Has insurance fraud investigation suffered from too much group think?

The insurance sector is failing to exercise proper control over its use of private investigators. That’s the stark message coming out of a factsheet issued this week by the Financial Conduct Authority (FCA). Left unchecked, it risks undermining the sector’s anti-fraud initiative and the support insurers have slowly built up with Government. No doubt some sort of framework is being prepared to tackle the multiple shortfalls identified in the FCA survey, but will it be enough? There’s a danger that it will address the symptoms, but fail to treat the cause.

Let’s quickly look at what the FCA’s survey uncovered. It found insurers’ management of private investigators (PIs) to be significantly underperforming on:

due diligence (“there was significant variance in the formality and level of detail of insurers’ procurement processes and due diligence when selecting private investigators. Of those questioned, five did not follow a formal procurement process.”)
contractual arrangements (“Six of the [10] insurers questioned did not have full contractual agreements in place with the private investigators acting on behalf of the firm.”)
scope of remit (“Where no such contractual agreements were in place, it was not clear how the basis and scope of the private investigators’ work was determined”)
monitoring quality (“Eight insurers undertook limited or no external due diligence or technical… reviews… regarding the quality and appropriateness of work undertaken by private investigators.”)
management information (“Nine had limited or no management information to demonstrate how frequently private investigators appointed to undertake surveillance activities had actually identified any evidence of claim exaggeration or fraud.”)

These findings seem to fly in the face of the reassurances that insurers have been giving about how insurance fraud investigation is being managed. And insurers have certainly recognised the reputational risks from what PIs might get up to when working for them – 9 out of the 10 insurers surveyed by the FCA confirmed this. The great danger is that this apparent disconnect between what is being said and what is being done will infect the wider debate about how the sector is tackling insurance fraud and undermine the support that insurers have been building up amongst the public and various Government bodies.

It’s a disconnect that should be of particular concern to the Insurance Fraud Bureau, which relies heavily on the quality of insurers’ fraud investigation work. Have their own audits uncovered similar problems?

So how might this gap between the reality and the reassurance have developed, on what looks like a pretty pervasive scale? What characteristic of fraud investigation has allowed this disconnect between reassurance and reality to take root and spread?

I believe that a significant factor in this could have been the ‘socialisation’ of those involved in the investigation of potentially fraudulent claims. By socialisation, I mean the process by which an individual acquires certain knowledge and attitudes from participation in a particular social group. Too narrow a socialisation and the individual develops too narrow an understanding and perspective on something. This can become engrained into what is often referred to as ‘group think’. One mindset predominates and self perpetuates itself by interpreting internal and external events according to its particular point of view. And of crucial importance here, challenge to that mindset is stifled and new entrants vetted for similar views.

Could a ‘group think’ have developed around fraud investigation, both vertically within companies and horizontally through sector wide fraud prevention initiatives? Could too great a focus have been put on the ends and not enough on the means? Has there been too little attention given to diverse or dissenting views? Has the culture of claims departments allowed such views to be voiced? Questions like these need to be raised because so many insurers recognised the reputational risks from PIs but so few chose to take reasonable steps to manage them.

How then to tackle this apparent disconnect? The most obvious step is of course to take a life cycle approach to managing private investigators. The most important step however is to take a serious look at the ethical risks associated with claims and with fraud investigation. It’s a step more likely to address the causes rather than the symptoms, and to unlock cultural blind spots.