Income protection gap opens door to fraud

An uncertain employment market and insufficient policy cover could spur a rise in fraudulent income protection claims. Aamina Zafar reports

They say education is when you read the small print, but experience is what you get when you don’t. Never has a statement rung truer than for income protection policyholders who discover they do not have the correct cover when making a claim.

This is often down to a lack of understanding around policy terms, and can mean some resort to manipulating information to try to recoup money they believe is owed to them.

With fraudulent claims a growing concern for the insurance industry, could combating a policyholder’s confusion be the key to preventing sham claims?

Phillip Deacon, independent protection claims expert, says: “Lack of understanding as to how the product works may mean some policyholders do not get the benefit they thought they would at the point of claim if their earnings have reduced since taking the cover out. This is why annual reviews are so important.

“Cases where financial information is manipulated to try and justify a higher benefit than is payable are relatively few and far between but do occasionally happen.”

Deacon stresses that the majority of claims are genuine, but a small number each year are found to be fraudulent – either where the circumstances of the claim are made up, or more commonly where they are exaggerated beyond any level of tolerance.

“This might be exaggeration of the symptoms that prevent someone from working, or even exaggeration of the duties that they’re required to perform on a regular basis,” he says. “Occasionally, customers are found to be working while claiming income protection at the same time.”

Understanding details around the deferred periods within a policy can be particularly confusing for customers, according to Vicky Churcher, executive director at Income Protection Task Force.

The protection industry is strongest when insurers, advisers, and customers work together with transparency and trust.

Vicky Churcher, Income Protection Task Force

She warns that if these are not clearly explained at outset and at point of claim, there can be misunderstandings in terms of when valid claims payments begin.

“The protection industry is strongest when insurers, advisers, and customers work together with transparency and trust,” Churcher says. “Proactive fraud prevention begins with ensuring that customers fully understand their policy, including what is covered, any exclusions, and the importance of providing accurate information at application stage.

“Advisers should manage expectations with clients, explaining the implications of incorrect disclosures and by ensuring policies remain relevant with regular comprehensive reviews,” she adds. “Insurers can support this with clear policy wording, simplified underwriting questions, and more flexible cover options.”

Fraud trends and examples

Income protection fraud occurs when individuals make fraudulent claims seeking financial benefits from insurance policies. Examples include false injury or illness claims, ongoing claims after recovery, undisclosed pre-existing conditions, phantom or non-existent jobs, and exaggerating symptoms or disabilities.

Christine Milsom, head of claims and medical underwriting, protection at Canada Life UK, says although fraud is uncommon in group income protection, there are cases where individuals have exaggerated their illness when they are no longer eligible to receive a monthly payment.

Other examples have included individuals working for a new company or setting up a business while continuing to claim on a group income protection policy.

She explains that this is why once a claim is in payment, Canada Life UK will monitor that individual’s progress and provide support to enable them to return to work when they are ready.

“Our job is to assess new claims to determine their validity and illness severity before progressing to payment,” Milsom says. “To protect ourselves and ensure a claim is valid, we gather evidence from the individual and their GP or specialist, with their permission.”

Various patterns in income protection fraud have emerged over the years.

Stuart Tragheim, managing director at Jackson Lowry Consulting, says notable trends include a rise in digital fraud, the emergence of organised fraud rings and changing work environments.

He believes insurers must adopt stronger verification processes, collaborate with medical professionals, and continuously monitor claims to prevent falling victim to fraudulent claims.

“Insurers are continuously exposed to this risk, and understanding emerging trends and examples of such fraud is crucial to combating it,” Tragheim says.

“Income protection fraud is a growing challenge that demands insurers to be vigilant and proactive in combating it. By adopting new technologies, improving verification processes, and collaborating with various stakeholders, insurers can better protect themselves against fraudulent claims and ensure that the system remains fair and effective.”

Fraud detection

Rooting out bad behaviours before they become an issue requires proactive measures, consumer education, clearer product offerings, and greater accountability.

Stuart Tragheim, Jackson Lowry Consulting

Tragheim says income protection insurers need to spot and manage two forms of fraud – improvised and premeditated.

Improvised fraud usually occurs when a policyholder makes a mistake, misrepresents details, or exaggerates a claim in a moment of desperation.

But premeditated fraud is typically more organised and deliberate. It involves planning and scheming to deceive the insurer for financial gain. 

Tragheim explains that insurers can detect improvised fraud by looking at behavioural analytics and through claims monitoring and cross-verification as well as having an advanced claim screening process.

However, he says premeditated fraud can also be detected by advanced identity verification, social media and public database scrutiny, and collaboration with other insurers and stakeholders.

Tragheim warns this is why insurers must combat ‘bad behaviours’ to reduce the potential for fraud.     

“Rooting out bad behaviours before they become an issue in the protection market requires a combination of proactive measures, consumer education, clearer product offerings, and greater accountability,” he says. “By addressing key issues up front, insurers can reduce the potential for fraud, misrepresentation, and dissatisfaction, ensuring a more transparent and trustworthy market.”

Technology pros and cons

UK insurers will need to adopt a multi-layered approach that combines technology, regulatory compliance, and operational best practices.

Tony Mudd, St James's Place

Advancements in artificial intelligence and technology have led to a rise in realistic looking fake documents, with fake IDs readily available for as little as £30. This is a growing concern for the industry.

Deacon agrees there has been a concerning rise in technology-related fraud across all protection products, with fake documents being used to support fraudulent claims.

“There have been worrying signs over the last few years that technology-related fraud is on the rise across all protection products, with digitally manipulated and fabricated documentation being put forward,” he says. “Insurers will need to be aware of this increasing threat and have strategies in place to deal with it.”

But technology can also play a major role in detecting fraud and can help identify fake IDs at policy inception.

Tony Mudd, divisional director for development and technical consultancy at St James’s Place, says: “Income protection insurance fraud clearly poses an increasing challenge for UK insurers. As fraud tactics evolve, as they have and will, insurers will be forced to implement proactive measures to detect and prevent these threats while navigating new regulatory requirements, particularly the ‘failure to prevent fraud’ offence under the Economic Crime and Corporate Transparency Act 2023.

“Income protection fraud will undoubtedly become increasingly sophisticated, and as a result UK insurers will need to adopt a multi-layered approach that combines technology, regulatory compliance and operational best practices,” he adds. “The failure to prevent fraud offences adds an additional layer of responsibility, making it imperative for insurers to invest in robust fraud prevention strategies to protect their businesses and policyholders.”

Another notable trend within the income protection market includes policyholders faking the severity of their mental health illness by exaggerating symptoms.

“These claims are time-consuming, complex and require specialist assessment,” says Ralph Tucker, co-founder Empath-AI. “Adoption of technology is vital in ensuring that the true claims are paid faster, ongoing condition assessments can be made more frequently and fraudulent behaviour is addressed sooner.”

The decline in economic and social wellbeing is also resulting in people committing fraudulent claims on their income protection policies.

“Let’s be honest, it’s pretty hard to fake your own death with life insurance or fake a cancer diagnosis for critical illness insurance, says Tucker. “So, this seems to be an income protection industry issue. The claims are long term and can be significant. This is the drag on the smaller specialist income protection providers that may not have the resources to investigate every claim to its fullest extent.

“But on the wider topic of insurance fraud; having cost effective technology at the disposal of the insurer or adviser that can identify certain behaviours or provide indicators to allow further questions to be asked at application, claim and ongoing assessment has to be of benefit to the industry. Paying legitimate claims quickly and sorting out the bad apples will help build consumer trust in our industry.”

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