Why fraud goes unpunished

Observations on insurance

The hope of monetary compensation will worsen almost any medical symptoms. The deterioration usually occurs independently of the sufferer's will: it is an effect of which he or she is unaware. But sometimes, as any doctor who prepares medical reports for insurance companies knows, claims are entirely fraudulent, in the sense that the alleged sufferer is fully aware that his or her symptoms are not real. For example, a man who says he has been prostrated on his bed for the past three years goes to Bermuda on holiday. In such cases, the insurance company needs a private detective rather than a doctor.

You might have supposed that, when an insurance company suspects fraud, it would go to great lengths to prove it and, when proved, to prosecute it. Not so. The companies go to no great lengths to expose fraud, despite the considerable sums involved. Occasionally, they do investigate if the claim is too outrageous or the amount too large; but even then, clear evidence of fraud does not necessarily lead to prosecution.

Not long ago, I prepared a report in such a case. A woman claimed to have been laid permanently low, so that she would never recover. According to the terms of her policy, the insurance company would have to pay her an income for the rest of her life, which might easily have exceeded 50 years. The total sum involved could have been more than £1m.

I was not satisfied that she was telling the truth, and the company decided to investigate. She was filmed going to a nightclub to dance several nights a week, despite claiming to be immobilised by her condition, and the company turned her claim down. I asked someone in the company's claims department whether they were going to prosecute her as well. They would not, he said, "because it is bad for public relations".

Something about this answer didn't quite ring true. No department store would fail to prosecute shoplifters on such grounds. Surely most of the people who pay premiums to the company would be only too delighted that a fraudulent claimant had been detected and then vigorously prosecuted. After all, pay-outs to fraudulent claimants could only result in higher premiums for everyone else. The company itself would surely want a prosecution to be publicised as widely as pos-sible, to deter other fraudulent claimants. Only if the company believed that most of its customers were criminals, trying to defraud it, would publicity be bad.

Then I realised why fraud was neither vigorously exposed nor prosecuted. In effect, it adds to the insurance firms' profits and turnover. They merely pass the cost of fraud on to their customers, plus a handling fee and a percentage for profit.

In short, a little bit of fraud does you good if you're an insurance company. It has to be just a bit, or the whole scheme would collapse, with nobody able to afford premiums. But the failure to take fraud more seriously is - well, fraudulent.

This article first appeared in the 10 January 2005 issue of the New Statesman, The other tsunami