Does a zero tolerance approach to fraud increase or lower customer trust and confidence?

January 28th, 2021

A recent ICNZ Speaker Series webinar discussed the issue of insurance fraud in times of recession, with a panel of international insurance fraud experts. This topic raised some interesting questions from webinar attendees, one of which we wanted to take the opportunity to take a closer look at in this article. The issue of whether a zero tolerance approach to insurance fraud can have a positive or negative impact on customer trust and confidence, is a complex one.

What is zero tolerance?

By having a zero tolerance policy, this means there is a policy in place that ensures that perpetrators are given the most severe punishment for committing a crime or breaking a rule.  In an insurance setting, this means that anyone caught committing insurance fraud is prosecuted and charged according to their local laws, and could expect to experience long term repercussions such as being added to an Insurance Fraud Register, that would impact on their future ability to apply for insurance policies and make insurance claims in the future.

In New Zealand, fraud may be prosecuted according to the Crimes Act 1961. We have an Insurance Claims Register that details fraudulent consumers and shares this with local insurers. All claims are loaded into the register, which is shared by Kiwi Insurers who are members of the ICR. If a claim is found to be fraudulent or exaggerated it would be flagged. If you appear in this register, it may prove difficult to get any other insurance or housing lending from banks.

What are the challenges with implementing a zero tolerance approach?

1. Soft vs Hard Fraud

Implementing a zero tolerance approach is complicated by whether or not fraudulent activity is “soft” or “hard” insurance fraud.

Hard fraud includes intentionally making a false claim, for example, lying about an item being stolen, lost or damaged. Hard fraud can also include more obvious planned and organised criminal activity, by asking someone to steal or burn your property (say a car, or house) so that you can claim on the insurance.

Soft fraud can be more difficult for insurers to prove. Often, customers making soft fraud insurance claims are not aware their exaggerated claim is in fact illegal. They often take advantage of opportunistic fraud, where they have a spur of the moment opportunity to exaggerate a claim, rather than making a calculated plan for their fraudulent behaviour. Soft fraud can include burglary claims for extra household items, or claiming for a lost item that subsequently turns up.

2. The perceived cost of a zero tolerance approach to insurers

Identifying insurance fraud can be difficult and costly. But paying out insurance fraud claims can also add up for a business, and from an ethical point of view, is clearly not the route to take. Our recent whitepaper made some interesting statements around this dilemma.

“Detecting fraud is hard to do and often, the cost to investigate and recover is considerably more expensive than the cost to settle the claim. Insurer reputation is also a factor which can make an insurer reticent to raise the issue publicly. However, a collaboration of resources with law enforcement, ICNZ/IFB members, and other government agencies would make detecting and prosecuting fraud more affordable, more measurable and would take away the stigma of negative publicity for the insurer, thus removing adverse branding perceptions.”

Source: https://ifb.org.nz/wp-content/uploads/2019/08/Insurance-Fraud-Bureau_White-Paper.pdf

3. Company culture and education

The culture of an organisation is also important – making it clear to both staff and customers alike that insurance fraud will not be tolerated is important for all parties, and may remove some of the barriers to tackling insurance fraud too. Clearly stating you have a zero tolerance policy to fraud and educating staff and customers on what constitutes insurance fraud can naturally reduce fraud and make conversations about fraud easier.

“Employees, vendors, partners and customers must understand that honesty and integrity are the standards for business behavior – and that you will not compromise.”

Source: https://hornellp.com/media/1445/ffl-7-ways-tolerance_fraud.pdf

4. Enforcement

Enforcement of insurance fraud is one of the key issues plaguing many jurisdictions in their attempts to tackle insurance fraud. For example:

“The trick… for the insurer is to convince its customers of the added value of its proprietary investment in fraud control…. Another way to break the chain of argumentation for passivity is to get insurers to co-operate and to credibly commit to concerted, uncompromising action against fraud. Co-operation would not only take away the threat for individual insurers of being commercially punished for taking a tough stance against fraud, it could also improve the cost efficiency of fraud control and upgrade its effectiveness.”

Source, Viaene S and Deden G, Insurance Fraud: Issues and Challenges, The Geneva Papers on Risk and Insurance Vol.29 No.2 (April 2004) pp 313-333

In some countries, even if insurance companies are implementing zero tolerance policies, when these cases get to the courts, the penalties imposed are not enough of a deterrent to prevent insurance fraud recurring.

Insurance fraud can also feature at the bottom of the list for law enforcement agencies. In countries where insurers, law enforcement, justice departments and other interested parties work collaboratively to prevent and clamp down on insurance fraud, real ground can be made in the fight against fraud.

A 2019 example saw US insurer GEICO, file a federal lawsuit in Arizona against an auto glass repair shop suspected of submitting fraudulent glass repair bills. This lawsuit demonstrated the determination of this insurer to commit to a zero tolerance policy of insurance fraud and signalled to other insurers and customers that insurance fraud would be treated as criminal activity.

Fraud fighting using tech solutions such as AI is also gaining favour in some countries. By improving claims processes, AI can help to identify fraud even faster.

What is NZ’s view on zero tolerance for insurance fraud?

New Zealand is fortunate not to be bound by differing state and federal laws (unlike the US and Australia). It can certainly simplify our approach to enforcing insurance fraud.

“Zero tolerance of insurance fraud — insurance companies may prosecute individuals through the courts when there is clear evidence that a claim is fraudulent.”

Source: https://ifb.org.nz/wp-content/uploads/2019/08/Insurance-Fraud-Bureau_White-Paper.pdf

New Zealand insurers also have a zero tolerance approach to insurance fraud, and other interested parties such as EQC, our natural disaster insurer for residential homeowners, have long maintained a firm approach to fraud.

Does zero tolerance increase or lower customer trust and confidence?

We put this question to our 2020 ICNZ Speaker Series webinar panellists of international insurance fraud experts.

Maria Dal Cin from Insurance Bureau of Canada felt that Canada insurers are let down by a lack of law enforcement for insurance fraud, and that it isn’t a top priority for law enforcement agencies. Consumer confidence in insurance is also lower than they would like, and they’re working hard to educate customers, increase awareness of insurance fraud and instigate prevention measures. A zero tolerance approach, combined with education, awareness and prevention measures will all support an uplift in customer trust and confidence.

Stephen Dalton from IFB UK commented that a zero tolerance approach in the UK needs to emphasise the fact that insurance fraud is not victimless – customers pay higher premiums to cover the cost of fraud. He also sees organised insurance fraud as a gateway to fund other types of serious and organised crime, so a zero tolerance approach in this respect will also serve to increase customer trust and confidence if we help them understand the bigger picture of criminal activity.

Aaron Soline from the National Insurance Crimes Bureau feels it’s difficult to establish trust and confidence “when one customer thinks that another customer may be committing fraud and everyone’s premiums increase because of it. Conversely, an apathetic approach to fraud could be perceived as committing fraud is acceptable.”

Role of the IFB to support zero tolerance in New Zealand

Overall, it appears that our zero tolerance approach to insurance fraud is a positive step to tackling fraud and is seen positively by the majority of New Zealand customers.

The IFB is working to increase media awareness and public education around the issue of insurance fraud, while also working with insurers and law enforcement agencies to tackle fraud collaboratively. Our Insurance Claims Register is another tool we use to deter and enforce instances of insurance fraud.

An environment with anti-insurance fraud messaging, reinforcing that this is not acceptable behaviour, and is in fact criminal activity, will all help to support a zero tolerance approach, and increase customer trust and confidence.