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Comment from Markus J. Schmidt, General Manager - motorcheck™

There has been a lot of press recently about "red-flagging" (a process where potential dishonest claimants are identified by demographics.)

Red flags are good for only a couple of things – annoying bulls and stopping fast cars.  They certainly do not work as a method of identifying potential fraudsters when it comes to motor insurance.

This was confirmed recently by ABI senior economist Alex Roy when he said: "The perception used to be that insurance fraudsters lived in tower blocks. But our research shows that it is middle-aged, middle class and university-educated home-owners who are more inclined to commit fraud."

We at motorcheck™ could not agree more. Over the last two years motorcheck™ has done more than 6000 vehicle inspections on new business policies in both the direct and the traditional/broker insurance business in the UK . The insurer typically sends us a percentage of all their new policies to be inspected within a specified timeframe. During this period the car is already on risk - the process works similar to the provision of no-claims discount (i.e. the motorist is instantaneously covered but needs to produce evidence within a certain timeframe).

During the pilot phase of a vehicle inspection program most insurers send us inspection requests based on targeted risk selections as well as random selections. We found that there is almost no difference between a random group and a selected group. Neil Walker, Motor Manager at Allianz Cornhill, told us: "The Vehicle Inspection programme proved conclusively that our original attempts at identifying potential fraud risks were simply invalid. We witnessed virtually the same level of pre-existing damage and potential fraud in both our targeted and random selections. Attempts to stereotype fraudsters seem doomed to failure."

One of the main issues with motor insurance fraud is that currently the focus is on fraud DETECTION when a claim is made and not on fraud PREVENTION when a new policy is underwritten. Over the last two years motorcheck™ has found, that only 34% of all cars are a "good risk" and some 26% of all vehicles have some obvious pre-existing damage. 2% of all cars are already sold, stolen or written- off when contacted for an inspection.

We also know that 18% of policy holders refuse or avoid a vehicle inspection. Why? What do they have to hide? The service is free for them and the vehicle inspection is carried out at a time and place convenient to them. The fact of the matter is that policy holders who avoid the inspection are more likely to claim - their claims rate is 44% higher than the average.

The vehicle inspection program can identify these issues and prevent them from happening.

In my opinion, too much focus is put on fraud detection at the claims stage. Insurers spend £millions in an effort to reduce fraudulent claims by way of voice stress analysis, lie detectors etc, however, insurers also agree that this is generally too late to prevent fraud (see e.g. Insurance Times 3/11/05 – Allianz Cornhill Shuns Lie Detectors).

The current practice of retrospective underwriting, i.e. endorsing the policy or modifying the premium at the claims stage is also frowned upon. In recent test cases the insurance ombudsman highlighted that the insurance industry itself must take responsibility for verify their risk before underwriting it.

It seems to me that the obvious loophole in the motor industry is the fact that cover is provided WITHOUT physically seeing the risk at policy inception. I don't, for a minute, suggest that we adopt a US style model where vehicle inspections are mandatory before the policy is on risk. The UK market place has developed over the years into a system where insurance cover is instantaneous, either over the phone or the internet. Little information, such as driver details and vehicle specification are taken and, presto, one is covered and the insurer is on risk! Whilst this system offers maximum convenience to the consumer it also mainly relies on trust. Is the address actually the correct address or a neighbouring address in a different postcode area which "offers" lower premiums?  Are all licence endorsements declared?  Is the vehicle standard specification or are there undeclared (and expensive to repair) modifications etc?

As consumers, we all like the "ease of use" of taking out insurance in the UK. However, I'd suggest that motor underwriters should ask for evidence: set up a process similar to the provision of no-claims discount i.e. instantaneous cover for the policy holder but require him to produce evidence within a certain timeframe.

Recently, market research has been conducted into policy holders' experience of vehicle inspections.  This research reveals, interestingly, that a majority of policy holders see their insurer more positively as a result of the inspection. A typical quote from the survey: "The inspection showed an active interest in customer service and gives the impression of the insurance company concerns about fraud and its costs to policy holders."

I see no evidence that the introduction of a vehicle inspection at underwriting will result in market share losses. Quite the contrary - motorists these days are concerned about fraud and they want their insurer to do something about it. Properly and professionally conducted, the inspection service is a real opportunity for the insurance company to show its policy holders that it is doing something positive to reduce the costs of fraud and it also allows the insurer to get to know their customer better and hence to differentiate in a competitive marketplace.

I suggest that the focus should shift from fraud detection to fraud prevention at underwriting.  Think of it like buying a second hand car. Would you pay for one over the phone without seeing it first? Maybe it's time that we as an industry put the red-flag back where it belongs – annoying our four-legged friends!

"motorcheck™ is now creating a stir in the market place.  It's an exciting story, one that will continue to grow and grow."

Petrie Hosken 
Head of Communications