In-depth analysis: The many-headed hydra of fraud
Published 1 September 2016
Organised crime gangs, illegal and unethical practices in the claims industry, and a persistent compensation culture are all combining to create a costly problem for insurers that is to the ultimate detriment of policyholders.
Lower value personal injury claims are no longer as lucrative, given the Claims Portal and fast track fixed fees. The introduction of the concept of fundamental dishonesty and the willingness of the judiciary to make such findings has been a positive step. A new resolve by insurers not simply to repudiate civil claims but to pursue recovery of their costs and to use and publicise sanctions such as contempt and committal proceedings has sent a deterrent message. There are now consequences if you are caught.
However, motor fraud persists, and recent years have seen criminals and rogue elements within the claims management industry search for new and inventive ways to defraud insurers. “The insurance industry has had successes, but the battle is by no means won. Those who make their living from fraud continue to look for new opportunities to exploit,” says Catherine Burt, National Head of Counter Fraud at DAC Beachcroft.
One of the biggest drivers continues to be the conduct of some claims management firms and claimant solicitors. From sharp practices to out-and-out fraud, elements of the claims industry are looking to increase income through unethical or illegal practices. As the reforms have reduced opportunities for referral fees and escalating costs, the fraudsters have found ways to build their income through layering profit into multiple heads of loss with either fictitious or exaggerated elements of the claim. This has included claims for exaggerated or sometimes non-existent physiotherapy, cognitive behavioural therapy (CBT), interpreters’ fees, recovery, storage and hire, as well as many other types of exaggeration.
“It has become clear that it is enablers who are facilitating this multifaceted approach to fraud, revealing the extensive networks that exist behind many fraud claims,” says Kate Abrahams, Head of Intelligence at DAC Beachcroft. These networks are still driving the volume claims market, including low speed impact cases.
Some rogue claimant solicitors continue to present fraudulent claims – claims where they have no instruction, where there is no personal injury or even an accident. There is also evidence that unscrupulous claims management companies continue to harass and coerce potential claimants into making a claim, even where they have no merit.
Figures from the Association of British Insurers show that 83% of people have been contacted by a claims management company. Alarmingly, 92% of those were called despite not having been in an accident or taken out a relevant policy.
Although less headline-grabbing than fraud, arson continues to be a significant issue for the industry, and is an area where commercial insurers could learn from the experience of personal lines insurers in fighting fraud.
Fire claims are estimated to cost insurers around £1.1 billion annually in property damage claims alone, according to the Association of British Insurers. According to Fire and Rescue Service statistics around 46% of fires are started deliberately. The overall economic cost of arson was thought to be around £8.7 billion in 2008 (the last year for which figures are available) so not just property damage and BI, but also costs incurred by the Fire & Rescue Service, the Police, the criminal justice system and the health service in dealing with its victims and consequences. Yet despite the cost to both insurers and society, arson prevention (and detection) does not attract the same resources and co-ordinated leadership as fraud from the insurance industry.
“Commercial insurers could learn from the personal lines arena in combatting arson,” according to Nick Young, Partner at DAC Beachcroft. “For example, the advancements in tackling personal lines fraud – such as funding bodies like the Insurance Fraud Bureau and the exchange of information – should be replicated in fire cases to advance our understanding of the real cost of arson (and fraudulent arson) and in looking at prevention as well as detection. Perhaps the industry may start to pull together when it is confronted with the true cost of arson – although why wait when the (albeit crudely collated) statistics tell a very clear story? It is remarkable that in 2016 industry statistics do not distinguish between the cost of accidental and deliberate fires when you see how much money the industry pays out as a consequence of fire claims,” he says.
“A key hurdle in tackling arson is the lack of a joined up approach between insurers and the wider arson stakeholder community. However, the government has announced plans to merge police and fire services, a move that could prove to be a significant development in the fight against arson as it may bring about a more joined up approach to arson prevention and detection in the future,” explains Young.
Deafness claims / slips and trips
Fraudsters have diversified the types of claims they are prepared to submit, such as public liability and disease claims. Noise induced hearing loss, or deafness, claims are open to exploitation by criminals and unscrupulous claims companies and, while viewed by many as straightforward and lucrative (as the majority fall outside the scope of the Low Value Protocol and the fixed costs regimes), the reality is that liability in these claims can be complicated and a high proportion do not succeed.
Deafness claims notifications have grown steadily since 2005, when there were around 10,000 cases, to a peak of 85,000 in 2013, according to the Institute of Actuaries GIRO Deafness Claims Working Party.
Claims management companies and solicitors have been actively targeting deafness claims, and stories of fraudulent practices and persistent nuisance calls are emerging – while the sharp increase in low severity deafness claims hints at claims farming, according to David Williams, Partner at DAC Beachcroft.
“There are firms presenting deafness claims that are not genuine and insurers are incurring costs to defend meritless claims. Unless insurers invest and fight this, the problem will snowball,” he says.
There has been a notable increase in public liability claims too, according to Williams. “The claims industry, together with organised criminal gangs, sees opportunities in slip and trip claims, which are hard to defend. It is easy for a fraudster to find a pothole or loose flagstone and present a claim and increasingly claims management firms co-ordinate such bogus claims which are hard to detect without the use of intelligence,” he says.
“Data and intelligence are powerful tools in the fight against fraud, and they will become even more so with better analytics and increased industry co-operation.
“Not only can data and analytics be used by insurers to identify fraudulent claims, they can also be used to gain insights and intelligence,” explains Kate Abrahams, Head of Intelligence at DAC Beachcroft.
DAC Beachcroft is using analytic tools to identify emerging fraud hotspots as well as to reveal misconduct of solicitors and other professional enablers. For example, analytics can highlight which firms are bringing the most fraudulent or struck-out claims and those that are inflating costs, or which insurers are being targeted.
“It is about knowing your opponent and getting under their skin,” believes Abrahams. “Through analytics and intelligence it is possible to spot trends and tactics, from sharp practices to out-and-out fraud.”
While data and intelligence sharing is a useful tool for insurers, Rhiannon Webster, data protection specialist and Partner at DAC Beachcroft, warns that data protection compliance should also be considered as insurers make greater use of big data and analytics for fraud work.
“With big data analytics, data scientists often don’t know exactly what they are looking for. Data protection laws require companies to only process minimum levels of data as necessary and to inform data owners of how their data is being used,” she says.
“Data protection compliance for fraud trend analysis could prove particularly challenging when seeking to comply with the much more prescriptive and strict requirements of the new General Data Protection Regulation in time for its implementation in May 2018,” explains Webster. “For example, fair processing notices given to insureds will need to contain more detail on the data that is collected and how it is processed than ever before.”
There are further limitations and considerations when insurers seek to share fraud related intelligence and data to identify trends.
Ideally, unless data is needed at an individual level, data should be fully anonymised so that it is no longer possible to identify an individual from that data, which takes it out of data protection regimes. However, full anonymisation is a high and often difficult threshold to achieve.
Planning your response
Slaying the hydra will require a multifaceted response, ranging from tougher regulation of the claims industry, to the sharing of data and intelligence and measures to tackle cultural attitudes to defrauding insurers.
The Insurance Fraud Taskforce report published in January 2016 called for more stringent enforcement of claims management company regulation and a tougher approach by the Solicitors Regulation Authority (SRA) to fraud.
There are signs that the government may be listening, at least as far as the conduct of claims management companies is concerned.
In March, the government announced its plans to subject claims management companies to tougher regulation, transferring supervisory responsibility for the sector from the Ministry of Justice to the Financial Conduct Authority (FCA). The move will make senior managers at claims management companies personally accountable for their firm’s conduct under the FCA’s senior managers’ regime.
The volume claims market and the organised fraud threat both require a sophisticated set of ‘know your opponent’ strategies. “The deployment of bespoke market intelligence to understand the behaviours of our opponents is the key to preventing fraud,” confirms Abrahams. “This combined with meaningful sanctions, will keep the pressure on the perpetrators of fraud.”
There is also a need continually to challenge the perception among some that it is acceptable to defraud insurers. And there are signs that attitudes are changing: research for Aviva found that falsifying injuries on a motor insurance claim is considered worse than purchasing stolen goods and as unacceptable as drink-driving.
There are also positive noises coming from the government, which last year proposed a number of measures to deal with the UK’s compensation culture – including an increase in the small claims limit to L5,000 and an end to general damages for ‘minor’ soft tissue injuries.
“The removal of damages for minor whiplash claims would be a big step forward,” according to Burt, “while greater enforcement by the courts and the use of sanctions such as restorative justice may change behaviour and act as a deterrent to people who think it is acceptable to exaggerate or bring unmerited claims.”