Looking for a loophole

While the Ministry of Justice's proposals for process reform in personal injury claims have the best intentions, Neil Joslin argues they could do more harm than good due to potential fraudsters being notified the instant insurers become suspicious, allowing them to destroy evidence

Fraud is a big problem for the insurance industry at the best of times. But when the economy stutters into recession and more people are driven to try their luck with fraudulent claims, it becomes a major drain on insurer performance and profitability and ultimately drives up the cost of cover for innocent customers.

Now is the time we should be taking every possible step to defeat this insidious crime. But there is a distinct possibility that in publishing its new guidelines on the handling of personal injury claims, the Ministry of Justice may actually make things worse.

With fraud costing the insurance market anything up to £1.6bn a year, all the industry's efforts to combat fraud are necessary and welcome. The problem faced is two-fold: identifying cases of fraud happening now, and changing the mind-set that makes insurance fraud a socially-acceptable crime in many circles.

Part of the MoJ's new guidelines state that if an insurer alleges fraud and thus refutes liability, the claim will be taken out of the new settlement process to allow further and full investigation.

This is where the potential concern creeps in. On the face of it, it makes sense to pluck suspect cases out of the settlement process so they can be given the time and attention they merit. But as soon as an insurer signals that a case is being treated in this way, the claimant knows that the possibility of fraud has been identified. If that claimant has something to hide, they can then take steps to remove or destroy vital evidence or otherwise interfere with or disrupt an investigation.

Dropping the claim

There may also be instances where claimants drop the claim because the insurer has effectively alerted them to its concerns. That leaves the insurer in an invidious position. Does it let the matter rest, even though it knows that fraud might have been afoot? Or does it invest the time, effort and money required to pursue the case anyway?

Insurers will inevitably broadcast their suspicions by the very act of complying with the MoJ procedures. There might also be a possibility that some insurers could turn a blind eye to blatant or possible fraud because, in crude economic turns, it makes more sense to stick within the MoJ guidelines. And this triggers a vicious circle: if people succeed in low-level fraud, they will tell their friends and associates and the problem will spread. And if low-level fraud succeeds, the stakes will eventually be raised.

We've seen how organised motor fraud has become a significant issue in certain towns and cities. This is not only costly but potentially dangerous. So it's not difficult to see how the MoJ strictures can have the opposite effect to that intended - the potential exists to increase the number, complexity and size of insurance claims.

As with all topics relating to insurance, we have to be aware of the regulatory perspective. The Financial Services Authority is responsible for running fair and efficient markets, and its task is compromised by financial crime. It therefore expects regulated firms to take action to reduce and eliminate fraudulent activity. In other words, firms can only achieve regulatory compliance by actively tackling fraud.

The FSA has made reference to the fact that "using anti-fraud techniques or forensic analysis can be expensive, which may account for the fact that low level fraud may encounter limited resistance from insurers". In other words, it is aware that some minor fraud cases get through because it costs too much to pursue and resolve them. But surely the regulator's patience will be tried if firms are lax in this regard?

There is also the Treating Customers Fairly perspective. Is it fair for insurers to allow honest policyholders effectively to subsidise criminals through higher premiums?

To tackle this problem, insurers and brokers need to intensify their vigilance. That means backing industry initiatives from the Insurance Fraud Bureau, the British Insurance Brokers' Association and the Association of British Insurers. It demands a wider understanding of the fraud threat and published good practice to mitigate the risk. It requires the support of data-sharing initiatives to identify repeat fraudsters and it means being alert to issues of identity, where people use false personas and buy insurance with the purpose of making a fraudulent claim. It also means continuing the long battle for the hearts and minds of the public, who still think of insurance fraud as less serious than other forms of theft.

Transparent process

A practical step that can be taken swiftly to improve matters involves transparency; specifically, the origin of the claim (the source of referral) should be disclosed at the earliest stage practicable.

This is because the ABI and IFB, as well as insurers at the coalface, know there is a vibrant claims-fraud industry embracing an unfortunate minority of accident management companies, repairers, recovery/storage companies and solicitors. People who have been in accidents but have not claimed can find themselves directed to make a claim, and they are put in touch with this network of would-be fraudsters who are all too keen to promulgate illicit activity.

The claims industry, through hard-won experience, knows which firms and allegiances are suspect. Alarm bells ring when the players become known, but often this is too late in the process - at least in the context of the MoJ deadlines. If referral disclosure is mandatory at the offset, insurers will have access to a key fraud indicator, which will improve the integrity of the whole process.

It would seem that, with its 15-day deadline to make a decision on liability, the MoJ has fallen victim to the law of unintended consequences. Its laudable aim of delivering improved access to justice has, in effect, opened a potential loophole to fraudsters.

Ironically, as this loophole has opened, the need to tackle fraud is rising up the political and regulatory agenda. We've seen the creation of the government's National Fraud Strategic Authority on 1 October and the police establishing the National Fraud Reporting Centre. These are concerned with fraud in its broadest sense, but they will inevitably focus on insurance fraud as part of their overall effort.

It seems the various agencies are pulling one way as the MoJ - albeit inadvertently - pulls the other. Time for some joined-up thinking, perhaps?

There is no silver bullet that will eliminate the fraud problem. But our industry needs to be on the front foot in the battle to reduce the costs and headaches it brings. It would help if the MoJ could engage on this specific issue to help all stakeholders find appropriate solutions and achieve their quest of improving the personal injury claims process for genuine claimants.

- Neil Joslin is technical claims manager for personal insurances at Groupama.

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