Getting application fraud right is important. Honest policyholders benefit from fairer premiums and better service. There’s a clear ethical side to this. Yet as I’ve mentioned before, there’s an ethical side to how application fraud is tackled. We don’t want honest policyholders to be charged unfair premiums or receive a less friendly service. So casting a curious eye over how application fraud is developing is worthwhile.
A recent article in the insurance trade press reveals some interesting data for application fraud. It focusses on motor insurance fraud, the main source of fraud in the UK sector at the moment. I've set it out below...
Before exploring what these numbers tell us, it's worthwhile explaining two things. Firstly, what is application fraud, and secondly, what's the purpose for addressing it?
Application fraud encompasses things like...
- changing your proposal form data to get a lower premium or better cover - for example, by not disclosing previous claims or entering a different age or occupation;
- fronting for the actual main user of the vehicle, such as when a parent insures their child's car in their own name;
- ghost broking, where fraudsters set up a website to entice consumers to pay for insurance that doesn't exist.
And the core purpose of application fraud is to stop fraudsters getting onto an insurer's books, so that they then don't have the opportunity to submit a fraudulent claim.
What the Data Tells Us
The data set out above tells us some interesting things.
Firstly, the significant growth in the volume of application fraud in UK motor insurance over the period 2017 to 2019. It more than doubled, from 325,416 cases to 732,087 cases.
Secondly, there's been little movement in the number of confirmed cases of motor fraud (98,894 to 100,456) but a huge movement in the number of suspected cases of motor fraud (226,522 to 631,631). That's a little under a threefold increase over three years.
Thirdly, the relative proportion of suspected fraud to confirmed fraud. This has moved from 70% of overall application fraud in 2017 to 86% in 2019.
Fourthly, there's a curious consistency each year in the per case value of application fraud, across both confirmed and suspected fraud. They're always the same, albeit increasing each year.
Questions Raised by the Data
The stand out question raised by this data relates to the underlying cause of the huge growth in the number of suspected fraud cases. Is this down to more fraudsters, more fraudulent activity, better detection, or a change in scope definitions? Remember that all of this data is pre-pandemic.
I struggle to see this increase as down to some mix of more suspected fraudsters and more suspected fraud. A near threefold increase in suspected fraud over three years that, looking back on from these current times, seem economically relatively stable, doesn’t feel tenable.
Sure, ghost broking has risen a lot and has become a big contributor. Aviva are said to have ghost broking at 20% of policy fraud. Even so, that would be spread over confirmed and suspected, and wouldn’t account for that near threefold increase in the latter.
I struggle to put this near threefold increase down to better detection rates. If it had, then it would have been all over the insurance trade press. While data and analytics will have undoubtedly improved, I doubt this has been to the extent that produces such increases over just three years.
Levers and Dials
So this points, in my opinion, to some form of change in scope definition, of terms like fraud and proven, like confirmed and suspected. Bear in mind that from the start of initiatives like the Insurance Fraud Register, the definitions adopted were those of the insurance sector, not the courts.
A lot of fraud is now assessed by risk scores, drawing on numerous sources of data brought together by all sorts of analytics. A lot of this work is done by software houses, data brokers and organisations like the Insurance Fraud Bureau.
These organisations have all sorts of levers and dials that can be moved in relation to assessments of fraud. And it looks like they have been moved, if a near threefold increase in suspected motor fraud volumes says anything. What is behind this redefinition?
Another obvious question that curious members of the public will ask is in relation to the 100,456 cases of confirmed motor fraud in 2019. What’s become of such cases?
Only a small fraction seemed to have gone through the courts. In February 2022, the City of London Police’s Insurance Fraud Enforcement Department (IFED) celebrated ten years since its launch. Over those ten years, IFED carried out 2,930 arrests and voluntary interviews. They secured 584 court convictions and 1,418 judicial outcomes. Good numbers, but clearly, in a different league to over a hundred thousand cases of confirmed fraud in 2019 alone.
If the vast majority of those one hundred thousand cases were ‘confirmed’ but not addressed by IFED, what became of them? If I scratch my head over the meaning of confirmed, what might those curious members of the public do?
These are very obvious questions. And some of you would respond along the lines of ‘they are criminals, but the courts are too slow. Let us just get on with it.’ And a little bit of me gets this, but a large bit of me would really like to see more independent oversight, to ensure that those scope definitions remain fit for purpose.
There’s a reasonable chance that Citizens Advice’s research on discriminatory pricing will spill over into counter fraud (more here). Their research confirmed the influence of counter fraud systems of the quotes they obtained.
At the moment, Citizens Advice appear to be sitting patiently, waiting for the sector to engage with it in a discussion on the possible reasons for the discriminatory pricing outcomes that their research found. I suspect however that the sector would very much prefer to be left alone to get on with pricing and counter fraud as they wish.
What this risks however is a debate being forced on the sector. In such circumstances, control of the narrative is all important and to be honest, I think insurers would struggle to control it. They would come too late to the debate for that.
What this means for individual insurers then is the importance of having good answers to the obvious questions that will be raised. The fraud volume figures I’ve highlighted above could well represent just the tip of an iceberg of such questions.
At which point, what have you got to show that your counter fraud strategy falls comfortably within the scope of the FCA’s Principles for Business, within the scope of the new Consumer Duty? How have you been challenging yourself to make sure that ‘what you have to show’ is as robust as you think? And finally, what would you be willing to put into the public domain to reassure the public that honest policyholders are being treated fairly?
I expect UK insurers to be facing such questions within twelve months. It's important that they are prepared. Catching fraudsters is too important for the sector to fall into a reputational ditch on this.