Some insurers are now prepared to pay the police to prosecute fraud gangs. Caroline Jordan reports
Organised fraud gangs targeting the insurance industry remain at large in the country and their scale is growing. Often involved in staged accidents, the ABI estimates "conservatively" that gangs cost the industry £50m a year.
Yet they remain largely unpunished. The police are generally not interested in prosecuting, and if the gangs' operations are discovered they spring up again in a new guise, making it even harder for insurers to reject fraudulent claims .
But now the net is closing. Insurers are launching a major multi-pronged attack on fraud, incorporating a ground-breaking new database, better intelligence sharing and increased government lobbying to press for the crime to become a higher police priority.
And controversially insurers are now also prepared to fund police prosecutions, with one case, R v Hounsham and others (see box) sending ripples through the industry. Prosecutions were secured, but the defendants appealed, claiming that money paid by insurers to the police had prejudiced the case.
While the appeal judges agreed that the police acted ultra vires or beyond their authority in taking payments from three insurers - Royal & SunAlliance, Norwich Union and Direct Line - it was held this did not constitute illegality. And, the insurers showed the ends justified the means with the appeal being dismissed.
David Pipkin, an associate with solicitors Davies Arnold Cooper, says any moves to fund police cases should be more transparent.
"It was said it was improper to accept the money and the police cannot be seen to be soliciting for funds, although there is nothing in the Police Act that actually outlaws what happened.
"If insurers do need to fund cases though, it needs to be more open in my view - insurers could club together for this purpose."
Pipkin says this is already established practice in the US, where insurers are historically less shy about taking decisive action on fraud. And, Pipkin adds that in the past year, the industry in the UK has moved on enormously.
"We are starting to see some good results. There is better dialogue and more examples of police tipping off insurers. I would also like to see the government look at the whole issue of fraud as part of its Compensation Bill. Fraud is a crime which is often part of a wider remit."
Nigel Adams, a senior solicitor at Davies Arnold Cooper, says: "We will start to see insurers do more in terms of getting the message across that insurance fraud is often part of more serious crime. The police are cottoning on to this and we want government to understand such criminals may well be involved in gun running, drugs and terrorism."
Communicating this message is largely the role of the ABI, which traditionally has concentrated more on analysing the cost of fraud on the industry and the impact on honest policyholders. ABI figures suggest that fraud costs the UK around £1bn a year.
Chris Hannant, head of financial crime prevention at the ABI, admits that there is work to be done with the Home Office.
"A fundamental problem is that fraud does not register on police performance measures. They get no credit for solving cases. We want to get fraud on these performance indicators. A forthcoming Fraud Bill will help define the crime, but we know there is more to do and we will keep banging away."
Hannant says insurers paying for private prosecutions is a rarity and that the case in question "goes to the heart" of the problems facing the industry. He says the ABI remains in regular contact with the Association of Chief Police Officers and is also meeting frequently with the FSA's financial crime division.
While admitting there is plenty to be done, Hannant is upbeat about future prospects, a view shared by many senior counter fraud managers at insurers. "In the City of London there is now a dedicated financial crime unit, which is a step forward. We want to see more prosecutions and assets removed. Providing we continue to work together, I believe we will see a more effective response."
The one key advance which insurers and the ABI are keen to promote is the new anti-fraud database which is set to go live by the end of the year. A data-sharing agreement at the end of last year meant the activities of Polaris and Insurance Database Services were merged. A new database is being created which will provide a far more sophisticated detection tool.
AXA fraud risk manager Richard Davies says: "This is breakthrough technology. We will be able to see where data is being manipulated."
His biggest concern is frustration over the lack of police support. "I want us to get fraud on the National Policing Plan which is set by the Home Office. If we can do this, it would make a huge difference." IT
Paying for justice: insurers allowed to fund police prosecution
In 2004, Robin Hounsham, Richard Mayes and Michael George Blake were convicted of conspiracy to defraud.
They were accused of staging road traffic accidents, which were the basis for fraudulent claims against various insurers. The case involved prestige cars being written off, clocking (falsifying the mileage of a car), false invoices from companies owned by the defendants, fake salvage work and false injuries. Investigations were time consuming and costly.
Hounsham was jailed four years with a confiscation order of £5,768. Mayes was jailed for three and a half years with a confiscation order of £12,000. And Blake was jailed for 12 months with a confiscation order of £2,065.
They appealed on the ground that insurers gave the policy money towards their investigations - Hampshire Police had asked insurers to help fund their investigations.
Royal & SunAlliance gave £2,000, Direct Line £1,500 and Norwich Union £1,000.
The judges said the act of "soliciting by the police of funds from potential victims of fraud, or any other crime, quite apart from being ultra vires police powers, is a practice which is fraught with danger".
They said: "It may compromise the essential independence and objectivity of the police when carrying out a criminal investigation."
They added that it was a practice which would soon lead to a loss of confidence in a police force's ability to investigate crime objectively and impartially.
But the judges decided the police officer who requested the money "acted in good faith, and consulted superior officers who also sought advice".
The appeal was dismissed.