Mortgage fraud is a concept we are all well aware of. It has risen year on year since 2006 to reach record levels in 2012 according to Experian. Its last annual fraud report found that the rate of mortgage fraud increased to 38 in every 10,000 applications last year, up from 35 in every 10,000 in 2011. And there doesn’t seem to be any light on the horizon with Experian expecting this to rise again in 2013.
But the mortgage industry isn’t the only segment of the financial services sector that is suffering at the hands of fraudsters. According to BDO’s Fraud Track report published this January, insurance is the second most susceptible UK industry to fraud. The industry lost £473 million to fraudulent activity last year.
Fraud committed against insurers is estimated to add on average an extra £50 to the cost paid by the honest consumer for a general insurance policy such as buildings and contents cover or income protection that you might sell them.
Insurance Fraud: Behind the Headlines
One of the biggest – and probably most highly publicised – problems that insurers have faced over recent years is ‘cash-for-crash’ rings which involve gangs faking accidents and making false whiplash compensation claims. These incidents involve drivers slamming on their brakes at junctions, hoping the driver behind would crash into them. The fraudster and passengers then claim compensation for whiplash injuries. Some of the gangs are sophisticated enough to control auto-recovery companies which invoice insurers for removing damaged vehicles from cash scenes.
A scam run by a 60-strong gang in Country Durham was successfully broken and the culprits prosecuted up by Durham police last year. The gang swindled so much money that it is estimated that motor insurers raised bills of people in the area by around £100 a year.
This type of fraud has spread around the country and the Insurance Fraud Bureau claims to be currently investigating almost 50 organised fraud rings across the UK, with the combined value of these scams estimated to total some £66 million. But it doesn’t stop there.
Organised crime: The tip of the iceberg
Dishonest motor claims may cost the insurance industry the most thanks to fraudulent whiplash claims, but home insurance fraud is actually more common. Last year insurers detected 71,000 individual dishonest claims valued at £106 million – dwarfing the total cost of the organised motor insurance scams. It makes you wonder what the value was of the ones that got away.
In the light of these shocking numbers, insurers are now intensifying their crackdown on insurance cheats and are dedicating ever increasing resources to the fight against fraud. They’re uncovering a staggering 2,670 fraudulent insurance claims worth around £19 million every week according to the Association of British Insurers.
Victimless Crime? An attitude adjustment is required
The Insurers face an uphill battle in addressing this issue as the biggest problem appears to be that few consumers see insurance fraud as the criminal offence it really is. The common perception is that as long as no-one gets hurt, it is acceptable behaviour and something that in one shape or form is done by many. Despite the figures from the ABI that show the impact on the pocket of the honest customer, consumers appear to view fraud as ‘victimless crime’. The only victim is the insurance company and the common view expressed by policyholders is that ‘they can afford it’.
A leading insurer carried out some research amongst its small business customers earlier this year. One in three admitted they have or would inflate a claim, while one in ten would bend the truth when applying for a policy. A fifth would consider it acceptable to fake a whiplash claim or a minor accident at work in order to make a claim.
Insurers are increasingly looking to the brokers who sell their policies to act as a first line of defence in the fight against fraud.
Brokers to the rescue
It’s not an easy message to get across, but brokers do need to educate their customers that insurance fraud isn’t a victimless crime and that they are the ones footing the bill through higher premiums as insurers are forced to pass on the additional cost of inflated claims and increased fraud investigation resources. Additional costs are the last things that consumers want to face at any time, but never more so than in the current climate. But of course the gains of fraud are more immediate and tangible than the losses of higher insurance premiums for those consumers so predisposed.
Consequently, the stronger message to get across is that insurers have developed increasingly sophisticated processes to detect and prevent fraud. If a broker does identify any client trying to provide false information or, for example, trying to inflate a claim, then they need to do their utmost to persuade their customer that it is in their long-term interest to do otherwise. Getting caught could mean that a claim could be turned down, but in more serious instances the customer would risk criminal proceedings and problems getting any insurance again in the future.
Kevin Paterson is managing director of Source Insurance