Thursday, 19 May 2011

Micro Level Trends - Auto Insurance – The Inadvertent Marketing of Criminal Activity

Recessionary times typically witness a rise in crime, activities across the board from harassment begging to organised on-street personal theft to white-collar massaging of company account books.

As the hard times start to bite so social morals appear diminished,and society itself becomes less cohesive.

In the world of personal motoring certain sections of society see the apparent high cost of auto-insurance as of limited cost-benefit, especially if driving an old, low value vehicle. With little more than a slap on the wrist from the authorities, the threat of even a driving ban of little dissuasion, recent years have seen an upward trend in the recession-riddled western nations.

The situation of course creates a virtuous circle of problems, the unscrupulous uninsured drivers of what have become almost 'throw-away' vehicles then have far less incentive to drive courteously and safely and so increasingly likely to be liable for an accident. If so, the outcome is that he/she will very probably walk away 'Scot-free' incurring the damage to or loss of his/her car, whilst the accident victim if not a 'mirror image' must bare the brunt of vehicle repair costs on his/her own auto-insurance policy.

Thus the recession has brought on a type of social moral hazard for insured drivers and their insurance companies.

But that moral hazard has more recently become even greater, this time to insurance companies themselves.

To combat the uninsured driver problem more and more UK insurers have started to offer policies that provide the policy-holder with no loss of the annually built-up 'no-claims bonus' that off-sets the premium. This if of course a marketing initiative to demonstrate corporate empathy for its current and potential clients. Part of the insurance companies' rationale for doing so will included the internal intelligence input from the synthetic modeling of trend-analysts and actuaries, demonstrating the theorised boost to the premiums income-stream from new clients and retained clients versus the 'down the road' pay-out costs. In an era when insurance company CEO's and CFO's are pressured to generate earnings - given the intent of large insurance conglomerates to re-build the balance sheet since the 2008 crisis - even if modeled outcome do not reflect a wholly persuasive argument to do so, the competitive pressures in the sector mean that the decision to offer the new client package becomes almost a default position. Then having to gauge the level of premium cost-absorption different client types will withstand.

However, unfortunately the new offer is undoubtedly seen to be 'manna from heaven' for those less-than-honest sections of the community, who see the policy-coverage as a tempting way to 'earn easy money' by playing the personal injury game; investment-auto-motives witnessed the aftermath of what seems such an incident only last week, in the local area.

An apparent accident between 2 cars dislocated nothing more than a corner small iron fence, both were cars undamaged, but the female driver of the 'staged' car across a pavement and still nudging the fence, periodically massaged her shoulder and neck as she gave her statement to the called police officers. The drivers were all young, the cars about 10 years old. In normal circumstances the drivers would exchange contact details and insurance company details, inform the fence owner of the occurrence, then drive away in their undamaged cars.

But such a staging needs external independent affirmation to ensure an ultimate high-price 'pay-out', and the ironically the police serve such a purpose. Police officers were called to the 'accident' scene, and even if to them it had looked completely staged, limited to the procedural responsibilities of police officers they could only undertake their own duties in reporting the accident and taking statements. The 'accident' is thus reported to the insurance companies or company, ratified with the corresponding police report, and thus the insurance company has little if any proof that the accident was staged, and so must pay.

Now with the marketing of 'uninsured driver cover' the ability to stage a dishonest incident is even greater, 2 co-conspirators in separate cars staging a 'swerve and run', where the covered driver swerves into something that will not overtly damage the car, and the (supposedly) uninsured driver 'runs' away. Staged in more populous middle-class areas the accident has typically good-natured witnesses and so apparent authenticity. The 'victim' driver in turn claims for personal injury costs from his (but more typically) her company, her innate gender also adding plausibility to the case.

Obviously, insurance companies are trying to differentiate themselves as offering improved service over the competitors, but even if such policy-offers do seem on a modeled basis to buoy the corporate income stream, the innate moral hazard generated which such organised criminals leverage, must be questioned, and insurance companies themselves must take greater care in assessing the validity of claims.

Of course insurers are typically observant, UK assessors considered diligent, as was the case recently when one criminal gang with multiple accomplices was jailed for major insurance fraud.

Yet even such well publicised examples of supposed deterrent seemingly do little to truly deter, especially amongst those are younger, are used to higher-disposable personal expenditure, as see this blatant act as a form of low-level, victimless, almost white-collar crime.

But of course there are clear victims: they appear in 3 forms.

Firstly, those other individual drivers that must ultimately pay the price of year on year increased insurance premiums, a cost which is becoming ever harder to bare for the average driver, couple or family. For many having to make an uncomfortable choice between the bills that are or are not immediately paid, or indeed the small luxuries that will have to be denied.

Secondly, the theft from the insurance companies themselves means that the re-capitalisation of their own balance sheets suffer.

Thirdly, given that a portion of those incoming premiums are typically directed toward a 'float' for general investment purposes, it means that the economy itself is proportionately dis-served as investment opportunities, or investment levels in specific opportunities, are negated or under-fed. Thus in a national, regional and global sense, the wealth creation mechanism could be said to under-perform, again arguably necessitating additional 'socialised costs'.

At a time when the necessary reduction of government expenditure in areas such as public policing and public prosecution, the onus to try and eliminate such white-collar crime seems to lay in ever greater ways with the insurance sector itself. No doubt it has what it regards as good crime detection and aversion principles, from policy-making to accident research, IT systems creating ever better inter-body links that aid intelligence gathering.

But more than ever, now is the time to decline suspicious claims, if presently non-existent combining efforts and financial input to resource stand-alone investigative bodies as appear the case with high-price fraud in other insurance-related spheres such as the art world. If such an entity already exists, all the better, simply a probable need to boost its capabilities.

This unwelcome trend for staged accidents has apparently been surrupticiously imported from the USA. There, Florida, New York & California have all suffered the greatest rates of these 'non-Kosher' accidents, there often staged with groups of passengers as pretend victims of personal injury and share-out the 'winnings'. So the UK and European insurance sector, now feeling the full impact, must interact with the US insurance giants (eg GEICO) as much as possible to gain both in-depth knowledge of the criminals' methods and how best to counter.

As shown, the ultimate cost of such insurance scams is far higher than perhaps immediately apparent, it impacts the price of insurance for the individual, the ability to re-bound by insurance companies and the investment push of the economy at large.