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Fraud thrives in the Covid-19 crisis - why the insurance industry needs to stay vigilant
April 2020 by Dennis Toomey, Global Director, Counter Fraud Analytics and Insurance Solutions, BAE Systems Applied Intelligence
The international insurance exchange Lloyds of London closed its underwriting room for 24 hours on Friday, 13 March 2020, in a stress test of its emergency trading protocol. The members of Lloyds of London had to work in the home office. It was the first time such a measure had been taken. The stress test was successful and due to the dynamic development of the Covid-19 crisis the underwriting room of Lloyds of London was closed again on 19 March in line with the UK government’s coronavirus advice. It is already clear that the Covid-19 crisis will affect insurers in many ways.
A first immediate consequence will be an increase in the direct costs of claims. Life insurance and travel insurance are among the sectors affected. The cancellation of the Tokyo 2020 Olympic Games is one of the biggest claims cases the industry will have to deal with.
According to Nick Wildgoose, formerly responsible for supply chain management at Zurich Insurance, the floods in Thailand in 2011 and the tsunami in Japan have cost the global economy £300 billion. This raises the question of how much damage we can expect to incur in this crisis.
There will be a large number of justified claims with enormous costs for insurers. Unfortunately, we also have to recognise that in times of economic hardship people take the opportunity to exploit insurance companies by making unjustified claims. In the wake of the Covid 19 crisis, insurance fraud, which is not a trivial offence but a criminal offence, is likely to be at the top of the list of offences.
Among the lessons learned from past experience are:
• According to the Association of British Insurers (ABI), a total of 107,200 unjustified insurance claims worth £730 million were made during the recession in 2008. This was an increase of 17 per cent on the previous year, when unjustified claims totalled £560 million.
• A similar pattern as in this recession year was seen in other parts of the world. For example, the Florida Division of Insurance Fraud reports a 21 percent increase in referrals in fiscal year 2008/2009 compared to the previous year. In the wake of falling incomes, there was an increase in fraud types, including vehicle insurance and workers’ compensation premium fraud, alongside increases in related arson for profit occurrences.
• A frighteningly high number of one-fifth of respondents said in the recession year 2008 that they would not rule out making unlawful claims against their insurance companies in the future.
What can we learn from this? We might not see a peak in fraudulent activity immediately, but the sector should prepare for an increase in claims and policy applications as the knock-on economic impacts of our current situation take hold.
Let’s take the example of a small business that has to temporarily stop operations. It’s possible that this firm’s business interruption insurance isn’t covered if a loss occurs as a result of a viral outbreak like Covid-19. But if the insurance coverage is misunderstood by the firm’s owners, and they are in fact relying on their policy, it’s easy to see how they might be pushed to misrepresent the facts.
In my experience, the insurance industry is extremely empathetic and has a history of looking for ways to help customers whenever possible. Customers should therefore make sure they know and understand their policy language, and work with their insurance company if they suffer a loss.
Furthermore, at a time when customer excellence – ie meeting or exceeding customer expectations wherever and whenever they interact with the company – is key, insurers must also ensure that they identify all suspicious claims and settle legitimate claims quickly.
