Fraud is no longer the preserve of a few people within an insurer's claims department, its importance has permeated up to board level as savings mount. Post assembled an expert panel to spotlight this evolution and discuss where things could go next. Andrew Foxwell reports
A decade ago, fraud was not something insurance companies were willing to talk about. It was hushed up, hidden away and often accepted as a necessary evil - bad debts that were regrettable, but part and parcel of working in insurance.
Over the past five years, however, things have changed dramatically.
The previous reticence has been cast aside by company boards who now realise they have a duty to shareholders and customers to openly fight fraud. This sea-change may not have taken place had it not been for the monetary rewards that anti-fraud teams have produced, clearly to the delight of their chief executives.
It was on this point that a recent round-table discussion kicked off - asking how senior management's perception and methods of tackling fraud have changed and for what reason?
John Beadle, chairman of the Insurance Fraud Bureau steering-group and counter-fraud manager at Royal and Sun Alliance, pinpointed the real change as having taken place three years ago, when Financial Services Authority regulation was imminent.
He said that FSA financial-crime sector leader Philip Robinson's 10 expectations of the industry, in terms of control, had focused executives' minds - as did the Sarbannes-Oxley requirements in the US, which "permutated down organisations".
Bobby Gracey, Crawford and Company's head of counter-fraud solutions, pointed out that fraud managers "have a vote at the top table", because they are now seen as "such a critical part of the business process".
On the point of regulation, he added: "One of the biggest things the FSA has done is create a top-down approach to fraud - the CEO doesn't want the FSA knocking on his door with a fine for a failed fraud-management strategy. Before the FSA, change would have involved a hobby-horse fraud manager who wasn't empowered to do anything."
Richard Davies, Axa's fraud-risk manager, disagreed over the extent of the FSA's influence, saying that one of the most important factors has been "winning the argument over resources", a decision in which the regulator "plays a very small part".
Putting it succinctly, he commented: "The reason we're seeing more resources and influence is down to one thing - we've demonstrated that we are saving money."
Mihir Pandya, Allianz Cornhill's fraud manager, also identified cash savings as the primary motivator: "Over the past two years, senior management has seen financial benefits in the fraud area. When you make and validate the savings, they are very clear. It's more difficult to extrapolate what the actual monetary value is in something like a training programme; for example, it's difficult to say that £25,000 has brought a real benefit to the organisation, whereas in fraud when you set up the costs the savings are clear."
Mr Pandya pointed out that Allianz Cornhill had doubled the size of its fraud teams in the past year, the underlying reason being that it could demonstrate how much fraud safety and savings each person could produce.
While, undoubtedly, executives' sole concern is always money and profit, Simon Arundel, compliance-fraud manager at Ecclesiastical, said ethics were a factor in anti-fraud reasoning. "It isn't just about results - increasingly companies are called to account for their ethical management. It's a moral issue and senior management realise they have to meet the expectations of policyholders and shareholders by doing socially responsible business."
So is it this ethical dimension that means companies feel obliged to step out of the shadows and publicly confront fraud?
This was acknowledged by Mr Beadle: "We're moving to a new phase. Even in the recent past, companies may have done something around fraud, but kept it in the background. No company really wanted to acknowledge that it was tackling it for fear it would affect their market-share position. Now, however, companies are actually saying 'we're doing this to protect our customer and that's the driver'. The industry is saying it tackles fraud because it wants to be customer-centric, rather than customer-attached."
As the traditional public face of fraud and fighting fraud is changing, does that mean it will be extended and modified into other areas of the insurance industry?
Mr Davies pointed out that there is a lot more progress to be made, in terms of providing a wider risk-management arrangement. He said the fraud sector had to consider whether to look at other dimensions of the practice, such as fraud in distribution channels, internal fraud and underwriting risks - all of which could be developed over the next five years. This could require a further realignment of practices, with Mr Davies explaining that Axa's claims-fraud management only evolved into its own department over the past five years.
Mr Beadle agreed about the possibility of extending anti-fraud practices - he said that while anti-fraud measures start off in claims, inevitably they spread their tentacles to other areas of insurance business. "It's not long before you have to take a more holistic approach. This then involves how you're writing the business, how you're wording the policies, how you're marketing yourself, and how you know your customer. There's a whole raft of things you can do on the underwriting side which is what we're coming round to," he said. Baden Smith, Legal and General's head of assurance services, concurred with this assessment.
Mr Gracey added that, as part of this spread of anti-fraud measures, the net had to be widened: "We need to look at the issue of any colleagues involved in claims administration, because fraud's an industry problem and everyone involved in claims processing and validation has a role to play. They should begin with an induction course to show them what fraud looks like, before arming them with an escalation process. That would be a good start, for good education and awareness."
In terms of the crucial importance of education and spreading responsibilities, Mr Beadle explained: "At RSA we have sign-off on new products and launches just to health-check them - asking questions like 'are we going to be committing an own-goal here', 'are we going to do something we regret?'"
On this point, Mr Arundel said that anti-fraud measures may come back to concentrate solely on claims. He said underwriters had a difficult part to play because they could not discriminate according to postcode.
Mr Beadle vehemently disagreed with this, saying it was eminently possible to use postcode profiling to determine which geographical areas are the most likely to commit fraud.
"For instance, insurers have used flood-claims profiling in terms of pricing or whether they want to do business with household cover based on the likelihood of flooding. There's no reason why you can't apply the same philosophy to fraud."
Mr Pandya responded in equally emphatic terms, disagreeing with such a concept, even though it was a "nice ideal" because the flooding process is scientific in determining high risk areas. "Speculatively assessing where fraud might occur is a lot more difficult. We have run a number of pilots in the past where we took postcodes and looked at them historically. When we ran an analysis, it was almost a 50/50 chance of whether it was fraud or not."
Mr Beadle retorted: "I'm not saying we're there. All I'm saying is, with the improving technology in terms of euro networks and being able to look at known frauds, take out the elements of that and profile it against socio-economic profiling and known-customer profiles, and then you can actually come to more than a 50% chance of proving it's fraud."
He continued: "I don't know why you would find it shocking that an insurer would profile someone for their likelihood to commit fraud. If you have someone who has, for instance, committed five insurance frauds previously, a company would not want to take him on its books. A company is entitled to prevent itself from being exposed to that risk. Preventing fraud in underwriting makes common sense - if you get that right, you're able to spend more time tackling the claims farmers."
In terms of tackling fraudsters, what is proving the most effective method?
Glen Marr, AIG Europe's regional claims-compliance and fraud officer, said he believed a key measure of anti-fraudsters' success will be when a survey shows the public believes there is a material risk of being detected when committing insurance fraud and, crucially, that there is a real risk of being prosecuted.
The group agreed that not all fraud cases could be referred to the police since there was a danger of simply inundating them.
Mr Beadle said he believed the biggest deterrent to fraudsters would be that identified in the Association of British Insurers' 2003 survey - that, if caught, they would be unable to obtain insurance cover or other financial services products in the future. With ever-increasing cross-industry data-sharing, he added that this threat is bound to increase.
Getting the message across
Mr Gracey said that, in terms of getting the anti-fraud message across to the public, the key lies in how you position the discussion: "Some insurers may want to assume market share, and they don't want the black mark of being associated with a fraudster. However, you can reverse the discussion to say that, 'as a result of our fraud-management solutions, our premiums have become more competitive and this is a safe place for your premium'. The insurer then assumes number-one position. That's a route the industry has not been sophisticated enough historically to appreciate."
As always, money can be seen as the determining factor, and Mr Gracey questioned whether it should be made a central factor in anti-fraud marketing: "Do you think we need to build the relationship up between the cost of fraud and customers? That's when you're going to get customer buy-in - once they appreciate the cost of fraud. I don't think the relationship's made of stone in many respects. In terms of customers, there isn't great awareness about the cost of fraud to them and their premium - but once you build that relationship, it will change the behaviour of others."
The ABI fraud committee, which many of the roundtable participants are members of, is one of the central co-ordinating bodies, which is why Mr Davies mentioned the development of media messages had been hotly debated. "One point is that you can quote a policy cost to a customer but if you multiply that by the number of policies they have and get a much larger figure, then you can actually translate it into something real for them, like the cost of a week's shopping - that's when you start to make your mark. The danger is the baseline figure, say £40, doesn't actually mean that much to an ABC1 insurance-buying sales rep, because it's not that big a figure. Yet if they have five or six policies, the end figure could certainly make a difference."
Indeed, as Mr Beadle points out, 5% of the total premiums in a household is a large figure - with 5% being the generally accepted amount that is added to the cost of a policy as a result of fraud.
Mr Marr likened the challenge to other practices now deemed anti-social: "We've just got to get the message out that committing insurance fraud is unacceptable - it's a bit like the drink-driving campaign we had years ago. The impact of that played a key part in communicating the fact that drink-driving is socially unacceptable, but we do need to get the balance right. Over the years, I've sat with both policyholders and third parties who have admitted making fraudulent claims, and when faced with the harsh reality of their actions they have been only too quick to say 'I wish I'd never done it'."
While some around the table said people need to know they will be caught and punished if they commit fraud, Mr Davies pointed out that the people who are the targets for such marketing are not the 10% of fraudsters but rather the 90% of honest customers.
This was backed up by Mr Arundel, who revealed that research suggests 10% of people are inherently honest, 10% are inherently dishonest, and in between there's a margin which could fall either way given the right rationalisation. He explained: "The challenge is to ensure that people see greater barriers to fraud, in terms of it being socially unacceptable and with less opportunity to commit it. Getting that combination and making it a rational decision not to commit fraud is what is important."
Putting his 'ABI hat' on, Mr Beadle said this debate around communication is similar to those he had with the industry in the lead-up to the IFB's establishment, and once the concept was achieved it all moved forward quickly. "The same applies to communication - we've been debating for the last couple of years on how we get the message right and it's not a simple thing; what message are we trying to deliver to whom and what's the outcome we're looking for? That's a really difficult thing to get to grips with. I promise you, when we get to the right concept, which we're not far away from, things will move quite quickly."
Mr Pandya concluded by saying that the key decisions in the industry faced by fraud practitioners, fraud managers and insurers are, crucially, "whether we educate or punch. At one moment - when it suits us - we're talking about educating and saying it's socially unacceptable and then literally the next dialogue is about harder sentences and prosecutions."
Mr Beadle countered that what the industry is trying to achieve is behavioural change: "you want people to stop doing it as prosecutions and the like are reactive. So if you can actually drive behavioural change, you get back to the preventive side, and that's where we've got to be looking. It's about saying to people - change your behaviour because it's good for you and good for us."
Chair: Jonathan Swift, editor, Post
Simon Arundel, fraud and compliance-risk manager, Ecclesiastical
John Beadle, chairman of the Insurance Fraud Bureau steering-group and counter-fraud manager at Royal and Sun Alliance
Don Clarke, head of fraud, Keoghs
Richard Davies, fraud-risk manager, Axa
Bobby Gracey, head of counter-fraud solutions, Crawford and Company
Glen Marr, regional claims-compliance and fraud officer, AIG Europe (UK)
Mihir Pandya, fraud manager, Allianz Cornhill
Baden Smith, head of assurance services, Legal & General
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