With technological advances arguably making insurers more susceptible to fraud at the underwriting stage, should validation techniques be learned from banks? Amy Ellis examines the issue of fraud at the front end.
In May this year, Groupama's former counter-fraud manager Stephen Teeling wrote an impassioned comment article in Post insisting that the insurance industry needs to be more alive to the problem of identity fraud at the underwriting stage, with the 'distance' created by communications technology making such fraud much easier to perpetrate when applying for insurance.
Mr Teeling pointed out that criminals, as well as otherwise honest people, have long seen insurance as an easy target and that matters have not been helped by the way in which insurers and brokers communicate with customers through the telephone and the internet.
John Freeman, counter-fraud director at Questgates, highlights that the UK's fraud prevention service, CIFAS, says that 50 000 victims of impersonation fraud have already been reported by its member customers in the first half of 2010. "Application fraud and identity fraud continue to be a principle vehicle for modern day fraudsters and it is naive to think insurance should experience anything different to the rest of the financial services market," he says.
"The difficulty, particularly if you look at motor, is that we seem to have moved into an environment where cover is instant, and this is demanded by the public. In the insurance world it is a matter of wanting to insure your car now, going onto one of the aggregator sites and within 15 minutes having cover. I am not sure whether we have created that demand, or whether the public has created that, but now we have got it, I suspect that the public wants it."
In his article, Mr Teeling suggests that — to stop matters deteriorating further — the industry needs to pursue improvements and argues that insurers should follow banks when it comes to validation techniques. However, Mr Freeman believes it is that instant demand that separates insurance from the banking industry.
Commitment for life
Peter Oakes, head of fraud at Hill Dickinson, agrees: "When you take out a bank account it is, in many cases, a commitment for life. Customers appreciate the ease and the convenience with which you can take out an insurance policy on the internet or on the telephone. The commercial reality is that it is better to take on a few fraudsters, while recognising that is not ideal, to make sure that you get all the legitimate people coming through, rather than putting obstacles in their path."
Bobby Gracey, vice president of counter-fraud solutions at Crawford, agrees that there is a spectrum of strategies towards fraud in every business: "One will be a strategy of zero tolerance and at the other end of the spectrum it will be about the cost to the business and, therefore, a tolerance to fraud."
He believes the industry itself has created a lot of the problems that Mr Teeling spoke about in his article. "For example, one of the main tools in the industry, the Claims & Underwriting Exchange, appears to have completely lost the second word. It is used as a claims tool, where it was designed as a preventative front-end deterrent. The industry would have appeared to, whether rightly or wrongly, encouraged fraudsters to enter the book and leave it to identifying them at the claims stage."
Mr Gracey adds that the companies that are nearing zero tolerance to financial crime and fraud, will very much be looking towards technology as a preventative tool.
Tony Pinch, business development manager at the Callcredit Information Group, says that in trials it has carried out with major insurers, results have shown that the average claim value of a customer whose application details are not verified is six times higher than a customer with verified details. "This highlights just how much an insurer can benefit from carrying out these checks at the underwriting stage, before determining whether to provide the requested cover," he says.
Mr Pinch adds: "In such a competitive market it is understandable that insurers are cautious about introducing new processes that could impact on customer services, but verification tools can be seamlessly integrated into an insurer's system to prevent any extra administration or application delays. Many industry-leading companies across a wide range of sectors rely on these tools to reduce the risk of fraud, without suffering any negative side effects. Not only that, a significant reduction in fraudulent activity could, ultimately, lead to lower premiums for customers in the long term and a positive impact on the overall loss ratios."
Graham Knight, fraud manager at Allianz, adds that its activity has historically been around post inception, using various tools to analyse business and identify potential fraud for investigation once it is on the books: "But with the advances in technology and the high number of data sources, that is something we can now look more closely at during the underwriting stage, prior to business being taken on."
He stresses that this does not mean that the industry can completely dispense with people: "There are certain tools that people hold in terms of picking up on subtle hints that you could not build into any solution. It is important to emphasise that the people side of things is still very important."
Mr Knight adds that as well as a technological approach, there also has to be an education about managing expectations. "The customers' expectation has been for speed and a straight through process, but what is ascertained and achieved in that process by the insurer is key to whether it can accurately assess the risk. If customers realise that, given a bit of additional information, the risk can be assessed properly, we may find that we are able to process more accurately and in return bring down the premium."
Kate Carr, assistant director of markets and regulation at the Association of British Insurers, agrees that consumer education is very important and that insurers need to recognise that more work is needed to raise awareness of what constitutes fraud, the likelihood of getting caught, and the impact of a fraud conviction.
While Mr Freeman explains: "If you look at the credit card arena, they are advertised on the television with an emphasis on the extra services that it will provide is to protect you against fraudsters. The public needs to know that if you choose a certain insurer, the controls might be a bit tougher, but that you will actually benefit. Companies have been reluctant in the past with associating themselves with the word 'fraud', but I don't think that is so much the case now, times are changing."
Mr Gracey agrees: "There is a denial in the industry — no one wants to admit that they have a fraud problem. There is a stigma that then suggests that you have poor underwriting rules and poor claims trigger and ineffective screening."
He adds that he would like to see the Insurance Fraud Bureau evolve in relation to detecting fraud at the underwriting stage. "It needs industry sponsorship to help tackle some of these issues. We shouldn't lose sight of the fact that operationally the IFB is only targeting the staged accident element of motor and that is only one of a hundred things that we need to do as an industry. I am hoping as the IFB evolves that it will gain the wider industry support that it deserves so that we can start to tackle the issue purely in a non competitive fashion, because in my view the sector is still highly competitive although it is an industry wide issue."
Mr Freeman supports this: "No one insurance company could do this on its own, it is going to have to be an across-the-board co-ordinated approach. As soon as one insurance company does something and the others don't follow, it will be competitive pressure that gets in the way."
Glenn Marr, director at the IFB, agrees that its model is claims-centric, but he also recognises that it has the potential to do more, subject to the appetite of the industry. "The IFB is well positioned to develop itself into a more all-encompassing model to help combat fraud and that could include dealing with it at the front of the insurance life cycle," he says.
However, Mr Marr considers that one of the challenges would be to look at how the industry captures its data. "I am not sure that anyone has a hand on how much identity fraud is affecting the insurance sector," he worries. "The industry would need to agree on how it captures this data at the front end and whether it wants to extend into validating identities, for example, in a similar way to the banks. This would be quite a large change for part of the insurance sector, especially if you are online. It is not unachievable, but it would probably need a fee change in the way that insurance is distributed."
Ms Carr reinforces that prevention is always preferable to detection. "The ABI has established a task force reporting directly to chief executives of member firms to consider how we can identify more fraudsters at application stage. Improved data sharing — both within the industry and with other sectors — is key, and we are currently exploring a number of options to facilitate this. In particular, we're keen to increase the amount of data we can validate externally. The more information insurers can get from other sources, the harder it will be for fraudsters to provide false details, and the quicker and easier the insurance-buying process will be for honest consumers," she explains.
Mark Bates, CEO of RDT, says that it would welcome the creation of an industry populated centralised fraud database, which would enable it to support insurers further. "The market has made marked progress in fraud detection and we recognise in parallel the move towards increased emphasis on fraud prevention at point of sale. A growing number of our insurer clients are requesting the facility for checking external data sources as part of their specified product definition."
Nikki Grieve-Top, investigative psychologist and claims psychology director at Crawford & Company, believes that delving into the psyche of customers could link up to technological solutions to provide an alternative answer. "There is a fair bit of literature that suggests if you administer a written deterrent at the point where somebody has the opportunity to start to commit a crime, that has a substantial impact on reducing claims fraud later. So, for example, when I take out a policy, if in among all my documents I receive something in writing that told me what my new insurers response to fraud is, that could work," she says.
Ms Grieve-Top adds that this concept could translate online: "A pop-up could tell the customer that the insurer will carry out checks to validate their identity and if it finds out that they are not who they say they are, it will take certain actions. There are numerous studies to suggest that the threat of penalty has much more effect than the actual penalty itself. As an industry we are missing a trick. We are very soft on our potential policyholders because we want their business, but if they are not legitimate policyholders and they are taking the policy out with the sole intention of committing claims fraud, do we really want them anyway?"
Steve Barkhuizen, financial crime manager at MMA, says that a pop-up would deter some fraudsters but not all. "What you really need is a pop-up when somebody has made a change to their information online, such as their no claims bonus or date of birth three times, then you would definitely know that the insurer knows that you have been manipulating the information."
There are several options and approaches available to insurers to tackle this problem but as Ms Grieve-Top concludes, if there is going to be a real solution to identity fraud it has to be all encompassing. "No one aspect will solve the problem. You have got to have the technology and you have got to have the data within the technology to feed off of. You have got to have your own staff educated, access to the right claims and the right sort of claims to get the right results. You have got to have good field investigative staff and surveillance, and you have got to have the whole tool box made available to you."
Fraud 2010 will be taking place on 30 September 2010 in London, to register your attendance visit www.postevents.co.uk/fraud
Nick Mothershaw, director of fraud and identity solutions at Experian, will be discussing how insurers can best work with the credit industry.
Combating identity fraud
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