High net worth insurers need to be more alert to false claims. Bobby Gracey and Nick Orringe explain how to pull the rug out from beneath dodgy claimants' feet
Much has been written about the rapid growth of the high net worth market over recent years. Various definitions of it exist but what is clear is that new money, particularly from the East, has had a major impact on the UK in markets like art and property. Within the claims arena though one aspect has been neglected: fraud.
Across the industry there has been a growing awareness of the problem of insurance fraud, particularly as research has emerged showing that one in 10 adults admit to making a fraudulent declarations and that 8% of people have made false claims on an insurance policy. But there is a serious misperception that the HNW market is not subject to fraudulent activity. Indeed it was generally thought that insurers were less likely to be exposed to fraud through their HNW offerings. Nothing could be further from the truth, however. There have been a number of high-profile cases over the past 20 years where people have been prosecuted for committing insurance fraud on a massive scale involving items such as classic cars.
Furthermore, experience and claims data suggest that since the onset of the sub-prime mortgage collapse and the credit crunch, the instances of exaggeration and potentially fraudulent claims that have been made within the HNW area have risen substantially. For example, since January 2008, instances of claims involving single high value items of jewellery that have 'gone missing' between either the second home and the principal home, or in the 'supermarket car park', have increased tenfold.
More worrying is the perception among a segment of the population that taking out a HNW policy guarantees a payout. Apparent losses of high value items, such as Rolex watches and designer jewellery, have increased, often within three months of a policy starting. Other examples within the domestic arena include items such as paintings and high value sculptures, which have disappeared as a result of alleged break-ins.
But subsequent detailed investigation often reveals that the disappearance of these items can be linked to the policyholders' financial obligations elsewhere. Their lack of liquidity sometimes tempts them to 'lose' items for which they are financially indebted, thereby committing fraud. The important point here is that the real cost of fraud within the HNW area is significant even though the frequency of losses may not be high.
In fact, the Association of British Insurers suggests that these incidents are adding an extra 5% to premiums. Combating this rise in claims that appear dubious on first reading has led to the development of specialist adjusting staff with detailed knowledge of jewellery, fine art, classic vehicles and so on, to be deployed on cases like these. Typically, they will work with counter-fraud experts to investigate claims, often contacting the original manufacturers to check on their database the origin and specification of the wrist watch or item of jewellery in question. They are also careful to ensure the burden of proof is substantially backed up by policyholders with the relevant documentation.
One recent case, for example, involved the loss of a high value wrist watch, for which a two-year waiting list is widely acknowledged by jewellers and the manufacturers. The policyholder did not have any documents to authenticate their ownership of such a watch but did have photographs of them wearing a high quality replica, which they were also known to have shown to friends.
Following the discovery that a replica watch was being passed off as genuine, in order that the policyholder would benefit by approximately £10,000, further background enquiries indicated undisclosed convictions on the part of the policyholder. The insurers, of course, repudiated this claim and cancelled the policy.
In another instance, supposedly high value Persian silk rugs suffered extensive water damage following a domestic flood. Yet, upon examination, it transpired they were cheap copies from Ikea. Again a lack of suitable pre-loss valuations to evidence these values or sight of the original dealer's receipts proved a stumbling block for the would-be fraudster.
Contrary to public, and perhaps industry opinion, fraud detection and containment solutions are just as critical a core competency to a business in HNW as it is to defeat the fraudster within opportunist low value, high volume commodity sectors.
So can the insurance industry do more to combat HNW fraud? Yes, fraud identification is all about effective validation techniques including: fraud awareness training, suitable questioning techniques and methods to capture the evidence. Fraud leakage within the industry tends to come about via a lack of knowledge within the boardroom, poor education of claims staff, multiple ownership of files and inadequate operational measurements.
Rising cost of fraud
The ABI estimates the cost of fraud at £1.6bn per annum. How much of this is currently attributed to the HNW market? With industry statistics suggesting that 10% of all claims are fraudulent, the same sort of figures are probably correct in this specialist sector.
The industry, therefore, has a duty to build effective claims processes that contain suitable levels of resistance that will enable it to successfully manage fraud, while still maintaining high levels of customer service. Suitable fraud detection tools are available but, currently, poorly used. In this respect the HNW sector has much to learn from the composite insurers, which are investing in ever-improving detection systems and operational solutions.
- Bobby Gracey is vice-president of global counter fraud solutions at Crawford and Company and Nick Orringe is fine arts and antiques specialist at Crawford Esteem.
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