Counter fraud experts explained that difficult economic conditions are leading to increased levels of fraud from non-traditional perpetrators, necessitating a rethink of existing anti-fraud models

More businesses and individuals could be tempted into defrauding their insurers for extra money as the cost of living crisis continues to tighten purse strings across the country.

A collection of counter fraud experts at yesterday’s virtual Fraud Charter roundtable (6 September 2022) – hosted by Insurance Times and sponsored by Carpenters Group – confirmed that they were already beginning to see the impact of the cost of living crisis on the frequency and type of fraudulent insurance claims.

Carpenters Group director Donna Scully explained: “One of the things we’re seeing is more fraud in the low level domestic space, where people have identified quick wins that can get them some money.”

The cost of living crisis has created increased costs for both small businesses and individuals. For example, the Rising cost of living in the UK briefing, published on 2 September 2022 by the House of Commons, revealed that between July 2021 and July 2022, domestic gas prices increased by 96% and domestic electricity prices rose by 54%.

In turn, these escalating prices have led to an increase in fraudulent claims from non-traditional sources.

Kellie Lacey, head of intelligence and claim insight at Crawford Legal Services, told Fraud Charter attendees that her firm had begun to identify fraud attempts from sources that would not have previously presented a fraud risk.

She said: “We’ve got claims now from dentists, police officers, teachers and doctors – people who, previously, you would not have thought were going to commit fraud.

“There’s been some raging examples of blatant fraud that perhaps would have previously been overlooked because they didn’t fit into that typical risk profile of people who were going to commit fraud.”

Laura Horrocks, head of fraud technology and intelligence at Sedgwick, confirmed that like Scully, her firm were also seeing increased fraud from low level domestic sources.

She added, however, that her real fears for the next 12 to 18 months emanated from the commercial sector.

“There’s been a lot of talk about protection for small and medium-sized businesses but there’s already talk of 300 pubs closing down,” explained Horrocks.

Pubs and restaurants were hit particularly hard by the Covid-19 pandemic due to the associated lockdowns and social distancing rules causing operational difficulties. These types of businesses now face the prospect of the cost of living crisis hitting them just as they were getting back on their feet.

The Coronavirus and its impact on UK hospitality: January 2020 to June 2021 report from the Office for National Statistics, published in July 2021, revealed that consumer spending on hospitality was 70% less in May 2021 when compared to pre-pandemic levels. Turnover for these businesses was also one-quarter lower than recorded 2019 levels in May 2021.

Horrocks continued: “Over the coming months, we’re likely to see more [potentially fraudulent] fire and escape of water claims for these commercial premises where it becomes completely unsustainable for them to do business.

“A lot of these businesses are going to be tipped over the edge, so they’re very vulnerable at the moment.”

Fertile ground for CMCs

While the cost of living crisis has prompted increased fraud from unexpected sources, it has also created advantageous conditions for claims management companies (CMCs) that make their money by enticing customers to submit fraudulent claims.

Ben FitzHugh, Clyde and Co’s head of intelligence, explained: “The concern is obviously the vulnerability of potential customers and claimants being approached to pursue claims that they wouldn’t necessarily have already thought they might want to – there’s a significant risk of CMCs going and finding the work themselves.”

Statistics released by the ABI last month (26 August 2022) revealed that the volume of fraudulent claims in 2021 fell to the lowest recorded level since 2007 – a total of 89,000 across the year.

FitzHugh, however, suggested that this fall may be the result of fraudsters focusing on “areas where there’s less sophisticated kinds of fraud identification”, such as housing disrepair claims.

He said that there was a “big, big risk” that individuals would increasingly be approached by CMCs trying to take advantage of the cost of living crisis to sign up customers for property disrepair claims.

Realigning fraud models

Considering the impact of the cost of living crisis on the insurance fraud landscape, Lacey suggested that traditional fraud detection models were no longer necessarily fit for purpose and that Crawford had begun advising its clients to “do some rejigging on their prediction models”.

Horrocks agreed that historic data around the likelihood of fraud from certain sorts of claimant would not be the best approach to identify future claims.

She explained: “[The people now submitting fraudulent claims] are not necessarily people in organised groups that have experience of committing fraud previously.

“We can’t really look back and use data matching on what we’ve seen previously – we’re really going to have to rely heavily on the expertise of the individuals within claims teams to spot any concerning behaviour patterns.”

Formulating a solution

David Parkin, deputy director for civil justice and law at the Ministry of Justice (MoJ), attended yesterday’s Fraud Charter to update himself on emerging fraud trends related to the cost of living crisis.

He explained that the MoJ had begun work on the “likely direction of the cost of living crisis and its impact on the justice system - particularly around how it may create and develop new forms of fraud”.

Parkin suggested that the cost of living crisis may require “a reset [in] the response of justice to fraud”.

He added that this could potentially be achieved by reconvening the Insurance Fraud Taskforce (IFT).

The IFT was originally established in January 2015 to investigate causes of fraudulent behaviour and recommend solutions to reduce the levels of insurance fraud.

A final report was published by the IFT in 2016, which was briefly reviewed in 2018, but the organisation has not operated since then.

Scully supported the reconvening of the IFT, noting that she believed it was “the most joined up the industry has ever been in the fraud space”.

Better communication

Apart from reconvening the IFT and formulating responses to new kinds of fraud, Fraud Charter attendees emphasised that better communication from the insurance sector could present an effective solution to ameliorating fraud arising from the cost of living crisis.

Mark Allen, chief fraud and financial crime officer at the ABI, said that it was “really important” that the insurance sector effectively communicates a counter fraud message to customers.

He added: “It’s really important that we do reassure customers that we recognise that most policyholders are honest and that they will get their claims paid expeditiously.

“However, we’re mindful that customers are more vulnerable to scams during periods of financial austerity.”

Tom Hill, detective chief inspector at the Insurance Fraud Enforcement Department of City of London Police, said that effective messaging to dissuade potential fraudsters was “key”.

However, there also needed to be a “proportionate law enforcement response” to punish those who did commit fraud and dissuade others from committing it, he added.