Fraudsters cost the (re)insurance market billions of dollars every year. Cameron Andrews looks at what is being done to combat crime.Fraud is as prevalent as ever. Across all sectors of business the
problem is rife and nowhere more so than in insurance. In the US the
Coalition Against Insurance Fraud (CAIF) estimates that fraud costs the
industry $79bn a year, while the Association of British Insurers (ABI)
puts the UK total for 1999 at around £650m ($984m).
This is just the tip of the iceberg, though, according to John Wagstaff,
manager of the crime and fraud prevention bureau at the ABI. "Obviously
there is a lot more that we just don't see," he says.
Insurance fraud is a persistent problem, he points out, because it is
perceived by criminals to be lucrative and relatively safe. The potential
gains from organised insurance fraud vastly outweigh those of walking into
a building society with a sawn-off shotgun. "An armed robbery will land
you with an 18-20 year sentence for relatively little reward while fraud
carries a far lesser sentence," Mr Wagstaff says. "One family in Preston
tried to get £3m out of insurers and the state before they were arrested,"
Fraud in various guises
Fraud comes in many forms, affecting both insurers and reinsurers. At the
most basic level it is individual policyholders making a claim and lying
about the true value of their loss. Another form is gangs 'ripping-off'
insurers as a criminal business.
Leslie Bryce, director of fraud and investigation at CGNU, identifies a
third form: "The non-policyholder fraud, which is fraud by suppliers,
staff and brokers." Ms Bryce heads a team entirely dedicated to this type
of fraud, which she says is a booming industry and one that is
particularly hard to detect.
Insider fraud ranges from staff making claims cheques out to themselves to
brokers exceeding their binding authority or placing business with
companies with a substandard capital base.
Peter Taylor of the Insurance Solutions consultancy sees the latter type
of fraud growing as market conditions improve. "If the market hardens the
fraudsters will be back out again, but in a soft market there is very
little reason to use duff security because there is so much available," he
Oliver Prior, head of the criminal risks practice at broker Willis,
believes that insurers need to take more care to protect themselves from
unscrupulous brokers: "Every now and again you see a broker issue a cover
note without any placing behind it. The client must take a closer look and
ask what security there is," he says. He also says (re)insurers should be
vigilant for cover notes that claim to be placing the risk with, for
example, an 'A' (strong) rated (re)insurer, when the actual credit
worthiness of the paper may only be 'BB' (marginal).
However, insider fraud is not limited to brokers and staff. Mr Prior
points to underwriting agencies also entering into fraudulent practices:
"If, for example, you have an underwriting agency writing on behalf of a
Lloyd's agent, which can't write financial guarantee reinsurance, if the
agency wrote it regardless and was bound to it, the Lloyd's agency would
declare it inviolate and the policy would only be worth the value of the
agent and not the principal," he says.
To avoid the pitfalls, Mr Prior believes cedants should take greater
notice of security ratings. "The market doesn't take notice of security
(ratings) and so the scope for fraud is large because you can play the
game on paper with very little capital," he warns.
Blowing the whistle on cheats
Ms Bryce's department at CGNU is testament to the fact that insurers are
tackling the issue but, as with all fraud, the scope of insider fraud is
very difficult to measure. "As a department one of our objectives is to
put in better tools to identify fraud," she says.
CGNU has recently set up a third-party 'whistle blower' line to enable
staff to report any instances of malpractice anonymously. "So far the
take-up has been reassuringly low," she says, but adds that it is early
The problem with such systems is that employees may feel uncomfortable and
see it as encouragement to spy on each other. Ms Bryce insists this is not
an issue. "What tends to happen is that if someone steals from the
company, other employees feel that that person has stolen from them as
well," she says.
The idea of a 'whistle blower' line has also been implemented nationally
over the last year, targeting policyholder fraud in the UK. "We run a
(freephone) line for people to report fraud," the ABI's Mr Wagstaff
Cheatline, which has been run in conjunction with a national advertising
campaign, Fraud-Check (see posters above and right), receives over 200
calls a month and about 25% of the calls have led to information on claims
being passed to insurers or the police.
Such attempts to combat fraud would seem to be working. According to the
ABI the number of fraudulent claims, as a percentage of total claims, fell
from 4.1% to 3.9% in 1999.
A role for reinsurers
Fraud, in particular policyholder fraud, by definition affects direct
insurers more than reinsurers and as a result the majority of action to
limit its impact is taken by primary companies.
Christian Jacobi, spokesman for Munich Re, says: "Fraud is something our
clients have to cope with and is not a typical reinsurance matter. We care
about whether premium will cover the losses paid out and whether this
includes fraud or not is irrelevant."
However, by default, reinsurers writing proportional business cannot avoid
the incurred costs of fraud. Maximiliane Moody, executive director of the
Kansas-based International Association of Insurance Fraud Agencies
(IAIFA), believes that they should do more to help combat fraudsters.
"I would like to see more reinsurers get involved by making more
information available," she says.
Indeed, although Mr Jacobi says that Munich Re has no single working group
dedicated to fraud, he claims that the subject is not ignored. "We do
accumulate knowledge and pass it on," he insists.
Willis' Mr Prior considers that while reinsurers are not overly active,
they are at least protecting themselves: "(Reinsurers) leave (combating
fraud) to the insurers, although they do have the right of audit to go
through a client's book of claims to determine whether payments are
In the past it was just a token gesture, but it has been used more
frequently in recent years," he notes.
Mike Bennett, a director in the insurance claims services department of
Pricewater-houseCooper's (PWC), adds: "Reinsurers only really get involved
if a cedant has a problem that they are not addressing." He points out
that this tends to be only after there has been a major loss and that
reinsurers do little on the preventative side.
At the end of the day, though, Mr Jacobi suggests that fraud is paid for
by the policyholders rather than insurance companies. "In certain lines of
business, for example motor, (about) 5% of the premium covers fraud," he
Increasing premiums is the obvious way of coping with the problem,
according to Mr Prior. "When you borrow money on a credit card you pay for
fraud in the interest rate and it's the same in insurance. As long as
people are willing to pay, fraud will continue," he says.
Mr Jacobi adds: "If primary companies want to fight fraud and reduce
premiums for consumers they will." However, he points out that it is
easier and more cost effective for them not to.
Turning a blind eye
Complacency in the battle against fraud is a big problem. Referring to the
US the CAIF says: "Many insurance companies unwittingly promote fraud by
paying suspicious claims rather than fighting them. Insurers sometimes
reason that it would be less expensive to pay a suspicious claim than to
pay more in legal fees to fight it."
Swiss Re takes a dim view of such behaviour: "If insurers continue to turn
a blind eye while others are literally helping themselves to the goodies,
they may very well find themselves faced with the accusation that they are
no longer the victims of insurance fraud, but rather the accomplices to
However, CGNU's Ms Bryce argues that insurers are obliged to make an
effort to satisfy their reinsurers that they are consciously trying to
reduce fraud. "Reinsurers must be looking into insurance companies to see
the action that they take to control fraud because it's part of
understanding how we manage all our risks," she says.
Being seen to be actively fighting the risk also acts as a deterrent, the
IAIFA's Ms Moody argues. "If someone is out to commit fraud they look to
see who the easiest target is," she notes, although she adds: "Even if you
have got a good anti-fraud programme, you'll still see some fraud."
Mr Prior also believes that anti-fraud programmes make a discernible
difference: "If you put the right controls in place they'll stop coming at
you," he says. However, the system is against insurers. "If the industry
could develop a network of communication that was as effective as the
criminal network, I'd be impressed," Mr Prior jokes.
It is a joke that rings true nevertheless. The battle against fraud is
largely based on intelligence and the flow of information, but data
protection laws inhibit the process.
"With data information you have to be careful about what you say and what
you pass on because people can sue," Ms Moody says.
However, PWC's Mr Bennett says: "(In the UK) you can get special
dispensation (from the data protection act) on various issues and in
particular in cases of fraud."
Despite this, he confirms that the supply of information does not meet the
requirements of the industry. "Direct Line recently said that there is an
unco-ordinated approach to fraud and not enough pooling of information."
It, like a number of other insurers, put in its own claims management
system which compares claims and looks for irregularities. "If there was
an industry-wide one, it'd be better," Mr Bennett notes.
Co-operation against crime
So far, the UK's only industry-wide claims information system is the
Claims and Underwriting Exchange (CUE), which is owned and run by a
consortium of UK-based insurers. "It's not as successful as it was first
thought, though. It's quite difficult to keep such a system up-to-date and
use effectively, and people are losing faith in CUE because it hasn't done
so," Mr Bennett says.
The ABI's Mr Wagstaff agrees that CUE is not perfect, but adds: "Its
success depends on companies themselves putting the data in." He adds that
the database is undergoing considerable improvements. "At the moment it
covers just household and motor, but it's being extended to cover injury
and travel," he says.
In the US the National Insurance Crime Bureau (NICB) is also active in the
development of such systems. Having linked up with Insurance Services
Office (ISO) to offer a comprehensive claims data system for motor, bodily
injury, property and workers' compensation claims last year, it launched
another information system in May. The system, Forewarn, is designed not
just to detect organised fraud as it happens, but to predict it before it
occurs by focusing on trends.
Even more recently, ISO updated its ClaimSearch software to enable users
to detect staged accident rings and multiple claims for the same loss.
While supporting efforts in the exchange of information and increased
co-operation between insurers, the IAIFA's Ms Moody has another view on
how to address fraud.
"What I would like to see is a basic ethics course within every sector of
insurance," she says.
By tackling fraud at its most basic level, she believes people's apparent
propensity to defraud insurance companies would lessen. "It's an economic
situation. People are tight for money and somehow fall into (fraudulent
activity). They may get away with it once and so try again. Then greed
sets in. It's the basic principle of ethics that people must be taught.
They need to be shown how it affects people," she claims.
Swiss Re agrees: "The most effective kind of counter-measure would seem to
be a broad educational campaign carried out by the responsible organs of
the insurance industry," it says.
INSURERS AS A TOOL FOR FRAUD
- In addition to being the victims of fraud, insurers are increasingly
becoming tools used by fraudsters against other financial organisations,
according to Oliver Prior of broker Willis.
- "Often objects such as works of art are put up as collateral on loans,"
he says. "To show that the painting has value (criminals) may go to
Lloyd's to insure it and the bankers therefore think that Lloyd's will
have done due diligence."
- Mr Prior points out that due diligence in such an instance is unlikely,
however, as an insurer will only investigate after there has been a loss
and not before. As a result it is easy for fraudsters to get insurance
documents for non-existent works of art.
- "Banks have a weakness and insurers are sort of the innocent party," Mr
Prior says, explaining that once a loan has been secured on a policy that
is effectively worthless there is no come-back for the banks.
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