The insurance sectors in most countries encourage members of the public to report suspected insurance fraud. Should they then be rewarded for doing so? While there is growing public awareness that insurance fraud is not a victimless crime, would rewards do harm or good?
In the US, legislators in several states have passed ‘insurance fraud prevention’ acts that reward members of the public who report insurance fraud against private insurance firms. And those rewards can be substantial, at around 40% of the proceeds of the successful recovery. Such reports are said to have made a significant difference to the amount of fraud being reported in these states.
So might this be considered in the UK? It may already have been, although I’ve not heard anything along those lines. Back in 2014, the FCA was asked by Parliament to consider incentivising whistleblowers on misconduct matters with monetary rewards. The regulator was firmly against it, but in response, it did significantly increase resources and reporting around whistleblowing.
A Sea Change in Attitudes?
That was around misconduct within the market itself. So what about insurance fraud? It has upsides, for example by almost certainly moving up the reporting of suspected fraud by several gears. Does the sector have the investigative resources to handle this? And of course, rewards bring further attention to insurance fraud not being victimless, as the reward is based around the amount recovered. Could it deliver a sea change in attitudes, that will then feed back into public behaviours? It could well do so.
So what might be the downsides? A lot of marginal reporting is one likely outcome. This will still require investigation, with all the time and resource that would take up. After all, if you’re offering a reward subject to conditions, then it’s incumbent upon you to carry out your side of the bargain.
Reports would undoubtedly come in on both application and claims fraud. The problem here is that sector statistics point to application fraud being by far the bigger of the two. Yet the monetary amounts upon which a reward would be based are far smaller than the amounts involved in claims fraud. Offering rewards that end up so small that they look like damp squibs is a move that can easily backfire on those offering them.
Fuelling a Reporting Industry
One incongruous outcome of offering rewards for reporting suspected insurance fraud is that it might trigger a mini-reporting industry. And active players in that industry could be the very claims management organisations who the sector believes (with some justification) feed off them in the form of dubious third party claims. It would feel like feeding the hand that is biting them.
That said, the sector has been willing to ‘feed the hand that is biting them’ in the past, when referral fees became hugely popular as a source of income for insurers. It added a lot of fuel to the then growing industry of dubious third party claims and it took regulatory moves to kill off what amounted to one of the most stupid practices ever thought up by the sector. These fees are a classic example of how rewards can entirely backfire (times ten in this case) on those offering them.
I don’t think there is any appetite amongst insurers to reward reporters of suspected fraud. They don’t have the resources to handle it, and only claims fraud would offer worthwhile monetary rewards. The sector’s preference is I believe to stick to its ‘data and analytics’ strategy, around which it can exert control and direction much more to its own liking (too much control in my opinion, but that’s another matter).
Half Way House?
Is there a half way house perhaps? One might be to introduce a small, notional reward amount – say £100 for example. This might be given in cases of substantive fraud, either application or claims, although the line around substantive will be a tricky one. It would avoid a reporting industry, while also raising the profile of that key ‘not victimless’ message.
Even then however, I’m still reluctant to go down the reward path. Not surprisingly, I would prefer people to ‘do the right thing’ for its own sake. I recognise though that is likely to engage only so many people, although still more than most people would think.