Insurance is essentially based on the principle of mutual benefit and is designed to safeguard against significant but uncertain circumstances. However, insurance fraud undermines this principle, as fraudulent activities and claims drain the money paid by many honest consumers. Insurance fraud has an indelible impact on both consumers and insurers.
While technologies may have evolved to make life easier for insurers, the issues related to insurance fraud have persistently plagued the industry even to this day. Sometimes even technology itself becomes the catalyst for insurance fraud. As the methods of fraudulent activities change, so do the challenges that insurers need to deal with.
Insurance fraud makes difficult business conditions even more challenging for insurers. At a time of economic upheavals, inflation and other pressures, fraud leads to the imposition of additional tax on every policyholder.
On that note, this blog will elaborate on some alarming statistics, types of fraud and the challenges encountered by insurers.
What Constitutes Insurance Fraud?
Fraud impacts every type of insurance, whether it’s non-life insurance, life insurance and health insurance. Fraudulent activities essentially consist of:
- Presenting incomplete or false information in insurance applications or proposal forms.
- Submitting a claim for a loss based on false or misleading circumstances, which includes exaggerating a genuine claim.
- Otherwise misleading an insurer to gain a benefit under the insurance contract.
Insurance fraud may be carried out by the policyholder or by a third party against an insurance policy. It may range from opportunistic claims, and claims for fictitious injuries in road accidents to organized crime rings.
Global Statistics on Insurance Fraud:
Insurance fraud has existed for almost as long as the insurance business itself. We have put together several alarming statistics to provide a clearer picture of the state of insurance fraud as of now.
- In 2021, insurance companies in the UK registered 89,000 fraudulent claims.
According to ABI’s data, this was a decline of 5% compared to 2020 and the lowest level registered since 2007. This indicates the number of fraudulent claims is on a decline owing to the continuous fight against insurance fraud.
- An average identified fraudulent insurance claim in the UK in 2021 was worth £12,283.
While there was a decline in the number of identified false claims the average fraudulent claim value was at a record high in 2021. UK insurers uncovered £1.1 billion worth of insurance fraud in 2021.
- Fraudsters remain creative in 2021.
In 2021, fraudsters continued to commit unlawful schemes against insurers. Persistence and creativity are ongoing problems that insurers continue to face. At least 41% of survey respondents from a survey conducted by FRISS find it hard to keep up with the modern methods applied by fraudsters.
Diverse Types of Insurance Fraud
According to Aviva UK’s study, the rate of employers’ liability and public liability claims declined in 2021. However, suspected fraud grew by 12%. About a quarter of fake liability claims declined by the company are for slips, trips and falls. The insurer also suspects that some organised parties involved in whiplash fraud have turned or are turning to pursue liability fraud instead.
Personal Injury Claims
One of the most common tricks that fraudsters try to make fake injury-related claims is cold-calling, according to the Association of British Insurers.
Cold calling refers to the aggressive marketing tricks adopted by claims management companies regarding minor injuries. These tricks may involve spamming members of the public with text messages and cold calls, even encouraging them to make false claims where there has been no accident.
Data collected by ABI indicates that whiplash is one of the most common personal injuries Brits claim compensation for, with over 1,500 claims made in the UK every day. This costs the insurance industry approximately £2 billion a year.
A study conducted by Zurich UK revealed that it discovered £8.4 million worth of fraudulent property claims. This was a significant jump from the £4.7 million that the insurer detected from the previous year. The number of claims unapproved due to fraud likewise climbed from 394 to 473, which indicates a 20% rise.
High-value jewellery, television and mobile phones were among the most common items that fraudsters have claimed to be stolen, lost or damaged. The average value of the claims reached approximately £8,800, according to the firm.
For Aviva UK, 13% of all fraudulent claims detected in 2021 were in home insurance. The number of incidents has increased up to 45% which is the highest increase in seven years. The most prevalent types of fraud detected were fake claims for accidental loss, accidental damage, and theft. Aviva also shared that the average value for a fraudulent household insurance claim was around £3,600.
Insurance Fraud Challenges Faced by Insurance Companies
There are several alarming issues and challenges that insurance companies face in responding to fraudulent activities. We’ll elaborate on these different kinds of challenges insurance companies are grappling with frequently.
- Keeping Up With the Modern Fraudsters
Fraudsters are always looking for a weak spot. Much like the technology in the insurance sector, these entities have evolved as well. They use different means, and different insurers and assume fake identities. If they figure out a way to utilize new technologies that are not fraud-proof yet, they’ll use those technologies to their advantage.
Fraudsters are usually quick in their actions and by the time the companies figure out, the damage is already done. Detecting organized fraud activities often differ based on culture.
- Changes In the Pattern of Fraud
It’s true that insurance technology and fraud detection processes are evolving to include new and innovative solutions. However, fraudsters are also adapting to new technologies. Like most other crimes, criminals are searching for loopholes and opportunities to embezzle and/or claim fraudulent policies.
This change of pattern in insurance fraud created major issues for claim departments. This is because it doesn’t only impact the current claim but also previous and future claims, forcing the investigators to go through previous cases.
- Limited Access to External Data
Insurance processes have become a distant affair these days. Consumers rarely rely on insurance brokers as it’s more convenient to use the internet for any kind of insurance requirements. If there’s no personal contact with clients applying for a policy, how does one make a solid assessment of the risk that’s taken on?
Risks are an integral part of insurance but risks must be valued as thoroughly as possible for a healthy return on an insurance portfolio. Information from external sources may provide more clarity and present strong and sound arguments for acceptance, rejection or revised conditions. External data enhances the health of insurance portfolios by seeking the proper balance in risk coverage.
The availability of external data sources differs depending on the country. Expenses and usability may differ as well. Sources that procure company information, such as the Chamber of Commerce and credit data providers, are frequently used. Companies that can screen social media such as Facebook and Twitter are rising. This is particularly to complement the geographical information of a claimant at a specific time or to complete an applicant’s profile.
- Outdated Internal Fraud Solutions
Insurance companies can take advantage of having access to more data. If data is processed by a specific software that’s able to easily perform comparisons and analyses, insurers can easily automate underwriting and make better pricing decisions. Moreover, an automated screening process enables an accurate and thorough risk assessment. This results in a healthy portfolio and lets insurers maintain competitive pricing without losing out their profit margin.
That said, unfortunately, a huge number of insurance companies use outdated internal systems or still follow manual processes. The follow-up and investigation of possible fraud cases are most simplified and effective when the relevant details are available in one system. There would be more clarity on which cases require attention, while the majority of them could be processed quickly.
In fact, investigating false positives will be minimised to a great extent as insurers can apply objective risk assessment while following corporate guidelines.
- Need For Cooperation Between Different Insurers
In order to detect fraudulent activities at an early stage it’s crucial to share intelligence. The sharing of data between the public and private sectors could help prevent, identify, and investigate insurance fraud. However, in many countries, privacy laws presently forbid the public sector from setting up a process for intelligence sharing. Insurers can join forces by sharing data and working together to learn about fraud schemes.
It’s possible for some companies to have second thoughts about giving out business information as they may feel that it’ll impact their competitive advantage.
Myths and Facts About Insurance Fraud:
Myth: Insurance fraud isn’t harmful to anyone.
Fact: Insurers incur costs in investigating suspected frauds which also affects their capacity to deal with genuine claims swiftly. For honest customers, this automatically leads to higher premiums. Insurance fraud is also known to fund and facilitates other heinous crimes and, in many cases, pits people’s lives at risk.
Myth: There are no significant consequences of committing insurance fraud.
Fact: Committing insurance fraud has grave consequences. Fraudsters may face criminal prosecution and a prison sentence. At the very least, they can find it harder to get and pay more for, insurance in the future. Repeat offenders may also find it more difficult to obtain credit and other financial products.
Myth: Insurance fraud is easy to commit.
Fact: Dealing with insurance fraud remains a strategic priority for the insurance industry and insurers continue to enhance their systems and controls against diverse types of fraud.
Opportunistic fraudsters who do not consider the risk factors and concerns about getting caught, often suffer additional consequences other than the sentences they receive. This includes financial consequences and the stigma of being an offender.
Myth: The police won’t be involved in insurance fraud.
Fact: In the UK, a specialist police unit has been assigned to deal with insurance fraud. The Insurance Fraud Enforcement Department (IFED) is funded by the Association of British Insurers and Lloyd’s of London and is dedicated to safeguarding insurers and consumers against those who commit insurance fraud.
Even with all the technological advancements, insurance fraud remains a persistent concern that the insurance industries across the globe have been grappling with. There are various fraudulent activities and challenges that require the immediate attention of insurance companies. However, insurers have been increasingly focusing on the detection and prevention of such activities which will hopefully yield a positive outcome soon.