Insurance fraud costs huge sums of money every year. Yet this seems to be a crime
which few people outside the industry take seriously. In the face of chronic under-funding of police forces, the insurance industry must itself do more to solve the problem.
Christine Seib reports

Fraud cost the insurance industry £650m in 1999. This was a rise from £645m in 1998 and £595m in 1997. This is alarming enough, yet Association of British Insurers (ABI) anti-fraud head John Wagstaff fears these figures may be the tip of the iceberg. It is suspected a huge amount of fraud slips through the claims process undetected. The crimes are being committed by two very separate groups: the opportunistic and the professional fraudsters.

Opportunistic fraudsters are claimants who load a legitimate claim, usually because they feel they have been paying insurance for years and `want their money back', or because they fear the insurance company will beat their claim down. Professional fraudsters often work in a group, faking car accidents or break-ins, and are commonly defrauding benefits agencies, the tax and customs authorities and credit and finance companies concurrently. Both groups contribute to the £38 that crime is estimated to cost each UK citizen every year.

Despite the massive and rising cost of fraud to one of the UK's most valuable industries, the message to that the police and Home Office do not care is firmly entrenched in the minds of most insurers, loss adjustors and investigators. As Hugh Thompson wrote in a recent edition of The Loss Adjustor, "despite repeated attempts by the Chartered Insitute of Loss Adjustors and the Association of British Insurers to influence the Association of Chief Police Officers (ACPO) and the Home Office, those investigating possible fraudulent and exaggerated claims find the co-operation of the police patchy at best". Thompson follows with the example of an "overworked and undermanned" police force that is unable to act on clear evidence of fraud, will not release information to insurers due to a poor understanding of the Data Protection Act, or will charge up to £50 for the appropriate crime report. One investigator likened dealing with the Metropolitan Police on insurance fraud to being a prisoner of war.

It is not fair to accuse Britain's entire police force of ignoring insurance fraud. The City of London police operate a specialised fraud squad that concentrates on big-money fraud in the Square Mile. For even larger cases, the police have a Serious Fraud Office. Andrew Gordon, who runs PricewaterhouseCoopers's insurance claims service, reports an excellent police response to his multi-million pound international investigations. He recently handled a £2m commercial claim following a suspicious fire, in conjunction with police, with good results.

However, size matters when it comes to police interest in insurance fraud. There is no doubt that investigators who specialise in household and motor fraud do not enjoy the same level of response as Gordon.

There are very good reasons why police do not always pursue fraud as vigorously as insurers would like. Fraud detection is not used as a key performance indicator by any police force other than the City of London, which means there is little public kudos in fighting fraud. With all types of crime on the rise, police are not inclined to allocate their already badly-stretched resources to fraud. And finally, fraud is a time-consuming crime to solve, often involving mountains of paperwork and days of footwork, yet the penalties meted out by the courts are minimal.

City of London detective inspector Michael Dockree says police are as unhappy as insurers at being forced to give fraud a low priority. "A lot of the time, the police feeling about fraud is frustration. So many of our forces are underfunded, that insurance will go to the back. Politicians want to operate on a shoestring and to have excellent results but crime's going up and there's no more police and no more resources."

Dockree says the police face the danger of emphasising fraud detection only to have figures skyrocket and the force receive a further public shaming, as happened when police began focusing on race-hate crimes. He also says fraudsters are becoming smarter, buying false identities on the internet to commit a number of frauds, before discarding them. This claim is backed by figures recently released by the Credit Industry Fraud Awareness System (CIFAS), which showed that false identity fraud had rocketed by over 460% in the past year. Just over 2,000 cases were detected in 1999, compared to 12,300 in 2000.

Dockree suggests a combined fight against fraud by police, insurers and social services, for research has shown that professional fraudsters often commit fraud against more than one group. "Don't overlook organised crime; this isn't the Mafia, but people who defraud everyone they come across," he says. "Why can't there be joint initiatives."

The co-operation and data-sharing concept is heavily endorsed by Bill Trueman, who ran Lloyds TSB's credit card fraud office before becoming head of fraud at Direct Line. Trueman, who is also a board member of CIFAS, said that insurers had to remember that the police were also inundated with fraud cases from banks, credit and telephone companies. "I was on the Plastic Card Fraud Prevention Forum and I heard the same arguments then that I hear now in insurance," Trueman says. He adds that CIFAS comparisons between lists of known credit, bank, insurance and telephone fraudsters regularly brought up the same names. He also believes that insurers could learn from the banks' treatment of fraud. "The credit card industry is much more mature about how it deals with fraud. It identifies and verifies identities before it accepts business, which the insurance industry doesn't do."

Claims Management & Adjusting director Philip Swift, who specialises in motor claims and submits up to six cases each month to police for prosecution, says many opportunistic frauds could be stopped by a change in the public perception that fraud is a victimless crime. "The victim here is an insurance company, seen as a faceless organisation making big profits. In a way, it's the same as shoplifting."

Public perception must change
Insurance lawyers are also frustrated, because this perception means juries are reluctant to convict and judges reluctant to punish insurance fraudsters. Keoghs claims to be the only legal firm in the UK with a dedicated insurance fraud unit, yet it will only push for a criminal conviction after it has won a civil case against the suspected fraudster. Keoghs' associate partner and fraud specialist, James Heath, says the growth of fraud has forced Keoghs to expand its fraud department in the past three years from three lawyers working part-time to fifteen working full-time.

Heath agrees that the public perception of fraud has to change before the courts will alter their treatment of fraudsters and, in turn, police will be more keen to pursue fraud. "It's a vicious circle," he says. "The public perception is that it's OK to have a go at an insurer. Penalties are often no more than a slap on the wrist and there's no impetus for the fraudster not to do it again." Wagstaff of the ABI agrees, saying "at the lower level, they don't find much police interest because, when it comes down to it, it'll be a caution rather than a conviction".

Heath says that, because fraudsters are often from a low economic bracket, insurers are also reluctant to try to recover court costs - "It's very difficult. They see it as throwing more good money after bad," - thus reaffirming the perception that there is little reason not to attempt insurance fraud again.

There are several initiatives already within the insurance industry to improve this situation. The ABI has a freephone line for the public to report fraud anonymously, and it has set guidelines with the ACPO on reporting fraud to the police, called an `evidence bundle'. Wagstaff reports the freecall line to be reasonably successful, but police response to the evidence bundles depends on the attitude of individual officers and stations.

There are also several databases that allow insurers to search for discrepancies in claims histories and multiple claims, such as the Claims and Underwriting Exchange (CUE) and the Motor Insurance Anti-fraud and Theft Register, plus commercial databases available from Equifax, Dun & Bradstreet, Standard & Poor, and trade databases like CIFAS. CUE holds records of 90% of household and 75% of motor business done in the UK insurance market and can help reveal non-disclosure and concurrent claims activities, for which insurers are billed per inquiry.

The ABI holds a database of every person who has had a fraudulent claim denied or has been been convicted of a fraud-related crime. Insurers can also buy software such as i2 and Hunter, which search for links between claims from simple details such as names and dates of birth, to the use of the same solicitors, accountants, surveyors, loss assessors, doctors and contractors.

Co-operation needed
Accepting that the police-fraud situation is unlikely to change and that fraudsters are become more bold and innovative, what can be done? GAB Robins Investigations Services' UK director John Baldock presented some answers to an insurance conference called Fighting the Fraudsters on February 21. Baldock says the dramatic mergers and acquisitions of recent years have robbed the industry of its knowledge base. He advocates increased training to recognise fraud, an anti-fraud emphasis during the marketing of insurance products and a high standard of customer service at all times, to keep faith with the honest insurance buyer.

Baldock says the anti-fraud filtering process needs to start at the first stage of a claim, using a "red flag trigger" that could be built into a computer system or used manually. He advises the appointment of a Key Fraud Contact (KFC) who is advised as soon as the red flag is triggered and oversees the appointment and management of a specialist investigator.

"It's important that there be a flow of information back to the claims handler who initially instigated the red flag trigger. This will encourage the handler and his or her colleagues to repeat the success." Baldock says. He also emphasises the need for a succinct definition of fraud and a method of measurement, so that the industry can know the true extent of the problem. He says this could be done through knowledge sharing. "I'm sure the answer lies in having joined-up strategies and efficient processes linked to an anti-fraud culture. With accurate means of measurement and red flag triggers being effectively employed and managed by shrewd KFCs, who appoint suitable specialists, I'm certain that the £38 penalty which we all presently pay in increased premiums can be saved."

Do other top loss adjustors buy this theory? Property & Casualty Services (PCS) Investigations operations manager, Alistair Macrae, is behind Baldock in his theory that insurers must take the fight into their own hands. Macrae also agrees that there will be a heavy reliance on databases to combat fraud in the future. However, he is worried that wholesale information sharing might cause firms such as PCS to lose their commercial edge. "I agree there needs to be cohesive action but it would have to be controlled by the ABI," he said. "If the information is going to be shared, it would need to go to a non-commercial body."

ABI recently announced that it was reorganising its anti-fraud and crime unit, bringing in a fraud committee comprising experts in the industry, and hiring an anti-fraud manager.

ABI general insurance boss John Parker says the aims of the new organisation are to liaise closely with police and other agencies and to re-examine the methodology of compiling fraud statistics.

`Know thine enemy' seems to be the new name of the game. If combined with an advertising campaign to convince the public that fraudsters are their enemy too, it may work. Any move forward has to be a bonus, because, until insurers stop looking to the police and start solving the problem themselves, the fraudster is going to be laughing all the way to the bank.

Insurance Solution's website contains tips from insurance law and investigation experts on how to spot fraud in personal injury and fire claims.

British Insurance Law Assocation vice-president Derrick Cole offered this advice on spotting arson.Three essential indicators are:

  • accelerant on the premises
  • insured recently on the premises
  • insured in financial difficulty.

    Other factors to be taken into account include:

  • over-insurance or last-minute cover increases
  • previous criminal record
  • failure to issue accounts
  • failure to register for VAT
  • removal of valuable items immediately prior to the fire
  • elaborate and complicated version of events for alibi
  • vague or unsatisfactory alibi
  • insistence on high level of confidentiality before establishing alibi or releasing documentation
  • prevaricating when information requested
  • high degree of indifference shown to insurance
  • exerting pressure to settle claim quickly
  • unusually high level of knowledge about insurance procedure
  • eagerness to compromise the claim without good reason
  • refusal to sign statements
  • inconsistencies between statements at the scene of fire when compared with later inquiries
  • inability to produce satisfactory documentary evidence
  • submitting bills or receipts from one supplier only
  • similar handwriting on bills or receipts from different suppliers
  • loss early in the policy

    Insurance investigator Paul Devlin, of Devlin Associates statistically analysed 200 claims he investigated on behalf of permanent health and disability insurers. The results showed:

  • 74% of fraudsters are male
  • 50% of fraudsters claim back and joint pain: they are least likely to claim post viral fatigue (6%)
  • 48% of fraudsters are aged in their 40s: they are least likely to be in their 20s (1%)
  • 98% of fraudsters are married
  • 49% of fraudsters work in skilled manual fields: they are least likely to be professionals (5%)

    Know the SCORE
    A futuristic fraud fighting idea has emerged from Crawford & Company's fraud solutions manager Will Gaskell. Gaskell employs applied psychology in a method called Scientific Customer Orientated Risk Evaluaton (SCORE), which he developed in a previous position tackling travellers' cheque fraud for Thomas Cook. SCORE requires the gathering of a detailed account of the claim through "conversation management," which Gaskell says is "designed to expose the fraudulent claim, on the premise that the genuine claimant will have no difficulty in tellng you about something that really happened".

    Applied psychology is then used to identify potential deception through the claimant's behaviour, willingness to co-operate and choice of language. Gaskell insists that excellent customer service must be maintained at all times during this process. "In fact, the empathy and consideration shown to a fraudster can unsettle them sufficiently to abandon the claim," he says. By January this year, SCORE was achieving a 75% withdrawal or repudiation rate for doubtful claims, and a 20% saving on those that do go through.

    Law makers and enforcers
    Want to know what England's law makers and enforcers think about insurance fraud? Finding the answer is not as simple as it would seem. It took more than two weeks and numerous phonecalls before the Association of Chief Police Officers (ACPO) could find someone willing to speak on the topic to Insurance Times. The Home Office's performance was even more dismal, with promised information that never arrived, countless phone messages that went unreturned and finally, after three weeks, a demand for written questions to be submitted so they might be considered. No answers ever arrived, despite a wait of over a month by Insurance Times.

    If this is the response received by the UK's largest weekly general insurance magazine, what kind of message does this send to the industry to whom it writes? That the Home Office and the police don't have time for an industry that controls 30% of personal wealth investment in the UK ?

    The feeling that police have given up the fight on insurance fraud is not a new issue. In 1996 Lord Norton made his maiden speech to the House of Lords on crime statistics. He said: "The Home Office assesses the efficiency of the police service. When it comes to annual certificate of efficiency inspections, fraud - a cancer in society - is not one of the national performance indicators. At present, the police service receives no credit for devoting resources to this area. Fraud investigations are often costly and complex, so it's only natural for the police to think of other priorities if their work on fraud is not recognised as valuable and effective." Norton said that the social cost of all fraud was £8.5bn in 1992. Now, the same problems exist, but the cost is higher, up to an estimated £17bn in 1999.

    This is confusing to the outsider, as a large proportion of insurance fraud cases fulfils three of the Crown Prosecution Service's "public interest factors in favour of a prosecution": frauds are premeditated, often carried out by a group and the fraudsters often have previous records for similar crimes.

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