Are we beating fraud?

Exaggerating insurance claims is almost a national pastime that costs the insurance industry untold millions every year. Like speeding on the motorway, it seems to bypass the morals of even the most law-abiding people. Perhaps they relieve their conscience by calculating the years of dutifully paying premiums without a claim, or perhaps they see insurers as big companies with mean reputations.

Inflating claims is endemic. Royal and Sunalliance (R&SA) found seven out of ten people thought someone would exaggerate a claim if they could get away with it. Out of the 2,000 sample population interviewed, 76% believed fraud was a common practice and just under 50% thought people inflated the value of claims by a third.

Now, the industry is actively seeking to crack down on these "exaggerations", as well as professional swindlers, through the repair and replacement service. The service has grown in popularity in the past five years. In the old days, claims were made on paper and policyholders could easily add items or numbers at will unless the insurer asked for receipts. If the claimant was asked to provide two estimates for the item, they could simply nip down to the high street to find the two highest. But repair and replacement has given insurers more control of the claim and more opportunity to vet the claimant, especially because most claims are now handled by call centres.

At R&SA, staff are trained in an interview technique modelled on that of the police.

Moreover, major insurers have struck bulk discount deals with the major retailers that supply the repair and replacement service, again helping to cut their spend. As a consequence of this relationship, suppliers have become involved in the claims process themselves.

For example, both Norwich Union and R&SA have discovered Rolex watches are a popular item for creative claims. There are some simple give-away signs when someone is lying - for instance, if a policyholder claims to have lost their 20-year-old Rolex, the supplier asks the policyholder how to change the date.

But how much of this is theory and how much is widespread practice? The Association of British Insurers is reassessing its current estimate of fraud in the UK, because it is woefully low - this speaks volumes. Insurers have the same problem with fraud as the police do with drugs. Despite their best efforts and some headline-grabbing successes, the amount they discover is just the tip of the iceberg.

Slow progress
R&SA personal lines fraud manager Peter Jackson says it is too early to say whether new techniques are having an effect. "We have only just started to train our suppliers in claims handling techniques, and I don't think we will be able to judge the results for another two years. But they are willing partners."

Norwich Union's fraud manager Neville Warnes agrees there is room for improvement, but admits the current priority is to amalgamate the claims handling teams inherited from the merger with CGU.

Progress against fraud is slow. Claims managers are under huge pressure to process claims as quickly and efficiently as possible. The wave of mergers and acquisitions in the past five years, coupled with the refashioning of claims handling through call centres has caused massive disruption.

The priority is to hit targets and keep business.

Indeed, insurance is a soft target for fraud because of its own culture and structure. Firstly, policies are founded on the principle of utmost good faith that effectively makes it open season for the fraudster. This has been exacerbated recently because the sector has lagged behind the rest of the financial services. Claims managers use the analogy of a fraud balloon: if you squeeze it in one area, it will bulge in another. "Banks, building societies and social security has been squeezing for a few years and so the fraudsters have moved into insurance," says Jackson.

In addition, it took a long time to settle claims in the past, not only because it relied on the Royal Mail but also because brokers were in the middle. "If the claim takes four or five weeks to settle, the claimant has all the time in the world to think of a way of frauding us or just be a bit too optimistic," said Cornhill's fraud manager Harry Rule.

Tell-tale signs
It's not surprising, then, that two direct insurers, Direct Line and Churchill, were the first to adopt fraud detection software - Hunter and Detect - that is already used in the banking and financial sectors.

These systems hold a database of known and suspected fraudsters. In addition, they can look for similarities or discrepancies in a policy that could be a tell-tale sign of fraud. For instance, a crook is likely to change their name and address if filing multiple false claims, but not bank account details. Hunter and Detect enables them to spot the recurring bank account.

There is little new about the techniques used to detect fraud, but technology is helping to spread the knowledge far and wide. R&SA has trained its call centre staff in scientific customer orientated risk evaluation (SCORE) - jargon for asking the right questions and spotting unlikely scenarios and circumstances.

For instance, it is highly unlikely if a claimant says only a valuable antique has been stolen by burglars who also graffitied the house. Burglars who steal antiques don't generally doodle. Shared databases such as the Claims Underwriting Exchange reinforce this expertise.

But it is only in the past two years that R&SA has set up fraud teams, the first UK insurer to do so. The commercial business division has 15 specialist fraud investigators working in area claims offices and is headed up by ex-Scotland Yard Detective John Beadle. The home and motor fraud units, managed by Peter Jackson, are based in Peterborough and Leeds, with support from field-based investigators. This year, Jackson's squad will investigate 7,000 claims, nearly double the number of two years ago. Of these, half will result in the insurer crying foul. But this is just 1% of the insurer's 700,000 personal lines claims.

Repair and replacement will make a difference to the practice of exaggerating claims, but not because of sharp and sophisticated claims handling call centre staff or the expertise of the suppliers. When insurers can provide a fast and efficient repair and replacement service, most people will not bother inflating their claim.

"When there is an accident, most people just want insurance to work," says Rule. "If we can provide a fast and efficient service, they will be happy."

Repair and replacement will help crack down on fraud in the future, but only if the industry introduces the commitment shown by only a few insurers so far.

Too vague to know for sure
Jewellery is a favourite for fraud. There are an average 300,000 claims a year leading to payouts of up to £400m. But the industry has little idea what it has insured, because of the vagueness of ordinary buildings and contents insurance. Less than 3% of claimants do not have proper documentation because the item fails to warrant special treatment in the high net worth bracket. The industry is signing bulk discount deals with the major high street retailers, such as Cignet, but the old-age practice of seeking two high street estimates is still widespread. About 10% of claims are now handled through the Loss Management Group (LMG), a specialist firm that employs 25 professional valuers and expert jewellers. Managing director Tony Le Fevre says surveys reveal the LMG makes an average £200 saving on every £500 claim. Two-thirds of claimants accept cash settlements, while the rest opt for replacement.