Insurers are seeing some successes when it comes to tackling policyholder fraud. Peter Smith explains why it is time the industry comes together to solve third-party fraud
However we examine the issue, fraudulent claims continue to concern the market, the regulators, honest policyholders and claimants.
Fraud in liability claims presents a particular challenge compared to first-party policyholder claims, given the relatively limited sanctions available. More often than not, a successfully exposed fraudulent liability claim concludes with a repudiation but no more than that, despite all the time and effort.
Across the industry, there is a general consensus that there needs to be a more proactive approach to a problem that impacts insurers' balance sheets and causes customers to bear a cost in increased premiums. To this end, there is a growing call for greater involvement in finding ways to combat the problem.
In terms of employers' or public liability claims, this proactive stance should not only focus on identifying those claims that are fraudulent. The industry must also seek to do more than simply reduce the level of the claim or get it withdrawn by a claimant, who has sought to deceive the industry for their own financial gain.
Two years ago, the Association of British Insurers conducted its own research, which found that half the UK population said they would seriously consider making a fraudulent insurance claim if the opportunity presented itself. Indeed, 7% of those who were questioned admitted that they had submitted a claim that was totally, or in part, fraudulent. This is not surprising when considering that the study also found that the public viewed defrauding an insurer to be as serious a crime as that of the theft of a towel from a hotel room.
A syndicate of insurance-related organisations, of which Royal and Sun Alliance is part, is set to publish new research on the levels of, and attitudes to, commercial insurance fraud.
Bodily injury fraud has risen alarmingly during recent years and this mirrors the growth in such claims generally. In 2003, the amount paid by UK insurers for all personal injury claims was £8.5bn - an increase of 50%, in real terms, since 1993.
The increase can be linked to the scrapping of legal aid and the introduction of no win, no fee arrangements in the mid-1990s. The so-called compensation culture has been further fuelled by the explosion in the claims support industry, consisting of accident management companies, specialist solicitors and after-the-event insurers. Previous studies by insurance organisations have shown that 40% of the cost of liability claims is now taken up by legal fees and other costs.
However, there is also now a regulatory demand that the market tackles fraud. The Financial Services Authority has stated that it wants to see insurers demonstrate they have an active and effective fraud policy in place. The scrutiny of the FSA is not only focused on individual insurers, there is also an expectation that the industry as a whole will work together to combat fraud.
Protecting honest policyholders by making it as hard as possible for the dishonest minority to get away with it is, therefore, a priority for the insurance industry. Most insurers have upped their game in this respect, by introducing various methods to weed out opportunistic cheats from among their policyholders. There is also an increasing recognition that individuals caught attempting to commit such insurance fraud not only risk getting a criminal record, but could find it increasingly difficult to obtain insurance or credit in the future.
Many of the tactics and sanctions available to insurers when dealing with first-party policyholder fraud do not, however, apply in respect of third-party fraud. The industry needs to find new ways to get tough with this end of the insurance fraud arena.
Traditionally, if - during a third-party claim - an attempt to defraud or exaggerate is discovered, the amount of the claim is either reduced or the claim is refuted. On the face of it, the result is a financial saving to the risk carrier but often it does not remove the problem. As an industry, we need to find ways to take tougher action against those who seek to defraud the industry in this way.
With third-party claims, the options open to insurers have been limited but the industry should work closer with each other, the Department of Work and Pensions and other stakeholders, in an effort to increase detection and leverage greater penalties against third-party fraudsters.
While many fraudulent third-party bodily injury claims are committed by opportunistic individuals, there remains a determined and persistent organised crime element that attacks insurers by establishing fraud rings: for example, staging accidents. In the motor environment, the contrived or induced road traffic accident has, regrettably, become a modern phenomenon.
To tackle this organised element, the industry is drawing up plans to apply state-of-the-art analytics to the existing industry databases order to identify cross-insurer linked frauds. The plan will also include the setting up of a central unit to co-ordinate industry action to tackle the route causes, rather than each insurer continue to pursue suspect claims on an individual claim-outcome basis. Insurers will also benefit from an early warning in respect of serial claimants. It is not uncommon, for example, to discover an individual who has 'slipped' and injured themselves in five different supermarkets.
Traditional ethos dictates that insurers need to approach every claim as genuine. They must continue to adopt an innocent-until-proven-guilty approach - even if the claim triggers several indicators. If we adopt the reverse approach, and treat every claim as suspicious, we will suffer in terms of the way we handle claims and the service we are able to provide to the vast majority of genuine claimants.
A balance needs to be struck. While we need to continue to discharge our legal obligations in a fair and speedy fashion, we must ensure we are not a soft touch for the would-be fraudster.
As an industry, we need to underpin the ethos with proactive counter-fraud measures that will enhance the ability to identify and investigate fraudulent claims. Part of this is to spot potential fraud indicators early.
Some examples, which - in their own right - are innocent enough include: claimant's injuries persist for an unusually long time; and a claimant failing to correspond with the levels of injury you would expect to find from such an incident. However, people heal differently and in accidents there are no uniform injuries, meaning this cannot necessarily be taken as a real indication of fraud in isolation. Another thing to look out for is a loss of earnings claim from someone who is self-employed. Clearly, however, a large proportion of the population is self-employed and this most certainly is not an indication in its own right by any means. Minor accidents that result in significant levels of what can be described as subjective injuries are also an indicator. Injuries such as headaches and backaches are extremely difficult for a doctor to accurately measure or diagnose; nonetheless, people do have headaches and do suffer back problems.
Coming at claims from the basis that all are genuine unless proved otherwise, and that each of the above or some together are quite genuine, it should nonetheless be a mixture of several such indicators that should trigger further attention from the insurer.
If there is a clear indication that the claim needs to be examined, the next step is to use a fully trained and qualified team of investigators. These will often be employees that have particular experience and expertise in finding out information that is above and beyond the realm of the traditional loss adjuster. For example, at RSA, several of our investigators have a background in the police force. Clearly, it is important that any investigation remains within given guidelines and complies with our legal and regulatory obligations.
If the claim is proved to be fraudulent, then the insurer will challenge the claimant or their solicitor with the evidence that identifies the claim as such. In the vast majority of cases, the claimant decides not to pursue the claim as it is, and will either accept a reduction in payment or often simply walk away if the claim is found to have been completely fictitious.
It is at this point, perhaps, that insurers could consider a more proactive approach. While the prosecution of first-party insurance fraudsters is relatively common, it is rare in respect of third-party fraud. There are many practical reasons for this, with the evidence often being harder to come by, but there has been a reluctance for insurers to report such cases to the police. This may be because they are simply relieved to have achieved an indemnity cost saving, or they fear the police will simply not take the case on.
The latter point is a fair one but we should seek prosecutions where we have the evidence. Some well-publicised cases may well have a deterrent effect on others who might be similarly tempted.
Insurers should work much closer with the DWP. Under the Social Security Fraud Act 2001, the DWP has the power to obtain information from banks, building societies and, of course, insurers. However, the flow of information is one-way. While there may currently be legal deterrants to greater insurer and DWP co-operation, such as the Data Protection Act, many third-party insurance fraudsters are also defrauding the DWP by claiming benefits to which they are not entitled.
In June this year, Manchester Crown Court sentenced a man to 12 months' imprisonment for benefit fraud. The man claimed that an accident had left him unable to walk more then a few steps and, as such, had been claiming disability benefit for some months. Investigators were alerted to the fact that the man had greater mobility than he was claiming and, as the investigation continued, were stunned to discover pictures of the man on holiday in Florida, where he had been wrestling alligators. The man had claimed £17,000 in benefits during the time of his alleged disability.
With this level of sanction available - given that a fraudulent third-party liability claim may accompany a benefits claim - as part of the industry's counter-fraud measurers, insurers should routinely hand files to the DWP for investigation. If benefit fraud can be found then the penalties offer an even greater deterrent.
Work and Pensions Secretary David Blunkett has, in the past, said the DWP is determined to come down hard on benefit fraud. The determination of the DWP to get tough with benefit cheats could have positive implications for the insurance industry as it seeks to expose third-party fraudsters to greater punishment.
If we are to mount an effective counter-fraud policy against third-party fraudsters, the industry and the DWP should find ways to get work together and get tougher with those who seek to defraud it. In the meantime, the insurance industry can and is helping itself by ensuring we are not individually a soft touch and that we work closely together to combat a problem that affects us all.
- Peter Smith is claims operations manager at Royal and Sun Alliance.
ROYAL AND SUN ALLIANCE PROFILE
Royal and Sun Alliance is one of the world's leading multinational quoted insurance groups, writing business in 130 countries and with major operations in the UK, Scandinavia, Canada, Ireland, the Middle East and Latin America. Focusing on general insurance, it has around 26,000 employees and, in 2004, its net written premiums were £5.2bn. With an almost 300-year heritage, RSA is the oldest insurance company in the world still trading under its original name.
Within the UK, RSA is the second largest commercial lines insurer, covering the insurance and risk management needs of a significant number of FTSE 100 companies. It has a full multi-distribution capability, writing business through brokers and corporate partners, direct and online. RSA is also one of the UK's top three personal motor and household insurers.
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