Property - Playing detective

In direct correlation to the worsening economy, insurers, adjusters and fraud specialists have been preparing for an onslaught of spurious property claims.

Received wisdom tells us all that as jobs and household incomes fall away, the likelihood of insurance fraud rises commensurately. This assumption seemed to be confirmed at Post Magazine's Claims Club meeting in December 2008 when Scott Clayton, claims fraud investigation manager at Zurich, said the insurer had identified a 28% increase in suspicious property claims that year and that this had saved it £6m. "This is a very real problem for us," said Mr Clayton. "We can now definitely say we are experiencing a credit crunch rise in referrals."

So, is this case representative of the wider industry? And what issues lie behind these conclusions? Bobby Gracey, vice president of global counter fraud solutions at Crawford and Company, believes it is. "In the past 12 months, we've seen an increase in our property personal lines fraud cases by up to 21% in certain sectors, and a 15% increase in commercial fraud in the year to 2008," he says. "Obviously, it's very difficult to be 100% certain whether that increase in frequency is directly attributable to economic factors, but it does point to it. It's not as though we've had any additional marketing or sales campaigns at our end. There's been an additional level of work being identified by insurers that requires investigation."

Mr Gracey adds: "The accidental damage peril for some insurers has increased by up to 35% in terms of claims frequency. In particular, claims for LCD TVs and laptops, paint spillages to carpets and so on; these are off the scale in relation to where they were 12 months ago. I can only assume that it's easier currently to intimate an insurance claim than it is to find the funding to visit the retailer and buy the product. The public perception is that it is still easy money."

A crime of opportunity

Rebecca Hills, claims adjudicator at Absolute Fraud Management, believes it has become an acceptable and cheap way to upgrade home furnishings. "This applies for electrical goods and hi-tech gadgetry, too," she says. "This is now exacerbated by the pace of change in today's consumerist world - be that design fads, styles or product improvements. More and more policyholders are therefore tempted to replace or upgrade their home and belongings by making up or exaggerating a claim."

Phillip Bird, director of claims at Groupama, says it is hard to discern a pattern and that opportunism still comprises the majority of household claims fraud seen by the insurer. However, he adds: "One area of interest is in the buy-to-let market, where owners have claimed for damage caused by tenants, but after we have carried out identity checks we often find out the tenant doesn't exist."

Damian Ward, head of the anti-fraud division at law firm Halliwells, says the next level up from such opportunists are household fraud 'rings'. "This is where empty properties are insured and multiple claims are made for alleged losses," he says. "It takes heat away from motor fraud, and these claims may succeed more easily. Without the need to involve solicitors or medical experts and with less evidence to challenge, such as vehicle damage, they are also generally paid much quicker."

Following storm surge events, insurers have complained of a rise in fraud with the finger of blame often pointed elsewhere than at the policyholder. Mr Gracey explains that, in relative terms, 2008 was a benign year for extreme weather-related claims, but by opening the floodgates insurers are their own worst enemies.

"With any form of catastrophe, an opportunity arises - and the industry tends to present it as one. For example, in a storm claim all normal terms and rules of engagement in the claims department will be abandoned because of the surge. Rather than more attention to detail, the barrier is raised and insurers will say, 'During this busy period, we'll increase the authorisation without visit to £10,000'." Mr Gracey believes this leaves the way clear for contracters to put bills in at £9999. "The way the industry behaves creates the opportunities," he says.

Panic stations

Anna Fleming, property claims director at Zurich, refutes this: "In a real surge situation, like the 2007 floods, when you have a full year's worth of claims in three weeks, then all bets are off. If it was a small-scale surge, like the thaw after the recent freeze when we had a rise in burst pipe claims, I don't think it's fair to say we stopped our focus on fraud in those situations."

Jonathan Davison, strategic development director at the British Damage Management Association, argues: "There is no doubt that fraud is a factor in the property claims sector, however the BDMA does not understand fraud to be as widespread as many would believe. There are contractors and customers who will, for example, consider a flooded property an ideal opportunity to extend scope of works, and such activities are seen to become more evident in times of surge, where manpower within the wider supply chain is stretched and normal control protocols are relaxed."

Mr Davison says in order to reverse these trends there is a need for insurers and adjusters to more fully understand the complexities of damage management: "They must acquire greater awareness of the technical parameters that should be applied by professional recovery and restoration contractors. This allows them to tackle the grey areas relating to scope, which can be breeding grounds for fraud, whether opportunistic or planned."

For its part, the insurance industry has gained considerable PR mileage from its battle to reduce fraud over the past few years. Allan Clare, head of financial crime at Direct Line, says: "The insurance industry is much better placed now to detect fraud than it was during the last financial downturn in the 1990s. We have invested heavily in people and technology and our relationships with other insurers and industry bodies, such as the Insurance Fraud Investigators Group, means we can share intelligence and develop unified strategies to fight fraud.

It is understood Direct Line's figures compare favourably with those quoted by Mr Clayton at Zurich, although, Mr Clare would not divulge details. "To date, we have not seen an increase in fraudulent claims as a direct result of the credit crunch. We are fully prepared for any increase in fraudulent activity," he says.

An insurer that has gained plaudits and awards for its approach to claims handling is Groupama. Mr Bird explains that its policy of using experienced handlers at first notification of loss helps spot inconsistencies and that this year these teams will take on further anti-fraud responsibilities. "That has been very powerful on an individual claim basis," he says. "Our anti-fraud capability is about the combination of experienced front-end handlers and sophisticated tools like the Hunter database through which every claim is run."

Groupama has now made the decision to up-skill its claims handlers this year in an effort to bring its anti-fraud efforts in-house. "Cognitive interviewing is a set of personal skills and we are fans of this rather than the technology alone that tests voice stress. We will be training our people much more extensively this year to master cognitive interviewing, which we've outsourced to date. One benefit is that claims skills are core to insurers, so we have more control and there is a cost benefit as well."

Shoddy maintenance

While insurers' attention may have been diverted towards a concerted effort in the fight against fraud, it is clear that non-fraudulent claims trends could also be hitting the bottom line. This April, Post's Property Claims Conference will discuss property fraud trends, but not in isolation. As a variety of experts will attest, it should be seen as just one of many targets to be concerned with.

According to Andrew Dear, midlands regional manager at loss adjusters MYI, property claims have been rising generally for all perils and the old ones seem to be making something of a comeback. "Fires will always be there, but burst pipes claims are growing in prevalence. I did some research 18 months ago because a lot of insurers were telling me these were on the rise," he says.

Mr Dear explains that 10 years ago, 3 to 5% of claims would be a result of burst pipes, but this has, in some cases, risen to 50%. "There didn't seem to be any logic to it, unless it's come to a situation where pipes are just getting old and in homes built since the 1950s the pipework is coming to the end of its natural lifespan. These weren't bad weather-related claims alone - although there was a surge over winter when we had a cold snap - the pipes I'm talking about were just breaking down."

Depending on where the burst occurs, claims for a typical four-bedroom, semi-detached house can come in at up to £40,000 for the damage and £10,000-plus for the contents. "I've always said throughout my career that a bad claim like this is far worse than a serious fire," says Mr Dear. "It causes more devastation and takes much longer to rectify."

Martin Singleton, technical manager in the property underwriting department at Norwich Union, says that burst pipe claims are a growing trend that his business has been forced to recognise. He also believes they are affecting both household and commercial. "Escape of water claims are starting to impact on commercial premises. Such claims can be for a couple of reasons: modern methods of plumbing mean that pipes are no longer being welded; instead they use plastic piping pushed together. I've been told that they are tested at 'x' amount of pressure and bursts won't happen, but we think it is a problem because while this plumbing may be OK in houses at typical mains water pressure, when you have a large premises where water is pumped around the system at high pressure, we have seen some losses caused by a shock to the system that has broken these pipes apart."

Mr Dear adds: "It comes down to maintenance issues. A lot of factory claims we've seen show how the pinch is being felt by businesses, and has been for several years. Routine maintenance has been one of the first things to be cut back and, therefore, more fires have started through this lack of attention to maintenance."

This can manifest itself in a variety of ways, he argues, such as cleaning duties not being carried out or oil deposits and chemicals from production processes building up on work surfaces. "Once these ignite, they can spread a fire much more quickly. There is also the potential for equipment and machinery to be looked after less, and these things are all in the melting pot of either causing incidents or resulting in greater damage when they do start. Every single claim where we identify something like this results in a referral to the insurer."

Pulling of the mask

A recent example of a fire in which poor maintenance exacerbated a blaze within the policyholder's property highlights how policyholders are leaving themselves open to question. "In this case, the insurer accepted that on the basis that they had surveyed the premises just six months prior to the fire and hadn't highlighted the build-up of materials in the roof that accelerated the blaze, so they felt culpable," explains Mr Dear. "However, that is a pretty fair, reasonable and generous insurance company. One or two other insurers I can think of might have denied that claim and repudiated it for a lack of reasonable care on the part of the insured."

The message for those concerned about property claims should be one of maintaining vigilance, and that while many old assumptions are worth paying attention to, experience shows that trends can become manifest in a variety of guises. A slowing economy means money is tight, which encourages fraud and discourages scheduled maintenance of property. Insurers' financial and strategic capability to deal with these threats will be their ultimate test.