The news that GDP fell by 20.4% in April in the UK, the worst ever month for economic performance since records began shows the possible extent of the financial crisis we are staring into. As we look to the road ahead of us as we (hopefully) unwind from lockdown it is clear that the only certain thing is that times will be very uncertain indeed.
The measures the UK Government have taken to protect employees with the furlough scheme, and the self-employed with the Self Employed Income Support Scheme have averted wholesale job losses and disaster for those individuals. However, there is a portion of the economy that has not been as well looked after.
How safe stables might become high risks
Whilst an SME may have been able to furlough staff much of the owner/directors’ income usually comes from dividends, with perhaps only a minimum of pay through PAYE. Only the much smaller PAYE element has been eligible for furlough, and as such many owners whose businesses have not been able to operate through lockdown will have been taking cash from the business just to survive. As we come out of lockdown many businesses may not be able to start up again, and many of those that do, will face considerable cash flow challenges. Cash flow is king in business, and many seemingly profitable businesses fail through a lack of cash flow, even in better times. The cash reserves of many businesses will have been burned though supporting the directors and owners through lockdown.
SME insurers will need to be on their guard as the challenges faced by business can multiply into losses for them. When cash is tight shortcuts are taken and the necessary precautions around Health and Safety that in normal times would be adhered to, can sometimes be the victim. This will lead to a rise in claims across multiple lines of business from Material Damage and Business Interruption to Employers’ and Public Liability. As policies renew, the previously safe stable business the insurer may have a long history with may present an entirely different risk.
SME fraud through the lens of the fraud triangle
All insurers should also be concerned about a rise in fraud, and perhaps we should look at this through the lens of the fraud triangle.
Pressure: Motivation or Incentive to Commit Fraud. As night follows day a rise in fraud follows an economic recession. A report by the Centre for Counter Fraud Studies at the University of Portsmouth shows that fraud increased in each of the last three recessions. No-one knows how deep this dip is going to be, but I think we can all guess that it is a generational event and the potential pressure caused by the economic hardship is going to be severe.
Rationalisation: Justification of Dishonest Actions. We all like to think that we would never take that step into criminality, however, with insurance companies unjustly seen as the bad guy, it perhaps puts that faulty decision making process into context. The current bad press surrounding the issue of Business Interruption cover and the perception that leaves will not help as some business owners will see this to help justify fraud.
Opportunity: the knowledge and the ability to carry our fraud. The Washington Examiner recently reported a rise in the number of search on “How to Set a Fire”! It’s not winter yet. My anecdotal conversation with Claims Managers have indicated that they are already starting to see more fire claims than usual. It’s probably going to get worse as the full impact of the economic fallout unwinds.
The risks are summed up by Craig Beattie of Celent who states, “Any recession or financial difficulty can result in an increase in opportunistic claims fraud, both small and large. The present dissatisfaction with the insurance industry from small businesses in the UK over the handling of business interruption covers, during the pandemic, and an emerging recession could cause a perfect storm for fraud.“
My colleague Martino Scheepens, has been reviewing volumes of claims and investigations being handled by FRISS customers as lockdown eases in other countries. . “As the world started to come alive after 3 months and “life as normal” began to resume, claims volume started trending back toward normal. This regional trend was steady as municipalities loosened restrictions.
We also saw an expected correlation between claims volume and the number of cases being investigated. This curve followed closely as the number of claims fell. As re-opening began, we saw a sharp rise in suspicious cases. Investigation volumes are now on track to exceed normal volumes.”
As lockdown eases in the UK a similar pattern here will be found. Insurers need to be aware of the changed circumstances of the businesses they are insuring. This is applicable from both a risk selection/pricing point of view and for claims. The insurers that use data and analytics to understand the impact of the changed business both in underwriting and claims is going to be a key differentiator in protecting the portfolio over the next couple of years. Those insurers that are able to do so effectively will achieve a differential performance than their peers.
Start prevention today to be safe tomorrow
As a recent publication by Simmons & Simmons on fraud in the time of COVID-19 states, there are a number of steps to take in order to safeguard your future. One of the most important steps for insurers would be to take measures that help identify risks coming from your current and future portfolio. SME insurance would be particularly vulnerable for the above explained reasons.
With lower volumes of claims insurers now have the time and resources to invest in solutions that could save them from paying out fraudulent (fire) claims in the post-COVID period. Once the number of incoming claims rises insurers will be too deep into settling these whilst attempting to maintain a high level of service at the same time. And that’s one tough challenge. If you’re helped by an automated solution to identify the risks for each SME policy application or claim, that could save you and your adjusters a lot of stress -and money.
The future and the road ahead are unclear, but there are steps insurers can take to protect their portfolio both in underwriting and in claims, the insurers that embrace these opportunities in times of change will be more successful, but even so, hold on to your hats: it’s going to be a bumpy ride!
