Since the introduction of the Jackson Reforms twelve months ago a number of clients have reviewed their counter-fraud strategies. They have wrestled with a key conundrum. Is it still effective and economic to fight fraud at pre-Jackson levels? Alternatively, should they leave all but the most obviously suspect claims within the Portal, and leverage the Portal costs regime on the majority of claims?
The aim of the reforms was not only to reduce the cost of personal injury claims, but to try and eradicate frivolous and fraudulent claims. By reducing the costs available – both in terms of referral fees as well as claimant solicitors’ costs – it was hoped that personal injury claims would become a less attractive commodity to fraudsters looking for an 'easy return' and they would be driven from the market.
There has certainly been evidence since introduction of the reforms that the claimant supply chain has been disrupted. This is especially so in those areas of the market which were dominated by CMC referrals and backed by ATE premiums. Indeed, the year to date average monthly Portal Claims Notification Form (CNF) numbers for 2013/14 are around 5% less than for the 2011/12 Portal year. However, in our opinion it is highly unlikely that such disruption will be permanent. Some clients are already reporting that claims frequency is approaching pre-reform levels, and many insurers are predicting that it will stabilise at between 95% and 100%.
The level of sophistication with which most insurance fraud is now perpetrated, and particularly the organised criminal’s proven ability to adapt to changing circumstances, suggests that fraudsters will find ways of circumventing the Reforms. So if frequency does return to pre-reform levels it is reasonable to assume that, whilst perhaps slightly lower than before, there will still be a high proportion of fraudulent and dubious cases within the total claims submitted to the Portal.
This situation has not been helped by the way in which QOCS has been implemented. The fact that a claimant solicitor’s average costs (income) per case are lower consequent to the reforms is a disincentive to pursue suspect claims. But, because of QOCS, there are few circumstances where claimants will be ordered to pay the defendant’s costs should their claims fail. Without robust clarification on what constitutes ‘fundamental dishonesty’ – which seems to be unlikely in the short term – there is little to dissuade a ‘have a go’ approach, particularly at times when Portal volumes are high and insurers are under pressure.
There are attractive economic arguments for retaining as many claims as practicable within the Portal. However, in an environment of pre-reform claims frequency and possible pre-reform levels of underlying fraud, we believe any blanket approach presents a number of risks. Firstly, if an insurer’s Portal retention target is set too high, then they may become a ‘target’ for fraudsters. Claimant solicitors are likely to run more dubious cases against an insurer with a high retention policy than against an insurer with a lower Portal retention rate. Accordingly, the highest retention rates may also drive high claims frequency.
Secondly there is a risk that Portal retention and settlement will effectively ‘validate’ potentially fraudulent claims in the eyes of a court. Take the example of where a claimant has been involved in a number of accidents in a short period, all of which have been settled without challenge within the Portal. An insurer receives another claim which this time it decides to investigate. It exits the case from the Portal and follows up all of those previously paid. Even if it now uncovers concerns on those claims the claimant will be able to effectively counter-argue that the current claim is just as valid as the previous ones, which must be genuine as they have all been paid. The court would be unable to give much, if any, evidential weight to a volume of previous claims which have all been settled.
Thus in the medium to long term, a policy focused primarily on Portal retention and paying less attention to fraud prevention may well lead to both increased claims frequency and a higher number of fraudulent claims being paid. This has the further disadvantage of encouraging insurance fraud by increasing cash flow to claimants and facilitators.
Additionally, insurers have a regulatory obligation imposed upon them by the FCA to tackle financial crime. The FCA states: “Tackling financial crime is a key part of the FCA’s remit. We help to protect market integrity by fighting financial crime. Our aim is to protect consumers and prevent firms from being used as a channel for financial crime.” Whilst the broad definition of financial crime covers a wide range of risks, the FCA specifically states that:
Fraud falls within the FCA's statutory objective of reducing the risk of financial crime and also impacts on our consumer protection objectives.
The FCA’s objectives translate into requirements for its regulated bodies. And whilst the requirement of insurers to reduce financial crime risk is not one of perfection, there is an expectation that all reasonable precautions and processes will be put in place to ensure that the industry does not become an easy target for financial crime.
Insurers will no doubt have their regulatory duties firmly in mind when reviewing their fraud controls both within and outside the Portal processes to ensure a prudent approach to fraud prevention and detection.
Selection and conversion of claims is key to achieving the right balance
The Claims Portal Company do not publish definitive retention figures. However, by making some reasonable assumptions, especially about the use of the ‘Exit Process’ function in the Portal, we have estimated the average industry net retention rate for Stage 1 claims. We estimate this to be around 60% of CNFs received for the three months to the end of February, compared to 51% twelve months ago, and 53% two years ago.
Despite the slight reduction in the long-term volume of claims passing through the Portal this represents a significant shift. Obviously, there are a whole host of reasons why claims ‘Exit’ the Portal process, suspected fraud being only one. Similarly, there could be a combination of reasons for the improvement in retention – which could include a more economic approach to fraud following the reduction in Portal fixed fees. So if an insurer’s Stage 1 retention rate is significantly higher than the ‘industry average’ do they need to review their fraud policy? Is there a ‘right’ number of claims to exit from the Portal?
The ABI published industry fraud statistics show that in 2011 (the last time this figure was reported) 7% of all motor claims had been rejected on the grounds of fraud. This is probably a good starting point to try and answer those questions. Given that the overwhelming majority of all motor claims now pass through the Portal, and assuming that all claims removed for fraud suspicions will deliver a fraud resolution, this suggests that a minimum of 7% need to exit to deliver results comparable with historical statistics. In reality, we are not aware of any insurer that delivers a 100% ‘conversion rate’ on claims processed through its fraud management structure. Typical historical industry performance would tend to be in the region of a 50% conversion rate.
Consequently, it could be argued that 14% of all Portal claims – not exited for other reasons – should be processed as suspected fraud in order to deliver the ‘industry standard’ 7% fraud prevention by volume. This creates an obvious conundrum as applying this criteria would mean that the remaining 7% of claims would incur significant extra costs as a result of removing them from the Portal process. It also takes no account of how good individual insurers are in converting suspect claims, or the varying rates of targeting they will endure from fraudsters.
In the same way that setting a Portal retention target can create issues, in our opinion there can’t be an ideal, ‘one number fits all’, Portal exit rate either. The effectiveness of an insurer’s counter fraud model will be determined by striking the right balance between Portal exit rate and suspect fraud conversion rate. A high conversion rate on a low number of Portal exits could mean that significant fraud leakage is still present. Conversely, a low conversion rate on a high number of exits probably means cases are being pulled from the Portal unnecessarily with all the extra costs that result.
We believe the key to achieving the right balance is to adopt a ‘find, focus, fight’ approach whereby:
This would lead to those cases having good prospects of successful conversion on fraud grounds being removed from the Portal whilst those deemed weak remain in the process to leverage cost benefits. This does not mean that a full fraud investigation has to be conducted in Stage 1. By utilising the most effective blend of people, processes and tools at the earliest stages of the claim lifecycle fraud risks can be identified and validated to a sufficient level to enable a robust decision on Portal retention to be made.
Arriving at this decision is also facilitated by the changes made to the costs regime both within and outside the Portal.
Historically, the lions’ share of reserves were made up of a claimant solicitor’s litigated costs. The fraud strategy was very much driven with the claimant solicitor’s CFA in mind i.e. 'is the chance of success worth the risk of incurring a 100% uplift in costs?' However, for the vast majority of suspect claims the claimant solicitor’s costs will now be fixed, even in litigation. As such, a typical £2,000 personal injury claim will attract fixed costs in the region of £3,550 to trial (even less if the claim is settled pre-trial or indeed within the pre-action protocol period).
This means that insurers will be in a position to make a decision on strategy with a definite figure in mind for third party costs. Even if a claimant were to succeed after a pleading of fundamental dishonesty, or where allocated to the multi-track, the costs would not attract an uplift and would need to be proportionate to the claim presented. Therefore the worst outcome is that the costs payable to the claimant would be (at least) 50% of what they would have been pre-Jackson.
This rebalances the clear inequity in place prior to the reforms. When coupled with the tightening of the court rules and an increasingly strict approach to any breaches/plea for relief and extensions of time it means that insurers that are able to front-load intelligence enquiries and investigations will be at a distinct advantage. Not only will they be able to proactively repudiate suspected fraudulent claims, and ideally dispose of them pre-litigation, but on claims that do litigate they will simply be able to ‘hand over the baton’ to their suppliers to drive through the procedural timetable, taking a robust position with regard to any default by the claimant. The knock on effect of these factors are that results will be optimised, whilst supplier costs and cycle times will also be reduced.
In summary, we consider that setting fixed targets for either retention or exit is problematic. A Portal retention target at unrealistic levels is likely to lead to more fraudulent claims slipping through the net, whilst a Portal exit target set too high will result in avoidable costs being incurred on non-fraudulent cases. The reforms do provide an opportunity for insurers to remove suspect claims from the Portal with a much clearer understanding of the potential downsides, and a greater ability to weigh the risks of their actions. Therefore an insurer that can apply the right tools, people and processes to enable them to:
With the right model in place Portal exits can in fact be increased, safe in the knowledge that effective fraud controls are limiting leakage. We are working with all of our clients to support the deployment of such a model and to help clients deliver optimal fraud performance in the post-Jackson arena.
The service you deliver is integral to the success of your business. With the right technology, we can help you to heighten your customer experience, improve underwriting performance, and streamline processes.