Application Fraud: The whole truth?

Application fraud is a major issue for underwriters. With investment returns low, underwriting in a profitable manner has never been more important. However, the continued growth of online distribution means consumers can often immediately see how changes to their declared details affect the premium offered – usually negatively.

This creates the potential for a perfect storm. Insurers need consumers to tell the truth when they apply for insurance in order to offer an appropriate premium, yet consumers can see that telling the truth often results in a higher premium.

We need to understand more about consumer attitudes towards applying for insurance. What happens when consumers feel that even with their best efforts, the price offered by competitive insurers acting on accurate information is too high? The results from a study Lexis Nexis conducted with Consumer Intelligence highlights that insurers must prepare for up to a quarter of all applications to be deliberately inaccurate – in fact, a remarkable one in four said it is sometimes acceptable to omit or adjust information to obtain a better price.

The study revealed the areas of the application process most vulnerable to data omission, adjustment or outright fraud. One of the most significant findings was consumers’ willingness to use someone else’s address when applying for motor insurance – more than one in 10 (13%) of those in the study rated this as an acceptable activity.

A related challenge is that 29% of people currently admit to ‘fronting’ their policy – choosing someone other than the person who will drive the car the most as the main driver –
in a bid to drive down the cost. This means simply working out who is really the driver of an insured vehicle can pose major challenges for insurers.

Driver history is also a risky area, with a number of consumers (9%) admitting they feel it is acceptable to omit information regarding previous claims to try and lower costs. This underlines the need for accurate sources of claims data for use at point of quote.

The study also found the accuracy of no-claims information – a significant rating factor, with discounts of up to 75% on offer – is also vulnerable. 15% of consumers questioned said they think it is acceptable to try and change their years of no claims to obtain a better price.

So how should insurers respond? In the US the insurance industry is already tackling fronting through the use of third-party contributory policy databases. This means insurers can spot instances of policy overlap, such as where an individual would appear to be the primary driver of more than one vehicle. This is a solution the UK can potentially adopt.

Inaccurate address information can also be corrected in part through intelligent use of ID information at point of application. Driver history information will soon be verifiable through the My Licence initiative, meaning insurers will soon have more data analytics options available today than ever before.

Of course, it would be wrong to treat all consumers as potential fraudsters. Of those who do believe it is acceptable to adjust information, some simply may not realise the importance of the information provided to the insurer. 

It could also be that changes in distribution – such as the shift to online – has created an impression among consumers that they are dealing with a faceless computer, or that the system encourages experimentation with different information to obtain
the best price. 

There is, therefore, a strong rationale for insurers and brokers alike to do more to explain to consumers exactly how information is used and why accuracy is important.

Nonetheless, it is also evident from this study that insurers cannot rely solely on the information provided by a consumer. It is more important than ever before to find ways of validating information without making the customer journey too complex.

By making better use of the data sources currently available, the insurance industry can both tackle application fraud and improve the consumer’s experience of our industry. This is something to look forward to in 2014 and beyond. 

Bill McCarthy
Managing director, UK & Ireland, Lexis Nexis Risk Solutions