Why the insurance industry needs to tackle opportunistic fraud
Insurance fraud is a big problem, with around £1B detected and dealt with in the UK each year. This detected insurance fraud is typically perpetrated by organised criminal gangs. However, it is estimated that around two thirds of insurance fraud (around £2B) passes undetected.
Of the estimated £2B of undetected insurance fraud, around half (£1B) is estimated to be in the form of retail opportunistic fraud, with around 85% of this (£850M) in turn estimated to be in the form of first party claims or applications opportunistic fraud1 (i.e., perpetrated by the person making the claim or application), as opposed to third party opportunistic fraud (fraud committed by someone who is not the direct beneficiary of the policy).
This opportunistic fraud is generally committed by otherwise law-abiding citizens. It occurs when the customer decides to lie or exaggerate on their application or claims form in order to get themselves a better deal (i.e., a lower premium, or a higher claim). For example, a young driver may include the name of a parent as the main driver of a car in a motor insurance application in order to get a lower premium (a form of fraud known as ‘fronting’), or a person making a claim for stolen goods on a home contents insurance policy may exaggerate the value of the items stolen in order to receive a higher claim.
Such opportunistic fraud is often not premeditated, and instead occurs in the heat of the moment. Customers often feel justified in their decision, believing their erroneous answers to be ‘white lies’, and the result a ‘victimless crime’. Indeed, many myths abound that are used to justify such fraud. Insurers may be seen as the ‘enemy’, who are actively trying to avoid paying out on claims. However, the real impact is an industry that has to put resources into detecting fraud and prosecuting fraudsters, and an increase in the costs of premiums for honest customers as a result of the undetected opportunistic fraud that is occurring.
The question is, can anything be done to prevent it? With the application of behavioural science, we’ve demonstrated that the answer is ‘yes’, and the positive impact is potentially huge for both insurers and customers! Click here to find out more.
1 All numbers quoted here come from the ABI Fraud Research Report 2007