Insurers must turn detective to combat rise in property fraud

This article originally featured in Insurance Day, August 2024. 

Property fraud is on the rise: the City of London Police’s Insurance Fraud Enforcement Department reported last year property claims represented the second-highest incidence of opportunistic fraud, accounting for 29% of fraudulent claims reported in the UK.

While this includes household claims, the commercial property sector is also significantly at risk from the increased rate of commission.

What are some of the factors contributing to this changing fraud landscape and how can insurers mitigate the threats posed by fraudsters?

Previous economic downturns have often led to an increase in fraud and today’s economic situation is no exception. With sectors such as hospitality particularly financially vulnerable because of post-Covid difficulties and the ongoing cost of living crisis, the incentive is clear.

Property fraud can take multiple forms: fabrication, misrepresentation or exaggeration. Fabrication occurs when a fraudster might entirely invent a loss, such as arson/wilful fire raising or deliberately causing an escape of water. Misrepresentation involves lying about the cause, date or circumstances of a loss in an attempt to trigger an insurance policy response. Exaggeration is self-explanatory; when a genuine loss is fraudulently exaggerated to allow a fraudster to recover losses they are not entitled to.

Fraud detection

Detecting serial fraudsters can be difficult where different corporate entities mask the individuals behind a claim. The absence of a commercial claims database also hampers detection. However, there are some common features of fraudulent property claims to look for when dealing with a claim. It is important to be vigilant at all stages; from first notification of loss to settlement. Some examples of key fraud indicators can include recent business incorporation, late requests for additional levels of cover or additional losses added partway through the claim.

Where a fraudulent claim is suspected, insurers should closely examine the statements made at policy inception. Dishonesty at the claims stage can often mirror dishonesty at the policy inception stage, particularly when the individual concerned is under financial pressure to reduce premiums. Investigation of all representations made at inception and renewal, in the statement of facts, is therefore vital, particularly as it can be more cost-effective to avoid a policy than to defend an indemnity claim following a repudiation for fraud.

The involvement of third parties or professional enablers in bringing or exaggerating a property claim is a potential risk claims handlers need to be aware of. For example, while the vast majority of loss assessors are genuine, taking their regulation by the Financial Conduct Authority (FCA) very seriously, there are occasions when bad actors hold themselves out as loss assessors when unregulated and seeking to exaggerate or fabricate losses. Claims handlers should therefore check for FCA regulation and the industry intelligence on those parties already implicated in the pursuit of fraudulent claims.

Threat from AI

The rapid evolution of artificial intelligence (AI) in the insurance sector offers exciting opportunities and benefits for insurers to, among others, streamline processes, reduce indemnity spend, improve the customer experience and drive automated fraud detection.

However, generative AI also comes with challenges, as it enables potential misuse, inadvertently equipping fraudsters with the tools to craft more convincing false claims, manipulate data, and exploit system vulnerabilities. Validation of claims and the documentation provided in support of them has always been key for detection of fraud. Previously, bad actors needed time and resources to understand the claims process, generate convincing documents and create fake websites.

Now, generative AI can develop code for a new website and detailed schedules of work almost instantaneously.

Comment

Insurers face a number of obstacles when fighting property fraud, such as the absence of an industry-wide database and the use of “phoenix” companies by directors to evade detection from previous claims involvement. The investigation of claims is still heavily reliant on the experience and datasets of loss adjusters. The engagement of a good loss adjuster is crucial, but in a collaborative approach sometimes the need for claims to be clearly set out and committed to evidence is key.

Too often a claim evolves to include fraud, but insurers are unable to evidence the nature and content of submissions to a judge as such content will be contained within undocumented conversations. This is turn leads to a difficult “he said/she said” scenario. The Insurance Act 2015 itself can present challenges to an insurer in a first-party claim, as this also requires a careful assessment of whether dishonesty is material or collateral to the claim.

A robust fraud detection process is key to mitigating risks. This includes early identification, early collaboration with forensic investigators, loss adjusters and solicitors to direct investigation, secure evidence and ensure false positives are reduced.