Chair: How serious is fraud?
Chris Hill: It takes at least £16bn from the economy, it costs £340 per household, and all of those costs come back to the public. It fuels the growth of organised crime and it damages our economy. The Attorney General's recent fraud review assessed it as being second only to class A narcotics in terms of the harm it does to society.
Faisal Khan: It costs much more than £16bn, because a huge amount goes undetected. Perhaps only 20% of fraud is ever detected, so nobody really knows how big it is. The other big issue relates to whether we actually have a legal definition of fraud. My understanding is that we do not.
Steve Wilmott: In the City of London, it is a priority. My unit has over 150 detectives dedicated to the task of investigating fraud. We run anything up to 350 cases at a time.
John Beadle: We do not know how big the problem is. Fraud is not generally reported to a central point. It costs the insurance industry around £1.5bn a year, and that is based on £1bn of personal lines insurance, and £500m of commercial lines.
Nick Starling: Insurance fraud covers a range of situations, from people who are fraudsters targeting insurance, to people who simply exaggerate claims. One in 20 cars is not insured and it costs all of us £30 on our premiums.
Chair: To date, it has been difficult to put proven fraudsters through the courts. Is it time for the industry to consider other means of ensuring that fraudsters suffer real consequences for insurance fraud?
Beadle: There are difficulties with reporting insurance fraud. Fraud is not in the national policing plan at the moment, so police forces do not have the resources to deal with it. We must be realistic in our expectations of what the police can achieve at the moment. That is why the insurance industry welcomes the Fraud Review. According to an ABI survey, the biggest deterrent to fraudsters was not imprisonment, but being debarred from obtaining insurance in the future. As the insurance industry and the wider financial sector get better at sharing data through things like the Credit Industry Fraud Avoidance System, it may be increasingly likely that proven fraudsters will find it difficult getting access to financial services and insurance.
Hill: We share data with other insurers about prolific claimants, but we do not currently have the facility to share specific fraud-related data across the industry. That is something that should be considered in the long term, but I think we have to prioritise the methods that will deliver the best results in combating insurance fraud. There may be other methods that would be quicker and more effective.
Wilmott: If there were a false claim for a camera, that could be investigated by the industry. There are 140,000 policemen in the country, terrorism is at the highest threat level in history and we must deal with that along with our other responsibilities. We cannot investigate everything.
Khan: Why is all the focus on capturing fraud after the event? That will always be the most expensive approach. We should invest more money at the other end of the process. It is very unfair to put that burden on the police. I would prefer that the money received by the police is used for dealing with high level crime. We should have third party bodies, like the Financial Ombudsman Service, that can adjudicate on minor fraud issues.
Hill: At Norwich Union, we threw out around 15,000 fraudulent claims last year. Transposing that to the whole industry, that means there were at least around 100,000 fraudulent claims. Realistically, there is no way that the police could take on 100,000 more investigations. However, as the Attorney General has suggested, the anti-fraud resources of the police need to be ring-fenced, because they are being eroded. Those resources need to be focused on the most serious frauds, and that should be decided on the basis of harm. Some frauds endanger public safety, some are fuelling the growth of organised crime in regional centres and some are damaging particular sectors of the economy.
Wilmott: The national policing plan sets no targets. Were I a chief officer in a county force in the Midlands, I would deal with areas where targets are set: in vehicle crime, drugs, burglary, Asbos and so on. I do not think the police should work on individual claims which can be investigated by the industry, but on significant, co-ordinated attacks. In the future, we can assist in providing data to the industry to assist you in judging whether you need to insure a person, who is a risk, and whether you need to pay out.
Hill: Very frequently people say that technology is the answer to the problem of fraud. Our experience is very different, in that we tend to find that manual interventions, involving training and developing our staff, deliver the best returns. These have been ongoing in the industry for years, and that is one of the reasons why the fraud performance of the industry has improved by 30% over the last year.
Beadle: The ABI has looked at the industry centrally pooling all of its insurance data and using that for fraud prevention, both in policy inception and claims. However, it would be very expensive - around £28m.
Khan: There is a lot of concern about data protection. However, as far as I am aware the Data Protection Act says that you can use data if you are using it to fight crime. It is a reasonable expectation that we will have a centralised database of fraud.
Chair: Would the fraudsters get around that by changing their names?
Wilmott: Yes, we already see a lot of identity fraud in all types of criminal offences. On data sharing, we are looking at ways in which we can disseminate some information from the National Fraud Intelligence Bureau back to the industry. If we set up a national fraud reporting centre, each report of fraud will contain an element of intelligence. The details of that fraud go onto a database, and we would be able to match that individual, house, car or phone number across the board. We could then check with the three industry databases, which will come about in around two years, resulting in prevention of fraud with things being intercepted at a much earlier stage.
Chair: Where the industry has proved that fraud has occurred, without the involvement of the police, because they are busy with other things, should they go on the database?
Starling: If databases are to work there must be certainty that the data is correct. We must be certain that the system works properly. I do not think that the insurance industry should invent something for itself at this stage. It must be done carefully. It is clear that we need to use databases more, but they need to be properly designed and thought through, and we must not start accusing innocent people.
Chair: Would you be reticent because the people on your database have not been through a court, or been prosecuted for anything.
Khan: The issue is around whether fraud has been proved. The industry would claim that it knows. There seems to be no reason why there should not be relevant databases.
Chair: Are you happy with that definition?
Beadle: There are already examples from within the industry. There is no problem with filing proven frauds on a central database.
Chair: Chris Hill, can you help with the threshold? Would it only be for serious fraud?
Hill: I do not view this as being so much of a problem. The industry has defined what fraud is, so we have a template to put over any repudiated claim to give a feel for whether it is fraudulent. We are used to operating in the civil arena of proof, so we are quite clear what the civil burden of proof for fraud is. It must be material, and it must be deliberate.
Chair: And does "material" mean that they lied, rather than exaggerated?
Hill: If the area of dispute on a £10,000 claim is a £100 item, that is unlikely to be material. However, if someone lies about a £2,000-£3,000 item, and there is evidence to support that, it would be judged to be material. There is an element of common sense.
Starling: We are focusing on the biggest, first. There is a lot of fraud around involving the exaggeration of personal injury claims. I know that personal injury is a particular problem area, and we are focusing on that.
Hill: A data sharing approach is valid, as is training staff to spot suspect claims. The first and easiest step is to start a dialogue between household and motor insurers, and those involved in travel and pet insurance, and share best practice.
Khan: I do want to pick up on this point about low value claims, and whether it is worth doing anything about it. I am surprised at how poorly the insurance industry uses technology. Data capture, and the intelligence you can access around the time of first notification of loss, is a great way of capturing opportunist fraud, rather than the organised kind. It does surprise me how insurance companies still use antiquated claims administration systems rather than using intelligence, or even looking at the policies that a customer has while the claim is logged in order to validate the data. There is a lot we can do by putting our house in order to capture these low level claims.
Chair: Will automation catch clever fraudsters who change identities and play the system?
Khan: I believe so.
Wilmott: It is quite the reverse. Automation can tell you where to direct your resources and where to go. But the human element has to be involved to take things one stage further. We will be able to classify issues on a traffic light system, where a 'red' would be a high priority for investigation, 'amber' cases should be reassessed and 'green' would be clear in our records.
Chair: Steve Wilmott, do you think the police should share their records with insurers?
Wilmott: We do. If someone goes to court, it becomes public knowledge that they have been convicted.
Chair: When a person is convicted, his criminal record can go in the papers that week. The information is then held centrally on the Criminal Records Database.
Beadle: Safeguards are needed. If we move towards the National Fraud Database that Steve Wilmott has talked about, I think there may be some mechanisms in that whereby specific data could be shared.
Chair: If someone were convicted of embezzling money from their firm and imprisoned for five years, he might come out of prison and want house insurance. Should insurers know about his criminal record?
Beadle: My honest view is that it would be very helpful. The reality is that a sales and servicing person in a call centre would never be able to access that.
Chair: Does the panel believe in rehabilitation?
Hill: Even convicted fraudsters have the right to have insurance, and this is difficult territory that we are straying into.
Chair: Is there not a problem with someone who has been convicted of embezzlement getting their home insurance without any difficulty?
Hill: With one person, there is the presumption he is still active. If there is a trail of devastation running behind an individual up to the present day, that impacts the risk profile. In the case of someone where, theoretically, a line has been drawn under his past, we have to respect that.
Starling: If a person is deemed to have paid his dues to society, that person cannot go through the rest of his life debarred from having any insurance.
Beadle: I think it is a question of risk appetite. Even if we brought in a stringent database and a theoretically uninsurable person, there would probably still be an insurer somewhere who was prepared to take that risk.
Hill: If someone has committed an offence, including driving offences, and that offence has expired, it would breach just about every human rights law to take a prejudicial view on giving him insurance. We are talking about a situation where individuals represent 'live' risks. Those things may be relevant in deciding whether to take on that cover, or whether to assess a particular claim.
Khan: In our society we tend to focus on fixing things after the event. Like quality, if you get it right first time it can be relatively cheap, whereas if you have to fix it after the event it will cost you 10 times as much.
Hill: Yes, prevention is worth twice as much as cure. However, the challenge is the difference between receiving a claim and judging it on its evidential merits, and actually saying that you have a defined balance of proof that someone is going to commit fraud.
Chair: How do you tell people that you want their business, but you do not want them to mess you around?
Starling: We have been giving a lot of thought to how to construct a campaign discouraging fraud. However, we do not want to have the opposite effect and inspire people to commit fraud. There is certainly something in the idea that people perceive the industry to be full of sharks who never pay out on a claim and somehow invite fraud.
Beadle: We have to be clear about who our target audience is, and how to change its behaviour. The message to those who exaggerate their claims should be wholly different to that aimed at the organised crime element.
Chair: The public feels sorry for the pensioner who is a victim of fraud, but not necessarily for this whole industry because the fraud is often at a very low level, and it involves people exaggerating claims. But, how can that mindset be changed?
Wilmott: Where someone is defrauding pensions in Liverpool, they are also defrauding pensions in a variety of other places. That is where the police come in, to tackle organised attacks against the public. There must be a realistic approach in that we can take on the big cases which, ultimately, will save you a lot of money, but if you self regulate the more minor cases, or investigate them yourselves, we can join up quite well. The number of fraud officers has declined because of the Proceeds of Crime Act. Most chief officers have now moved their fraud investigation officers to financial investigation because there is an incentive related to that. If I go out and tackle drug dealers and put my fraud officers on taking their assets off them, I get half of those assets under the Proceeds of Crime Act.
Starling: The Fraud Review has been a major step, since we were here last year. Much of what has come out of the Review is very important, and it talks about the need for leadership from government, proper strategy and data sharing. These issues are being addressed, but funding is a crucial part of it. The industry must start to think hard about what contribution it can make to that.
Khan: I keep hearing that it is somebody else's problem, whether the police or the government. Insurers can do a lot more to prevent fraud. Software for addressing money laundering or fraudulent behaviour in your customer base is not that expensive any more.
Beadle: The IFB is applying sophisticated analytics to industry data in order to identify networks, which you would not see within each individual insurer, not having the benefit of that overview.
Chair: Are there any companies that would be against the sharing of data because it is fundamentally anticompetitive, and they can get a competitive edge by not sharing data?
Starling: I am not aware of any company that takes that approach. We are getting better at sharing data on health insurance to stop people from taking out multiple policies and making multiple claims.
Chair: If your company were extremely good at gathering information about your customers, why would you want to share that with your competitors?
Hill: Ultimately, we all stand to gain more from sharing than we do from taking pleasure in the fact that other companies might be losing more than we are.
Chair: Could the ABI be more like the Health and Safety Executive and act as the Crown Prosecution Service in some cases?
Starling: The ABI certainly cannot do that. Many insurers do take cases to the CPS asking for them to be taken forward. There is often an issue with persuading the police and CPS to take things forward, even when there is good evidence.
Hill: In 2004, Norwich Union had around 4,500 frauds where we believed we had a level of proof that was beyond all reasonable doubt. Of those, 41 were accepted by the police. Of those, fewer than half made it through the CPS. All were convicted in court, and around 71% received non custodial sentences.
Wilmott: The Fraud Bill should become legislation on 1 January. Sentencing is something that was looked at in the Bill. In the US, sentences tend to run for around 15 to 20 years for fraud. Here we have seen very low sentences, suspended sentences and supervision orders. With luck, once this Fraud Bill goes into the government response, we will get a little more clarity. We are hoping that the City of London police gets lead force status for the country and that we will receive funding to enable us to increase our staff and be able to take on larger inquiries elsewhere in the country. We are also hoping that there will at least be some notification in the policing plan that chief officers should do a little more towards policing fraud.
Beadle: In terms of how much insurance fraud is organised and serious, it would probably be closer to 10% than 20%, but somewhere between those figures. As you rightly identify, that means most of it is domestic or entrepreneurial exaggeration by individuals.
Hill: The small frauds are much more important to us in terms of pure value than the larger ones. Out of the £135m worth of fraud that we detected and stopped last year, we believe less than £7m related to organised crime. To sum up, I think we are at a really pivotal time. The insurance industry that I joined five years ago has been transformed in terms of its ability to deliver effective anti-fraud controls. With the Attorney General's Fraud Review we now also have a blueprint for a much more fraud resistant framework in terms of both personal and business fraud. It is not a green light, however, and our industry now has to lobby hard to get these appropriate and balanced recommendations through.
Khan: I believe that the technology is there to help us crack this, but it is just a tool. Technology is not an end in itself, and it is a question of how we use it together to solve the problem.
Wilmott: Some things, such as ring-fenced policing units, may not happen as soon as we think they will, but you will see a change in the policing plan. However, I also see that lobbying will continue. Over the next four or five months you will see more clarity, and over the next two years until April 2009 you will see the beginnings of these big initiatives like the Fraud Reporting Centre and the Fraud Intelligence Bureau.
Starling: Companies are getting better at detecting fraud, and we are trying to find ways in which we can try to change the public perception of the seriousness of insurance fraud. Over the past year some really key issues have come out of the Fraud Review in terms of strategy and leadership. The IFB is playing its part, and there have now been two changes in the law on uninsured driving, so things are beginning to change.
Beadle: If you think back five years, we would never have entertained this debate, so the industry has moved on tremendously. Over the past two years the industry has doubled its level of detected fraud each year and there will be another advance this year. In terms of organised insurance fraud, it is a smaller proportion of the losses. The Insurance Fraud Bureau will significantly improve our ability to detect fraud.
