It’s easy to blame the recession for last year’s 30% rise in the detection of fraudulent claims. But is it simply down to insurers being more vigilant? Muireann Bolger asks these industry experts to find out their verdict
Recession leads to more fraud. This belief holds so much sway that it has taken on the air of fact. And the figures seem to back it up too.
According to the ABI, the estimated cost of undetected fraudulent claims has increased by 24% in the past two years, rising from £1.6bn to £1.9bn. Last year, the cost of detected fraud throughout the industry rose to £730m, a 30% increase compared with 2007.
The insurance industry is divided, however. Some insist that the bleak economic climate has undoubtedly led to a rise in fraud, and insurers need to be more vocal about publicising their awareness in order to stem the tide.
But others challenge this accepted wisdom. They argue that it is impossible to identify whether fraud has risen above pre-recession levels or if the industry has simply become more vigilant. As anti-fraud measures become more sophisticated, many believe insurers are now better at weeding out the false claims that have always wound up on their books.
Insurance Times talks to those in the frontline of the industry’s fight against fraud to hear how they view the recession’s impact.
Scott Clayton, claims fraud and investigations manager, Zurich
The recession is having an effect on fraud. By measuring the volume of fraud by the amount of claims that are referred for investigation, we have seen a 27% increase of new referrals for domestic property claims in 2009 compared with last year.
The financial crisis is clearly creating an environment where cash is a major issue for businesses, and they may see an insurance policy as a way of meeting monthly payments.
We are looking at first-party fraud and domestic property claims: mainly at exaggerated and staged burglaries, loss of personal items and damage to items. In the commercial sector, we have seen a 50% increase in referrals of fraudulent claims.
We’ve also seen a rise in our private client market, where wealthy people who are very asset-rich but have problems with cash may be attracted to fraud. I think the industry needs to be quite bold and say, “Yes, we are seeing an increase because of the recession.” We have to make sure that the public is aware that insurers are becoming more and more vigilant.
Phil Bird, director of claims, Groupama
We are detecting an increase of fraud partly because we are devoting more resources to it and we have more sophisticated tools to analyse databases.
We have seen an increased number of arson claims, which is a typical indicator of a recessionary environment. We are probably seeing a 100%-plus increase over the past year in that sector, and there has been a continuous increase in fraudulent personal injury and motor claims.
With personal injury, it is really hard to tell whether the increase is recession related or if we are just finding out what was going on anyway. Arson is more specifically recession related.
Future levels of fraud depend on the economy. I am a bit of a pessimist regarding this, and I don’t think we have seen the worst yet. I think we will see further increases in arson in particular.
In addition, when the summer holiday season is over, we will see more fraud in the travel portfolio.
Andrew Buck, claims fraud manager, Aviva
In 2008, Aviva detected 29,000 fraudulent claims worth in excess of £200m. Compare this with 2007, when we identified and prevented 22,000 claims with a total value of £170m. That represents a 30% increase in fraud cases and 20% in cost.
For the first six months of this year, the level of fraud detected increased by a further 10%. We have seen significant increases in both the motor and household arena.
Clearly when times are tougher, crime increases and so we expect to see more fraud. There is a rise of exaggerated claims, where a genuine incident takes place but additional items are added on, and we are also seeing more fabrication of claims, such as fake accidents in the home or vehicle thefts when the vehicle has not been stolen.
There has been a clear uplift in fraudulent travel claims made for baggage or fictitious incidents of a theft whilst on holiday. In terms of fraudulent claims related to baggage, we have seen a 50% increase. I think by the end of this year, fraud detection will increase above 2008 levels.
Roy Hebburn, divisional claims manager, Allianz
The recession has been around for a year now, and history tells us there is a lag and that it will be at least a year before you will see an increase in fraud.
I don’t believe that will be different in this recession. The difference now, though, is that insurers have seen an increase in detected fraud. We are not just necessarily seeing an increase in actual fraud, although that is bound to start happening.
Household claims fraud detection has gone up by about 20%. I think fraud will go up across the board by 15% or 20%.
Fraud is endemic in insurance, and you will see more in the event of a recession, so we have to be ready for that. There is a strong suspicion that the activity of the Insurance Fraud Bureau (IFB) around motor fraud has caused some of the organised gangs to change their focus and begin to move into the employer and public liability or the “trips and slips” area. That is something we believe the industry should start focusing on.
John Beadle, counter-fraud manager, RSA
The age-old question is whether we are seeing more fraud or detecting it better? There isn’t any significant spike that would lead us to believe there is a large increase in recession-related fraud. We are tracking it but we are not seeing it.
It could well be a lag effect. Financial stress is already recognised as one of the biggest motivators for financial fraud. One of the key drivers of financial stress is unemployment. With this continuing to increase, we are still alert to the risk but it hasn’t transferred to a statistical reality. Just because we are detecting more fraud does not necessarily mean there is an increase.
Stuart Morgan, head of claims, Admiral
You expect theft and bodily injury claims to be affected by the recession. We haven’t really noticed the theft side move, but small-scale bodily injury claims have picked up and we expect that could be because of the recession.
There are more people responding to claims farmers, who ask if they have had an accident in the past few years. The referrals with our fraud unit have increased by a third, but you have to temper that with the fact we have increased our workforce as well. The amount of fraud we have seen in 2009 is worth about 2% to 3% of the £404.6m in premiums we have written.
David Williams, claims director, AXA
We are about 10% to 15% up in cases of fraud, but I don’t know how much of that is down to better detection. Despite the stories from the ABI and the IFB saying, “Look, we have saved all this money and it is a number that is increasing”, I don’t think that is necessarily good news. When I analyse our own performance, it leads me to believe there is an ever-increasing number of fraudulent claims going undetected.
I think one of the big problems of insurance fraud is that people see it as a victimless crime. When you have a travel policy, it is even more removed. You are not even claiming on your own household insurance; it is a transient purchase via a travel agent online. Undoubtedly, the proportion of fraudulent claims has increased in travel. We have seen a lot of injury claims that are fraudulent.
I think people don’t resort to crime immediately when they are in a recession. It tends to build up over a period.
Rob Smale, claims director, Fortis
Fraud levels vary between products, but we have seen a 15% to 20% increase across the board. There are two types of fraudster: the professional and the normally honest policyholder. The levels relating to professional fraudsters who try to commit fraud all the time stays at pretty much the same rate during a recession.
We do find more incidents of the normally honest person exploiting the claim, however. We are noticing a rise in the likelihood of people making a claim and exaggerating some elements, if not all, of the claim. There has been a particular rise in household and travel because those are the areas where it is most easy to make an exaggerated claim.
In the SME area, people are beginning to commit fraud because their business is experiencing financial difficulties. We are expecting to see increases over the next 12 to 18 months.
Andrew Mc Bride, claims director, QBE
Our fraud detection has almost doubled over the past year. But we feel the underlying rate of fraud has increased as well. The obvious suspect is motor and public liability claims.
You also see an increase of fraudulent employers’ liability claims. That can be caused by individual hardship, but where there are redundancies, particularly closures of factories or large premises, you can get a wave of employers’ liability claims.
There is also an issue that has cropped up in relation to funding. A commercial customer having difficulties with cashflow or securing credit from their banks will seek funds from their insurers because of the scarcity of credit facilities. If you take a small business that is very tight on cashflow, they can’t walk into their bank now and ask for an overdraft of £20,000. During the previous recession, the banks were better disposed to do that.
Graham Lambourne, head of claims, XL Insurance
The increase of fraudulent claims in a recession tends to impact personal lines more significantly, but the commercial sector is also affected.
While this trend is usually not as extensive in the commercial sector, we have seen some anecdotal evidence of a rise. Although we rarely see any fraudulent activity committed on first-party policies, it is fairly common to see fraudulent or, more particularly, exaggerated claims on third-party policies.
We do see a prevalence of exaggerated injury claims made against our clients in difficult economic times. Clearly, the industry must address fraudulent claims as robustly as possible, but it must also continue to develop technical expertise to ensure that we continue to handle genuine claims with speed and efficiency. IT