During recession there are some organisations that are tempted to consider reducing their risk management activities. However, this is exactly the time when they should be looking to continue with and even expand their risk management activities. Failure to do so could be storing up ‘trouble’ for the future. The skills, tools and information at the disposal of the risk manager are needed to create reassurance and to enable organisations to continue to take decisions with confidence.
A number of professional organisations and insurance sector companies have suggested that in times of recession there is often a corresponding correlation in levels of crime, including fraud and burglaries. To reduce vigilance at such a time would be to open the doors to a flood of potentially fraudulent claims and other losses.
So why does the recession have an impact on the risk of insurance fraud?
The fraud risk is ever present and people from all ages and walks of life can be attracted to making a fraudulent insurance claim for a variety of reasons such as necessity, greed or jealousy.
Whilst the overall risk may remain constant, the extent of the threat can vary depending on the motives and need to commit fraud. Many members of the public and businesses are facing unprecedented financial pressures and are responding in various ways. See below how the recession can have a direct effect on the frequency of people committing fraud:
- Unemployment
Most families rely on income from secure employment. A loss of income can have devastating consequences as bills accumulate with no funds available to pay rent or mortgages.
- Debt
As domestic debt increases, so does the pressure to meet financial commitments. Until recently, credit was easy to secure with many people attracted to 0% interest and free balance transfers. Times have changed and these debts still have to be paid but potentially at higher interest rates with less income.
- Negative Equity
Homeowners with negative equity find it almost increasingly difficult to move house and in some cases are trying to pay mortgages which they can no longer afford.
- Repossession
If a number of mortgage payments are not met, repossession is likely. Some homeowners in these circumstances will see repossession as an indication of their failure to provide for their families. This is an extremely emotive situation and some will turn to crime as a last resort in an attempt to prevent their home being taken away.
- Savings/Shares
Many pension funds and investment portfolios rely on the performance of shares. The volatility of the stock market has seen share prices plunge as confidence falters so the value of such funds will have diminished. The drop in interest rates affects savers, particularly those who rely on the interest on savings as their income.
If we accept that the risk of fraud could have increased, we must focus attention on the areas which can provide maximum yield to the fraudster, such as:
Personal Property
Those seeking to commit fraud are mostly doing so to release cash. With the increasing use and reputation of online auction websites, such as Ebay, goods replaced by insurance companies are easily and quickly sold. If items are brand new and unopened, it is quite possible to achieve a sales price close to the retail value.
The following types of claim carry a particularly high risk of fraud:
- Accidental loss of personal possessions such as jewellery, watches and cash
- Burglaries – staged or exaggerated - For Zurich Municipal customers, examples could include third party claims for losses from leisure centres and similar public buildings
- Losses close to policy limits, e.g. single unspecified items
- Accidental damage to televisions or electrical goods
- Theft/loss of laptop computers, golf clubs and fishing tackle – Educational
establishments in particular may be at increased risk of theft of IT equipment.
Commercial Property
Many organisations are experiencing a downturn in trading, amplified by the unavailability of credit. With fixed overheads and staffing costs, there will be some businesses that look at a fraudulent insurance claim as their only hope. With the downturn in the property market, unoccupied properties are difficult to sell yet still require maintenance. This is particularly relevant for those customers with commercial properties for rent and may be at risk of losses caused by tenants, including:
- Fire/Arson
- Malicious Damage
- Escape of Water
- Theft/Burglary/Robbery
Motor
The motor industry continues to be severely affected by the recession with new vehicles stockpiling and second hand values seeing double digit percentage reductions. Some people will have over committed themselves when purchasing their car and now find it difficult to meet repayments and maintenance costs. The option to sell is restricted due to the reduction in values and some will therefore be attracted to fraud as a means of escaping acute financial pressures.
Equally, allegations of damage caused by customer vehicles may increase. Many customers already experience such claims against, for example, refuse and other large vehicles which are only reported some considerable time after the event and where there are no witnesses, or perhaps a lack of independent witnesses.
Employers Liability
The increase in unemployment can lead to an increase in the number of people who have a grudge against former employers. During notice periods it is not uncommon for employees to feign an injury in an attempt to claim damages against the employer.
So what can you do to protect yourselves?
- Protect yourself against fraud by having a robust Fraud Risk Management programme in place to minimise the opportunity for fictitious claims
- Investigate any incident at the earliest opportunity and secure evidence, especially if you believe it has the potential for fraud
- Keep records of all conversations in relation to an incident that has the potential for a claim
- When you receive a claim always be aware of the possibility of fraud and make reference to current Fraud Indicators – click here for more
- Cross reference claimant details, witness details and the incident location against your records to highlight for serial offenders or ‘hot spots’
- Thoroughly investigate all aspects of the claim by validating the information and evidence through independent sources
- Pay close attention to documentation, particularly invoices or estimates which are lacking in detail or look as if they may have been altered.
- Be prepared to challenge claims if the circumstances seem unusual, there are no witnesses or the loss hasn’t been reported to the correct people on time
- Trust your instincts. If you have any suspicions whatsoever about the validity of a claim, let your insurance company know at the earliest opportunity.
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