Insurers struggle to keep up with fraudsters

Last week, the Association of British Insurers (ABI) warned against the rise of insurance fraud in a recession and published figures demonstrating a 17% increase in insurance fraud from 2007 to 2008, with the total value of fraudulent claims (£730 million) rising by 30%.

Dishonest claims on home insurance were the most common accounting for 55,000 false or exaggerated claims. By value, however, fraudulent motor insurance claims were the highest. The rising cost of fraud adds an additional £40 a year to insurance premiums, the ABI stated.

Bart Patrick, head of insurance at risk management and business intelligence firm, SAS UK, made the following comments regarding the latest ABI figures:

"It is hardly surprising that in the current economic conditions that fraud is rising. A sophisticated approach is required to overcome the increasingly savvy fraudsters out there, and sadly insurers will always struggle to keep up with their activities while they adopt a piecemeal approach to fraud detection, using a range of disjointed systems, and unsophisticated methods.

A link analysis tool and a bunch of rules does not a fraud strategy make. An integrated system, which uses the widest range of techniques (rules, advanced analytics, profiling, visualisation and experience) is the answer when implemented in an environment which has the people and process to action the frauds discovered. You can lead an SIU (Special Investigation Unit) to the fraud trough, but without the people and process to action this, you cannot make it drink.

Accuracy is key in being effective. The SIU must focus on the biggest frauds first, however if they are chasing shadows with a high false positive rate, then much of their effort is wasted. Only an integrated set of techniques can achieve this. If you have a simple, single approach to fraud, you are almost certainly wasting your company's time and money.

While fraud is viewed as an after the claim event, insurers will always play catch up. Most realise that some insurance policies are written just for the purpose of committing fraud. However they have no way of stopping this at policy inception. More importantly is the rising spectre of claims abuse, whereby people inflate their claims by a "reasonable" amount. This type of activity lives in the thin layer between acceptable behaviour and fraud, and this is where much of the insurance industry's real problems lay.

We are reaching the stage where a vicious circle is emerging. The SIU's are undermanned and over burdened as the numbers of potential frauds increase. Without a concerted, co-ordinated and sophisticated approach to fraud, using good old fashioned investigation and the latest technology in harmony, companies will struggle.

Let's flip this argument around to something policyholders will understand - the longer the insurers ignore fraud, the longer they will persist in charging a higher than necessary premium to cover the cost of fraud. In this increasingly competitive and fickle market with policyholders buying on price, it's actually impacting on competitiveness, so combating claims abuse and fraud is now a critical commercial consideration for all insurers. Ultimately, better Fraud and claims abuse detection reduces claims expenditure, reduces combined ratios, protects market share and increases profits."

Insurers fight fraud by sharing information

Any fraud officer is only too familiar with the challenges of detecting and reducing fraud; whether it is online banking fraud, identity theft or anti-money laundering. However, one industry appears to be having some success in fighting fraudsters, and it puts its achievements down to good old-fashioned information sharing.

By sharing claims data, the Association of British Insurers says that in the last three years, motor insurers alone have identified 70% more fraud equating to £5 million worth of claims per week. The Insurance Fraud Bureau (IFB) was established in July 2006 and uses a central computer system containing claims data from a number of insurers across the UK. Details of insurance policies and claims records are analyzed to identify suspicious activity.

Bogus and inflated insurance claims cost the UK insurance industry more than £1.6 billion a year. Insurance fraud ranges from policyholders exaggerating claims to organized criminal gangs inducing “innocent” motorists to crash into the backs of fraudsters’ vehicles. In a number of cases criminal gangs may have submitted bogus insurance claims to a number of insurers at the same time, so by sharing claims data, the hope is that it can be more easily detected.

While the insurance industry has enjoyed some success in combating fraud, Simon Evans, a partner at Cardiff-based law firm, Dolmans, warns that "fraudulent" insurance claims are still excessive.

"We have previously dealt with a case where a lady accidentally scratched a car door in a car park and, motivated by honesty, left her details to be contacted in order to arrange a repair of the minimal damage," says Evans. "However, when the claim came through it was for thousands of pounds of repairs. The lady has been dragged through the court system as a result, but without photographic evidence taken at the time, she has had little ability to defend her case.

“On the other side of the coin, I have been told about a recent occurrence when an intermediary tried to create a personal injury case to pass on to a solicitor. The intermediary had tried to encourage the victim of a car crash to make a claim for whiplash, even though no injury was suffered."

Evans said that charges, including perjury, contempt of court and obtaining monies by deception, were being used to deal with contrived and induced accidents. He pointed to the example of a claimant that was awarded £9,200 in compensation from a local Council after claiming he broke his ankle in a pothole. Further investigation found the claimant was injured playing football. The claimant was jailed for nine months after pleading guilty to obtaining property by deception and perjury.

The courts are also discarding evidence of a claimant if it is "tainted" by fraud and Evans said witnesses who give fraudulent supporting evidence are also likely to have any claim dismissed by the courts. However, the challenge for most firms is detecting fraud in the first place, and trying to prevent it before it even gets to the courts.