Why the long arm of the law is failing to tackle motor insurance fraud

The National Fraud Authority estimated insurance fraud at £2.1 billion in 2012. It breaks down into £1.7 billion in hidden fraud loss, £392 million in organised ‘crash for cash’ fraud, and £39 million in identified insurance fraud (where claims are paid before they have been identified as fraudulent).  The ABI reported in May last year that nearly 60,000 fraudulent motor claims, with an aggregate value of £811 million, were detected in 2013.

These are big numbers, and of course they feed through to higher motor premiums, which means fraud is not, as is often believed, a victimless crime. To combat motor fraud, in 2012 a number of insurance companies, via the ABI, paid £4m to set up IFED (the Insurance Fraud Enforcement Department). Funding for IFED is set to increase by 10% this year.

And more broadly, the Government seems to be taking fraud seriously. A new Fraud taskforce has been set up under the chairmanship of Dave Hertzell, and is due to meet for the first time at the end of February. Another Government-backed initiative, MedCo, goes live in April to scrutinise injury claims from road accidents. Job done.

But while IFED slaps itself on the back, announcing it’s 1,000th investigation in December 2014, the vagaries of UK law enforcement, and continuing budget constraints, have created an enforcement vacuum which some experts argue is playing into the hands of criminals. Because IFED will only take case referrals from paying insurers, the effect could be to increase the likelihood of fraud, rather then deterring it. If you’re not a paying insurer, don’t bother IFED, seems to be the message.

Credit hire companies (CHCs) are often targeted by fraudsters, especially if their fleets comprise high value vehicles. They face an uphill struggle getting the local police to take on cases, even when they have a fraudster ‘bang-to-rights.’ Cash-strapped local forces don’t have the capability to deal with fraud, urging CHCs to refer the case instead to IFED. But IFED won’t take the case unless it comes from a paying insurer. Catch 22.

Neither is there much cooperation between local forces. Criminals know this, and are adept at hopping across police borders to escape the [not-so] long arm of the law. Locally elected Police and Crime Commissioners set their local force priorities based on local funding constraints and insurance fraud does not feature in any of the provincial UK police forces as a priority. In addition, local forces will not work across force boundaries where the result will be a reduction in a neighbouring force’s crime statistics at their expense. Catch 22 again.

Private policing (which is effectively what IFED is) should raise alarm bells with policymakers. Surely law enforcement should know no boundaries? Crime causes misery, and there is evidence that many fraudsters work for organised crime, and the proceeds of fraud are used to finance really nasty criminal activities.  Politicians don’t seem to be ready to step in though.

In a fascinating analysis of criminality and the law, Steve Evans, a leading entrepreneur and ex policeman himself, argues that the key driver is the inexorable reduction of the State, over many decades, as the underwriter of last resort, across a broad range of social hazards.  To offset reduced state intervention, governments encouraged citizens to take more personal responsibility and promoted the benefits of private insurance. The rise of insurance as a powerful and wealthy industry is thus a corollary to the shrinking State.

A YouGov poll on 29 January this year noted that voters tend to see the Government as a ‘force for good. 62% of the public lean towards “government doing more, while 38% of the public lean towards “government doing less.” Ironically, a shrinking State isn’t a vote winner.

But it is inevitable that, as the State rows back from providing security based on need, leaving its provision to market forces, more affluent consumers will procure security in the private market. The consequence is that the least powerful members of society will lack the resources to buy security or organise effectively against crime. In the case of motor fraud, rich insurers win, everyone else loses.

Before the State took control of and organised law enforcement in the 19th Century, citizens with a shared trade who had the means to do so clubbed together to buy the security to apprehend and prosecute criminals.

The parallel with the mechanism established by the ABI, the insurance industry trade body, for its members with IFED, is clear, and the risk of distributive injustice for non-insurers merits further investigation of the moral hazards of clubbing not private, but public security. Don’t bet on it though.