How fraud drives the motor insurance premiums skywards?



I was a keen student of economics at my Business School. I had learnt that when competition in the market increases, prices of commodities fall. Well, this law hasn’t held true in the UK motor insurance industry. It is a fiercely competitive industry, and the premiums are one of the highest in the world.

Fraud has been a major contributor to this anomaly. The cost of fraud for UK motor insurers is more than £1bn annually. As insurers pass on the costs to customers, fraud adds £150 on average to a motor insurance policy in the UK.

Motor Insurance fraud in UK is highly organized. The ‘crash-for-cash’ gangs orchestrate collision and raise claims with increasing sophistication. A collision can take the form of either a staged accident where two vehicles, both owned by fraudsters, are intentionally crashed. Or it can be an induced accident where the fraudsters deliberately slam the breaks making unsuspecting victims crash from behind. Fraudsters then file for damages with a hope of benefiting from personal injury or loss of earnings claims.

Whiplash (a term used to describe an injury to the neck) claims are particularly common as it is hard to disprove whiplash medically. Since the pay-out for whiplash can be relatively small (less than £2000), most insurers decide to pay rather than contest in the court.

This has resulted in whiplash accounting for 80 percent of the personal injury claims in the UK, whereas it does for just 3% in France. We know for sure the British don’t have weaker necks than Europeans. This disproportionate number only reflects how the motor insurance fraud has thrived more in UK compared to Europe.

Fixing the menace

Tackling fraud requires a multi-pronged strategy. First, insures should pursue suspicious claims in court more frequently. Due to high legal costs and low conviction rate most insurers prefer to pay rather than contest especially for low value claims. This needs to change, as contesting should be considered an investment towards nipping the problem in the bud. Contesting can also lead to busting of broader supply chain involving colluding doctors, lawyers, garages and planted eye-witnesses.

Second, insurers should leverage technology and invest towards developing counter-fraud systems. Telematics data from black-boxes inside cars is already helping insurers with vital evidence to repudiate fraudulent claims. Big data technologies like Hadoop can combine structured and unstructured data to identify fraudulent patterns, such as flagging that both parties involved in the accident are actually connected in real life.

Third, there needs to be a robust regulatory framework which supports prevention and detection of fraud. Measures like banning referral fees between insurers and claims management companies for injury claims was a step in the right direction. Other initiatives like offering treatments rather than cash for minor injuries, improved data sharing across insurers and aggregators, and clamping down on nuisance calls asking ‘‘whether you were involved in an accident which was not your fault’’ will play their part in fixing the widespread problem.

So the next time the vehicle ahead of you suddenly stops for no evident reason and the driver (fraudster) looks unusually calm, there is a high chance that you are the next unlucky victim of insurance fraud!

Also cross posted here



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