Insurance Fraud Not Limited to U.S. Market

Tony Boobier is IBM Software Solutions Group Insurance Leader for EMEA.

As insurers and adjusters increase their focus on claims fraud, costing the U.S. insurance P&C industry as much as in the $30 billion annually, according to the Insurance Information Institute, it is perhaps easy to forget that fraud is a global problem.

Fraud is thought to be in the range of $10 to $15 billion for the European p&c insurance industry, and the Insurance Council of Australia reports that 10 percent to 15 percent of p&c claims reported in that country have fraud indicators. Of course, we often think of fraud as being an issue of whether an event is covered by the policy or not, but a significant amount of fraud emerges through excessive claims.

Increasingly the use of technology has increased, with insurers using analytics not only to predict which claims are likely to merit special attention. This has not always been the case, and the claims industry has constantly sought innovative ways to catch both the crooks and the opportunists.

One significant change first emerged in the UK over 20 years ago, where insurers attempted to reduce claims leakage and fraudulent 'scope creep' by directly repairing damaged buildings or replacing lost goods, rather than allowing the policyholder to have control over the fulfillment process. This new model replaced the traditional approach of the policyholder providing three estimates for repair (often provided by the same building contractor, using different letterheads).

The approach also had the secondary benefit of providing additional customer service at a time of extreme anxiety. This approach remains in place, and as a result the UK P & C insurance industry has evolved to develop new capabilities especially in procurement and supply chain management.

The model is best described by example. In the event of a policyholders home being damaged (or even destroyed) by fire, the insurer will directly appoint the restoration company to do the cleaning and debris removal; the insurer will directly appoint a surveyor or engineer to design and supervise the repairs in accordance with local and national standards; and also directly appoint the contactor to carry out the work itself. The restoration company, surveyor, and contractor are retained all by the insurer under a term contract—perhaps 12 or 24 months—to carry out the work usually at discounted rates.

If the house is uninhabitable, the insurer will often have direct arrangements with removal companies and national letting agencies.   

In this approach, the policyholder has little or no say in the parties involved in repairing their home, and the adjuster's role is reduced to commenting on policy liability and acting as a project manager. Smarter adjusting firms combined the insurance and surveyor functions to maximize the revenue opportunity, going as far as setting up new building repair divisions. With many UK property adjusters having professional surveying qualifications as well as insurance qualifications, this was a natural evolution.

The legacy for this step change in approach emerged from two different directions. First, an increasing trend for auto insurers to assume responsibility for repairs following vehicle damage (if it could be done for vehicles, then why not for buildings), and secondly a recognition that social landlords such as housing associations used framework agreements with builders to carry out fire and flood work to the property of tenants, and insurers could use a similar approach. In fact, in the early stages, similar contracts and processes to those of housing associations were used.

Restoring properties in this way was to become a marketer's delight, firmly establishing the insurer as the trusted advisor who was able to restore the property to its pre-event condition. But the method also brought problems , in that delays in starting and finishing the work rested firmly at the insurers door, as did all issues of quality and responsibility for payment (other than where there was agreed betterment).

Claims savings costs were (and remain) significant, but are partly offset by the need for the insurer to have a procurement and supply chain management function. Indeed, procurement and supply chain became new key competences for insurers, with C-level representation.

One key issue of supply chain management for insurers is the management of the supply/demand imbalance, typically in the case of a major weather incident such as flooding or storm. While not of the scale of the U.S. market, UK flooding in 2007 cost insurers $5.0 billion and created immense strain on the UK construction industry. Catastrophe or surge planning is a critical consideration amongst insurance supplier managers, but with some much dependence on subcontract labor, even the best plans have their vulnerability.

Of course, this did not completely remove fraud; in fact it moved it away from the policyholder and towards the repairer who would take the opportunity to use cheaper materials than specified, and shortcuts in the repair process which would reveal themselves well after the event. Supplier audit heightened in intensity, with analytics increasingly being used to identify outliers.

Against this backdrop, the claims market in Europe continues to evolve, with U.S. claims software companies gradually gaining a foothold, but it has been a long journey for them. Part of their learning has been more than the challenge of different currency and measurements, but also the greater variety of building types, and the localized practices of the marketplace. Overall, with no sign that the problem of insurance fraud inEurope(or anywhere else) is likely to disappear, the claims industry inevitably awaits the next step change.