the industry keeps working as it is, that day may well come.

    About the author: Martyn Oughton is a financial services professional with over 20 years’ experience in the industry. He has been a compliance professional since 2007. In 2009, he became a Professional Member of the International Compliance Association (ICA), and has recently been an examiner for the ICA, marking exam papers and assignments for their UK and International Compliance, Anti-Money Laundering and Financial Crime Diplomas. A regular contributor to Wolters Kluwer Financial Services’ Compliance Resource Network, he also regularly writes for the ICA’s members’ journal “inCompliance”, and is also a freelance business-to-business copywriter and article writer.

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