In-depth analysis: The many-headed hydra of fraud

Published 1 septiembre 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.

Systemic fraud
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.

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.

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.”