The industry bites back

Last year, the total cost of insurance fraud for the industry was around £2.25bn. Independent research by the Association of British Insurers shows that 7% of people have admitted to making a fraudulent claim and 48% would not rule out making one in the future.

"Someone who exaggerates a claim, as far as I am concerned, is a fraudster," comments John Beadle, counter-fraud manager at Royal & Sun Alliance. "If somebody has had five items stolen and believes they are worth £200 each when they are really worth £150 each, then that is fine. However, if the person lost only four items and claims for five, then that is fraud."

Unfortunately, customers do not seem to realise that, by exaggerating claims, they are contributing to rises in their premiums. The ABI estimates that 3.7% of all insurance premiums result from fraud losses.

Prosecution

Currently, offenders can be prosecuted under eight offences of deception under the Theft Act 1968, Theft (Amendment) Act 1996 or the common-law offence of conspiracy to defraud.

However, insurers claim of difficulties in interesting the police. Out of 52 regional police forces, only one - the City of London police force - counts financial fraud as one of its priorities.

Jenny Sholtke of Croxley Green, Hertford-shire, pleaded guilty to six offences of insurance fraud and asked for a further 42 similar offences to be taken into consideration. Sholtke had taken out numerous household and motor policies, many of which were followed within days or even hours by fake claims. However, despite the co-operation of six insurers, she was only given a probationary sentence.

Andrew Evans, underwriter at Admiral, says: "I expect honest policyholders will be disappointed to hear that Sholtke was given only a probationary sentence despite her numerous offences."

The insurance industry appears sceptical about the police service's interest in insurance cases. Beadle concedes: "It is difficult to get the police interested."

In order to simplify the prosecution process, the government is developing a proposal for a general offence of fraud. It will stipulate that fraud can be committed in three ways: by false representation; by wrongfully failing to disclose information; and by abuse of office.

Home Office Minister Baroness Scotland has pledged to grant police and prosecutors greater powers if a single offence of fraud is introduced.

She added that the government will introduce a fraud bill when parliamentary time allows.

Interestingly, in September, the Irish Insurance Federation and An Garda Siochana - Ireland's National Police Service - launched its own guidelines for reporting and investigating suspected insurance fraud in Ireland.

Shifting attitudes

In the past, the insurance industry recognised the problem of fraud but was reluctant to devote time and money in this area. It especially did not like to talk about fraud in public.

Mihir Pandya, fraud manager at Allianz Cornhill, says: "In the past the system was very flawed. Training was on an ad-hoc basis and we had a centralised claims unit where referrals were limited. Fraud was a dirty word before and people were embarrassed to talk about it."

However, he recognises a shift in tactics, "There has been a cultural change over the last few years. Managing directors are willing to talk about fraud to the press, admitting there is a problem and are making resources available to tackle it. Now we have a fraud module in training and have set up a team to investigate staged motor accidents."

David Williams, claims director at Axa, says: "In the old days, we didn't do very much at all. In the 1980s people were less open to questions. The reason fraud is gaining attention now is because the problem is getting worse."

Beadle says: "Recognition of the cost of insurance fraud began in the early 1990s. This is when insurers began to experience tougher times with the collapse of the stock market."

Commenting on the rise of bodily injury claims, he says: "The general growth in bodily injury claims can be related to 2000 when legal aid was scrapped."

There is no single solution for detecting an exaggerated or fraudulent claim.

There are certain warning signs in claims such as lack of detail, missing periods of time and referring to 'the' car rather than 'my' car - de-personalisation of the claim.

For the investigation of potential problem claims, insurance companies are now using methods such as voice risk analysis and cognitive interviewing to investigate higher-risk claims.

VRA is a computerised stress test. Highway has been using VRA since 2002 and has saved £3.1m to date. Esure and First Alternative will sign up to VRA, provided by Digilog, by the end of this year. Axa is also considering a Digilog trial.

An explanation of the complexities of VRA is worthwhile. HBOS explains in a company statement: "Voice risk analysis works by identifying changes in the frequency, pace and pitch of the claimant's voice and by analysing answers to a questionnaire designed to detect signs of undue stress as a result of hiding the truth. It will take into account levels of distress that may already be present as the result of the incident leading to the claim, such as the loss of valued or expensive items."

It has had some success too. The statement continues: "The pilot VRA trials indicated that, in certain categories, as many as 30% of all claims were worthy of further review. Upon investigation, over 40% of the claims that underwent further review were subsequently withdrawn by the claimant, repudiated or resulted in a detailed fraud enquiry."

Questionable claims

The trials also indicated that the highest incidences of high-risk or questionable claims are for accidental loss, theft or accidental damage claims.

Another attraction of VRA - apart from saving money - is that the technique speeds up the process for genuine claims, pleasing both the customer and the insurer.

Cognitive interviewing, a form of psychology, is also having some success in identifying fraudulent claims. Originally devised as a police interview technique in the 1980s and 1990s, it is now being used by more than 20 companies.

The cognitive level of the voice is an element that indicates the amount of conflict or agreement with the words actually spoken. The interviewer uses extensive questioning of the claimant to determine whether the claim is genuine. The emphasis is on finding out as much information upfront as possible and will involve as many conversations as necessary.

Cognitive interviewing primarily deals with motor theft, accidental damage and burglary claims. Household and travel claims are also good targets.

Absolute Customer Management, a specialist cognitive interviewing firm, is working with 15 insurers, including Esure and MMA. Absolute, director William Trueman, says: "There are two types of claim fraudsters. The first is the premeditated, professional who will push the claim all the way.

The second is an opportunistic fraudster who will back out after probing questioning.

"We trap the fraudsters by making them think that they are going through a huge number of hoops, bearing in mind that their number-one priority is for the claim to be paid. Dishonest people can be detected via analysis of a combination of their vocal volume, speed, language, pitch and tone. The way we interview them is specialised."

Absolute tends to employ graduates with degrees in criminology and psychology, and provides them with four weeks training before they can start using the technique. It has around 29 staff dealing with between 500 and 600 claims a month, and is currently recruiting to cope with further demand from insurers.

Axa tied a deal with VFN and Aquilo at the end of 2003, and is setting up its own in-house team of seven.

Williams says: "I believe that, in the future, we will have a much bigger return than £3 for every £1 spent."

Pat Smith, director of Aquilo, prefers to see the claims management process as one that identifies as many genuine claims as possible. He says: "The claims experience should delight the genuine customer. We are not a fraud squad; we are validating truths, rather than identifying untruths. We have a fix on process and a disciplined approach. It is a balance between the risk, the client and customer expectation. We are identifying the claims that should or should not be paid and our in-depth knowledge helps us help the insurer."

By having knowledge of policies, experienced operators can also identify claims that are not covered under the terms.

Allianz Cornhill is currently piloting schemes with Absolute and Digilog in cognitive interviewing and VRA respectively.

Information sharing

Tackling fraud requires mutual co-operation across the sector.

Beadle says: "The ABI anti-fraud committee, set up in May 2001, sees that fraud is cross-industry and it breaks the normal competitive bounds. You are entitled to share data, for example, Insurance Hunter is a good data-sharing tool."

Malcolm Tarling, ABI spokesman, says: "We are working to develop a master database, which will create easy access to the existing databases, such as the motor anti-fraud and theft register and the claims and underwriting exchange."

Information sharing can work on two levels: insurers sharing information about fraudsters; and insurers sharing information about how to tackle fraudsters.

Philip Robinson, financial crime sector leader at the Financial Services Authority, says: "Information sharing is one of the most powerful weapons of all against the fraudsters, who typically will be active in more than one area."

He continued: "For the 30 small and medium-sized firms who responded to a recent survey, every £1 they spent on fraud prevention yielded £3.80 in savings; and yet fraud budgets were tight, with 71% of the firms having no designated fraud budget at all. We need to find ways of ensuring that this kind of information is in the hands of the senior management who control the purse strings.

"It is not for the FSA to lead a moral crusade. But we recognise a challenge to the industry - and indeed society - to promote the message that dishonesty is wrong and is ultimately a tax on us all."

Insurance companies will never be able to entirely eradicate the problem of fraud, and would have a harder task persuading everybody that exaggerating claims hinders customers in the long run.

However, as awareness and attitudes improve, detecting fraudsters will become easier and cost savings will increase. What is most interesting for insurers is that the more money invested in fraud protection, the more they are likely to save.