The COVID-19 pandemic has exposed many things that were hiding in the shadows, challenging the Canadian insurance landscape in new and different ways like never before. While the industry has weathered many crises in the past, the COVID-19 pandemic is different in that it affects all lines of general insurance including home, auto, and property. As well, historically, in times of economic downturn, there is an upswing in insurance fraud. Economic instability and financial stress create both more opportunity for bad actors, as well as more interest in fraudulent schemes on behalf of policy holders.
As the Canadian insurance industry’s new, independent, national organization dedicated to reducing and preventing insurance crime and its impacts on honest, hardworking Canadians, Équité Association is examining several of the alarming fraud trends you and our members are facing.
Pre-pandemic, both carriers and consumers were shifting toward digital platforms, and this shift toward digital activity accelerated during the pandemic.
Aite Novarica’s 2021 paper Insurance Fraud: Rethinking Approaches in the Digital Age advises that most carriers saw an increase in digital activity by their customers in 2020 across both underwriting (77%) and claims (76%). While this paradigm shift is, in many ways, enhancing the customer experience, it is leaving both carriers and consumers vulnerable to fraud. The study found that a staggering 67% of property and casualty carriers polled reported that an increase in digital transactions has resulted in higher fraudulent activity. This can include identity theft or a data breach, which allows cyber criminals access to an individual’s personal information, which they can then use to set up fraudulent policies.
To compound this problem, there seems to be an increased tolerance of fraud among individuals under 35. According to research conducted by the Coalition Against Insurance Fraud, 81% of Americans over age 55 say that premium evasion is unethical compared to only 68% of Americans under 35 years old. Unsurprisingly, it is precisely this generation of millennials that property and casualty (P&C) carriers are focused on when it comes to digital initiatives. All of this suggests that our industry is on the precipice of a new reality and we cannot afford to overlook fraud as a side effect of digital transformation.
With the shift toward digital platforms, it would not be surprising to see carriers experiencing significant data breaches. Consumers’ personally identifiable information (PII) is more accessible than ever to fraudsters. As a result, our industry now has an identify theft problem. Organized crime rings make swift use of this data, pooling it in databases and gathering sufficient information to impersonate individuals.
The pandemic has forced many consumers to adopt digital processes leading to an influx of tech “newbies” in the marketplace who are much more susceptible to social engineering schemes and identify theft. Consumers expect our industry to adapt and innovate but they also expect that we will protect their personal and financial information along the way. This places a large onus on insurers to evaluate their current fraud management programs.
Another interesting trend is the rise of underwriting fraud. Historically, P&C insurers focused resources on claims-related fraud. As brokers, you likely have experienced a significant decrease in face-to-face interactions with your clients, and fewer physical inspections due to virus-related concerns.
Rate evasion and premium leakage are on the rise. Rate evasion is a form of fraud where the client deliberately misrepresents information at the point of sale for the specific purpose of obtaining a cheaper insurance rate. The Aite Group estimates “… that between 5% and 14% of an insurance company’s premium revenue is lost through rate evasion.” Rate evasion is a contributing factor to premium leakage, which occurs when underwriters use erroneous information, such as incorrect address, or underreported mileage, to assess risk thereby leading to inaccurately priced premium.
Rate evasion and premium leakage can be tied to the growing gig economy, with many policyholders surreptitiously using their vehicles for services such as DoorDash, Uber, and Lyft. Both rate evasion and premium leakage cause monetary losses for insurers, but brokers can play a critical role in the reduction of this specific type of fraud. Fraudsters thrive on anonymity, and brokers often get to know their clients in a holistic and personal way, offering them a unique opportunity to disrupt potentially fraudulent schemes.
Équité members have also noticed an increase in ghost brokering. Ghost brokering is a specific type of fraud that originated in the United Kingdom and is now across the globe. Simply put, it occurs when an individual alleges to be a legitimate insurance broker and sells a client a policy at a cheaper rate that either isn’t valid or simply doesn’t exist. Financial stress, unemployment and general misinformation are some of the factors responsible for the increase in this type of fraudulent activity. Many new immigrants, not yet familiar with the insurance system in Canada, are the targets of ghost brokers, but these fraudsters can dupe savvy consumers as well.
Fraud might once have been seen as the cost of doing business. Today, the industry acknowledges this problem is growing too large to write off. In 2021, the industry took action to move beyond its own internal fraud management programs toward industry collaboration. We can’t solve a puzzle without all the pieces, and fraud, by nature, is designed to be elusive. Équité aims to bring Canadian insurers together in a coordinated effort to collaborate on investigations of mutual interest using data, analytics and coordinated support services.
Fraud is not a victimless crime; not only does it affect our insurance premiums, it also erodes our public safety. Make no mistake, organized crime groups use insurance fraud to launder money and to finance their criminal activities both at home and abroad. When we choose to look the other way, we are directly contributing to the problem and, ultimately, undermining the very system that is set-up to protect us. As brokers, you can playa vital role in the detection, suppression and prevention of insurance crime. This Fraud Prevention Month, we encourage you to educate yourself, your clients and colleagues about the newer types of insurance fraud. For further information and to report a tip either online or by phone, please visit our website at www.equiteassociation.ca.
Fraud Related Trends and Stats
 Insurance Bureau of Canada. Insurance Fraud in Times of Crisis: COVID-19 Pandemic-Related Risks in the P&C Insurance Industry, Fall Update. Toronto: Insurance Bureau of Canada, 2020.
 Rose, Stuart. P&C Underwriting Fraud: A Market Overview. Boston: Aite Group LLC, 2021.