First published in ITIJ 105, October 2009
Stewart Farr investigates how and why the level of fraudulent insurance claims rises during a recession
Economic recession brings financial hardship and unemployment; ways of making money by less than honest means become more of a temptation, encouraged by the 'them' (the bonus-laden corporate fat cats) versus 'us' (the downtrodden, cheated etc) mind-set. Not surprising, then, that the incidence of travel insurance fraud has intensified since the credit crunch started to bite in 2007. Last year, insurer AXA reported that travel insurance fraud increased by 83 per cent in July compared with the previous year, while the Association of British Insurers (ABI) calculated some 4,300 fraudulent travel insurance claims in the UK in 2008, at a cost of around £5 million. Interestingly, records show that more Louis Vuitton luggage is lost abroad by Britons than is ever actually sold in the UK!
Travel insurance is third-placed in the volume league table for UK general insurance fraud, following the motor and household categories. Earlier this year the ABI reported record levels of fraudulent general insurance claims, at the rate of 2,000 per week – worth £14 million. Last month it issued new research, indicating that undetected general insurance claims fraud totals £1.9 billion a year – a 24 per cent increase on 2007's figure. The cost of such fraud is now estimated to be £5.2 million every day, adding £44 to the annual costs individual policyholders face, on average, each year. Put another way, this £44 is the equivalent of six per cent of total premiums paid across general insurance product lines.
Other countries have similar or higher percentages of fraud: Australia estimates around 10 per cent of claims by value, Canada 10-15 per cent of premiums and the US, 10 per cent of claims by volume. The Swiss Insurance Association has no statistics on the extent of insurance fraud, but says insurance companies proceed on the assumption that around 10 per cent of their benefit payments are based on bogus claims, representing several hundred million Swiss francs every year. According to an Insurance Council of New Zealand survey, 10-18 per cent of claims have some sort of fraudulent aspect to them, whether by way of inflation or outright dishonesty. Insurance cheats cost New Zealanders a relatively modest $65 million a year. By contrast the Coalition Against Insurance Fraud estimated a fraud loss of some $80 billion in the US – in 2006, before the clouds of recession started to gather. Yet the United States Travel Insurance Association doesn't seem to be perturbed. The UStiA Claims Committee, when discussing the issue of fraud, reported that various members had not seen anything substantial with regards to an increase in fraud due to economic conditions – the UStiA has 63 corporate members responsible for $1.3 billion in annual revenues.
Approval of insurance fraud could stem from disaffected travellers having a heightened sense of 'entitlement' during tough financial times
As the ABI notes, in its latest research, several studies from around the world over the past decade provide evidence of a long-term relationships between non-violent crime and the business cycle, suggesting the current recession will increase the risk of fraud for insurers. Indications of this recessionary effect include an increase in the number of 'walk-aways' (the claim is dropped in response to enquiries from the insurer) and a significant increase in the proportion of 'suspect' claims and in applications for insurance where underwriting fraud to reduce the level of premiums is suspected. Research by Royal & Sun Alliance shows that the number of people in Britain who think insurance fraud is acceptable increased substantially – from 3.6 to 4.6 million – between March 2008 and January 2009. Since August 2006, the monthly volume of calls to the Insurance Fraud Bureau's Cheatline has increased fivefold; during 2008 alone, the volume doubled. Many callers say they are motivated to call because of the increased premiums they pay as a result of fraudster activity.
A right to claim
Approval of insurance fraud could stem from disaffected travellers having a heightened sense of 'entitlement' during tough financial times, but deliberate fraud is still a criminal offence. The ABI notes that both insurers and loss adjusters have reported significant increases in accidental damage and loss claims, particularly relating to specified high-value items – claims on expensive watches, cameras, laptops and the like increased by as much as 35 per cent between 2007 and 2008. “Many holidays are planned, booked and paid for some time in advance. Clearly, the recession may have affected people's financial circumstances in the interim, so inventing a scenario to enable a cancellation claim tends to increase. Otherwise, the rises in travel insurance fraud will typically be exaggerations,” says Mark Jones of financial crime consultancy EMB. He continued: “Suddenly, people will have a number of cameras with them or the watch stolen will be a Rolex. Such claims may also increase because people get back from holiday and realise they could not afford to have gone in the first place.”
Other tourists see a neat way of recouping travel expenses before leaving countries where local police are free and easy with the issuing of theft/loss reports or susceptible to corruption. Recently, for example, two British female law graduates were arrested by Brazilian police after £1,000 worth of items, claimed to have been stolen during an earlier bus trip, were subsequently found hidden in the women’s hostel. Rather than heading back to the UK, expectant of a (seemingly planned) nice little earner, the women instead journeyed to a jail in Rio de Janeiro. The consequence of their deception was a suspended sentence of one year and five months (ITIJ 104, September, Wish you were here?). In another instance, an Israeli citizen openly admitted (to The Sunday Times) that he used his many trips to Asia to accumulate gadgets, saying: “I would treat myself to expensive cameras at the start of my trip, then report them stolen to the police. Buy the holiday, get the kit free.” ABI spokesman Malcolm Tarling says: “Overseas police are cracking down on cheats. They are fed up with tourists wasting their time. If a fraudulent claim does reach us in the UK we can spot suspicious cases quite easily and a challenge usually results in a walk-away.”
More Louis Vuitton luggage is lost abroad by Britons than is ever actually sold in the UK
Travellers who find they need to recoup money by cancelling trips booked in more financially buoyant times have often feigned illness or a medical condition preventing travel and then persuaded doctors to provide them with the relevant medical certificates. So swine flu has arrived at just the right time for those, now unemployed or redundant, holidaymakers who wish to, or have to, renege on earlier bookings. The symptoms of the H1N1 virus have been given extensive media coverage and the UK's Department of Health recommends that anyone with swine flu should not travel until after their symptoms have stopped. The call centre and website of the National Pandemic Flu Service will deliver diagnosis and treatment with no need for 'the sufferer' to consult a doctor. A unique ID number is issued along with a prescription label confirming the patient's name and date of issue. Swine flu is an illness so trip or holiday cancellation costs can be claimed, provided the travel insurance cover was already in place. Hitherto a doctor's note was necessary to validate a claim; the Flu Service doesn't issue notes, so it's helpful to fraudsters (as well as the genuine sufferers) that amended ABI guidelines now indicate that insurers, in the absence of a note, will accept the aforementioned ID number and label as evidence of a valid claim.
The recession may yet bite deeper into purses and pockets, despite opinion in some quarters that the worst is over and green shoots are becoming evident in some countries' economies. The International Monetary Fund (IMF) says it expects anaemic growth in 2010, and a meeting of G8 leaders last month echoed IMF warnings that, although the world is beginning a long haul out of its slump, a frail recovery could still be derailed. However, the impacts of recession are frequently subject to a time lag where unemployment and the running down of household savings and redundancy payments are concerned, so insurance claims fraud will still have an impetus.
In addition to fraudulent insurance claims, there is also the continuing problem of underwriting fraud – non-disclosure or misrepresentation of relevant facts during the process of obtaining insurance cover, obtaining cover without payment (the credit card payment is voided), and intermediary fraud, where the broker fails to pass on premiums or initiate the contract (both of which are the main areas of underwriting fraud). Much of this is recorded as claims fraud because it isn't picked up until the claims stage. Cost comparison websites don't help the underwriting fraud situation and a rise in the popularity of standardised off-the-shelf products, particularly for travel insurance, along with the simplification of application processes, contribute to an ongoing, albeit often unintentional, fraud problem.
Although insurance claims fraud is on the increase, so too is the level of detection. Last year, in the UK, the value of detected general insurance claims fraud (savings) reached £730 million, representing a 30 per cent increase on 2007's achievement, according to the ABI. However, the way travel insurance is generally sold makes it difficult to expose potential fraudsters at the quotation or policy stage, unless the scam is on a more organised level. Data matching and mining technologies can be used to check policies against 'suspect' addresses which, say, have previously yielded multiple claims (a simple change of policyholder address details could flag up a higher fraud risk).
“The real opportunity for travel insurers is to identify potential fraud earlier in the claims life cycle,” says EMB's Mark Jones. “This approach also leads to a better experience for genuine claimants.” His company has developed EMB Validate ,in conjunction with Direct Group, to help insurers' claims and investigation teams verify the plausibility and consistency of statements when a travel claim is first lodged. “The underlying technique is founded on criteria-based content analysis (CBCA),” explains Jones, “which was originally applied to test the credibility of child statements in sexual abuse cases. On average, the automated questioning structure should reduce call-handling times by 30 per cent, while engagement rates for investigation teams would typically be cut by 25 per cent. Another technique is cognitive interviewing; this employs lines of questioning to draw information from claimants on the detailed circumstances surrounding a claim. The delivery and content of responses can quickly determine whether it is genuine or potentially fraudulent. Stephen Teeling, whose company, Groupama Insurances, has recently installed a new cognitive interviewing team, says: “It is a highly skilled process that draws on a range of factors, including tone and speed of voice, to help determine the likelihood of the claim being dishonest or exaggerated. It is especially successful in identifying opportunistic fraudsters who will often reconsider or withdraw a claim in response to detailed questioning.”
Travel insurance is third-placed in the volume league table for UK general insurance fraud, following the motor and household categories
Using these and other conversation management techniques can, it is claimed, increase the number of ‘walk aways’ and zero settlement travel claims by as much as 45 per cent. However, improving the detection rate of travel insurance fraud is in part a balancing act; false-positives can interfere with the efficient dealing of honest policyholders' claims, so it is essential to ensure that more effective detection is not at the expense of a less efficient claims process.
Could there be greater international coordination by travel insurers to minimise the prevalence of fraud? Certainly there is no element of competition among insurers about preventing fraudulent travel claims and it is in everyone's interest to share information and data. “It is an international issue especially when the travel claims involve some medical element and local practices/issues become prevalent, ie high rates for medical care in the USA,” says Mark Jones. “Other sectors of financial services have been co-operating closely for some time. Card issuers, loan providers and other institutions routinely pool data and knowledge , which significantly enhances their ability to predict and tackle sources of fraudulent activity.”
Perhaps more effort could be channelled into changing the consumer mind-set. “Research indicates that 18 to 29 year-olds are by far the worst offenders, with 33 per cent admitting to lying when claiming on their travel insurance, compared with just seven per cent of over 50s,” says Patrick Chong of Insuremore. Apparently, 18 per cent of those who commit fraud justify their behaviour by saying they are owed the money because they have not claimed before. Ten per cent of fraudsters take the attitude that it's okay because 'everyone does it'.
If a fraudulent claim does reach us in the UK we can spot suspicious cases quite easily and a challenge usually results in a walk-away
Do they? Certainly increasing the price of items and/or adding extra ones to a claim for losses seems a popular pastime. “Travel insurance is always susceptible to fraud and, when times are tough, people look at ways of raising what they believe is easy money,” says Tarling of the ABI. Despite the fact that fraud leads to high premiums for every traveller, this year's ABI research finds that almost one-in-five UK adults (19 per cent) would consider making a fraudulent claim in the future. Last year the Coalition Against Insurance Fraud discovered that the same ratio of US adults think it's acceptable to defraud insurance companies under certain circumstances. A Swiss opinion poll showed that every fourth individual surveyed knew someone who had engaged in insurance fraud, whilst a survey of New Zealand policyholders found that one in five personally knew someone who had submitted a false or exaggerated claim.