With almost 173,000 reported cases last year, identity fraud is an ever-increasing problem. Insurers are taking a proactive approach to fight this pernicious problem
Identity fraud is a growing problem for the financial services industry. Almost 173,000 cases were reported last year, the highest number on record, according to fraud protection service Cifas. Whether this involved someone falsifying their own details, making an identity up or stealing someone else's, it's something the insurance industry is keen to stamp out.
Although the problem is growing rapidly, it's nothing new. "Identity fraud used to be all about a chap going through the bins to see if they could find any personal details they could use," says Kurt Rowe, associate solicitor at Weightmans. "But now, thanks to the internet, identity theft can happen much quicker and on a much larger scale."
The internet helps in two ways. First, it's a lot easier to acquire someone else's identity, either using methods such as hacking and phishing or simply by buying the details. Then, once obtained, online sales mean the fraudsters don't even have to bluff their way through the application process face-to-face or over the phone. Unsurprisingly, Cifas found that nine out of 10 fraudulent applications for financial products were made through the internet.
Identity fraud takes many forms in the insurance market, from the opportunistic through to more organised approaches that net thousands of pounds or even conceal other types of crime. And, while insurers see it across all lines of business, because insurance is a legal – and sometimes expensive – requirement to drive in the UK, it's most prevalent in motor insurance.
At the opportunistic end of the scale is fronting, where someone uses another person's details to obtain a lower premium. Sometimes everyone involved will be party to the fraud, for instance a young driver taking out a policy with one of his or her parents as the main driver.
This type of application fraud is evolving, as James Burge, underwriting standards manager at Allianz, explains: "The latest threat hitting the market comes from fraudsters stealing an identity to pass application security checks," he explains. "The fact the details are genuine conceals the true identity of the fraudster, who may then add themselves to the policy as a named driver."
Although a recent addition to the fraudsters' methods, this type of fraud is growing fast, according to figures from Synectics Solutions. While there were only nine cases in the first half of 2016, the number increased to 2357 in the second half of the year. "We've found more and more insurers are admitting it's a problem," says Matt Stanton, head of business intelligence at Synectics Solutions. "It can be difficult to detect, especially as the innocent policyholder usually won't know their identity has been stolen."
Securing a lower premium may be the objective in some cases, but identity fraud can also be part of organised crime. "Using someone else's identity allows you to conceal your history," explains Steve Jackson, head of financial crime at Covéa. "As the industry has successfully clamped down on uninsured driving, a stolen identity could be used by someone who wants to commit a crime and doesn't want to be traced."
It can also facilitate money laundering. A criminal might take out a series of policies in stolen identities, cancelling them within the cooling off period and pocketing the freshly laundered money.
Ghost broking is another aspect of identity fraud, with fraudsters praying on vulnerable groups and drivers who struggle to get affordable cover. "This is on the up," says Michael Kelly, head of counter fraud at Axa direct and retail partnerships. "The ease of obtaining data means a ghost broker can use stolen identities to purchase seemingly legitimate cover under a false name."
These policies are doctored to include the unsuspecting client's details. The ghost broker then disappears with their cash, leaving them with a fraudulent and worthless policy.
Claims are also susceptible to identity fraud. Chris Aplin, head of investigation services at Cunningham Lindsey, says he's seen a variety of techniques being used. "On the opportunistic side, we've seen instances where someone's had a claim settled and they've resubmitted it with the same documents and a slight change of name. As the calls were recorded, we were able to prove it was fraudulent and confront them," he explains.
"At the more organised end of the spectrum, someone submitted a series of claims using different aliases. We were able to identify him as he was covered in tattoos and had a fondness for Manchester United."
While Aplin's seen all areas of general insurance suffer from identity fraud, it's something that is commonly used in motor insurance alongside staged accidents. In these instances, having a car full of people with fake identities can stop an insurer discovering they've all had a series of similar claims in the past.
Identity fraud can also involve the experts associated with a claim. Anthony Carrington, partner at DAC Beachcroft, has seen cases where doctors, engineers and even solicitors have had their identity stolen so the fraudster could produce a report in their name. "We saw one claim where fake identities where used for the insured, the claimants, the engineer and the law firm. They'd submitted a claim for an accident, receiving £10,000 for credit hire and personal injury, then disappeared," he explains.
The amount of cash at stake, coupled with the ease at which identities can be stolen and used, has helped to drive this increase but the insurers also say the problem has become more visible because detection rates have improved.
Paula Howett, manager, fraud and risk quality at Ageas, says her firm started to see cases of motor insurance application fraud around a year ago. "As the fraudsters were using a false address, we introduced more robust identity verification in the application process to cross-reference the details. This helped us to spot instances where they were doing this to get a cheaper premium."
Unfortunately, the downside of deploying more sophisticated detection methods is that the fraudsters adapt their techniques. Howett says that they're more likely to use a stolen identity now, which can be much harder to spot. "The industry is working together to stay on top of this problem," she adds.
This proactive approach isn't surprising. "Where insurers are accepting risks at a lower price, there will be increased costs," says Stephen Dalton, head of intelligence at the Insurance Fraud Bureau. "On top of this, there are operational costs associated with setting up a fraudulent policy."
Taking a proactive approach to identity fraud is also important from a regulatory perspective. Insurers have an obligation to fight fraud and financial crime, with any failure to meet this resulting in a significant fine from the Financial Conduct Authority.
Given these costs, plus the moral hazard associated with insuring criminals, the insurers are using a number of strategies to stamp out identity fraud. But, while they're adopting a zero tolerance approach, they also need to be sure they strike the right balance to protect their innocent customers. "You need to have a blended approach both before and after the sale," says Howett. "We want to spot the criminals but we can't block genuine customers."
With such a fine balance between vigilance and a slick customer journey, technology has an important role to play in the battle against identity theft. As an example, as well as checks on IP addresses, device verification is becoming standard. This looks at the device being used to take out insurance, checking what type of device it is and whether it is in the UK. "We can also provide a risk rating for an email address, looking at details such as when it was set up to get a sense of whether it has been created solely for the purpose of fraud," says Stanton. "These checks can all take place in real time, so there's as little friction as possible for innocent customers."
Emerging technology will also help insurers stop identity fraud. "Insurers use voice analysis software to detect when someone is nervous, and therefore potentially fraudulent," says Rowe. "They're also investing heavily in analytics and artificial intelligence to beat the fraudsters."
Back to basics
There's a call for more vigilance around some of the basic checks. Jackson says that basic 'know your customer' checks are essential. "These can uncover a lot but not every insurer is doing as much as they should," he says. "If an applicant can't confirm an address, we won't do business with them."
But, rather than ask more questions to verify an applicant's identity, Jackson says insurers could ask fewer questions. He advocates using the information that is already available to check someone is who they say they are.
Using data in this way can help an insurer build up a detailed picture of the individual. John Marsden, head of fraud and identity at Equifax, says this can then be backed up with data analytics to sift out the more suspicious cases. "By interrogating the data and looking for trends, you quickly know when you need to step up the checks," he says. "This could involve asking for more documentation or sending the policy documents to the address for a signature. If they don't live there, they won't be able to supply this."
Marsden would also like to see the insurance industry toughen up their identity checks around claims, especially those from third parties. He says that although most insurers reserve the right to carry out an identity check if someone has completed a claims form, this won't always be rigorous enough. "If it's a stolen identity, the name and address will exist and pass the checks," he says. "Insurers need to go deeper. We're working with one insurer to confirm that the person's details match up with their bank account."
As well as fighting the fraudsters, because innocent parties are also swept up into this when their identity is stolen, the insurance industry needs to do more to raise awareness of identity theft.
Often the first someone knows their identity has been compromised is when they receive an unexpected letter from an insurer. Howett says this is just the tip of the iceberg. "When someone contacts us about a policy they don't recognise, we'll direct them to Action Fraud but we also work with them to check how their identity has been compromised. We often find the criminals have used it to take out other financial services products too."
Unravelling the web of policies, credit and bank accounts that have been taken out using their identity can be tricky, so any awareness campaigns need to focus on prevention too. This could include recommending customers check their credit record regularly but also simple internet safety tips such as using strong passwords and being vigilant on public wifi.
Insurers also need to collaborate more effectively to beat the criminals. "If insurers report and share cases of ID theft and application fraud, we can work together to prevent it happening," Dalton says. "The more we share, the more effective we can be."
Several organisations are available to facilitate this sharing. These include the IFB, the Insurance Fraud Register, the Insurance Fraud Investigators Group and the Insurance Fraud Enforcement Department.
However, Jackson says that while many insurers are happy to collaborate, it has to be an industry-wide approach. "Most insurers share data but some are reluctant to share knowledge about how to combat fraud as they see it as affecting their competitiveness. But sharing information and knowledge is the best way to beat the fraudsters," he explains. "Fraud shouldn't be another commodity that insurers trade on."
Insurance Fraud Awards
The hugely popular Insurance Fraud Awards are back with nominations for 2017 now open. The ultimate accolade for the top fraud fighters of the general insurance market, these awards will once again reward those at the forefront of tackling and preventing insurance fraud at a gala event at the Brewery, London on Thursday 5 October. The deadline for entries is 28 June so do not delay, get working on your entries today. For more details on categories and how to book a table go to www.theinsurancefraudawards.co.uk
Zurich disappointed in new #discountrate. David Nichols, Ch Claims Officer: "The failure to change the discount rate to a balanced level will only serve to increase the cost and, therefore, affordability of certain types of insurance - especially for higher risk customers." pic.twitter.com/ac1CfBzfxX— Zurich Insurance UK (@ZurichInsUK) July 15, 2019
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