Posted: 20th September 2016
First published by the ABI
The constantly evolving nature of fraud can make detection and the subsequent recovery of loss a challenging task. This is no truer than in the insurance sector, where instances of fraud can have great cost implications for firms and consumers.
High profile issues such as “trip and slip” and “crash for cash” scams have raised the fraud agenda for firms. The value of detected fraud is at a record high, however, undetected fraud remains significant, estimated at over £2billion per year.
Not only do these figures represent an opportunity for insurance firms to further limit losses, but it’s estimated that insurance fraud can cost policyholders as much as £50 a year in higher premiums, with honest policyholders picking up the cost.
There are clear commercial and customer advocacy benefits, then, to addressing insurance fraud robustly and proportionately.
Insurance firms, consumer groups and legislators know from direct experience that the commonly held notion of fraud as a victimless crime is far from true, and that proportionate action is required from all industry participants to help prevent it. So what are some of these actions? With legislative developments in this area coming thick and fast, how do insurance firms best conduct themselves in this changing environment?
Protecting consumers and reducing the risk of fraud is a key focus of regulators and legislators. This recent activity attests to the need for firms to act:
- The Government is implementing various initiatives to tackle fraud and protect consumers. The Insurance Fraud Taskforce, set up in January 2015, was introduced to assess the scope of fraud within the insurance sector. They recommended actions in their final written report, published in January 2016, around public perceptions of fraud, the importance of consumer trust, the sharing of data and taking a more robust approach to defending claims
- In the Financial Conduct Authority’s (FCA) business plan 2016/2017, financial crime is positioned as a key priority. One of the main focuses detailed in the plan is to raise consumers’ awareness of scams through initiatives such as Scamsmart. Similarly, the Financial Ombudsman Service (FOS) is also turning their attention to the use of technology in fraud. The ombudsman is trying to raise awareness that fraudsters are increasingly using technology (that was originally designed make consumers’ lives easier) to retrieve personal information relating to those consumers
- In January 2016, the Insurance Fraud Enforcement Department (IFED) released statistics detailing their success in bringing fraudsters to justice with more than 200 convictions and over 100 years of jail time prescribed to insurance fraudsters since their introduction four years earlier
- Somewhat conversely to this, a recent ruling by the Supreme Court seemingly sets a new precedent for the future of exaggerated claims (in which ‘collateral lies’ may not necessarily invalidate an insurance claim). Industry commentators are warning this could further increase premiums for consumers, and the ABI’s Director of General Insurance Policy asserted that the ruling “could be a blow for honest customers”
Addressing the issue of trust in THE Insurance SECTOR
So with much industry discussion taking place currently (and with many recommendations yet to be consulted on) what are the activities that will constitute a ‘proportionate’ reaction to the current regulatory landscape?
The most pressing issue raised by the Insurance Fraud Taskforce is that of consumer trust in insurance, and firms aspiring to improve consumer trust can act now to increase advocacy for their firms. However, regardless of the regulatory action that sets the context for the current landscape, trust is a pressing concern in insurance, and one that should be addressed. How can firms do this?
Do your firm’s current and potential customers realise that submitting falsified information, or failing to disclose information they are requested to provide, when applying for a policy constitutes fraud and may invalidate their policy if they need to make a claim? Do they understand the implications of exaggerated claims?
Many see the insurance industry as ‘fair game’ for unethical behaviour, including fraud. Even early in the process of comparing and contrasting policies, consumers looking for quotes have been observed comparing premiums between different postcodes (perhaps that of a family member) to test the possibility of a better price.
As well as this, a “substantial rise” in personal injury claims despite a decrease in road traffic accidents lends clear evidence that consumers don’t always understand the definition and implications of insurance fraud.
If consumers are unaware on the definitions of fraud, then will they appreciate the measures your firm takes to prevent it, and why? Probably not. There is a great opportunity here for firms to bridge the trust gap by being explicit about the increasing threat of fraud and financial crime and the support they intend to offer their customers. Consider:
- The use of pop-up reminders (in an online setting) that are prompted by potentially fraudulent behaviour. This needn’t be an intrusive or confrontational message of course – your firm could choose to combine it with;
- Clear messaging that tells consumers of your firm’s responsibility to keep them safe from the implications of insurance fraud – some of the statistics now emerging about the bottom line cost to policyholders are quite compelling, especially when relating directly to increases in the costs of premiums
The advent of organisations such as the Insurance Fraud Enforcement Department and the Insurance Fraud Bureau, plus data sharing schemes such as the Insurance Fraud Register and the Claims and Underwriting Exchange have shown firms how important legislators and regulators believe tackling the issues to be.
The ongoing examination of this area is not likely to abate from a supervisory point of view, and it is now incumbent on insurance firms to engage with the issues and begin to consider:
- What ‘best practice’ looks like with regards to mitigating fraud risk and tracing instances of fraud. Debate in this area is likely to gain pace alongside the refinement of the legislative and regulatory approach
- The plentiful opportunities for firms to share their experiences through industry events, creating content for industry publications to spark debate, and of course, responding to further calls from the regulator to contribute to consultation papers
- How they will contribute to building up fraud data to be shared across firms – the Insurance Fraud Taskforce report asserts that “inconsistent, incomplete and, in some cases, inaccurate data undermines its effectiveness. Better quantity and quality of data would make fraud easier to detect at every stage of the process, from application to claim.”
- Whether in time, firms will be able to benchmark themselves against their peers and continuously improve their approach
Ensure consumers know they are protected
As well as considering which activities might make fraud easier to detect and mitigate (in order to minimise losses), making sure your response to insurance fraud garners the maximum benefit involves direct engagement with consumers; their perceptions of what constitutes fraud, what fraud does to the cost of their premiums, and the effects it has on society at large.
Educating your customers about your anti-fraud measures and communicating the social responsibility your firm has undertaken in deciding to fight insurance fraud may well be the key to using the above activities to regain consumer trust. As well as this, retaining and sharing comprehensive fraud data across firms will create a ‘virtuous cycle’ in the industry that will allow it to combat the evolving methods of fraudsters and the societal implications fraud has.
Success here has clear benefits for both the insurance sector and consumers.
Huntswood were sponsors of this year’s ABI conference.