Insurance fraud is costing the industry about £4m a day, but customers are not keen to report it. Andrew Holt reports on what insurers are doing to fight it
When it comes to fraud, the insurance industry is awash with depressing statistics. Nearly one in ten adults admits to making fraudulent insurance claims with the UK insurance industry paying out a whopping £54m a day in claims and insurance companies being hit by up to £4m per day as a result of fraud.
These are yet more figures, this time from Experian and the ABI respectively, which show how prevalent fraud is in the insurance industry.
The ABI study reveals that fraud is costing the insurance industry a massive £1.6bn per year, adding approximately £40 to the average annual premium of honest policyholders.
Key findings of the survey reveal that: a staggering one in ten adults – five million people – admits to having made a fraudulent claim on a general insurance policy, such as home or motor insurance. Opportunistic fraud carried out by individuals alone costs over £800m a year, and the home is the richest source for insurance cheats: with around half the cost of dishonest claims occurring under the home contents and building insurance.
Nick Starling, director of general insurance at the ABI, warns: "Honest customers should not have to pay for cheats."
The most common types of opportunistic fraudulent claims insurers frequently uncover include: deliberate spills or cigarettes burns of carpets or sofas that lead to claims for a new carpet throughout the house or new three-piece suite; false or exaggerated claims for injury against local authorities following trips over paving stones and exaggerating the value of items, such as cameras, lost or stolen while on holiday.
The Experian survey adds further worry to the fraudulent insurance picture. It aimed to uncover consumer attitudes towards insurance fraud and although it found that the majority of the population (91%) firmly believe that insurance fraud is a serious offence, only a small proportion (14%) would definitely report someone who had actually committed insurance fraud.
David Murby, managing director of Experian's Insurance Services division, notes there is a culture of not reporting fraudulent insurance activity.
"The survey revealed that people are well aware of what constitutes insurance fraud and consider it a fairly serious crime, which is not victimless. But they see it as a crime against an organisation rather than an individual and, as a result, appear less likely to report it.
"In fact, there appears to be a deeply entrenched impression that insurance fraud is commonplace in the UK, but the desire to do anything about it is not strong. Despite two fifths of the population claiming to know someone who has committed insurance fraud, the public is not inclined to report fraudulent activities."
Therefore, the lessons for insurers are clear. "It becomes even more important for insurers to be the ones taking steps to protect themselves and their customers from fraudulent activities.
“Honest customers should not have to pay for cheats
Nick Starling, director of general insurance at the ABI
"In addition, it would appear that the insurance industry collectively needs to raise the awareness among consumers of the impact of these crimes and work together to change the attitude people have about insurance fraud," adds Murby.
Nick Starling says the industry is tackling fraud. "Insurers are committed to reducing the fraud problem. We are devoting greater resources to weeding out the cheats, and working together to detect and combat fraud."
Backing up the findings of an ABI survey two years ago, the Experian survey revealed that incidents of fraudulent insurance claims are not limited to particular demographics. The likelihood of an offence being committed can be found across all social groups, whether they fall under what Experian term 'symbols of success' or 'municipal dependency.'
Symbols of success are those people with rewarding careers who live in sought after locations, affording luxuries and quality products. These people are concentrated in economically successful regions such as London and the South East.
Municipal dependency individuals are families on lower incomes who often live in large council estates where there is little owner occupation, generally found in large provincial cities, such as Sheffield, Nottingham and Birmingham.
But overall, there is a perception among the public that the cost of insurance is high and the benefits are rarely seen, making fraud almost justified. Consumers feel that they want to get value for money from their insurers so many, when making a claim, are likely to exaggerate it in the belief that the chances of getting caught are minimal.
David Murby adds: "Fraud continues to be a major challenge facing the insurance industry, costing an estimated £1.6 billion a year. There is little doubt that insurance fraud is seen as serious, and people are generally aware that it is not a crime without consequences.
However, only a small proportion of the population (15%) feel that efforts by the insurance industry to combat fraud are sufficient, while over half the population (51%) stated that they did not know whether the industry does anything or not."
Some insurers are taking a stand on the issue themselves: Admiral is one. It has warned motorists to tell the truth to their insurance company or risk losing their cover. According to Admiral, 10 % of motorists lie to their insurance company when they insure their car in order to get themselves a cheaper quote. Anyone who is found lying to their insurer runs the risk of having their insurance cancelled.
Admiral managing director Sue Longthorn comments: "Some people think that by telling a small lie they can get a cheaper quote. In reality they are committing fraud. An insurance policy is a legal contract so it's vital that you are honest, or the contract can be declared invalid and cancelled."
“The problems for many within the insurance industry is that fraud is a relatively new specialist area. Previously fraud was viewed primarily as exaggerating claims. But insurance fraud is evolving, with a significant surge in organised fraud involving complex fraud rings, new types of fraud, such as staged accidents, contributing to higher premiums and greater pressures on the insurer-customer relationship.
The problems for many within the insurance industry is that fraud is a relatively new specialist area. Previously fraud was viewed primarily as exaggerating claims. But insurance fraud is evolving, with a significant surge in organised fraud involving complex fraud rings, new types of fraud, such as staged accidents, contributing to higher premiums and greater pressures on the insurer-customer relationship.
Murby adds: "Insurers need to learn from one another as well as other industries that have adopted advanced processes to help them combat fraud. They need to ensure that they have in place effective processes that highlight inconsistencies and confirm facts. Insurers need to be able to detect and avoid fraudulent activity at every stage of the insurance lifecycle."
But help is at hand. The Insurance Fraud Bureau, launched last year, was set up to deal with organised insurance fraud and already has had successes in confronting fraud. Richard Davies, AXA fraud risk manager and Insurance Fraud Bureau deputy chairman, says: "I am not surprised that people are reluctant to directly report insurance fraud. There is a natural tendency not to make direct allegations against those you know, which is why anonymous reporting mechanisms, such as the bureau's Cheatline have such an important role to play."
It is estimated that the Cheatline saves the industry over £5m each year, and the bureau is keen to maximise the value of this facility in the future.
"We know that publicity works," says Davies. "There is a clear relationship between the volume of calls made to the Cheatline and media coverage of bureau success. Measured on a like-for-like basis, calls to the Cheatline are up 140% on the levels just over a year ago, and the bureau believes that there is still a lot of potential to drive the call rates up further."
Furthermore, the industry, and how it deals with fraud doesn't exist in vacuum, there needs to be political will. Nick Starling, the ABI, says: "These [fraud] figures highlight that greater deterrents, such as criminal prosecutions, are needed to discourage fraud. We are calling for police forces to be given more resources so fraud can be treated with the seriousness it deserves."
Davies adds: "The police do not have the resources to prosecute every individual fraud, and it is fair to say will never have those resources. Police effort needs to be focused on the most serious of offenders, and the proposed National Fraud Reporting Centre will have a significant role to play in identifying those individuals.
"However, there are many compensating controls sitting within insurers, who do their very best to protect the interests of every customer by implementing a variety of prevention and detection techniques. The entire industry has considerably raised its game in this respect over the last four years. In 2005, £405m of fraud was detected, an increase of 50% over the 2004 result."
Davies, warns however, that the whole issue of fraud needs to be kept in context of claims in general. "We do need to keep a sense of proportion. Both the Experian and latest ABI research tells us that 90% of customers are genuine claimants.
"The key focus of the industry has to be on validating the assumption that we are dealing with a genuine claim as quickly as possible, and of ensuring that we are offering the best possible service to enable our customers to recover from what is often a very traumatic event." IT