insurance and corporate fraud conference 2001

Speaker: Ray Carroll
Organisation: National Motor Vehicle Theft Reduction Council
Presentation Title: Insurance Practices and Professional Vehicle Theft

Summary
Vehicle theft in Australia has been at epidemic levels for decades. Turning the tide on the thieves requires a strategic approach and serious commitment to major changes to both infrastructure and practice by a wide range of stakeholders. This paper explores the role that motor vehicle insurers currently play in the vehicle theft reform agenda in Australia and raises a number of specific issues that the industry needs to consider to ensure that fraud does not remain a contributing factor to the overall problem.
THE DYNAMICS OF vehicle theft IN Australia
In the current corporate landscape an industry worth a billion dollars per annum would be embraced by most Australians. Unfortunately, only the criminals are the winners in this nation’s burgeoning trade in stolen vehicles.
The motivations for stealing vehicles are many and varied. In the past twelve months 139,000 vehicles were stolen in Australia. More than 100,000 of these were stolen by the proverbial spotty-faced kid looking for thrills, short-term transport from point A to B, or to carry the loot as he or she cleans out the neighbourhood of VCRs or DVDs. These vehicles were recovered in nearby suburbs largely complete but many having sustained collision or fire damage.
What we term “opportunistic theft” may be where the big numbers are, ie it accounts for 3 out of every 4 cars stolen in Australia, but it is the activities of the “professional” thieves who steal cars to convert them into money that present the greater challenge to our prevention strategies. In simple terms, professional theft represents about one quarter of the total vehicles stolen, but more than half the estimated $1 billion cost to the motoring community.
The most common means of converting cars into cash is to strip it of key components and trade them on the illicit parts market or change the stolen vehicle’s identity and on-sell it. Approximately 11,000 vehicles were recovered as major strips or stripped and burnt. An estimated 15,000 non-recoveries are believed to be completely dismantled while a further 7,000 non-recoveries are thought to be subject to re-birthing as whole cars. It is important to understand that we are not talking about amateurs. Most professional theft rings are “very professional”. They move swiftly, often holding vehicles for fewer than 7 days. They establish sophisticated logistics and communications networks and will go to extraordinary lengths to circumvent industry and government practices. We know that thieves will also exploit insurance practices to combine vehicle theft with insurance fraud to maximise their profits.
The bad news is that we don’t know the true extent of insurance fraud except that professional thieves are continuing to operate with relative impunity. Compared to the risks of dealing in drugs, car theft and insurance fraud provide lucrative returns and pose minimal risks.
So how can these unacceptable circumstances be changed?
Combating professionals requires a “matrix” of responses to reduce their economic returns by increasing their operating costs, while at the same time increasing the likelihood of their activities being detected.
It requires consumers to take responsibility for their property and to demand more secure vehicles from vehicle makers.
It requires vehicle manufacturers to continually improve in-vehicle security systems and to embrace more effective vehicle and componenent identification technologies.
It requires government authorities to establish and maintain effective information systems and to adopt more rigorous registration and inspection procedures to confirm vehicle identities and to identify “high risk” vehicles.
It requires police to share intelligence and tactical information between jurisdictions and adequately resource investigations.
And, it requires insurers to review their practices to ensure that they do not perpetuate or aid the activities of professional car thieves.
THE INSURANCE INDUSTRY
Before looking at some of the practices that need review, I want to just briefly outline the environment, as we see it, that the insurance industry in Australia is operating in.
Motor vehicle insurance is the largest component of the private sector general insurance industry in Australia, accounting for almost one-third of all general insurance premium income1. Insurers tell us that vehicle theft accounts for about 15 per cent of all vehicle claim costs.
You only need to read the business pages of any major newspaper to understand the competitive nature of the insurance market in Australia. A decade ago, there were 90-odd private general insurers who insured motor vehicles.
Recent years have seen a seemingly endless procession of mergers and acquisitions consolidating the industry, with more in the offing. In fact, the industry’s own seat on the NMVTRC has twice been vacated as a consequence of the incumbent being displaced in the fall-out of a merger. Today’s, insurance market is dominated by 10 insurers who between them share 75 per cent of policies. The top 5 account for 54 per cent2.
In such a competitive market, it is not surprising that there are policy paradoxes within companies. On one hand company marketing departments are busily promoting the message—insure with us and we’ll look after you whatever happens. In fact, we care for you so much, we’ll even insure your car for more than its really worth. And to top it all off we’ll make doing business with us much easier by not asking you to provide any substantial proof that the car actually exists.
These competition driven customer friendly policies compete against claims management policies as it leaves the claims departments to worry about the consequences of managing the increased risk of insurance fraud.
Having made these observations, it must be said that if it was not for insurers we would still be back in the environment of the 1980s and 90s without any sense of a national theft reduction strategy. For it was the insurance industry’s commitment to meet half of the $9 million required to implement a national strategy that was instrumental in persuading state and territory governments to establish the NMVTRC and tackle vehicle theft in a nationally coordinated and strategic fashion for the first time.
It would also be fair to say that if it were not for insurance industry funding, there would be very little in the way of community education programs on vehicle theft.
However, it is our view that the industry must critically examine its own practices to ensure that it is not inadvertently contributing to the problems that it is trying to combat.
HOW DOES VEHICLE FRAUD RELATE TO VEHICLE THEFT
When the Vehicle Theft Task Force first examined motor vehicle theft at the national level in 1997 we initially determined that fraudulent vehicle theft claims would not be included within our terms of reference. This decision was based on the assumption that theft prevention strategies were not applicable to fraud reduction given that the owner has full access to the vehicle.

We couldn’t however totally ignore fraud as an issue as fraudulent claims impact significantly on the apparent rate of vehicle theft. By their very nature, fraudulent claims are largely indistinguishable from genuine claims however many in the insurance industry are now developing increasingly sophisticated fraud indicators and claims analysis systems to produce a much clearer picture about the true extent of fraud.

Conventional wisdom has placed fraud estimates at about 10% of all motor vehicle claims, however more recently we are being informed of estimates of up to 20% in certain risk areas.
It is clearly in the NMVTRC’s interests to establish a better informed estimate of the impact of fraud on vehicle theft rates as we may be grossly overstating the true levels of vehicle theft in this country.

Insurance companies insure against genuine events, therefore from the industry’s perspective, fraud reduction presents the greatest potential for claims costs reduction.

VEHICLE THEFT CLAIMS COSTS ( REAL AND FRAUDULENT)
The NMVTRC has developed what we would argue is the most comprehensive database on vehicle theft for an entire country anywhere in the world.
The Comprehensive Auto Theft Research System (CARS) receives quarterly down loads of all vehicle theft reports made to all police services, claims details (excluding personal information) from the majority of insurers, twice yearly snapshots of all registration databases and the manufacturers’ vehicle specification database.

CARS, which is now available to our stakeholders via an internet search engine, allows us to produce a more detailed analysis of vehicle theft trends than ever before. The following tables provide a snapshot of average claims costs for motor vehicle theft experienced by participating insurers for the June 2001 quarter.

Table 1. – Distribution of average claim costs.

Average Cost per Claim ($)
Number
Percent
< $5,000
5,213
54.8
$5,001-10,000
2,007
21.1
$10,001-15,000
837
8.8
$15,001-20,000
545
5.7
$20,001-25,000
349
3.7
$25,001-30,000
192
2.0
$30,001-35,000
118
1.2
$35,001-40,000
81
0.9
> $40,000
170
1.8
Total
9,512
100.0

Table 2. – Top 10 average insurance claim costs.

Ranking
Make /Model/Series
Average Claim Costs ($)
Number of thefts recorded*
1
Toyota Landcruiser 80 Series
28,396
56
2
Toyota Hilux
17,476
180
3
Subaru Impreza
17,312
107
4
Holden Ute VS III
16,942
95
5
Holden Commodore VT
14,792
305
6
Honda Integra
14,731
21
7
Nissan Pulsar N15
14,217
70
8
Mazda 323
13,271
12
9
Holden Commodore VS
13,162
233
10
Mazda 626
12,579
37


Our sample of some 9,500 claims for the June quarter totals $75.7 million in net payouts. It can be seen from Table 1 that almost 76% of these claims were for less than $10,000 which reflects the fact that some 75% of vehicle theft is opportunistic and involves vehicles more than 10 years of age. The remaining 24% of claims are for amounts greater than $10,000 with almost 6% being greater than $25,000.
Claims costs totalling $5,000 or less made up 51% of all claims yet only 15% of total costs, while at the other extreme, claims over $30,000 represented only 3.9% of total claims but 22.5% of total costs.

Table 2 lists the average net insurance claims cost for the top 20 models which highlights the potential cost to insurers as a result of genuine theft and/or fraudulent insurance claims for individual models.

WHICH INSURANCE PRACTICES REQUIRE SCRUTINY
In moving onto discuss the insurance practices that may warrant attention, I should point out that the NMVTRC is yet to reach a definitive view on any of them. The following discussion simply reflects the common views held by some of our stakeholders. It is therefore important to understand that they may have a variety of reasons for suggesting that a particular practice requires review.
To raise these issues for broader debate, the NMVTRC proposes to conduct a detailed assessment of these and other issues in conjunction with the insurance industry and other stakeholders over the next few months.
As already noted, insurance fraud is often indistinguishable from legitimate claims because of the high incidence of professional theft where seemingly very secure vehicles are taken and never recovered. It therefore follows that strategies that impact on the activities of professional thieves will also assist to highlight suspect claims.
The disposal of written-off vehicles
The most common source of legitimate vehicle identities for vehicle re-birthers has long been insurance write-offs sold at public auction. A vehicle may be written-off because it is so badly damaged that it is not possible to safely rebuild it or because the cost of repairs exceed the vehicle’s market value. Around 100,000 written-off vehicles are sold at auction in Australia each year. It is estimated that up to two-thirds of those vehicles are either so badly damaged they could not be legitimately repaired or at best could be used only for parts.
It is these vehicles that professional thieves covet most. As a consequence, the wreck of a late model Commodore or BMW worth as little as $1,200 for parts can fetch tens of thousands of dollars for the value of its identifiers alone. While insurers may be grateful for the better than expected return on salvage, for every one of these events they, or another insurer, sustain a subsequent theft claim of much greater value for a stolen vehicle of similar description.
While state and territory governments are investing millions of dollars in establishing nationally consistent arrangements that will hopefully detect any instance of the identity of a wrecked vehicle re-entering the registered vehicle fleet, such systems can only ever be the last line of defence. An insurance industry-wide code of practice for the secure disposal or sale of high-risk vehicles to legitimate vehicle repairers and recyclers could have a dramatic and immediate impact on the re-birthing trade. But in addressing this issue we must re-visit the paradox of cost reduction. Are insurers prepared to accept lower salvage values in the first instance to reduce the overall cost of vehicle theft?
Agreed value versus market value policies
The degree to which ‘agreed value’ and ‘third-party theft’ policies contribute respectively to insurance fraud and motorists’ complacency about vehicle security also bears closer examination.
Insurers engage in a variety of marketing practices designed to attract new business or retain existing customers. The consumer naturally enough is looking for the best insurance deal. The best deal may be represented by the lowest premium, a combination of benefits that suit the particular policyholder, or the insured value of the car.
An examination of agreed value policies between companies will reveal some marked variations as to the insurable value. The real test comes when a company assessor is asked to place a pre-accident value on a stolen and damaged car, and that value too often falls well below the insured amount. Insurers often exercise different tolerances for agreed values away from the traditional trade guides, and vehicle inspections to verify enhanced values are rare where a higher than average value is ascribed to the car.
A comparison of the “theft performance” of agreed value versus current market value policies paints an interesting picture.
Table 3 - Average insurance claim costs by type of policy.

Type of policy
Number
%
Total ($)
Average ($)
Agreed Value
4,682
49.2
44,325,351
9,467
Market Value
1,442
15.2
9,227,613
6,399
Sum Insured
534
5.6
2,986,078
5,592
Unknown
2,854
30.0
19,168,861
6,716
Total
9,512
100.0
75,707,904
7,959

As can be seen in the above table, agreed value policies have a higher average claims cost than current market value. So why is there such a difference in the average cost of the policy types when a professional thief who is looking to sell a stolen car or its parts has no interest in whether the target vehicle is insured at all let alone under what type of cover?
Part of the answer will lie in the fact that in general, agreed value policies do carry a higher value than current market policies although we would suggest that this does not explain a $3,000 difference in average claim costs.

Further explanation may be found in the recovery rates of vehicles. Stolen vehicles manufactured in the 1970’s experienced an overall recovery rate of 81%, vehicles manufactured in the 1980’s have a similar recovery rate at 82%. However vehicles manufactured in the 1990’s have a low 67.6 % recovery rate with 2000, being 57% and 2001 a low 51%. These figures obviously reflect the attraction of newer vehicles to professional thieves.
On closer examination of individual insurers’ data however, we discover that where on some books that show an overall recovery rate of 81%, for some specific models, agreed value policies experience a low recovery rate of 60% whereas market value policies have an 82% recovery rate. On average there is a $5,000 higher cost on agreed value non-recovered claims. Across all model year ranges, agreed value policies have consistently higher non-recovery figures.
An obvious inference which demands further research is that agreed value policies are an inducement to insurance fraud. If a significant part of the difference highlighted here is in fact insurance fraud, without a real theft event, then we clearly want to understand it, and if nothing else, remove that incident from official theft figures.
The promotion and use of recycled parts in the repair process may also be impacted by the spread of the market between the two policy types, as this will determine the number of vehicles that are written-off versus being repaired. In a situation where the agreed values generally represent “over insurance”, there will be fewer total loss vehicles generated from the normal assessing processes that operate after a vehicle accident. The downstream impact of this will affect the supply of recycled parts that are available for the repair process. The demand for illegal recycled parts for vehicles that are in short supply through the regular public auction system may assist in perpetuating the vehicle theft problem.
Verification of vehicles and repair claims
In the interests of customer service and the reduction of overheads most insurance policies are written without any third-party verification of the vehicle’s condition or for that matter existence. A good deal of anecdotal information exists regarding the practice of ghosting where a fictitious vehicle is insured and later reported stolen. We have also been informed of fraud scams involving the corrupt registration of previously damaged vehicles which are then the subject of false accident claims. Scams are also extended to the parts orders of smash repairers for accident damaged insured vehicles. Smash repairers falsify parts orders and use stolen parts in repairs to reduce their own costs and improve the margin in the insurers’ reimbursement to them.
Verification of vehicle identities and repair auditing processes add administration costs to call centres and claim processing. Again, do the potential savings outweigh these additional costs?
Using premium incentives to promote secure vehicles
The final issue I wish to cover relates to the extent to which insurers are prepared to use premiums and other policy incentives to bring about an improved level of security to the Australian vehicle fleet and reduce their risk.
While premiums must enable claim and administrative costs to be recouped and deliver a return on assets, it could be argued that insurers could do more to reduce their (and their insured's) exposure to theft by a more innovative approach to pricing.
The use of meaningful insurance incentives for the owners’ of older vehicles to install an Australian Standards certified engine immobiliser to secure their vehicle has clearly become an issue. The most frequently asked question of enquirers to the NMVTRC’s Immobilise Now! Hotline—part of an initiative to promote the voluntary fitting of Australian Standards approved immobilisers—has been “Will my insurer provide me a discount on my premium?” I appreciate that a minority of companies do, but at least one Immobilise Now! customer who raised the issue with his insurer was met with the response “Well actually since your adding an accessory it will cost you $40 more!”. There is also much misinformation delivered to clients by insurers in relation to immobiliser standards. Some insurers continue to recommend more expensive, non-Australian Standards approved products, which do not offer any commensurately greater theft protection.
But more specifically in relation to combating professional thieves, the industry has long been calling for improved vehicle identification. The recent announcement by some of Australia’s leading motor companies to adopt the world’s most sophisticated vehicle marking system—the DataDot, which consists of up to 10,000 tiny dots each carrying the vehicle’s unique Vehicle Identification Number—provides a clear opportunity to pro-actively contribute to the expansion of this technology by recognising participating vehicle manufacturers through premium incentives.
Conclusion
The Council has been established to provide a strategic national focus to combating vehicle theft, but it is only by stakeholders doing things and taking action themselves that we can hope to strike a collective blow.
While not specifically included in the Council’s charter, the reduction of vehicle related insurance fraud, or at least a better understanding of its dimensions, will better inform the community of the true extent of vehicle theft.
I have attempted to articulate what we see as some of the issues that a range of commentators have suggested warrant scrutiny to determine their impact on the activities of professional thieves. They are by no means exhaustive and no doubt many of you could offer others.
In closing, one final observation I would like to make is that for whatever range of reasons there appears to be very little cooperation across the insurance industry to combat systemic fraud. A national claims data base, properly controlled to allay privacy concerns would be a significant advance in this country.
The challenge remains, “To what lengths are insurers prepared to go to ensure that their practices are not contributing to the problem they insuring their customers against?”
REFERENCES
Industry Commission (1994) Vehicle and Recreational Marine Craft Repair and Insurance Industries.
National Motor Vehicle Theft Reduction Council (2001) Comprehensive Auto-theft Research System (2001).
Australian Prudential Regulation Authority (2001) Selected Statistics on the General Insurance Industry Year Ending December 2000.

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