Application fraud has become a big focus for insurers. The logic is that fraudsters should be isolated before they get on your books. And while that makes sense, it’s also fraught with ethical risks. The danger is that insurers might ‘do the right thing’ in tackling fraud, but end up doing so in ways that undermine public trust in their work.
Here are four practices that introduce ethical risks into the pursuit of application fraud and which I believe are common practice across many insurers.
Ethical risk 1 involves the use of performance targets. Staff are performance managed and rewarded according to their success at finding and dealing with individual cases of application fraud.
Ethical risk 2 is the use of predictive analytics. Algorithmic systems are created that look for policyholders who are thought likely to submit a fraudulent claim in the future.
Ethical risk 3 is language. The various organisations working on application fraud have been tasked with creating a ‘hostile environment’ for potential fraudsters. It’s a phrase that outside of insurance has previously seen exaggerated interpretation at significant reputational cost.
Ethical risk 4 is statistical exaggerations. Data brokers and software houses are making claims such as “four out of ten claims are now marketed at fraudulent” and “on average almost 20% of all reported insurance claims have a degree of fraud.” On the rare occasions when such claims are substantiated, the ‘research’ is invariably weak and often an assemblage of diverse business surveys of varying focus.
These are only four out of many ethical risks associated with application fraud. This post is not however about each of those individual ethical risks. It is about the ability to spot and track those several and varying risks. In other words, the accountability of the overall application fraud initiative.
You may well ask of course why that accountability matters. It’s a private market, after all. Why shouldn’t insurers decide how application fraud is tackled – it’s their money and their customers they’re protecting.
Well, it’s important for two reasons. Firstly, insurers act as the legislator, the police, the judge and the jury in the campaign against application fraud. They define fraud and set the level of proof that is required. They investigate fraud, act as the judge and jury on a suspect individual, and decide the civil penalty for wrong doing. To a certain extent, this confluence of roles makes sense, but at the same time, it means a considerable concentration of authority.
And secondly, being tagged as a fraudster, and having that ripple across cross sector systems, changes your life prospects significantly. It cuts off any prospect of owning a car or owning a house. No one will insure you or give you a loan, except under the most punishing of terms. If insurers get that tagging wrong, the repercussions for an individual are significant.
Accountability comes in many forms. Insurers are accountable for tackling application fraud diligently, but they’re also accountable for doing so fairly. They’re accountable for tackling it thoroughly, but they’re also accountable for doing so with the right level of certainty.
What this means is that there’s a complex framework of accountabilities associated with how insurance fraud is tackled. Yet when one looks at the organisation at the heart of the sector’s push against application fraud in the UK, you find that the board of the Insurance Fraud Bureau (IFB) is made up of no one but insurance people.
Of course they bring a lot of expertise in claims and underwriting to the IFB, and that’s great, but at the same time, they bring little to no independent perspective to how application fraud is being systemically identified, weighed up and prosecuted.
Having an independent, professional voice at the heart of the campaign against application fraud would mean that any decisions that might increase the possibility of incorrect tagging are more likely to be recognised, questioned and scrutinised. Organisational weaknesses like group think and ethical fading are less likely to occur. This would help bring more challenge to the use of performance rewards and more scrutiny to ‘research’ claims about levels of fraud.
Overall, independent voices lead to better decisions by governing boards. That’s why, as institutional investors, insurers insist that the firms they invest in have independent directors.
There’s a real risk that group think will take hold within the sector’s approach to tackling fraud, be it at application or at claim. Unaddressed, that group think risks the good ship ‘Insurance’ drifting slowly but surely towards some significant rocks of unethical practices. The sector may raise an eyeglass and proclaim that no problems are in sight, but that, at Captain Smith found out, is of little help if your course is not in sync with the full reality around you.
The fight against fraud is too important to allow this to happen. Having a strong, independent and professional voice at the heart of the IFB may bring in a little short term complicatedness, but it would soon deliver long term reputational value.
Duncan is the founder of the Ethics and Insurance blog and the author of its many posts. He's a Chartered Insurance Practitioner, having worked 18 years in the UK market. As an adviser to many firms on ethics issues, as well as a regular conference speaker, he is one of the leading voices on ethics and insurance.