How behavioural dynamics influence insurance fraud

November 20th, 2020

In recognition of International Fraud Awareness Week this year, we wanted to highlight some of the behavioural dynamics we see in insurance fraud, and reinforce what constitutes insurance fraud.

In recent articles, we’ve explored the expectation of fraud increasing in tough economic times, and how the issue is being tackled all over the world. But do people really understand what insurance fraud is? Are all fraudulent claims intentional? And are there particular behaviours we could highlight, so that more people understand what insurance fraud is? Do people truly understand that insurance fraud is a crime, and a cost to us all?

New Zealand’s Commission for Financial Capability (CFFC) states that 72% of New Zealanders have been the target of some kind of scam or fraud, either online or by telephone. Although insurance fraud is just one component of this, CFFC believes the key to reducing this number, is through awareness and education. We support that message, and this week particularly, wanted to provide some further details around insurance fraud.

A report on “Reducing Opportunistic Insurance Fraud with the Use of Behavioural Interventions”, commissioned by the Insurance Fraud Bureau UK (IFB UK), Association of British Insurers (ABI), and others, demonstrated that attitudes and behaviours towards fraud can be turned around, thereby reducing the cost of insurance fraud to both customers and insurers.

Let’s take a look at some of their key findings.

What is opportunistic insurance fraud?

There is low awareness amongst customers about what insurance fraud is. An important myth to debunk, is that exaggerating a loss on an insurance claim, or deliberating misrepresenting details when applying for insurance, are criminal offences. The UK believes 46% of all claims could be dishonest, and 40% of insurance applicants could be making false statements.

Opportunistic insurance fraud is often classified as ‘soft fraud’, as opposed to ‘hard fraud’ that is planned or premeditated. The underlying impression from customers committing soft fraud is that this type of misrepresentation is not a serious offence, it’s low risk, quick reward and ‘everyone’ is doing it.

Why do so many people participate in opportunistic insurance fraud?

If the opportunity presents itself, why are so many people taking advantage of an opportunity to commit insurance fraud? The UK study believes there are a mix of reasons at play:

  • Perceived lack of risk
  • Social acceptability
  • Opportunity to make false statements

“Whilst most insurance customers make honest applications and claims, the industry as a whole has issues with customers tempted to lie or exaggerate in order to obtain lower premiums or higher claims values.”

Source: “Reducing Opportunistic Insurance Fraud with the Use of Behavioural Interventions”, 2018, IFB UK.

The idea that this type of behaviour is OK, is justified by offending customers on the basis that this behaviour is a victimless crime (as it’s a faceless insurer that will pay), that ‘everyone’ does it, or that insurers are the enemy (and looking for ways to decrease claim payouts or increase premiums).

Unfortunately, ‘soft’ fraud is not victimless – customers end up paying higher premiums because of the additional costs on insurers of identifying and investigating fraud.

How can we achieve positive behavioural change?

A range of research was conducted in the UK study to assess the most effective behavioural change tools. Here’s some of the key research aspects:

  • Understanding behavioural tendencies and influences
  • Development of ‘nudges’ to influence consumers to make the right decision
  • Targeted communications at the point of policy purchase and claims processing
  • Campaign message testing to the general public

Increasing public awareness of insurance fraud is key to achieving positive behavioural change. Providing customers with online information about fraud and publicly debunking myths about insurance in public channels (such as social media) are good ways to ensure the public are more aware about what insurance fraud is and isn’t. In fact, the best performing campaign message highlighted the additional cost of insurance fraud to customers, and what it added to household premiums each year.

Educating customers in relevant situations, such as when applying for insurance or making a claim, can help reinforce the importance of telling the truth. The UK study trialled pop up messaging during the completion of online forms which proved effective for reminding customers about their obligations to be truthful in their dealings with insurers. In fact, if customers received one or two ‘nudges’ throughout their application or claims process, the more honest they became.

All interventions tested had a positive impact on reducing dishonest behaviour in both the claim and purchase processes. The highest performing interventions reduced the level of dishonesty by up to 74% within a simulated claims environment.

Source: “Reducing Opportunistic Insurance Fraud with the Use of Behavioural Interventions”, 2018, IFB UK.

A little more on nudge theory

Nudge theory is a behavioural concept around the use of positive reinforcement, to influence behaviour or decision making. In this context, nudge theory is used to provide additional information, or specifically worded information to ‘nudge’ a customer towards the ‘right’ decision. Another way of thinking about this, is considering how a statement is ‘framed’.

In the case of awareness campaigns, making a promotion more personal, and demonstrating how much a consumer will pay in additional premiums if insurance fraud continues, is a good example of a nudge. Educating a customer while they complete an online application or claim form, by inserting reminders, or explaining the importance of being truthful, is an example of an education focused ‘nudge’.

Further details about a IFB UK study relating to nudge theory can be found here.

The impact of opportunistic insurance fraud on customers

In short, the impact of this form of ‘soft fraud’ means that the industry costs of paying out claims and investigating these fraudulent claims has a knock-on effect of increasing premiums for all insurance customers.

Keen to learn more about scams, and how to avoid them? The Commission for Financial Capability (CFFC) has some useful information to help you navigate all sorts of fraud and scams.

If you are aware of insurance fraud and want to report it, you can visit our website. You can make reports anonymous if you wish.