The Budget measures come as companies are uncovering more fraud and believe there is an increase in fraudulent insurance claims generally.
The latest concern is permanent health insurance policies, on which there are already believed to be hundreds of fraudulent claims. These pay out up to 75 per cent of gross income if someone cannot work through ill health. Previously the benefit was tax-free for one year only. The Budget makes the benefits tax-free for as long as someone is ill or disabled. The change takes effect from April, backdated to the time of the Budget.
"In general, this is great news, but we were taken by surprise," said an executive of a leading insurer. "Insurers are going to have to review their policy provisions urgently. A man on pounds 30,000 a year has a normal after-tax income of around pounds 21,000. The extension of the tax-free benefit will mean claimants will get a greater income under claim even after year one than by going back to work. This is unlikely to motivate a claimant with a more subjective ailment, such as the ubiquitous bad back, to go back to work." Taxing the benefit after one year was regarded as an "encouragement" to go back to work.
Companies, nevertheless, hope for a boom in PHI sales as a result of the Budget fillip. But one concern is that this "better- off out of work than in" aspect will be pushed by less scrupulous salesmen. Higher-rate taxpayers stand to benefit the most.
The industry is certain to force a reduction in the maximum amount a given policy will provide in the future but changes are unlikely to be overnight. Such a reduction should lead to reduced premiums. Policies sold in the meantime will be subject to their provisions as printed and the wholly tax-free payout rule will also apply to existing policies.
Currently more than one in 20 PHI claims are fraudulent, according to the Association of British Insurers. There are around 15,000 cases being paid out on currently, according to an estimate by insurer Swiss Re. ABI spokesman Malcolm Tarling said: "Insurers are aware of the opportunity for fraud in these types of policy. The problem is in identifying the charlatans without upsetting genuine claimants. Fraud raises the costs of everyone else's premiums."
In terms of insurance fraud generally, PHI is averagely fraudulent. But insurers admit that few fraudulent PHI claims are entirely premeditated. Most are the result of once legitimate claimants who then recover and take up some work again, but who then conveniently "forget" to remind the insurers they have recovered.
Insurers have stepped up their activities to uncover fraud - with some success. As well as looking closely at medical reports, companies employ claims counsellors, even private detective agencies.
A Norwich Union spokeswoman, Hayley Stimpson, said: "We have 2,635 permanent health insurance clients claiming at the moment, and the total paid per year is pounds 18m. Last June, we appointed a disability benefits adviser to find out how we could establish a better relationship with our claimants. Genuine claimants are desperate to get back to work, and we discovered that many of them did not realise they could still receive partial benefits if they went back to part-time employment. However, among the first 80 people that were seen we did discover that five were claiming fraudulently. The annual payout for just those five would have been pounds 44,000, and it takes a lot of bona fide clients to put the sums straight again. Even just one rogue claimant is able to affect premiums markedly, and it is clearly in the interests of responsible policy holders that we should protect their premium rates by reducing fraudulent claims."
Jackie Jamieson, claims manager at Friends Provident, said: "Well over 90 per cent of claims we are happy to settle. However, there are occasions when we smell a rat. The disability and its duration is often inconsistent. The three-year broken leg is not plausible, whereas a diagnosis of Alzheimer's disease resulting in a long-term claim is reasonable. If we experience 'no reply' to successive telephone calls to see how someone is, the alarm bells might ring. We prefer to leave people alone if they are genuinely sick, but we are prepared to use private investigators when deception arises."
None the less, the Insurance Ombudsman and the industrygenerally are keen to avoid discouraging policy holders from making genuine claims, while at the same time cracking downhard on deception.
The ABI's Mr Tarling said: "The bogus claimants are their own worst enemies, sometimes bragging that they have ripped off an insurance company. Conflicting medical reports and tip-offs from neighbours are the other way in which suspicions are raised. If there is no problem to hide, there is no problem to find. Genuine claims are not disputed."
Fair fraud cops
A man claiming for a general disability was spotted climbing easily into his car. He had made an appointment with the DSS to register as blind. "He didn't seem to appreciate the irony of the situation," says the ABI's Malcolm Tarling.
Norwich Union's disability adviser visited a woman who was alone in a sari shop. She told the adviser it was impossible to serve customers as she had a severe back problem.
Norwich Union has found people hanging wallpaper despite having broken legs, and a builder with a supposedly bad back energetically laying a patio.