Adjusting for Fraud

Insurance has been practiced over 300 years and yet we still have to continue to explore new strategies to deal with fraud in the industry. In the United Kingdom, industry analysts believe that the cost of fraudulent claims in personal lines business alone account for ?1 billion and a further ?2 billion in respect of commercial sector business. While the incidence in commercial business is lower, the amounts involved are high while in personal lines fraud is widespread but for smaller amounts. One would have thought that in a mature market there would have been systems in place to detect fraud more easily and that the incidence of fraud would have been minimal and consequently the payout for fraud claims would have been in single digits as a percentage of the total cost of claims.

Looking for Fraudulent Claims
The insurance industry recognises the high level of fraud and therefore it is always on the lookout to unearth fraudulent claims. It is in the quest to ensure that only genuine and legitimate claims are paid that the industry as a whole appear to get a bad name from the public. It is the looking for fraud rather than looking for honesty that causes the problem. In practice the front-line employees do not have the training and experience in taking claims information and generally genuine customers get the impression that the insurance company is unhelpful or looking for ways to get out of paying claims. While expertise is likely to reside in the back office it is quite common that customer service representatives and claims handlers are generally inexperienced.

Recently, it was brought to my notice that information emanating from the Association of British Insurers (ABI) showed that the average time taken to settle a motor theft claim from notification to settlement was 57 days. Certainly that time was much too long for a genuine claim although there were many instances where the time was significantly shorter — in some cases as little as ten days. It merely showed that the process consumed a great deal of time to sift genuine claims from fraudulent claims as well as giving the police authorities some time to recover the stolen vehicle.

What You Don’t Say
Some claims specialists are now promoting the concept of “behavioural psychology” which is premised on what you say, the way you say it and what claimants say and the way they say it and importantly what they don’t say. This process is called “cognitive interviewing” in the way information is obtained and is based on how we remember events and things. Claims specialists look to get the facts genuinely from memory since every story has a natural start and finish.

And the claimant should be allowed to give his story without interruption since it is in the details that they can detect fabrication and/or embellishment. A further process is the voice stress analysis which compares voice patterns in response to easy and difficult questions. The results have been impressive with a ten percent withdrawal of their claims by the claimants —  a further ten percent rejected on the basis of fraud,  and a further seven percent on the unearthing violation of policy conditions and eventually leading to only 73 percent deemed as honest claims.

Opportunist Fraudsters  
There is no substitute for the maintenance of a proper database in the industry which can detect the pre-meditative “fraudsters” since these usually have a track record. What is more difficult are the opportunists who come out of the woodwork when the occasion arises. These figures are indeed an improvement as the insurance industry statistics in the UK reveal somewhere between ten-15 percent of all payouts are fraudulent. Notwithstanding the high element of fraud associated with claims, insurance companies are under competitive pressure to settle genuine and legitimate claims in a timely manner and it must balance the need to root out fraud without putting good clients through unnecessary hassle. It is in this context that moral risk and evaluation of clients at the inception of a policy become important but it is not always possible to determine the fraudsters, in particular the opportunists. In Trinidad and Tobago, insurance fraud in its widest sense is a major problem for the insurance industry.

Adjusting Downwards
In motor accidents, it is common practice for estimates from garages to be inflated since it is well known that they will be adjusted downwards.
The problem is that for the motorist who never had an accident it would appear that something is wrong when an estimate is cut by 30-40 percent but seasoned claimants know the process and hope to get away with it. Very often investigations must be carried out in view of the accident reports or even the opinions from professionals. These further scrutinies only serve to delay claims settlements. In our society most persons see nothing wrong in defrauding an insurance company but in reality economic waste has a bearing on premiums and in theory, if fraud was minimised it would be possible to charge lower premiums.

Insurance fraud is a problem for all countries and the only difference is the degree with some markets worse than others. Sometimes we are not called “Trickidad” for nothing, as we know how to beat any system and while every effort must be made to provide exceptional service to customers this must be tempered by the need to stamp out the high level of fraud. The United Kingdom market has declared 2005 as a year when the insurance industry intends to launch a PR campaign to highlight the cost and consequences of fraud, to enhance the sharing of information in detecting fraudulent cases and to develop best practice guidelines. We can learn from the initiatives of a mature insurance market but we must go one step farther in making insurance fraud a criminal offence and, importantly, enforce such laws. Indeed this is a challenge when the vast majority of citizens see nothing wrong in defrauding an insurance company, especially since there is a high probability they will get away with it.

E-mail:daquing@cablenett.net