Insurance provides us with a financial backstop when catastrophe calls – even if it is a small bump in the car or a glass of red wine over the carpet. But it seems that recessionary times drive bad behaviour with the total amount of undetected fraudulent claims against insurance companies rising to £1.9bn a year. According to the Association of British Insurers (ABI), this adds around £44 to every individual policyholders premium in the UK. A high cost to pay for the law abiding and honest policyholder.
But the insurers are starting to fight back. The ABI says that its members have successfully thwarted around £730m worth of fraudulent claims in 2008 – an improvement of over 30% in the detection rate of 2007.
As technology and information sharing techniques improve, insurers are getting smarter and better at identifying claims that are not genuine. The Insurance Fraud Bureau is the spearhead agency that collates data and has helped to improve both the detection rate and with fraud prevention.
Insurance is a huge business in the UK. With mandatory motor insurance and mortgage companies insisting on buildings and contents insurance for homes, the retail market was worth around £21bn in 2009 in written premiums. The commercial or business market adds a further £12.3bn of written premium making the total market £33.5bn. Motor insurance makes up around a third of this total (£10.8bn) and property covers a further £8.8bn.
Motor insurance and home contents insurance is held by 73% and 75% or adults respectively. Buildings insurance is held by 62% and travel insurance by 35% of people. The ABI estimates that around 87% of all adults hold one or more of the general insurance products available in the market place today.
Fraud occurs most frequently with general insurance policies such as contents and motor policies. Opportunistic fraud occurs when an incident happens and a claimant exaggerates the damage done and/or the cost of repair. It may be that a few individuals wilfully extend the damage caused so as to exacerbate the claim.
A more sinister element of fraud is that perpetrated by criminal gangs. This usually involves setting up events where insurance claims can be made such as so called "cash for crash" traffic incidents.
The ABI estimates that the rate of increase in both opportunistic retail fraud has increased by 18% since 2006. Tougher economic times have also had an impact on commercial claims fraud with the incidence rising by 35% over the same period. All undetected fraudulent claims have estimated to have risen by 24% over the two year period.
But the UK appears to have a comparable record compared to our international counterparts. The UK estimate of 10% of claims by value compares to those rates experienced in Australia and the lowest of the US estimates of 11 - 15% for general insurance.
Detection rates are on the increase. In 2006 around 2.4% of all general insurance claims were repudiated as fraudulent. By 2008 this rate had increased to 4.2% leading to £730m of loss. New techniques introduced over recent years to help with detection rates include Conversation Management and Cognitive Interviewing techniques. These methodologies listen for faltering tones or unusual stress in the claimants' voice as well as a more direct line of questioning. During recent trials, 49% of previously approved for settlement claims were referred to investigating teams for further analysis resulting in 27% of customers ceasing their claims and 13% being referred to fraud investigation teams. A further 9% had their claims reduced.
There is some speculation that the current recession is driving increased claim levels. There was a 44% increase during the first quarter of 2009 in fraudulent claims compared with the same period in 2008. In support of this, calls to the industry Cheatline service (where the general public can anonymously supply details of what they believe to be fraudulent claims to the Insurance fraud Bureau) increased 500%. It appears that public attitudes towards fraud, as more information of the true cost to innocent policyholders is published, is hardening.
By analysing fraudulent claims, the ABI have put together an 'identikit' of the typical perpetrator. The stereotype is male; employed full time; aged between 18 and 34; has household income in excess of £30,000; has savings of less than £5,000; has debts in excess of £5,000; and lives in London or the North East. It seems, however, that all of us have 'tendencies' towards what may be acceptable behaviour when claiming. For example, 46% think it acceptable to increase the price of items claimed; 45% overstate the damage done; 365 hold back relevant information; 34% add items to the claim; and 23% add to the claim by doing further damage.