In series: tackling the problem of fraud

It is a positive thing that insurance fraud is out in the open. This means insurers are now not only talking about their determination to tackle the problem, but are also taking on more in-house and external specialists and, certainly in areas like 'crash for cash', are seeing some high-profile successes. But is this shiny new exterior a true reflection of what is happening on the inside?

The reality is that insurers are still paying fraudulent claims — and are more likely to do this if they have scant evidence and it involves a relatively low amount. However, it is notable that there is a growing mood of zero tolerance, and that some are willing to invest money to beat even the pettiest fraudsters. This is an attitude that will be of benefit to the whole industry in the long term.

Allianz and Zurich are two insurers that have been willing to talk publicly about their war against fraudsters in all sectors, not just motor. Others have been more inclined to hang onto the coat tails of the Insurance Fraud Bureau, which within a few years has brought insurance fraud-busting into the mainstream — albeit within tight limits.

Investigative investment
Scott Clayton, fraud and investigations manager for Zurich, comments: "The IFB does a great job, but it is focused on motor and also has budget constraints. We are only really going to be able to tackle fraud if individual insurers take action too — and that means investing in people and time, where you need to conduct detailed investigations."

However, this may mean utilising staff on cases for many months and bringing in outside specialists. Mr Clayton points out Zurich will use undercover surveillance specialists where there is strong evidence of fraud and also employs a number of ex-police officers, who understand the information that serving officers require to bring prosecutions — and can help build relationships.

He adds he is opposed to writing off potentially fraudulent claims, even if they are low value, because it is counterproductive. "A small household claim that is suspicious may be made by someone who is then going to set up a £20 000 staged burglary. You need a lot of commitment — and that can also mean appealing court cases if you believe you are right. But, the work and investment do create tangible results — certainly our experience has been that fraud within our book has been coming down."

Allianz has also steadily recruited people to its fraud unit, including recently setting up a specialist team to focus on liability claims. But, Mihir Pandya, fraud manager for Allianz, says that while huge strides have been made, the industry still needs to become more effective: "Certainly fewer claims are being written off, but there needs to be a more transparent approach. Dealing with fraud is a part of customer service, but insurers tend to get caught up too often in Mexican stand-offs."

He explains that some shameless fraudsters will be intentionally persistent in trying to force the insurer to pay up on a blatantly fake claim. "They will try to deliberately waste time and wear down the claims handler. As an industry we need to be stronger and not just hope people will walk away. We need to be able to close cases better and stop the fraudsters dancing in the shadows."

In the high net worth arena, taking a forthright stance when it comes to fraud is arguably extremely difficult. Garry Simmons, associate director with Sterling Insurance, says obstacles include the fact HNW is built around the perception of a high quality and accommodating claims service — and another obstacle is often the nature of fraudsters themselves. "We believe that around 98% of our claimants are genuine, but just because you are dealing with outwardly wealthy individuals does not mean fraud does not exist — or that you should simply pay up."

He continues: "You are typically dealing with people who may be at managing director level and who understand insurance and contracts. They do not like being challenged, they are confident — even arrogant — negotiators and, for the inexperienced claims handler, can be extremely difficult to manage. Their frauds are also likely to be better planned."

Mr Simmons explains these customers may even have loss assessors and solicitors "on side" to contest an insurer's repudiation. Indeed, their very make-up means they will want to avoid backing down. "Our claims handlers have an average of 19 years' experience. This is no place for new starters. You also need the ability to gather strong evidence where possible, which we aim to present to the Serious Organised Crime Agency and the police. We recently liaised with other insurers to ensure that an individual who was insured with Sterling was convicted and received a 12-month prison sentence."

Market conscience
However, he believes some insurers are too concerned with "protecting their shareholders, rather than having more of a market conscience". By this he means they are paying up too quickly and, in particular, "doing deals and entering into compromise agreements with fraudsters, leaving them free to move on to the next HNW insurer and continue their fraudulent activity — which does the industry no favours."

Mr Simmons also argues HNW insurers should take great care before they provide cover in the first place: "Conducting intelligence checks can help prevent future problems. It's known that fraudsters often have links to organised crime such as drugs and money laundering. So, if there is no clear indication of how someone came by their wealth, they may not be a good risk."

He explains that Sterling has started talks with a number of insurers to explore setting up a HNW fraud forum: "We also want to discuss whether it is worth setting aside funding for the police, which would focus on support for claims that fall outside the remit of the IFB."

Lawyer Scott Bowers, head of the counter fraud unit at Browne Jacobson, believes the cost of each fraudulent claim has fallen in recent years and "now averages anything from £2000 up to £10 000." But, he points out investigations are costly and so insurers may feel obliged to write off claims from a commercial perspective: "While the industry is better educated in terms of managing risk, when it comes to deciding which cases to fight, many challenges remain."

He also supports better pre-policy validation: "Currently insurers are blindly insuring the fraudster, so if the industry is serious about cutting the overall cost of claims its needs to channel more of its resources and efforts towards eradicating risk at the earliest stage. The role of IT cannot be underestimated. Unfortunately, many of the databases out there have also been prone to providing false positives so there needs to be a much stronger focus on qualified intelligence.

"There needs to be a significant cultural shift within the industry towards combating fraud. We need to see a more collaborative relationship when it come sharing intelligence and resources between insurers as opposed to the silo mentality we see today."

Early intervention
However, Karen Mann, partner and head of counter fraud at solicitors Greenwoods, emphasises that insurers do not want to write off fraudulent claims, but can be hamstrung by lack of evidence. "It is for the insurer to prove fraud, although in civil claims the burden of proof is lower than in criminal proceedings — the balance of probabilities rather than beyond reasonable doubt. Moreover, courts have been highly critical of insurers that have alleged fraud but have been unable to prove it.

"The result is that insurers are cautious about contesting doubtful claims unless they are pretty sure of their ground. The process of identifying a fraudulent claim is a costly one. It requires detailed screening of each claim, which involves claims handlers being specifically trained and afforded more time to spend on each file. With tight deadlines and other files to handle, the pressure is on them to reach a decision quickly. The investigation process is lengthy and ongoing."

She adds: "Vital pieces of evidence, which can make or break a case where fraud is suspected, will commonly not be available until after formal disclosure has taken place, within the court proceedings. The knock-on effect of this is that in lower-value claims the cost/benefit equation may tip in favour of settling rather than fighting, which, ironically, tends to encourage more fraudulent claims."

In addition she says there can be cases where a claimant enters a 'no-win, no-fee' agreement for a fraudulent motor claim and takes out after-the-event cover. If the claim is defeated on fraud grounds, and the ATE insurer refuses indemnity, then the defendant insurer is left to enforce a judgement against a claimant who may be unable to pay costs and/or cannot be located. "Understandably this has dissuaded insurers from spending time and resource on defending these claims, only to obtain a pyrrhic victory."

It is not all doom, however, and Ms Mann says the judiciary is appearing more supportive, including in cases of exaggeration. "Some judges have even gone as far as awarding exemplary damages. These signs are encouraging for the insurer."

Meanwhile, Mark Jacobs, Jubilee Managing Agency's claims manager, points out that "while suspect claims should be investigated, the ability to achieve a cost-effective recovery in the case of a low-value, high-volume claim can be a real factor in determining whether it is written off or not".

He continues: "I do not think this is a matter of deterring insurers from taking action — it should not be a reason to not investigate and attempt a recovery. It is more about basic economics. In addition, it should also not deter insurers from preventing fraudulent claims being made at the outset."

Despite this, he says the industry is hardening its approach, with the sharing of information at the forefront of this. He believes the work of the Insurance Fraud Investigators' Group has been effective and says the industry is also engaging in other cross-sector fraud initiatives — as fraudsters frequently seek to elicit money from several industries — such as the Telecommunications UK Fraud Forum.

Mr Jacobs adds: "We have seen a measurable impact with claims being dropped simply by including the IFIG logo on our claims forms and referencing our use of fraud investigation services when speaking to prospective claimants. The role of social networking sites in fraud investigation is now extremely valuable, as is the more traditional phone interview techniques."

Broker benefits
There are also benefits for brokers — particularly those with delegated authority — in taking a tougher stance on fraud. Paul Priestley, claims operations manager at Hastings Direct, says: "Ensuring fraudulent claims are identified early on using specialist software with high-level search capabilities to flag cases, we can limit the number of claims that are not fraudulent going into the fraud teams. This enables us to focus our time on analysing our proven fraud cases carefully, especially as we have the ability to change fraud indicators to reflect current fraud trends.

"If you take the stance of it being cheaper to pay than investigate, it will not take long for fraudsters to work out it is best to hit the insurer with a smaller claim. Our systems and staff identified more than £7m of third-party and customer fraud last year. Relative to our growth, we are seeing a reduction in fraud as the message gets out."

And, Jon Bates, operations director for underwriting agency APC, which specialises in SME, comments: "Brokers are the agent for the insured, but our message is that we believe they need to assist insurers where they can." He explains APC does not adhere to the practice of writing off claims if they are below a certain size and adds that, in his view, insurers are bringing in more stringent fraud targets. "There's real progress and we are willing to pursue civil and criminal cases."

The fact that insurers are more bullish about tackling fraud is encouraging. However, the larger insurers will clearly have bigger teams of investigators at their disposal. So, does this give them a vastly superior advantage?

Potential outcomes
Simon Arundel, risk manager at Ecclesiastical, says: "The quality of the underwriting is more important than the size of the account. And the competence of handlers is more important than the headcount. Success against fraud and profitability are both a matter of properly evaluating the risk and understanding the potential outcomes from each decision taken. This needs to be in balance with the desire to satisfy customers' demands for a good experience and a competitive price. Size is the least consideration."

He adds that, as a matter of policy, Ecclesiastical will not be constrained by the economics of a claim when investigating potential fraud. "However, every handler will have regard to the probability that the investigation will lead to a meaningful outcome. This is a matter of judgement and keeping the investigation proportionate to the risk. Insurers do not make provisions for chasing lost causes and the hard reality is that justice is simply not served in every event because the process of investigating and litigating on some cases will recover nothing and have little or no impact on the offenders. This is principally a third-party claims problem and a symptom of a justice system that is being systematically abused."

Certainly, in years gone by, insurers won few friends when they stood up to fraudsters. Furthermore, the cost of investigations, through employing smart people in-house, or bringing in outside experts, is considerable. Therefore, there are always going to be some claims where there is plenty of doubt, but the payment is made.

Yet things are changing. Insurance fraud may never be as distasteful as MPs scamming expenses or even benefit fraud, but a hardening of attitudes, together with enhanced investigative tools and a commitment to tackling the problem is bringing results. For fraudsters, this is one market that is far less welcoming than it was in the past.