As personal finance becomes tighter, the industry has seen a sharp rise in the number of false claims, writes Sarah Kennedy, and is working hard to combat a growing problem.
The credit crunch is costing the insurance industry more than jobs. As people become increasingly desperate to secure the finances they need, UK fraud managers have noticed an unsettling spike in the number of motor frauds this year, which they say is in direct correlation with the economic downturn.
“Without a shadow of a doubt, we see more types of fraud during financial hard times and fraud now is definitely on the increase,” says Gabrielle Stewart, technical director at Absolute Fraud Management.
Absolute evaluates the fraud landscape every quarter to keep abreast of trends within the insurance industry. Stewart says their most recent research reveals a significant rise in the number of fraudulent claims over the past three quarters.
“This is definitely a trend,” she says. “In this last quarter we have seen an overall increase in fraud of 13.3%. Our opinion is this will continue over the next two quarters because of the credit crunch and the economic downturn.”
In the past three months, the number of cases of people misrepresenting the information they provide to underwriters when they take out a policy has increased by 14%, says Stewart. “This is very telling. The cost of living is going through the roof and people are trying to keep the cost of their premiums down.”
Cifas, the UK’s fraud prevention service, says that in the first three months of 2008, fraud levels in the overall UK finance industry rose by 10%, compared with the same period last year. The number of people caught lying on financial applications grew by 13%.
Decreased access to capital, coupled with increased costs of operating a vehicle have led people to take more drastic measures, says Jack Brownhill of the World Motor Insurance Consultancy.
Brownhill says new tax bands legislated by the government in the last budget have suddenly made it more costly to drive certain vehicles. Larger vehicles or those that rate poorly in emissions tests can be paying up to £400 more in taxes. Those looking to sell their vehicle to save money will find that because of the new tax bands the resale value has dropped significantly.
“These vehicles are losing value quite quickly and there is a potential for fraud and ‘alleged’ theft,” he says.
John Beadle, president of the Insurance Fraud Bureau and fraud manager for RSA, agrees. “People have come under increased financial stress and find that suddenly something they own is no longer worth what they thought it was.”
“Fraud is on the increase and the credit crunch takes it to a whole new levelâ€
Gabrielle Stewart, Absolute Fraud
To cash in quickly, some drivers have been abandoning their vehicles and then reporting them as stolen. What is disturbing is many of the recent cases investigated by fraud managers are not at the hands of seasoned criminals but rather Mr and Mrs Average, who are acting out of desperation, says Stewart. “Fraud is on the increase and the credit crunch takes it to a whole new level,” she says.
It also keeps the insurance industry on its toes, as typically safe policyholders are now under suspicion.
The internet has also made it easier for people to commit insurance fraud, particularly those who have no criminal background and those who would find it more difficult to lie to someone directly.
“I think we’ve become quite lax,” says Brownhill. “For lots of insurers and their customers, it’s a pretty remote relationship.”
Brownhill says many motor policies are now taken out online where drivers’ licences and records are not thoroughly checked. It’s easier for people to fudge details when they can hide behind the anonymity of a computer screen.
“Many companies are still reliant on the old-fashioned method of good faith,” he says. “We make it very easy [for fraud to be committed], to be perfectly honest.”
Brownhill questions why the industry isn’t moving toward conducting more DVLA record checks online in order to access the information that policyholders may be hesitant to provide.
“There’s a lot of fraud going on out there that we don’t even get into,” he says. “The key is to stop it in the early stages.”
The industry will now have to be extra vigilant, and indeed it can have great success when it focuses its efforts.
The IFB, which was formed to tackle the dangerous trend of staged motor collisions, commonly known as cash-for-crash scams, has had some significant success over the past year. About 130 arrests have been made and dozens of charges laid as a result of joint operations between the police and the IFB. Beadle says the IFB is dealing with 28 live operations which could put a stop to thousands of claims.
“Cross-industry strategies are what helps the bottom line
Bobby Gracey, vice president, Crawford & Company
The resounding success has led to calls for the expansion of the IFB’s remit to tackle additional fraud scams.
The industry has also been waiting to see what will come out of the passing of the Serious Crime Act, which would allow data sharing between insurers and the public sector — leading to the potential blacklisting of serial fraudsters in all sectors.
The logistics of such a database are still uncertain, with many questions surrounding who would oversee the information, who will pay for it and what the legal ramifications would be.
Not everyone in the industry is on board with the database either, with some preferring to keep their measures of combating fraud guarded.
“Those brave enough to share their information across the industry are more likely to succeed,” says Bobby Gracey, vice president, global counter-fraud at Crawford & Company loss adjusters.
“Some seem to view their strategy to combat fraud as competitive, while others realise that cross-industry strategies are what helps the bottom line.”
Regardless, fraud managers are certain the database will take years to come to fruition and it’s clear, given the economic climate, that immediate action is needed.
“The industry needs to know there is no silver bullet when it comes to combating fraud,” says Gracey. “We are not even half way to where we need to be, but the key thing is to maintain momentum.
“Once we’ve tackled motor we must go cross-industry. It’s a global problem.”
The 10 most popular motor frauds believed to be influenced by the credit crunch, as seen by Absolutes investigators
1. Cash for crash. This continues to be the most significant and dangerous form of motor insurance fraud. The staged collisions are planned by organised crime networks, and investigators say it is known the money received from claims
pay-outs have gone to fund other criminal operations, including terrorism.
2. Misrepresentation of information when applying for a policy. In the past three months the number of fraudulent policy applications has soared by 14% a very significant jump for one quarter and a direct link to increased financial pressures, says Absolute technical director Gabrielle Stewart. People are directly lying about their driving history and even falsely claiming to keep their vehicles in a garage at night. They are doing this to try and keep the cost of their premiums down,Ã¢â‚¬Â she adds.
3. Staged motor thefts. The financial downturn has left many drivers in arrears when it comes to paying off their motor loans, says Stewart. Its a dire situation,she says. Ã¢â‚¬Å“People unable to get credit are taking out logbook loans against their vehicle. The financing for such a loan can be as high as 470% APR, which many find impossible to pay back. We are seeing a huge spike in these types of loans, she adds. As such, investigators are finding more people are reporting their vehicles stolen just prior to repossession to claim on the loss and pay back their loans.
4. Vehicles reported stolen after drink driving-related collisions. Stewart says Absolute investigators have noticed a rise in vehicles reported stolen but then recovered with no signs of forced entry. Further investigation reveals that the driver was involved in a drink-driving collision but then abandoned the vehicle and fled the scene prior to the arrival of the police. We cant say for sure this is a result of the economic downtown, but there has been a real increase recently, so I imagine there is a correlation, says Stewart.
5. Staged thefts to cover the cost of another claim. Some have tried to save on the cost of premiums by taking out basic third-party, theft or fire policies. Investigators from Absolute have discovered cases where drivers have been involved in a collision but because it is not covered by their policy, stage a theft to get the pay-out for the damages.
6. Staged thefts of 4x4 vehicles. With fuel prices reaching gouging levels and road tax bands increased to up to 400 pounds, drivers are finding it extremely difficult to afford or sell their 4x4s, says Stewart. So, some have faked the theft of their vehicles to cash in on the loss.
7. Fraudulent bankers drafts. People are increasingly being tricked into accepting forged bankers drafts when selling their vehicles privately, says Stewart. The criminals come to the owners house, strike up a rapport and because of the current pressures to sell, the drafts arent thoroughly checked. These are very clever criminals, says Stewart. Ã¢â‚¬Å“We have seen cases where even police officers have been duped by this. The fraudster then makes off with the vehicle and can use it for a variety of insurance-related claims, including staged collisions.
8. Arson. Policyholders covered for fire are increasingly turning to arson to get their claims pay-out. Stewart says some feel it is a more foolproof route to get rid of their vehicles because the fire destroys the evidence. However, insurers are increasingly using forensic experts to investigate any cases that might seem suspicious.
9. Policies taken out with stolen credit cards. This is a relatively new fraud for the insurance industry and one that only began appearing in the past quarter, says Stewart. Investigators are beginning to see links between certain identities and addresses that indicate this form of fraud is more organised.
10. Policies taken out with a fake identity. Although insurers are quick to cancel a policy as soon as it is apparent the policyholder has used a false identity, if the fraudster gets away with the crime, the insurer is highly exposed to false claims and staged collisions.