Fraud - Customer knowledge: Getting to know you

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With identity fraud a growing problem, Stephen Teeling argues the case for insurers to follow banks in validation techniques and ask for more information.

Everyone in the insurance industry knows fraud is a huge and growing problem for the sector, hitting honest policyholders, brokers and insurers with increased costs and administrative hurdles. We need to stop matters deteriorating further, and then we need to pursue improvements. But that is easier said than done.

Criminals have long seen insurance as an easy target. And many otherwise honest people have effectively committed fraud by viewing insurers as fair game and exaggerating, or even fabricating, part or all of a claim. So, why is the problem getting worse?

There are many complex and controversial arguments linked to economic stresses, social issues and even moral frameworks. But we can all agree that a substantial cause of the rise in fraud is the way customers — or those who purport to be customers — interact with their broker and their insurer.

Communications technology has rendered the two sides to the transaction effectively anonymous. It is possible to get away with a lot, in terms of body language and nervousness, if you use the telephone. Even more is possible when you use the internet. This 'distance' is making it much easier for criminals to perpetrate identity fraud.

It is ironic that as the phenomenon of social networking has emerged, we have become an increasingly faceless society. Gone are the days when a broker knew each of his customers individually and probably knew the names of their partners and children as well. But as brokers and insurers have evolved and begun to transact business online more regularly, the opportunity for face-to-face or even phone contact has become far less frequent. This now presents a major challenge.

Shifting operations
The scale of the problem is pretty scary. The Fraudscape report by Cifas — the UK's fraud prevention service — reveals that the total number of frauds increased by nearly 10% in 2009 compared with 2008. There was a 32% increase in identity fraud alone, where a fraudster applies in the name of an innocent party or uses an entirely fictitious identity.

The internet is increasingly the channel of choice for those who commit financial crime. For example, more than 74% of identity frauds in 2009 were perpetrated online across all industries. So, the benefits accruing to the insurance sector from online transactions must be balanced against the costs of crime that have resulted from this shift in the way business operates.

Arguably, the industry could become the victim of its own success in identifying persistent fraudsters. As we have become more sophisticated in spotting and sharing information on known criminals, they have been forced underground and resorted to identity fraud. Their acts now include obtaining insurance in the name of an innocent party or creating a false ID before staging an accident that targets a payout, often within the 30-day cooling-off period.

This shifts the problem to a whole new level. Staged accidents are always dangerous and may be life-threatening, so fraud can cost a lot more than an inflated renewal premium.

But herein lies one of the more ticklish problems faced by brokers and insurers. They want to protect their honest customers from the ill effects of identity fraud but they can only do so by making the application process more onerous. Clearly, there is a delicate balance to be struck.

An important reference point is the Financial Services Authority's requirement for financial businesses to 'know your customer'. This provides a compliance imperative on top of the commercial requirement to tackle the problem. It allows a business to remind the customer that there are official reasons why certain actions and routines are a necessary part of the sales or claims process. In other words, questions are being asked to ensure business is broked and underwritten correctly and, in turn, to protect the interests of honest and law-abiding customers.

Brokers and insurers must come to terms with the fact there is a need to make it more difficult for customers to misrepresent their insurance proposal or claim, whether negligently or deliberately. This is difficult when a good degree of our effort in recent years has been towards making the customer experience quicker and more streamlined than ever before. But if we want to address the identity fraud problem — and we must — the industry has to take whatever steps necessary to establish beyond reasonable doubt that customers are who they say they are.

Grasping the nettle
The banks have grasped this nettle. Try opening an account or making a withdrawal over the counter without producing a meaty piece of documentation, such as a driver's licence or passport. As for online transactions, the banks deploy an arsenal of tools designed to check identity against credible measures.

We in insurance must do the same. We must seek documentation where practical and deploy all possible technological measures to protect our customers and our business. When it comes to receiving payment, we must check credit card and bank account details. To date, we have been good at identifying fraud but we have been less successful at preventing it. We must learn how to close the stable door before the horse bolts.

Collaboration between brokers and insurers remains pivotal to the prospects of success of any anti-fraud campaign. Together, we must take responsibility for establishing the bona fide buyers — and insurers need to give the same priority to the technical integrity of their claims handling as they do to the speed with which they answer the phone and process the claim.

The industry needs to work together to change the widespread perception that it is a soft touch. Changing society's attitudes or influencing moral behaviour may be beyond our control but there is nothing to prevent us using our knowledge, expertise and technology to make life as difficult as possible for those who seek to take unfair advantage of brokers, insurers and their valued customers.

Stephen Teeling is counter fraud manager at Groupama Insurances

What can insurers learn from banks? - Click here to follow the debate on indentification validation

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