Mid-term adjustment fraud can lead to losses for you, and your customers. But what does it look like?
Some people deliberately change their policy during its term to save money on the initial premium. This is being done in a few different ways, let’s explore the three scenarios:
Scenario 1: adding drivers to an existing policy
A person takes out a policy with a car that is typically low cost to insure. They pay the low premium and are granted insurance. They then add a much more expensive car to the policy and only pay the adjusted premium.
The risk here is that the initial premium cost for the expensive car, at point of sale, is a lot more than the adjusted premium charged for adding the car to an existing policy. As a result, you lose out on premiums. The insurer is also liable for any third party claims against the driver who may now be judged a greater risk as they are driving a more expensive, and potentially faster car.
Another example is that a ‘lower risk’ customer takes out a policy and, after agreement, adds a second driver. This increases the cost of the premium – but not as much as it would have done if the second driver was named initially, or was the primary driver. In some instances this ‘second driver’ is the person who would be driving the car most and therefore the relevant risk assessment hasn’t taken place. In some instances, the additional driver may not have a UK driving licence, adding more complexity and creating a problem of liability for the insurer in the instance of a claim.
Scenario 2: compromised identities
A person may use someone else’s address to get a cheaper insurance policy.
In some cases, individuals use compromised identities. This is when a person purchases or steals personal information about another individual. This is a favourable method in order to bypass fraud controls at the point of quote/sales. The risk comes in ‘clean’ as it is using genuine information from a genuine identity, but quickly after inception they start to make changes to the policy. For example, adding named drivers. This is detrimental to the customers whose personal information is being used to trade with your organisation and could have a significant impact on an insurer’s loss ratio and combined ratio in the event of a claim.
Scenario 3: personal vs. commercial
A driver of a commercial vehicle uses a personal policy. Due to the type of policy and non-declaration of commercial purposes, the policy doesn’t cover the higher levels of use, and potential risk that commercial use could have. Another example is where a car trader, or retailer, covers individuals to drive their ‘saleable’ vehicles on their policy, but these individuals do not actually work for the trader. In some cases, they use their trade policy as a mechanism to allow associates to have short-term cover without any impact to their premium.
How do these scenarios impact insurers?
We have outlined just a few examples of where fraud occurs mid-policy. The impact of this is not only on you as the insurer, but also on your genuine customers who absorb the fraud losses through their premiums.
As an insurer, fraud does not just cost you at the point of claim but loses revenue, increases operational costs and has potential legal implications from these somewhat hidden areas of fraud.
It is important to bear in mind that these fraudulent mid-term adjustments sit side by side with genuine adjustment requests as people’s circumstances change. You are therefore faced with the added challenge of protecting genuine customers from non-genuine ones. In addition, organisations don’t want to create any disruption or inconvenience for genuine customers which adds another layer of complexity. Any check or process needs to complement the current one – making it seamless and friction free for the customer.
What can be done to identify fraud?
The simple answer is to replicate the same processes and checks which are in place at the point of quote and point of sale, using the same verification and fraud tools at the point of change. This will reduce the amount of fraud which slips through during adjustment and could save you, and the customer money – but also protects legitimate transactions.
Device and application fraud detection tools are particularly beneficial. This type of solution sits at multiple steps throughout the journey and covertly checks the device(s) being used to change the policy are ‘trusted’ devices associated with the customer. If the device used is not listed as trusted or has been used to change multiple policies, this will raise a flag for further investigation. This is helpful in fighting ghost broking too.
Another means could be to use a shared fraud database. This can be used, at any stage of the journey, to cross reference data. You can then identify if there are any flags against the individual from a credible source of fraud data. What this does is check, at any point of the journey including point of adjustment, for fraud against a central database that contains a log of fraud – compiled from multiple insurers. This can help you to help identify fraud through shared real-time data.