Consumers risk loss rather than premium: Policyholders lose faith as fraud and inflated claims drive up cost

A CLAIMS CLERK working on a routine task in the Croydon office of Legal & General happened to notice the same name in two different insurance cases. It might have meant nothing, but she decided to probe further, and thus uncovered one of the most blatant household insurance frauds ever to reach court.

Her curiosity led to the conviction of three people from Bournemouth for criminal deception. They pleaded guilty to making at least 41 bogus claims, swindling insurers out of pounds 18,765 over 11 months. The claims were modest, usually for about pounds 500 for the loss of a ring or a bracelet, or for a freezer breakdown. As well as Legal & General, the trio had defrauded TSB, General Accident, Eagle Star and Provincial.

The fraud started innocently, with a genuine claim, the court was told, but when the defendants discovered how easy it was they began inventing losses.

The Bournemouth case was one of the few insurance frauds to get as far as court. The defendants were sentenced to a total of 418 hours of community service and fined pounds 150 each. Many loss adjusters believe less obvious frauds are perpetrated every year by millions of people. Other innocent millions are having to shoulder the extra cost in higher premiums.

No one knows the extent of fraudulent claims. The Association of British Insurers estimated it at pounds 400m last year, out of pounds 14bn paid out. It said one in every 50 claims was bogus; one in 10 inflated. Loss adjusters say even these estimates massively understate the case.

A survey of more than 500 members of the Chartered Institute of Loss Adjusters found that 70 per cent of them believe the average householder knowingly adds at least 25 per cent to claims. Nearly half of them felt that up to 50 per cent of domestic claims were dishonestly inflated.

The loss adjusters were equally scathing about insurance companies: 85 per cent said the companies sometimes ignored their suspicions; 35 per cent said their suspicions were regularly ignored.

The institute also said claims for less than pounds 50,000 often escaped serious investigation because these were generally of little interest to the police and fire brigades.

Graham Mackenzie, of the loss adjusters McLarens, who investigated the Bournemouth swindle, said: 'My own view is that fruadulent claims form a much higher percentage of total claims than we realise.'

Among the most common frauds, according to the ABI:

Holiday-makers who claim a lost camera or money, returning home with an appropriate docket from foreign police.

Personal accident policyholders who fake injury, sometimes abetted by busy GPs, who have bigger worries than having to pick out malingerers.

Arson of shops or factories by small businessmen who get into financial difficulties and arson of cars that owners fear will not pass their MOT.

Altering of genuine invoices, eg, changing pounds 300 to pounds 800.

Taking out cover with several insurers and claiming for the same loss several times over.

Inventing other losses after a genuine burglary.

In addition, many claimants expect loss adjusters will try to reduce their claim, so they exaggerate the loss to ensure they end up square. This is not fraud; a policyholder has to put in a wildly exaggerated claim to be prosecuted.

Last year the ABI launched an advertising campaign using examples of these frauds, and describing how the perpetrators were caught.

According to Alex Gargolinski, a director of McLarens, the industry is getting better at detecting fraud. There are centralised claims registers for cars and works of art. Insurers have better databases, showing the true cost of consumer durables. More information is exchanged, and staff are trained to watch out for tell-tale signs. But all this costs money - so the reality is that the vast majority of small claims are not thoroughly checked out. To do so would, in the short term, send premiums higher still.

As it is, people are cutting down on insurance (though not on the amount they spend on cover). General Accident reports a trend towards third- party-only motor insurance, rather than comprehensive policies. Householders are opting for policies with higher 'excess' levels, meaning they shoulder small losses themselves and pay a large initial chunk of bigger claims.

Some insurers are unilaterally altering the terms of policies without any change in premium, thus transferring more risk to policyholders.

In effect, premiums are becoming so high that individuals are opting for self-insurance. As one inner-City motorist put it: 'I've switched from paying pounds 900 for comprehensive insurance to pounds 300 for third-party. I reckon the pounds 600 I save each year will more than pay for damage or replacement of my pounds 2,500 Escort.'

For many years large companies have self-insured. Dixons, for example, which has one electrical store broken into every night of the year, shoulders most of the risk itself.

The mathematics are compelling for self-insurance against small risks. Insurance companies only pay out an average of 75p for each pounds 1 they take in as premiums. The rest goes in administrative costs and commission to brokers. Even the relatively accident- prone are likely to pay more in premiums than they receive in claims.

The odds are even shorter for the honest claimants who cross-subsidise the fraudsters. And bodywork repair yards and other trades tend to charge more for 'insurance jobs' - again favouring self-coverage.

The insurance industry is in no danger of finding itself without customers. There are always the large amounts that people cannot afford to risk. Moreover, legislation obliges some motor insurers and mortgage lenders to insist on certain coverage.

But for smaller risks, policyholders are starting to lose faith in insurance and opting to shoulder the risk themselves. As Bob Scott of General Accident put it: 'Insurance was never designed for small losses. A lot of people have policies they don't really need.'

(Photographs omitted)