Fraud costs the UK insurance industry more than £1bn a year, according to new research by the Association of British Insurers (ABI). That's £66 for every household in Britain.
According to critics, the industry has only itself to blame. Claims are waved through because the cost of interrogation is high compared to the low levels of claims inflation that make up the vast amount of the £1bn.
The problem is now so bad that insurers are looking at introducing new measures in the fight against fraud. Some companies have floated the idea of using lie detectors to catch out fraudsters. But, it seems, the public is not prepared to accept such dramatic measures. Most will have to make do with the next-best thing: conversation management.
Conversation management, otherwise known as cognitive interviewing, began just over two years ago. Bill Jackson then worked for the Herefordshire police, where he developed both the world's first civilian surveillance team and a training programme for managing informants.
When he retired, he was headhunted by Thomas Cook to develop a unique "distance conversation management system" to be used on people reporting by telephone the theft or loss of travellers' cheques.
The Core system he developed, with the aid of psychologist Eric Shepherd, works by taking an account of the theft or loss over the phone and carefully conducting the conversation in a manner that would highlight deceptive behaviour such as hesitation, difficulty on detail or contradiction. The story is then put on a timeline, revealing areas of weakness and allowing the questioner to ask pertinent questions.
Thomas Cook found Core produced incredible results. It increased its claims repudiation rate from 4% to 25% and made an annual saving of £4m in defensible claims denials. There was no drop in customer satisfaction because Core's design ensured excellent service was integral to the system's success.
As the system grew in popularity, Jackson headhunted Will Gaskell, who he had worked with at Bedfordshire Police to help him develop Core further.
Loss adjuster Crawford & Co liked Core so much, it established a partnership with Thomas Cook to develop its use in the insurance industry and recruited Gabrielle Ashley from Norwich Union's motor department to begin building and selling the system.
Seven months later, Thomas Cook pulled out of the partnership, so Gaskell was headhunted by Crawford to continue the project. Meanwhile, Bill Trueman was using Core on motor claims at Direct Line. And Jackson was so convinced of the system's suitability for the insurance industry that he left Thomas Cook last January to set up VFM Services in Hitchin.
Ashley and Trueman now are in the middle of setting up Absolute Customer Management. Gaskell is still at Crawford.
While the systems are similar - Gaskell uses Score, Trueman and Ashley use Clarity and Jackson uses New Era - their approach is subtly different. While Gaskell sells the system accompanied by a loss adjusting team trained in following up fraudulent cases, Jackson offers to train the industry in the system. Trueman and Ashley have just established their headquarters at East Grinstead and are now recruiting people so insurers can outsource the use of the system
Gaskell's big clients include Legal & General and Royal & SunAlliance, while Jackson has Capita McLaren and Zurich. Trueman says his new company is in talks with "all the major insurers".
All four are adamant this is the fraud solution of the future. They also resolutely refuse to indulge in even mild criticism of their competitors.
"What holds me back is not competition, it's the education of the industry," Jackson says. "The more people are doing this, the more the industry will believe this is not a flash in the pan or smoke and mirrors."
Trueman has a similarly altruistic outlook. "As a fraud specialist, it's all about working together and sharing information," he says.
"We've got a common enemy and if we fight it together, we will win."
Gaskell says it would be unusual if the four did not communicate. "We're talking and that's extremely healthy," he says.
"None of us should turn our backs because you can only improve this and look for more effective ways of doing it."
It is easier to be polite when business is good. The insurance industry was slow at first to show interest in conversation management as a fraud solution.
"Fraud is never at the top of the agenda, because people see it as throwing good money after bad," Jackson says. "The penny's dropping, but big corporations don't move fast, no matter how much they're losing."
Gaskell agrees there were stumbling blocks to showing the system's worth. "There are people who say they're already doing something like this," he says.
"But it's nothing like it, they're just scripting their claims handling to look for fraud triggers, while conversation management is far more subtle, it doesn't require set questions to get certain answers."
But Gaskell says the conversation management experts have now proved their system works. "Insurance has always put fraud in the too-hard tray, but we've made the too-difficult tray almost empty," he says. "It's been that their approach to fraud has not been right.
In fact, they have proved themselves so successfully that both VFM and Crawford are planning on branching into other financial services sectors.
"Banks don't do this, but it's an extraordinarily potent product for first-party credit fraud," Gaskell says.
First-party fraud is fraud perpetrated by the named account holder, such as falsely claiming a card was stolen or that goods ordered on the internet did not arrive.
Crawford is talking with at least one bank about its system and VFM has been in discussion with a group of banks that want to pool their funds to research the system before buying individual training. Both are optimistic about their chances of having the system picked up.
"There's no doubt this is the future of fraud solutions," Jackson says. "I just want to still be around to see it when it takes off."