Policyholders behaving badly
One sure indicator of an economic recession has probably been overlooked by most financial commentators. When a nation’s wealth takes a tumble, embezzlement and fraud start to rise.
The best early measurement of this phenomenon is often to be found in claims that can best be described as suspicious, made under fidelity insurance policies. These insure organisations against loss of money or inventory resulting from crime.
As the credit crunch and fears of a global recession tightened their hold on economies in September and October this year, insurance companies were already reporting a rise. Some were also recommending steps that businesses could take to reduce the likelihood of becoming victims of crime.
What it seems to boil down to is that, in the good times, most of us behave honestly and make insurance claims only when they are genuine. But when we are squeezed from all sides and we are finding it difficult to fulfil our financial commitments, the behaviour of a small – but increasing – number of people changes dramatically.
A worrying trendA recent UK survey by ITV1 revealed that one in seven Britons believed it was acceptable to exaggerate an insurance claim.The attitude of Americans is even more worrying: a survey by Accenture Ltd in 2003 found that nearly one in four said it was all right to defraud insurers. | For them, making a false insurance claim is a dishonest act they feel able to justify because of their financial plight. Surprisingly, the number thinking that way may not be as small as we imagine. Martin Thomas, executive director of Aon, a leading global provider of risk management, insurance and reinsurance brokerage, points out that the effects of the economic downturn are being felt by the insurance industry on two levels. |
First, there is the increase in claims, both fraudulent and non-fraudulent, being made upon its clients, to which Aon has to respond. Second, there is an increase in false or inflated claims made by policyholders against the insurer.
“Could you say there has been an increase in fraud as a direct result of the global economic downturn?” he asks, before offering the observation: “There’s certainly been an increase in temptation.”
A classic scenario in the middle of a recession, Martin Thomas adds, is payment of invoices slow down or are challenged. Somebody chases an invoice for £100,000, and then a counter-claim for £1 million is received, alleging that the work was not performed to the best of a company’s ability.
“Often the companies raising those sorts of spurious arguments – assuming they are spurious – are looking to trade off the two: ‘I’ll drop my £1m claim if you withdraw your invoice’.
“One of the key things is to make sure you’ve got your insurers on board early in such a dispute before you start pushing for your debt,” he advises. It is, he adds, quite a common risk scenario, particularly for a recession-driven area such as professional and financial services firms.
Businesses need to be aware of this increased risk and ensure they are doing everything to reduce it.
Maintain good internal controls
“A lot of companies are cutting costs and looking to cut staff. What you can’t do is cut your internal controls. You’ve got to have a good mechanism of internal checks because you can’t depend on people,” Frank Scheckton adds.Businesses need to ensure they have a proper separation of duties as far as their purchasing processes are concerned. They need to verify their vendors are who they claim to be and not a fictitious entity, set up to defraud them. The person in your business who pays the invoices should not be the same person who clears the bank statement.
“I know this is going to sound quite elementary,” Scheckton admits, “ but, for the cost of a couple of pounds or dollars, go out and get a stamp that says ‘paid’ and use it on every invoice you settle. It could avoid huge multi-million dollar losses in a lot of companies where the person who’s running one of these frauds takes the same bill and runs it past the finance office twice.”
Insurers already know from experience that no-one should be complacent about fraud. It is a lesson that businesses of all sizes also needs to learn – and quickly.
Meanwhile, we are all paying for the rise in dishonesty. It is estimated in the UK alone that fraud is costing the economy £1.6 billion a year – equivalent to five per cent of all policyholders’ premiums. With more of them behaving badly, that figure is bound to rise.
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Policyholders behaving badly
