Fraud scene investigation

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New trends in fraudulent behaviour have emerged as the recession takes hold. Tracy Holder argues that insurers need to keep a close eye on the situation and not reduce the quality of investigations

Commentators have always believed a close link exists between the condition of the UK economy and the volume and cost of insurance claims. However, while the UK has only recently been officially in recession, signs have already emerged of not only traditionally expected trends but also new ones. Undoubtedly these will give insurers focused on managing their claims spend grounds for concern.

On a positive note, the number of reported claims resulting from road traffic accidents has fallen to its lowest level for a number of years. According to a February article in The Sunday Times, the volume of traffic on the road in 2008 fell for the first time in 30 years, thanks to a combination of high fuel prices and the recession. The average motorist drove 90 fewer miles than in 2007, which in turn contributed to a record reduction in road deaths in the 12 months to the end of September 2008.

However, some motor-related claims buck this trend and could be linked to the recession. For example, a 15% to 20% increase in low-value vehicle fire claims has been witnessed in recent months, many of which warranted detailed investigation. As the recession takes hold, some people find the urge to commit insurance fraud becomes stronger, especially after an expensive breakdown - a fire in the problem area and the resultant insurance claim of around £800 may be viewed as an expedient way of recovering the cost of repairs.

Organised crime

Quest Gates counter-fraud team has also seen an increase in motor claims potentially linked to organised crime while the incidence of vehicle theft - particularly high value, prestige vehicles - has increased in recent months as the demand for stolen-to-order vehicles continues to climb.

Many liability claims have also been investigated that, while not fraudulent, may have links to the current recession. As financial hardship intensifies, people inevitably look to other ways of supplementing their income. For example, a rise in the notification of entirely genuine employers' liability claims has been noted, but dating from incidents that occurred some time ago - occasionally years. By way of illustration, 10% to 15% relate to accidents that took place more than a year before a claim was made.

One explanation may be that, having recently been made redundant, employees are only now deciding to pursue a valid claim. This could also explain why surveillance is again delivering results by proving that some claimants exaggerate injuries in an attempt to obtain larger settlements.

However, the sector that has seen the greatest change in its claims profile is property investors. Whether individual buy-to-let developers or property investment companies, all have been affected by the credit crunch and this has had a significant impact on the insurance market.

The property investors sector has proved very profitable for insurers in recent years - claims experience has been good, property prices rose steadily and business boomed. However, everything changed in 2008. Financial difficulties caused tenants to fall behind on rent, disputes arose and the number of malicious damage incidents increased - just as the bottom fell out of the property market and credit for future acquisitions became unavailable.

This has created a worrying trend amongst unscrupulous property owners, who are submitting increasing numbers of property fire claims, particularly for unoccupied properties. Empty property has become difficult to sell and, if it is unoccupied for any length of time, falls into disrepair, decreasing in value even further - a vicious downward spiral. Quest Gates alone has seen a doubling of incidents in unoccupied premises over the past 12 to 18 months. Following a fire, reinstatement work could be seen as a means to refurbish the premises and make it eminently marketable at no cost to the developer.

Alternatively, the owner may seek to realise funds in the form of a 'diminution in market value' cash settlement. There is evidence of this over the past three months in that fraudulent household and motor claims from property developers have been uncovered. In each case the developer said 'business is booming' and 'this is a great time to be a property developer'. Given the evidence of enquiries, however, this is not always the case.

These examples are indicative of the way the profile of claims tends to change in line with society's prosperity and are not unique to the current economic downturn. So what is different this time?

Two main claims-related differences have been noticed. First, the value of potentially fraudulent claims, particularly under commercial policies, is often smaller than previously experienced. For example, analysis over the past six to 12 months has revealed a much higher frequency of claims falling into the £2000 to £10,000 bracket, whereas, historically the trend would be for such claims to be in excess of £25,000. It may be that policyholders feel a 'supplement' to their present income is all that is required. Or it could be that the recession has not yet bitten deeply and businesses are generally keeping their heads above water - for now. It will be interesting to see if there is an increase in major commercial fires over the next six months.

Desktop investigations

Second, and in many respects of more concern, is the fact that everyone has been affected by this recession - including insurers. Whereas in previous downturns insurers investigated potentially fraudulent claims more rigorously, a small proportion of insurer clients have actually reduced the number of claims they are passing to adjusters, preferring to conduct cheaper desktop investigations.

As an example, at a time when one could be forgiven for expecting to see an increase in the use of surveillance, as well as other counter-fraud tools, our own surveillance team Quantum is receiving slightly fewer new instructions in 2009 - albeit from an increasing customer base - against the comparable period of 2008.

The strategy of replacing field investigations with desktop claims handling will probably bring about short-term administrative savings but at what ultimate cost? History tells us that we have entered a period where fraudulent claims will increase and the insurance industry needs to be prepared. While everyone needs to be prudent during these difficult times, the answer is not to reduce the quality of investigation, but to control the overall claims cost through the appropriate level of investigation on every case.

- Tracy Holder is counter fraud divisional manager at Quest Gates.

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