As whiplash claims have become less attractive to potential fraudsters thanks to the Civil Liability Act, could gap insurance become a new problem area?

It is difficult to measure fraud, as Insurance Times editor Katie Scott considered last month, but the reported lower volume of claims for whiplash injuries has been a running theme since the introduction of the whiplash reform regulations on 31 May 2021.

Data released at the end of April 2022 by the Department for Work and Pension’s Compensation Recovery Unit showed that only 97,099 motor injury claims were made between 1 January and 31 March 2022 – a decrease from 107,463 claims in the same period in 2021, when Covid-19 lockdowns were in full effect.

Figures from the Official Injury Claim (OIC) portal, published in April 2022, also confirmed this trend. There were around 650,000 whiplash claims registered per year before 2020, but in the first 10 months of the new portal’s operation, it has only recorded just over 200,000 claims.

Peter Oakes, head of counter fraud at Crawford and Company Legal Services, said the whiplash reform had partially achieved its objectives.

He explained: “It’s true that [the] whiplash reform has brought the claims volume down, especially the high volume of ‘frivolous’ claims generated by a whole industry that had emerged around whiplash claims.

“But this change in volume may disguise some unintended consequences of the reform – namely, a shift from a huge volume of small claims to a smaller number of more valuable claims.”

Oakes added that potential fraudsters may be targeting areas which sit outside of the OIC portal, such as scooter accidents.

He also specified that another susceptible area for fraud was gap insurance. These policies provide cover to customers for the difference in value between what an insurer pays out for a motor claim and the price a customer paid for their car.

Oakes said he had noticed a “huge uptick in fraud” around gap insurance, “especially for return to invoice policies”.

Return to invoice (RTI) policies cover the difference between normal insurance payouts and the original invoice price. Therefore, fraudsters could opt to use their insured vehicle for the entire duration of their policy term, only to cause a situation to have it written off near the end of the insured period. They would then be compensated the full price for the vehicle as if it was new.

“This fraud is barely picked up, despite usually carrying some obvious red flags,” he added. “Ultimately, this is to the detriment of the main insurer.”

What to watch out for

The potential for fraud in the gap insurance sector is exacerbated because there is currently “no database for gap insurance policies”, added Chris Hallett, head of the special investigations unit at Synectics Solutions.

He explained: “Currently, gap insurers do not share data among themselves, let alone with the wider motor insurance industry. There is, for example, no way of knowing if there are multiple gap insurance policies on the same car, which - while not illegal - would be an obvious red flag.

“In certain circumstances, the existence of gap cover on a vehicle involved in a claim, especially a return to invoice policy, would be an important clue that should trigger a closer look.”

Hallett said that he had seen fraudsters attempt to make motor finance applications for a new car close to the end of a gap insurance policy, while their existing vehicle had outstanding finance payments attached to it.

“This current car then ‘mysteriously’ goes up in flames”, he explained, triggering the regular motor insurer to pay out at the market rate.

“A claim is then made against the RTI gap policy and, if paid, the claimant then [has] the funds to buy a brand new car again. When you see the same suspicious activity happening every three years when the vehicle finance is expiring, then questions need to be asked.”

Difficulties identifying this specific type of fraud are made worse because gap insurance fraudsters “tend to have no history or signs of fraudulent activity”, according to Hallett.

More data sharing

By way of a solution, Oakes suggested that motor insurers ask new or renewing policyholders whether they have gap insurance on the vehicle they are seeking cover for. “That’s a flag and an indication of risk,” he said.

“We’d also like to see more data sharing – simply to avoid multiple policies being taken out on the same car.”

Hallett added that the whiplash reform had potentially pushed “professional enablers” of fraud into gap insurance, producing “subtler, harder to spot patterns in the currently available industry data”.

“The big opportunity here lies in feeding more varied and unstructured data into fraud databases and [using] supervised machine learning to discover emerging, complex patterns of fraud early on,” he explained.

“This is, as ever, a game of whack-a-mole. The better the industry works together, the more likely it is we can keep up with scammers.”