COVER STORY: Crackdown on fraud

The battle lines have been drawn in the insurance industry’s war against insurance fraud with the establishment of a new Insurance Fraud Bureau set up by the Insurance Council. But just how common is insurance fraud? And what kind of scams have people been getting away with? By Angela Cuming CRACKDOWN ON FRAUD

On the surface it seemed innocent enough. A woman on a family holiday in Fiji said she went to the beach and lost her iPhone and her ring. The iPhone had fallen out of her pocket, she told her insurer, and the ring must have slipped off her finger in the water. The insurer asked for proof of ownership of the ring, and a photograph of what was claimed to be the woman’s hand wearing the ring was supplied. Only it turned out the photo was identical to one taken from an American wedding website. The claim was denied. That small but not insignificant bit of fakery is one of thousands of false claims insurers deal with each year, claims that cost companies time and money to deal with.

The Insurance Council estimates, based on overseas research, that as many as 10% of insurance claims could be fraudulent, causing losses of up to $614 million a year. That’s led the Insurance Council to declare open season on fraudsters, setting up a new Insurance Fraud Bureau (IFB) to wage war on fake claims by bringing all of ICNZ’s members together to combat insurance fraud.

“We want to make people aware that they are cheating everybody else and it’s a cost on everybody,” says ICNZ chief executive Tim Grafton.

The newly-formed IFB’s network will cover over 95% of New

December 2019 Zealand’s general insurance sector. Grafton says its primary purpose will be to educate New Zealanders about insurance fraud and provide a central point of contact for all insurance fraud issues.

It will also gather hard data about the prevalence, cost and patterns of insurance fraud in New Zealand.

ICNZ’s Insurance Claims Register (ICR) manager Yvonne Wynward has been appointed manager of the IFB.

She says the biggest challenge to face at present is trying to quantify how much fraud is being detected.

“The IFB over time will collect data from members to give a more accurate picture of detected fraud,” says Wynward.

Members of the public will also play their part in the fight against fraud. The bureau has a freephone number and an email address for tip-offs, with people encouraged to pass on information if they suspect someone else is trying to lodge a false claim.

“If tips relate to large-scale fraud, terrorism or organsised crime they will be passed onto police,” says Wynward. “But most ICNZ members have their own in-house investigations teams who will gather evidence and undertake investigations before giving to the police for prosecution.” Insurance fraud affects all policyholders, says Wynward, because the more fraud that is committed, the more it costs the insurer and the costs are passed onto the policy holder.

“There is totally this misconception that fraud is a victimless crime,” she says. “If, for example, you arrange to have your vehicle stolen and set alight, the police are now involved, and at the taxpayers’ expense. The police are now looking for a thief and an arsonist.”

While all this is happening, Wynward says, the fraud investigators are looking into the claim.

“The more time that is spent and wasted by emergency services is an expense to every taxpayer,” she says. “The insurer is also absorbing the cost of the investigation, perhaps the prosecution and the loss of the individual’s premiums and this is ultimately absorbed by the policyholder.” While news of the newly established IFB may be unwelcome to those who were planning to over-egg a future claim, the move has been met with enthusiasm by insurance companies, who have long been on the coal face of dealing with fraudsters.

“IAG supports an industry-wide approach to insurance fraud,” says IAG NZ fraud and investigations manager Mick Miners.

IAG New Zealand has seven fraud analysts and 16 mobile investigators who investigate about 5000 claims a year, Miners says.

“Any initiative that raises awareness and reduces fraudulent behaviour will help disadvantaged people by keeping insurance affordable,” he says. Affordable is one of the key words when talking about the F-word, because with fraud comes the inevitable rise in premiums. “Fraud is a major cost for insurance companies and that cost is passed on to customers in their premiums,” Miners says. “We have to allow for the cost of fraudulent behaviour in determining premiums.”

David Whyte, managing director at DCW Management, says fraud is a form of theft that causes harm to members of the insurance pool.

“There is – and should be – zero tolerance for this criminal activity,” Whyte says.

“Fraudulent claims can cause an undue drain on the collective pools of insurance funds that may not be entirely accounted for in retail product pricing due to the unpredictable nature of fraudulent activity,” he says.

“Actuaries will seek to forecast the impact of fraud in setting premiums for various classes of insurance business based on past experience and the likelihood of future occurrences, but this is a best-guess estimate and compensatory price adjustments may be required to preserve liquidity and solvency should fraud have a greater impact than anticipated.” Whyte says he welcomes the establishment of the new IFB. “For the protection of the vast majority of consumers and for the preservation of claims pools, reserves, and expenses, establishing a body of this nature has considerable merit and I believe that if the industry deems it necessary due to credible evidence and research, that the new IFB should be applauded,” he says.

Whyte did caution, however, that care needed to be taken in explaining

to the consumer the precise reason for its existence – namely to stop people committing theft.

“The purpose and raison d'etre of the new body needs to be comprehensively presented with maximum transparency around processes and procedures, and to emphasise that this measure is being undertaken for the benefit of honest consumers at the expense of those who would seek to steal from them,” Whyte says.

But what happens after an insurance cheat is caught out? There’s the obvious, says Miners, like declining a claim and withdrawing cover.

“But what people may not be aware of is that it is unlikely they will be able to get insurance cover anywhere,” he says.

“For example, if you committed fraud when claiming on your stolen mobile phone as a teenager, you may not be able to take out a mortgage in later years as it is unlikely you’ll get insurance cover.”

Other long-term consequences include potential police prosecution and a criminal record, Miners adds.

Companies like IAG are increasingly using technology when it comes to discovering and investigating fraudulent insurance claims.

“Sophisticated software now looks at all claims for triggers such as claims made immediately after taking out a policy, or the unusual hour of an alleged incident,” says Miners. “And information held on a customer’s phone can also provide an insight into what is and isn’t a genuine claim.” Online claims processes have “certainly” led to a rise in fraud, says Miners.

“People appear to be more comfortable being dishonest via a digital channel than in a person-to-person interaction,” he says.

“Consequently, we are constantly updating our analytics to combat these new trends.”

The message, then, is clear: think twice before you inflate your insurance claim.

“A little lie can have big consequences,” says Insurance and Financial Services Ombudsman, Karen Stevens.

“The long-term consequences of insurance fraud are hard-hitting. Declined claims are the tip of the iceberg,” says Stevens.

“If your insurance policies are cancelled, and your name is listed on the Insurance Claims Register (ICR), this makes it difficult to get future insurance, which can be devastating, for example, if you’re trying to buy a house.

“The bottom line is, tell the truth,” says Stevens. “Your claim, and your evidence, will be checked. We’ve seen some creative, quite elaborate storytellers get caught out.”

One man claimed his van had accidentally caught fire, because a petrol can had been knocked over during a “sort of a romantic meeting” on a mattress in the back. He said he’d later attempted to light a cigarette outside the van and “there was a boom”. The insurer, however, smelt a rat and quickly gathered hard evidence to prove the claim was fraudulent: petrol was everywhere in the van; the fire service had been called 38 minutes after the fire began; and the man had been trying to sell the van. There are varying degrees of dishonesty, and the law recognises a difference between a fraudulent claim and a false or dishonest statement in support of what would otherwise be a valid claim. “But the consequences for both fraud and dishonesty are more serious than most people think,” says Stevens. “When we investigate complaints involving dishonesty, false statement or fraud, we look at the policy, and whether the insurer has been able to provide evidence to the legal standard.”

The case of the van fire is an extreme example of fraud, but there are many different types of stunts and scams that people try to get away with. Stevens says that of the fraudulent claims that come through her office, most of them will be to do with car, contents and travel claims. She says the areas of life and health insurance tend to see fewer instances of fraud

December 2019 – most likely due to the presence of doctors, who regularly review each claimant’s situation.

“Where you get more blatant fraud is with travel policies, where people claim for items they say have been lost, but they’ve got no proof,” Stevens said.

“We’ve had a couple of cases where we’ve asked for evidence of lost jewellery and they’ll provide internet wishlists, for example. We get contents claims where people say things have been stolen, but the receipts are not actual invoices.”

Insurers do not tend to pursue claimants for fraud in such circumstances, says Stevens, because they’ll simply decline or stop paying. However, when it comes to premiums, she says both “soft” and “hard” fraud have the potential to affect premiums for other policyholders, and so claimants should stop to think twice before attempting to put in a fraudulent claim. “We had one person claiming for a new laptop after spilling coffee, but when a technical expert looked at it, he discovered it hadn’t been used for a year,” she explained.

“While some of that kind of thing is on a reasonably minor level, people should think first before trying to do something like that. That’s the flip side of the coin – from people being genuinely disappointed when claims aren’t paid, to people actively trying to mislead or deceive an organisation into paying something they’re not entitled to.

“On a common sense basis, if insurers have to pay a bunch of claims that aren’t genuine, that probably affects everyone else who pays premiums.”

One function of the new IFB may be to try and collect comprehensive information on the most common targets of insurance fraud, says Whyte, because identifying patterns at this stage is based on anecdotal rather than empirical evidence.

“Intuitively, travel insurance, house contents, and income protection insurance products spring to mind,” he says.

“From my UK days, I recall that approximately 8% of domestic household claims were deemed to be fraudulent.”

Had this been repeated following the Christchurch earthquakes, this would have produced over NZ$3 billion of fraudulent claims, Whyte says. “However, I understand that technology and forensic accounting combined to confirm that there was no systemic or endemic incidence of fraud in the claims experiences of the insurers.”

Travel insurance has recorded several incidences of fraud when the value of lost or stolen items has been deliberately inflated or even invented in some cases, Whyte says, and small incidents of this nature can have a significant impact in aggregate. Meanwhile, one fraudulent claim on an individual income protection insurance can have a significant impact on a product portfolio, he adds.

Unlike domestic residential insurance, income protection insurance is non-cancellable, and the claims liability 'tail' can be severe, Whyte says.

“In Australia, reinsurers record income protection claims 'spikes' during economic recessions among certain classes of occupations, and professions undergoing structural changes have also recorded increased incidents of claims.”

While most claims due to psychological disorder are genuine - and physiological evidence is difficult to falsify without the collusion of a medical professional - there will have been an element of fraud likely contained in claims experience during periods of economic and/or financial stress in the community, Whyte says.

“Fraud can also occur at the point of commencement of insurance cover by deliberate non-disclosure or concealment of material facts, and while legislation is pending to bring New Zealand into line with international standards on the issue of non-disclosure, consumers should be aware that increased claims sensitivity will result in more expensive insurance,” he says.

Grafton says there are several things which may motivate a policyholder

to make a fraudulent claim, and most of them come down to disgruntlement with the insurer.

Part of the IFB’s role will be to offer education on the impact of fraud, and to dispel its perception as a “victimless crime” which only slightly affects already-profitable insurers, he says.

“I have no doubt that there is an issue around a minority of people who feel they are entitled to exaggerate their claims,” Grafton says.

“The motivations can be varied – people may think they’ve been paying premiums for many years, and it’s about time they got some payback. They may have had a claim declined in the past, so they’ll try and put in another one.”

The IFB may also have the potential to be able to identify certain types of people more likely to commit insurance fraud, but Whyte says that may end up being a moot point.

“I'm not sure if there is a pattern relating to the 'types of people' to be honest,” he says.

“I've experienced white-collar clients 'gaming' their financial status in order to maximise payments under their income protection insurance, and I've experienced impoverished residents in a housing estate in the UK passing around the same fire-damaged fireside carpet which became the subject of multiple claims. Unfortunately for one of the claimants, a sharp-eyed claims officer recognised the carpet from another claim and, well, let's say no further payments were made!”

The industry – and customers – will now no doubt be waiting to see what happens to the price of premiums under the heavy weight of a rigorous system designed to flush out fraud before it costs insurers money. Wynward says it is too early to tell what will happen, but to watch this space.

NZ’s Local Insurance Brokers

AT A GLANCE

The IFB will take a lead role in: • Educating the New Zealand public about insurance fraud • Providing a central point of contact for general insurance fraud issues and allegations of insurance fraud • Developing a centre of excellence for anti-fraud initiatives • Researching national and international trends • Developing strong multi-agency relationships • Analysing and working with insurance fraud data in New Zealand to help find and reduce instances of insurance fraud Anyone wanting to report insurance fraud may do so by visiting www.ifb.org.nz, by calling 0508 372 835 or by emailing fraud@ifb.org.nz

“The IFB will expect that, after a few years of running the general public will have a greater awareness of general insurance fraud, equating to fewer fraudulent claims being submitted to insurers,” she says.

“It is also expected there will be an accurate quantitative measure of insurance fraud in New Zealand. Fraudulent claims do have an overall effect on premiums, but there are many other factors that insurers take into consideration when calculating premiums, so it is hard to say how premiums will be calculated in the future.”

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THE INSURERS OF THE NZ INTERNATIONAL CONVENTION CENTRE SHOULD BE HAPPY ABOUT THE FIRE CLAIM

By Crossley Gates

Insurance as a product transfers the risk of loss from the insured to the insurer. However, insurance as a business is about much more than that. It is primarily about balancing a key ratio. It must be - otherwise, for the reasons set out below, the business would no longer exist. THE BALANCING ACT

The risks that insurers take on must be risks that consumers and businesses feel a real exposure to. If the chance of a loss resulting from an insured risk is too remote, no one will want to pay money to transfer it. Every time a loss occurs as a result of an insured risk, the insurance product is validated. The need for it is reinforced. Sales are encouraged.

On the other hand, insurers don’t want the incidences of losses resulting from that risk to be too high. Otherwise, they won’t make a profit, or worse, they will become insolvent. Where a risk is so great or the size of the losses arising from it are so large that they can’t be successfully spread amongst the insurance/reinsurance world without risking insolvency, the risk is uninsurable.

December 2019 There are many uninsurable risks and there always will be – think of the common ones of war/nuclear/terrorism. A concern is that the effects of the climate crisis may be joining that list, which will have far-reaching consequences for businesses and consumers. However, addressing that concern is not the purpose of this newsletter. POTENTIAL CONFLICT

It is easy to see that to some extent there is a potential conflict between wanting to insure risks that have a realistic likelihood of losses occurring and not receiving too many claims. Getting the balance right is critical, and for this reason, it is the essence of insurance as a business.

That balance is reflected in the key ratio of premiums to claims – known in the industry as the loss ratio. Ignoring business expenses, if a product’s loss ratio is 100%, the insurer paid out the entire premium received in claims.

When you add expenses to the equation, the ratio is called the combined operating ratio (COR). If the COR is 100% the entire premium received equalled all the claims paid and all the expenses incurred – the insurer just broke even. Insurance is a business and insurers must achieve a COR

under 100% in order to pay a dividend to their shareholders. This is no easy task. PRICE/EXPENSES/RETENTION

Insurance is intangible; you can’t feel the transference of the risk, so demonstrating its worth when there has been no need to claim is a challenge. This makes the product very price sensitive. Market forces can drive the premium down to levels that are unsustainable long-term for insurers. Insurers have to control expenses tightly to ensure this part of the COR remains competitive. Lastly, the impact of claims has to be carefully managed by deciding how much of a risk to take on in the first place (100%, or less, requiring other co-insurers to take up the balance) and how much to retain before transferring the balance of the risk off to a reinsurer. One of the factors behind AMI’s insolvency was that it tried to save on its reinsurance premiums (expenses) by purchasing too little reinsurance. Its retention was too high. SALES AID

The reason for setting all this out is to demonstrate that in a perverse way, insurers should welcome claims. They are a sales aid. Insurers need

claims to demonstrate the need for businesses and consumers to pay good money to transfer the risk to them in the first place.

The graphic fire at the New Zealand International Convention Centre has now reminded the owner of every construction site in New Zealand of what apparently can so easily go wrong, and the size of the loss that can result from it.

The fire has promoted the need for adequate construction insurance and liability insurance in a very public way. This is a good thing, as the industry needs this to survive.

Crossley Gates is a partner at Keegan Alexander. Email: cgates@keegan.co.nz Direct Dial: (09) 308 1809

Jewellery claims

...how complaints can add value for you and your clients...

Jewellery is commonly lost, damaged or stolen. You can help your clients by encouraging them to take simple steps now to avoid problems later. The best time to take action, and to understand insurance policies, is before anything does go wrong. Help educate your clients by encouraging them to:

Check their policy: Check for limits on specific items, and exclusions. Check for obligations such as keeping jewellery in a safe place, taking “reasonable care”, reporting incidents immediately, proving ownership and loss.

Specify special items of value: Complaints show us many people don’t realise that items over a specific value (e.g. $3000) must be specified on the policy schedule and, if they’re not specified, the maximum cover for individual items will apply.

Keep receipts and get valuations: Many people don’t realise if they make a claim, they will need proof of purchase or ownership. Valuations should be reviewed regularly.

Travel safe and wise: Your travelling clients will be grateful for the reminder to take extra care of jewellery, check their policy for specific requirements, don’t leave bags unattended in public places, and report any loss immediately.

Tell the truth and provide accurate evidence: The consequences for being dishonest are far more serious than most people realise. Evidence provided for jewellery claims will be checked.

December 2019 The following case studies about jewellery claims demonstrate that sharing lessons from complaints could help your clients avoid issues in future. CASE STUDY: 00210697 (2018)

Carol’s* house was broken into and a significant amount of her jewellery was stolen. When she made a claim, her only proof of ownership was photos of herself wearing some of the items.

Carol engaged a local jeweller to prepare an “Estimate After Loss” to calculate the value of the jewellery stolen in the burglary based on her description of the items. This report concluded the replacement value of the jewellery was $56,887.

The insurer also engaged a jewellery valuer to prepare a report based on Carol’s descriptions of the items, and the photographs Carol provided. The insurer’s report concluded the replacement value of the jewellery was $24,513.

The insurer offered Carol a settlement of $24,513 for the jewellery portion of the claim. Carol requested a review. The insurer reviewed the first offer and increased the figure to $27,846. Carol wasn’t satisfied and made a complaint.

The IFSO Scheme case manager explained that, in situations where there is very little substantive proof of ownership or value, it is largely at the insurer’s discretion how it will settle the claim. It is common for insurers to decline to pay for items for which no proof of ownership has been provided.

Where photographic evidence has been provided, an insurer may opt to settle the claim, but for a significantly reduced amount, due to the difficulty of accurately valuing an item of jewellery from a photograph.

In certain circumstances, such as in this case, an insurer may be willing to pay what it believes to be the most likely value of the jewellery, based solely on the insured’s description of the lost items. However, it does not have any obligation to do so, because the insured has failed to discharge

the onus of proving a prima facie claim.

The case manager believed the second settlement offer of $27,846 was a fair and reasonable settlement of the claim. CASE STUDY: 00210229 (2019)

Tim’s* contents insurance policy included cover for the market value of jewellery. Tim separately specified an engagement ring. When Tim’s partner lost the ring, he made a claim. The insurer accepted the claim and paid Tim the ring’s market value of $2,200.

Tim made a complaint on the basis that the policy schedule specified the sum insured for the engagement ring as $3,390.

Tim said he had been told by the underwriter that the ring would be insured for $3,390 for 10 years, and that the underwriter underlined this figure on a piece of paper for him. The underwriter disagreed. Replacement value was only available under the policy for furniture and appliances under 10 years old.

Because there was conflicting oral evidence and no documentary evidence, the IFSO Scheme case manager was unable to uphold the complaint. CASE STUDY: 00211088 (2019)

In January 2019, Henry’s* house was broken into and a large amount of jewellery was stolen. Henry’s insurer accepted the claim and made a payment of $5,153.19 to Henry. A dispute arose as Henry believed the total “market value” of the jewellery was $3,792.85, which was higher than the insurer’s estimate.

The insurer had relied on a jeweller’s opinion to estimate the “market value” of the jewellery. Henry provided auction listings, which he said proved some of the items were worth significantly more.

The IFSO Scheme case manager acknowledged the subjective nature of “market value”. As there were many items, a minor increase for each item would have amounted to a significant increase in the claim settlement. Therefore, the case manager asked both parties to consider a compromise. Following these discussions, the insurer offered to settle the claim based on a further payment of $1,200; which amounted to an average increase of $25 per item. Henry accepted this amount. CASE STUDY: 132922 (2015)

After Paula’s* watch was stolen, she engaged a jeweller, who valued the watch based on an equivalent model and found its replacement value was $6,375. However, when Paula had set up her contents insurance policy, she didn’t have her watch valued and its estimated value was recorded as $2,900 (under the $3,000 limit for non-specified items). The insurer paid Paula the policy limit for non-specified items: $3,000 only. *Not real names.

Lessons from complaints to share with clients • Keep receipts and get valuations. Receipts prove ownership and valuations prove the value of the loss. Insurers will ask for this evidence. • Obtaining regular valuations is the only certain way of establishing replacement value. • Photographs will not generally be sufficient evidence. • A post-loss estimate based solely on the insured’s recollection of the items lost won’t generally be sufficient to prove value or a prima facie claim. • If your client cannot provide sufficient proof, it is largely at the insurer’s discretion how, or if, it will settle the claim. • As jewellery is very personal, it is often difficult to replace with like-for-like items. • Policy limits for single items or all jewellery may limit the claim.