Fraud costs the country £600 a second – and that will only increase during the recession. Ellen Bennett reports on how insurers can battle the blaze.
“Our claims department is getting ready for an emergency,” says Graham Gibson, director of claims at Allianz. He is not alone. As the global economy falls into a recession, claims – and fraud – are set to spiral. Across the industry, claims departments are readying themselves to battle the blaze.
Time is short. The impact of the credit crunch is beginning to filter through, with the ABI warning last week that urgent action to fight fraud is needed. Fraud costs the country £20bn a year – or £600 per second – and rising, the association says. Arson costs the economy £53.8m a week in England and Wales. What can the industry do to fight back?
History and common sense tell us that when individuals lose their jobs, or just begin to feel under financial pressure, they are more likely to commit minor frauds, such as inflating claims for lost personal possessions. They are also more likely to file genuine claims that they might not bother with in more stable times.
Crime rises too – and insurers foot the bill. In the recession of the early 1990s, theft rates accelerated as unemployment levels rose. According to actuary EMB, thefts peaked at 900,000 in 1992, when unemployment levels had nearly doubled to 11% over two years.
Arson is another headache. It’s no coincidence that as small businesses find it harder to survive, a lot more of them start to go up in flames.
Although UK crime figures for the past few months are not yet available, the consequences of economic slowdown can already be seen in Ireland, which slipped into recession in September. The Irish Central Statistics Office has reported a 9% hike in retail theft and a 7% rise in burglary this year. Arson is up by a staggering 24%.
“It is well publicised that arson and theft increase in times of economic difficulty,” says Dominic Clayden, director of technical claims at Norwich Union. “This has happened really quickly – people are in a lot more debt than they were, house prices are over-inflated, food costs have gone up. All the metrics point to a particularly unpleasant couple of years to come.”
It’s partly a perception issue. Many people still consider insurance fraud a victimless crime, despite the fact that everyone pays for it through higher premiums. So when they feel the squeeze, they think they deserve a “return” on the premiums they paid in the good times (see box, right). Insurers also complain that there is not enough of a deterrent to would-be fraudsters, thanks to their own historic reluctance to press charges and the police’s perceived lack of interest.
There is a consensus that the industry needs to increase public awareness, but a recent attempt by the ABI to launch an advertising campaign failed because of quibbles over funding.
This reluctance to work together is too often the industry’s downfall. Understandably, rivals are reluctant to share information and competition laws limit the opportunity to do so, but working together does get better results.
One recent success story is the Insurance Fraud Bureau (IFB). Launched in July 2006, it convinced insurers to share key data on organised crime and has already reported significant success (it saved the insurance industry £15m in its inaugural year) with numerous arrests and a handful of major convictions. But the IFB’s efforts are limited to fighting big-ticket organised crime.
Individual companies have made strides in developing their fraud detection. David Williams, AXA’s claims director, calls the current detection rates “stunning”, with 10 times more fraud detected in 2008 than 2004. But this is largely down to improved detection, so it is difficult to tell how actual levels of fraud have changed.
There are also limits to how aggressively claim handlers can attempt to detect fraud, without offending honest claimants. “The vast majority of my customers are absolutely law-abiding and genuine,” says Clayden. “They have had a loss, and we want to pay out as fast as we can.”
The industry can manage the tension with genuine consumers by being honest, reckons Clayden. “There can be a breakdown of confidence with customers when you’re not open. If we say, look, fraud is a problem, for us and for you, and we’re going to screen all calls in a non-invasive way, that’s an honest conversation.”
With suspicious cases coming in thick and fast, the claims community has no choice but to commit to a robust detection strategy – and to work together wherever possible.
'It's ok to lie to insurers'
More than 1 million Britons think it is OK to lie in insurance claims, according to research by RSA. The survey of attitudes to fraud, conducted in the summer, also found that nearly half of those who think it’s wrong to lie in claims still consider it only a “little fib”. But the public was aware of the consequences of committing insurance fraud, with 64% of respondents saying it could result in their policy being voided. Two thirds realised they would have to pay back previous claim payments, and the same number knew their future premiums could rise as a result. These minor consequences may not deter most people, but the possibility of a black mark on their financial record would make 78% think twice about committing fraud.