Faud: A tighter focus

It seems to be accepted practice in the UK that claims with a value of less than £2000 are simply instructed to supply chain companies. These firms have delegated authority to settle claims to the agreed authority limit, and they invariably provide insurers with a replacement discount, or a retrospective discount, based on overall spend per annum.

As a common practice in the market, this situation is of little concern to many and the consensus is that this system makes sense, however, a personal claims experience prompted me to question the practice. In 2006 a leaking central heating pipe caused minor water damage to my kitchen ceiling and a newish bedroom carpet. A little research revealed that the carpet was still available and could be replaced for £720, including fitting. However, the insurer's supplier was quick to reassure that money was not an issue as he was authorised to select a replacement to the value of £1500. This apparently being the limit below which insurer's authorisation was required.

Alarmed at the way in which the insurer was allowing suppliers to mismanage its claims spend, I informed it of the situation and asked why genuine customers should be paying for the cost of blatant fraud committed by its appointed suppliers. A cheque for £750 was received after a short correspondence, together with an assurance that it would be investigating the unethical conduct of the supplier.

Negative feedback

This eye-opening experience highlighted the issue of potential fraud in the supply chain and prompted Crawford and Company to conduct some research on how insurers manage their low-value claims, and how successful they are in managing fraud risks, particularly in light of Financial Services Authority's objectives on combating financial crime.

Surprisingly, the feedback was fairly similar and included statements such as, "we use supply chain companies, not loss adjusters or internal field forces, as supply chain is less expensive", and "we have very few fraud cases detected by our supplier and we assume we have no problem in relation to our FSA responsibilities". Comments were also made on discounts ranging from 10% to 30%, very few complaints and the fact that fraud detection is not a measurement used with supply chain companies.

These findings were considered in relation to the challenges faced by Crawford and the industry in general. It seems odd that, while certain loss adjusters have key performance indicators in place with some insurers of a 10% fraud detection rate when a claim exceeds £2000 in value, there are no measurements or incentives in place with supply chain companies if the claim value falls below this threshold.

Operating a supply chain procedure seems attractive for general insurers but it also poses risks, as these outsourced companies are not expected to be experts in fraud detection in relation to insurance law and underwriting procedures.

The lure of discounts appears to be causing complacency among some insurance companies and they may need to review the major key performance indicators used for supply chain companies. At present, the industry seems content to pay for low-value fraud claims as long as the replacement discount is secured and no one complains about the experience. Together, the industry should consider how claims are effectively and professionally validated, and ensure genuine losses are quickly settled.

Based on these experiences, Crawford's counter fraud solutions team recently entered into discussions with a composite insurer and a broker (with claims handling authority) to explore the benefits of working alongside their supply chains companies. A three-month pilot scheme was agreed and during this period, all risk and personal possession and accident claims under £1000 were analysed.

In advance of the pilot, both companies said that their suppliers had not, historically, identified fraud risks, although replacement discounts were always secured. The results, broken into four categories, show a very different story.

Over half of cases instructed were capable of being immediately settled and 17% of cases were found to be overstated in either scope or value. A significant 21% of cases instructed were either withdrawn or resulted in a nil settlement by virtue of policy repudiation.

This category had not previously been identified by the insurer/broker. And a frightening 9% of cases instructed contained so many unsatisfactory aspects and high-risk features that fraud investigators were called in to further investigate the circumstances giving rise to the claim.

Spurious claims exposed

By collaborating, spurious claims, which would previously have been paid, were successfully identified and investigated, leaving the supply chain companies to get on with what they do best. Furthermore, the insurer and broker collectively reduced their claims spend by over 40% and a spend-to-save ratio of £7 saved for every £1 spent was achieved, thus demonstrating the benefits of effective and professional claims validation services. In addition, the complaints ratio was less than 1%.

These findings suggest that the use of supply chain companies in isolation is not an effective barrier to the management of high-risk fraudulent claims, especially in relation to low-value claims. Therefore, the industry simply cannot allow the value of a claim to dictate the effectiveness of the market's stance on fraud. Companies need to ensure their fraud strategies involve clear measurements across all claims, regardless of value.

The key question that the industry should now consider is how expensive it will be for it if it continues to use current claims practices where obtaining replacement discounts via suppliers outweighs the benefits of effective validation and only paying claims that are actually covered.

- Bobby Gracey is the head of counter fraud solutions for Europe, the Middle East and Africa at Crawford and Company.