Insurance claims tend to skyrocket during times of recession, and, according to statistics, so does insurance fraud – something industry experts say can only be tackled through strong collaboration among insurers.
The Insurance Council of New Zealand launched its own fraud bureau last year, and, according to its 2019 data, insurance fraud is estimated to have cost $688 million. That number is expected to rise thanks to the COVID-19 pandemic and recession, and ICNZ said financial hardship is likely to be a key driving factor.
The Insurance Council recently heard from a range of international experts who discussed patterns of insurance fraud over previous economic recessions and explored how fraud can be tackled effectively. According to Stephen Dalton, an ex UK customs officer who joined the Insurance Fraud Bureau (IFB) in 2010, recessions are directly linked to upticks in fraud activity, though the scale of the numbers in 2020 remains to be seen.
“In terms of economic recessions, there are statistics available that show a direct correlation between a fall in economic output and a rise in fraudulent activity,” Dalton commented.
“Certainly, the 2020 recession is going to be the biggest of all of them so far. In terms of what that’s going to mean for fraud, we don’t yet know. We do know that fraud tends to rise as a result of unemployment, but we’ve got no sense of what size of a problem we’re facing – but it will be significant, there’s no doubt about that.”
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“A real challenge for us is understanding what the figures mean in terms of undetected insurance fraud, which by its very nature is impossible to determine,” he explained.
“Some studies have been undertaken to try and understand the potential level of undetected fraud costs, and the Association of British Insurers estimated back in 2009 that the cost of undetected fraud was in the region of NZ$3.7 billion.”
Dalton said that during the 2008 recession, there was an estimated 24% uplift in undetected fraud, with fraudulent motor claims being by far the most significant in value and volume. These included staged collisions, or “crashes for cash,” as well as inflated claims made by individuals.
When it comes to the UK’s response, Dalton said it is taking a “three pronged” approach based on detection, enforcement and prevention. He said the IFB has access to various databases which amount to 143 million records, one of which is a confirmed fraud database – a place where insurers can directly submit claims declined as a result of fraud.
“The IFB is the detection arm, and it’s a not-for-profit organisation funded by the insurance industry and a fraud levy,” he explained.
“Detection is done through data sharing, and the insurance industry shares that transactional and claims data with each other through the Claims and Underwriting Exchange.”
“The industry has a very advanced model in terms of data sharing, which it does quite effectively,” he added. “The IFB’s role is to host those databases and provide coordination.”
Over in Canada, the Insurance Bureau of Canada (IBC) polled 100 senior executive insurance leaders on the topic of fraud, and the majority of the audience believed it was primarily up to insurers to address and combat the issue. Maria Dal Cin, senior vice president insurance fraud & operations at the IBC said that no single organisation can tackle the issue alone, and that the fight needed to be coordinated between insurers, law enforcement and specialist organisations.
“As we know, the global property & casualty industry has been significantly impacted by the COVID-19 pandemic, but this is really just the beginning,” Dal Cin said.
“Around the world, countries are struggling with high levels of unemployment, growing numbers of personal and business bankruptcies and weakened economies. The longer these economic challenges last, the greater the likelihood of an increase in fraudulent activity. That’s not just an assumption or a guess, that’s based on evidence and past behaviour.”
Dal Cin noted a PwC study conducted in 2018, which attributed fraud to three factors – increased motivation to commit fraud as a function of increased financial pressures, increased opportunity, and an increased ability to rationalise a decision to commit fraud. She said organised criminals will almost certainly make use of the “chaos” of COVID to slip under the radar, thinking insurers will be too distracted to properly monitor claims.
“Whether it’s an experienced criminal or a person simply down on their luck, the pandemic and its economic impact may allow them to also justify their actions as necessary, and perhaps view them as victimless,” Dal Cin said.
“It’s hard to put an exact number on how much fraud increases in difficult economic times. But we do know that the number of insurance claims rose during the financial crisis in 2008, and we know that a significant percentage of those turned out to be fraudulent.
“Here in Canada, insurance companies are our fierce competitors when it comes to achieving success in the marketplace – but they’ve also learned to combine forces when it’s in their shared interest,” she added.
“In recent years, they have come together to pioneer new ways of combating fraud. More companies are now willing to share data, because they understand the benefits of cooperating and sharing with other insurers.”
Dal Cin estimated that one staged collision may result in an insurer paying out up to CA$100,000 – something everyone will ultimately pay for through premiums. She said that, ultimately, nobody can directly confront the issue of fraud on their own, and that collaboration was going to be key.
“We need to really work together, share information and best practices and share our successes, and we need to come together when we experience a setback,” she said.
“Together, we can meet these challenges and find a better way forward.”