Fraud - State of play

Fraud is a continuing problem for the insurance industry, though a raft of regulations are intending to straighten out the issue. James Heath says brokers and insurers should up the stakes

The debate about whether a compensation culture really exists in the UK continues to run and run. Commentators agree that the number of fraudulent insurance claims has spiralled in recent years, and continues so to do. Impending reforms to the law of fraud may seem like a light at the end of the tunnel, but will they actually make a difference? Though a step in the right direction, Keoghs believes the proposed reforms do not go far enough to provide the solution insurers really need.

Important lessons can be learned from the US, where insurance fraud has a much higher profile. Laws and penalties in the US are already much stricter than in the UK and are set to become even more severe.

At the end of July, Senator Charles Schumer released a report showing that motor insurance fraud costs New York drivers alone $300m (£164.7m) a year. He unveiled proposals for creating tougher criminal penalties to deter fraudsters, stating: "We should treat these criminals like the crooks they are. This means going after them at every level of government."

Federal penalties

His proposals include the introduction of new legislation - the Cheaper Car Insurance Act 2004 - which will set up new federal penalties including: fines of up to $100,000; and a three-tiered system of harsh penalties such as prison time for fraud-ring masterminds, organisers and participants.

Senator Schumer is also urging that a federal-state-local task force be set up, staffed by top prosecutors who will be dedicated to investigating, breaking up and prosecuting motor insurance fraud. He concludes: "Those involved with the fraud can expect to be arrested and expect to spend a lot of time in prison."

Unfortunately, this is not the case in the UK. The reality here is that the penalties and the level of prosecutions are currently too low for the public to view claims fraud as a serious offence.

Most forms of fraud crime, such as banking, benefit and identity fraud are considered by society to represent unacceptable criminal behaviour.

This thinking does not apply to insurance fraud, however, which is largely viewed as acceptable behaviour.

Statistics from the Association of British Insurers confirm this - 40% of people consider it acceptable to inflate an insurance claim and 29% consider it acceptable to present a wholly fabricated insurance claim.

Feeling the pinch

And it is not just insurers that are affected - local authorities feel the impact too. In 2003, Alarm, the national forum for risk management in the public sector, conducted a member survey into attitudes towards fraud. This reveals that: up to two-thirds of all claims against local authorities are considered fraudulent in some way; 60% of highway liability claims were considered potentially fraudulent; at least 48% of tenants' disrepair claims were deemed suspicious; 25% of local authority claims managers felt under pressure to pay claims that they considered fraudulent.

Recent research provides an insight into the problems faced. Tackling Insurance Fraud, a survey across all lines of the UK insurance industry published by Keoghs this year, confirms that fraud against insurers is still a growing problem and one that is difficult to quantify; fraud is seen by insurers as a fact of life, though it is not regarded as an acceptable loss; claims frauds, particularly personal injury claims, are the most common; the insurance industry accepts the significance of the fraud problem and wants to tackle it head on; there is not sufficient resource available to fight fraud, and there is a shortage of experienced, skilled staff.

Anti-fraud strategies

Despite these obvious difficulties, the research revealed a clear trend across all insurers polled - fraud is now an issue for managers and directors at the highest levels; and most insurers are steadily implementing detailed, and documented, anti-fraud strategies.

Insurers and local authorities are clearly taking this issue more seriously than ever before, recognising that it is in their best interests to take a more active role in influencing public perception of this crime.

As the number of fraudulent claims continues to increase, who are the parties most affected?

It is a commercial fact that insurers have to pass the cost of fraud onto honest consumers through increased premiums. This is also mirrored in the public sector. The explosion of claims has left some local authorities paying out more on highway liability claims than they spend on maintaining highways, with the inevitable conclusion of an increase in tax levies to cover these costs, hitting the public once again.

Claims fraud does not just cost us all in direct financial terms such as this, however. Senator Schumer's reference to fraud-ring masterminds and participants is not merely a US phenomenon. Keoghs' experience shows an increasing number of highly sophisticated claims-fraud rings operating within the UK. This is not opportunist fraud but highly organised criminal activity.

Whether related to drug crime or having national security implications, organised claims fraud is often the work of wider criminal networks. It plays a central role in these networks and is increasingly being used by criminals as a money-laundering operation.

Victimless crime

By investing in organising and managing a fraudulent claim and successfully obtaining compensation, criminals not only achieve an increased return on their investment but the compensation they receive is 'clean' money - this certainly dispels the frequently cited myth that claims fraud is a victimless crime.

In the Fraud Law Reform White Paper, the government finally recognises the significance of fraud within society. The White Paper is exceptionally wide ranging, but does not specifically address claims fraud.

The consultation period provided an opportunity to raise concerns with the Home Office. Keoghs, and a number of its clients responded, with the intent of raising this issue on the government agenda.

Though an encouraging start, the proposed reforms do not go far enough.

The UK will still lag some way behind the US, where a much more proactive stance is taken. We can, and should, learn vital lessons from their approach.

In the current political climate, insurance fraud is not on the government's radar to any serious extent. Though it clearly does not see this issue as acceptable, much more needs to be done.

Claims fraud does not appear in any police authority or Home Office crime statistics. The police are sympathetic to the issues but the resources dedicated to prosecutions in this field are only sufficient to scratch the surface.

Fraud law reform may help. The crucial factor that is missing, however, is resource to prosecute. Senator Schumer's proposal for a twin-pronged attack includes law reform and provision of dedicated resources to prosecute fraudsters. Not so in the UK, however. The true extent of claims fraud and its link to other organised criminal activity is not recognised at governmental level. Until this situation changes, law enforcement agencies will not be given key performance indicators for prosecuting claims fraud and so the current situation will not improve.

Target practice

The police need targets and adequate resource for prosecutions. This will only happen if claims fraud is given appropriate recognition in legislation.

The government, insurance industry and local authorities all need to work together to tackle this problem. Legislation could, and should, be the basis for creating a common interest for so doing. The current proposals are not broad enough to achieve this.

If the industry has been anything less than proactive in the consultation process then it is a missed opportunity. The consultation period has now finished, so we can only hope that the Home Office has taken these views on board.

As Financial Services Authority regulation looms, insurers cannot just wait for the legislator to address this issue, and commercially cannot afford to do so.

Insurers must take a proactive and strategic approach to fraud, identifying areas of potential exposure, and ensuring that robust processes are in place to effectively detect and deal with fraudulent claims.

A fraud strategy is essential, but what should be addressed by the strategy?

It must include, among other things:

- Policies - covering, for example, prosecutions, data sharing, financial recovery, publicising successful repudiations, lobbying and influencing the government.

- Procedures - a best-practice template for the proactive identification, investigation and handling of all potentially fraudulent claims, including codes of practice where appropriate. Procedures to prevent fraudulent claims from being presented in the first place are also critical.

- Resource - not merely headcount but ensuring the best people possible have the most effective tools available to them and are trained accordingly.

- Auditing - to ensure quality throughout the fraud process and enable benchmarking and ultimately robust KPIs to be set.

- Compliance - with the process itself, and with statutory obligations and requirements.

- Review - to ensure that, through implementation of the fraud strategy, all opportunities for improvement can be identified and the strategy and all its elements are updated as appropriate.

- Training - this should not just be limited to fraud specialists, but should be cascaded throughout the organisation for the maximum effect.

Customer sensitive

Obviously any strategy or process implemented must be customer sensitive - we are after all in a customer service industry. Honest customers or claimants should be treated fairly and promptly in resolving claims, whereas fraudsters should be left under no illusion that their claims will be scrutinised and that all possible sanctions or actions will be levied against them if the claim is found to be fraudulent.

Through implementing and maintaining a rigorous fraud strategy, insurers stand to put themselves in the strongest position not just to identify fraudulent claims, but also to prevent them from being presented in the first place.

Although claims fraud remains a growing problem, there is now a real desire throughout the industry for change. By adopting a strategic approach to the fraud problem, drawing on the experience of appropriate experts within the industry and working with the government, insurers have a real opportunity to turn the tide.

It is vital that the industry grasps this opportunity. It must also take positive and proactive steps to bring the claims fraud problem to the political table, only then can we break the myth that claims fraud is a victimless crime and really address the root of the problem, once and for all.

- Keoghs specialises in defendant insurance litigation work and handles claims arising from the full range of insurance products. Acting for many of the UK's major insurers, the firm is driven by highly developed processes and case management technology.

Keoghs' specialist claims unit assists insurers to detect, investigate and repudiate fraudulent claims. It provides training and consultancy advice on the implementation and review of fraud strategies, and tactics for handling suspected fraudulent claims, as well as co-ordinating responses to fraud-ring activities. With 60 dedicated personnel and more than 30 insurers and corporate clients, it is one of the largest UK fraud units.

For a copy of Keoghs' report Tackling Insurance Fraud, please contact Heather Dare on 01204 677210 or e-mail [email protected]

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