Breaking the vicious circle

The results of the latest ABI research formally confirm what the industry has known for many years: that a relatively small but growing number of claimants are dishonest, and that this is driving up the cost of insurance for honest policyholders.

So how did we get here? There's no doubt that inroads by organised crime have made a significant impact over the past three years, but this is only part of the story. A key message from the ABI research is that we are in the early stages of a vicious circle. As a compensation culture develops in this country, so ambulance chasing becomes more widespread, with the expectation that every minor misfortune is potentially worthy of compensation. To date, this compensation has been largely funded from insurers' claims funds.

As the impact of sharp increases in claims costs have forced premiums to rise across the industry, so a myth of excessive profit-taking by insurers has developed. The reality is that most insurers have historically sought to balance premium income against claims costs. But this has simply not filtered down to an increasingly resentful public. As a result, it appears that some customers are encouraged to try to recover their premium outlay with every claim, unwittingly increasing the future cost of their premiums yet again. And so the spiral turns.

This public disconnect between cause and effect is neatly summarised by one fraudster quoted in the ABI research as saying: "It's justice money for all the years that you've paid into insurance."

The problem is, one fraudster's so-called "justice" is an increase on everyone else's premium.

So how can we break the circle? Faced with this threat, most insurers have developed effective fraud prevention regimes, employing a sophisticated framework of manual processes, technology and legal/investigative expertise to detect and prosecute fraudsters.

But, ultimately, our industry needs to collaborate more if it is to stop the rot. The larger insurers are increasingly sharing best practice and co-ordinating industry prevention initiatives through the ABI fraud committee, on the basis that we all stand to gain more from sharing than we stand to lose in terms of "competitive advantage".

Many adjusters and investigators have not yet adopted this stance, jealously guarding their own best practice models like the crown jewels.

Brokers are well placed to play a major part in detecting and preventing fraud. In many cases they will know customers' histories and backgrounds in detail, and are often well placed to spot potentially suspicious or unusual claims. But they could do more. Prevention is generally better (and more cost-effective) than cure and insurers are either applying or considering the introduction of preventative screening at policy initiation. Some brokers already apply basic fraud detection processes at policy inception and renewal.

But more is needed to tackle this industry-wide issue. A practical framework for sharing best practice across all stakeholders in our industry must be identified and implemented. We all stand to benefit.

Chris Hill is head of claims fraud at Norwich Union

The ABI research paper What is Dishonest, can be found at the ABI website (www.abi. org.uk) undergeneral insurance publications