The word “insurance” is sometimes regarded with uncertainty by some of our older relatives but to everyone else, forking out a monthly premium to mitigate future financial risks has become a familiar facet of modern life. This is especially so for government mandated coverage such as motor insurance where repair and medical costs resulting from an accident can easily be overwhelming for an individual to bear.
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The motor industry in Singapore is a heavily regulated one. Vehicle ownership, both commercially and personally is tightly controlled by government mandated quotas and consequently, vehicle insurance revenue growth can only grow in tandem with the standing policy. At present, the motor car growth rate has been fixed at 0.25% per annum through a mechanism of supply restriction.
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Coupled with the generally limited motor insurance policies of third party, third party including fire and theft and comprehensive, along with a litany of possible optional add-ons, thin operating margins in this sector have checked its development as compared to other segments within the industry, such as general insurance and offshore insurance. Despite this, premiums collected still make up the lion’s share of the industry total, varying between 32% and 35% due to the sheer size of this market alone. The loss ratio, which is a measure of total claims payout expressed as a proportion of total premiums collected is also a prime determinant of profitability.
2014, saw a year-on -year improvement of 9.5 % improvement in this area, bringing record-breaking results of $149.5 million in underwriting profit that attracted an influx of smaller insurance companies flooding the market and bring about a price war for survival.
By 2015, this increased competition caused motor premiums to slip by up to 20%. This underscores the importance of fraud detection, as the only way to minimise the loss ratio and keep the motor insurance industry afloat.
The Cost of Increasing Fraud Cases
The insurance industry implemented the Fraud Management System in January 2017, which aims to improve fraud detection and reduce the staggering losses in profits that arise from this all too prevalent occurrence. Within the motor insurance segment, the executive director of GIA (General Insurance Association of Singapore), Derek Teo and its motor convenor Sam Tan have said in a joint statement that studies show up to a whopping 20% of claims are inflated or fabricated. Studies from 2013 also show that fraudulent claims chalk up a staggering $140 million in lost profits a year. They added, “ Motor insurance premiums rise as a result, and this translates to higher costs not just for motorists but also for public transport operators. These are then passed on to the consumers.”
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The scope of methods used in defrauding motor insurance companies is diverse, adding to the difficulty of detection. These tactics range from staged collisions and inflated damages to exaggerated medical claims and even claims by non-existent passengers. In 2014, 19 people were charged with motor insurance fraud for dishonest acts committed in 2008 – 2009; the most serious offender obtained a payout of $270,000 by staging accidents. In 2015, a 37- year old man was charged for making motor insurance claims of $465,000 by creating a network of people that lodged false accident statements. Most recently, in 2016, a member of a well-organised syndicate was jailed for 6 years for attempting to cheat insurers of $1.1 million, of which $216,000 was already paid out. On a smaller scale, motor workshops and, in some cases, medical practitioners become involved when they inflate costs, or provide more work than is absolutely necessary.This may be inadvertent, if the patient exaggerates injury and discomfort with his doctor, or works with his motor workshop to inflate repair costs. The difficulty of policing all claims emboldens potential perpetrators and, the industry has so far seen a worrying trend.
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These deceitful actions have prompted insurers to take action. To combat fraud, NTUC Income has implemented the pro-active measure of deploying Orange Force riders to patrol the streets. This initiative has the two pronged effect of improving service levels to genuine customers and having the effect of nipping any intention of making fake or exaggerated claims in the bud, as they assist in the accident claims process from the very beginning. Insurers that are members of the GIA fraud database share information on policyholders’ claims history in a bid to root out suspicious behaviour. Internally, many insurers have beefed up their fraud detection teams and policies to tackle its rise. In addition to this, public outreach programs aimed at educating the public about insurance fraud and its implications have been organised, as well as a setting up of hotlines for those in the community to make a report. All these initiatives place a heavy burden upon the insurers, which would then be saddled with higher operational costs on top of the already devastating squeeze of low premiums due to aggressive business competition.
Cost of Fraud Trickles Down to the Consumer
However, not only the motor insurer is affected. These fraudulent activities affect innocent parties through purposeful injury or damage. The very nature of the insurance industry, which works on a pooling mechanism whereby premiums are priced to cover costs, is such that the community will eventually have to foot the cost of increased claims as a collective through higher premiums. Conversely, instead of increasing premiums, payout amounts could be reduced. Other ways to mitigate fraud risk and costs associated with fraud include implementing more restrictive clauses and enacting more prohibitive payout conditions. This tightens the bottleneck on payouts by limiting the scenarios where compensation will be given. A natural consequence of increased fraud is also longer claims processing time, as loss adjusters pore through documents, information as they conduct their due diligence into every case. To bring the point home, GIA Executive Director Derek Teo said, “Insurance fraud … is everybody’s concern because we all pay the price.”
It is a never-ending game of cat and mouse and there will always be some opportunistic individuals that will try to outsmart the system but unlike what some of our more traditional forebears might think, it isn’t always big businesses with the smallest set of ethics. Sometimes there are bad apples on the other side of the contract.