Richard Day, consultant at actuarial and management consultants Tillinghast � Towers Perrin examines the problem of insurance fraud and looks at measures that insurers take to address this.
London, England, June 09, 2003 � The problem of insurance fraud is becoming worse with research from the ABI revealing that it currently costs insurers an average of �1.2 billion per year. This is perhaps not surprising when you consider that over a typical twelve-month period more than three million people are caught making dishonest home and motor claims. However, the true figure could be nearer 8.5 million, or 15 per cent of the population, as many fraudulent claims are not traced.
In a recent survey, seven per cent of people admitted to having made a fraudulent claim and nearly fifty per cent would not rule out doing so. There is no one particular profile of person who is more likely to perpetrate this type of crime, however research does show that there is a bias towards married, employed, home owning males. Ironically this is the group of people that the majority of insurers target as key customers.
In part, the problem stems from the fact that insurance fraud is perceived as a victimless crime, with the public believing that insurers are able to bear the cost. The most common reason given for committing insurance fraud is the perception that many people do it, or that customers feel justified in trying to get some money back after years of paying premiums. In reality though, it is the honest customer who ends up losing out. The amount of time it takes to settle a claim is lengthened, and premiums are increased as insurance companies attempt to recoup their losses. Fraud on motor and household cover costs policyholders an estimated �20 million a week in higher premiums.
Ultimately there needs to be a change in the perception and expectation of the policyholder. Essentially, the more people think they will be caught out, the less likely they are to make a fraudulent claim. And being caught out must carry some penalty, not just the rejection of the claim. Regrettably, prosecutions for insurance fraud are all too rare. Therefore insurance companies need to put some clear measures in place to ensure that fraudulent claims are rooted out and rejected and ensure that this stance is actively promoted.
It is vital that the industry starts to fight back against this problem. Some measures are already in place. The Association of British Insurers (ABI), for example, has introduced an anti-fraud database which gives full details of homeowners, their past histories and any previous claims, including fraud. They are also working with the police, insurers and crime fighting agencies to develop undercover devices to beat fraud.
Some individual insurers have developed sophisticated claims procedures to assist them in identifying fraudulent claims. For example one system �red flags� questionable claims and one insurer has even piloted lie detectors for use in telephone claims to try and gauge from claimants� voices if they are telling the truth.
While adopting these sophisticated systems undoubtedly reduces the amount of fraud, there is a number of simple steps that insurers should carry out, and indicators to look for within the existing claims process to identify potentially fraudulent claims.
Richard Day, “Our research shows that there is a common set of themes running through a large number of fraudulent claims. As a result we have identified a large number of fraud indicators that can be imported into any system to help identify those claims that have the greatest potential to be fraudulent. While individual features are inconclusive, patterns show up with some regularity. Combined with a best practice claims handling procedure, insurers could see a significant reduction in fraudulent claims.”
Here are just a few of the indicators that should be included in any fraudulent claim detection process:
- The insured obtained insurance through a broker far from where they work or reside
- The insured does not call emergency services to a major accident
- The loss occurs shortly after a policy has been changed to comprehensive cover
- The accident occurs in a deserted area, late at night
- Loss Assessors or contractors from outside the policyholders area of residence being used, particularly for minor household repairs
Claims staff can be trained to look out for these key indicators. Alternately they can be identified automatically by �intelligent� anti fraud software that learns how to spot these key indicators.
An overall improvement in the speed and efficiency of the claims process through use of Tillinghast�s best practice guideline can also assist in decreasing the level of fraud. Research from claims management companies show that there is a direct correlation between the amount of time that it takes to settle a claim and the likelihood of fraud.
Insurers are currently fighting an uphill battle against fraud. However having a strong understanding of the common themes that indicate possible fraud and the introduction of some basic measures into the claims process to help highlight them can substantially cut insurers losses to fraud and reduce their overall costs.
About Tillinghast � Towers Perrin
Tillinghast provides actuarial and management consulting to financial services companies and advises other organisations on their self-insurance programs. Tillinghast is a premier independent advisor to the insurance industry; its major clients include most of the world’s top insurers. It operates as one global business, through a network of 42 offices in 20 countries. Tillinghast is a division of Towers Perrin, one of world’s largest management and human resource consulting firms. The Towers Perrin family of businesses also includes Towers Perrin Reinsurance, a leading global reinsurance intermediary. Together, these businesses have over 9,000 employees in 23 countries. More information about Tillinghast is available at www.tillinghast.com.