The client is always right

20 October 2016 —
andrey_veselkovOver the last few years, the Russian insurers have tended to characterize insurance fraud as one of the most actual threats to their business. It would not be appropriate to say that there were no measures taken in order to reduce this phenomenon. Once they've considered, for example, that introducing a distinct article in the Russian criminal code dedicated to fraud will substantially solve this issue. As a result, in 2012 a special article was introduced in the criminal code (No.159, paragraph 5) - insurance fraud. However, the situation has not improved - on the contrary, it got worse.

Starting in 2003, this was the position took by the Russian courts of law - from the regional ones to the Supreme Court - and this was perhaps one of the main catalysts for the rapid growth of the insurance fraud.

Motor insurance was one of the most affected segments, but the statement mentioned above also had a strong impact on all law-enforcement practices in insurance.

In particular, the jurisprudence of the last 5 years and the decisions of the plenum of the Supreme Court taken in 2013 eliminated some protective mechanisms that allowed insurers to avoid payments of the most suspicious cases.

This so-called loyal attitude of the courts toward the policyholders and victims in comparison to the insurers, an increased emphasis of the statement according to which "the insured is the weak party in an insurance contract" (and, therefore, a litigation must be resolved in its favor), have led to some paradoxical decisions - many of which have a rather systemic character than a unique one. A few well-known examples are:

- Prior to the years 2013-14's the policy conditions of the most insurers in the motor hull stated that an insurance payment wouldn't be concluded if a car was stolen together with its keys and documents. The Supreme Court declared this provision null and since then the courts have obliged the insurer to make payments in such cases - and even impose fines and penalties for the delay in claims settling;

- In 2013, the Supreme Court obliged insurers to compensate the claims on the motor hull policies without taking into account the wear and tear. Thus, if as a result of an accident one side of a 20 -years-old car was affected - the insurance company will pay the full installation of the new part. The logical development of this situation would perhaps demand the payment of the full cost of a new car in a total loss situation with the same 20-years-old vehicle...

All these lawsuits (their number across the country rising to tens to thousands per year) have become excellent ground for training a large army of lawyers- intermediaries (usually referred to as motor lawyers) specialized in buying the claimants' rights against the insurance company. Their award is first of all the fines and penalties imposed by the courts on the insurers, guilty (those who are actually found guilty) for the delay of payment or for reduction in the claims amount to the victim.

Moreover, the delay is often provoked by victims themselves (by pushing the deadlines for a claim notification or for not submitting the documents to the company for payment, which are immediately sent to the court). Also, the charge that refers to the cases where the insurance company is reducing the amount of claims paid is caused mainly by flaws in the claims assessment process.

The situation is even worse on loss settlement. According to the MPTL law (one of its first version), it was stated that an independent institute should be created, which will set, among other attributions, the appropriate standards for the claims assessment process after an accident. This mechanism is still not working; as a result, there is no standardized mechanism for the claims assessment and evaluation.

Therefore, where any requested independent expertise of a claim can assess the paid amount by the insurer to be insufficient for fully compensating the damage after an accident - the courts massively decide that the insurer must not only pay the sum, but also pay to the victim a fine of 50% from the difference between the sum already paid and the amount set by the court expertise.

These fines and all sorts of penalties became a breeding ground for the rapid growth of unscrupulous legal intermediaries (which can be called cheaters). They are trying to get information on the occurrence of the accident in every possible way (often colluding with the traffic police officers, who are engaged in the accident recording); afterwards they are paying very quickly the minimum compensation to the victim (and convince them that the insurance company would pay even less). These intermediaries also attempt to convince the victim to transfer the right of claimant against the insurer - and immediately submit documents to the court, which usually gives favoring decisions for them.

This scheme is working very well - insurers become aware of the court decisions (and the fact of loss!) from their bank, when their account is automatically debited in favor of the lawyers intermediaries following the court decision.

Of course, certain steps were taken in order to minimize the damage from such frauds. Pretrial procedure of claims settlement was adopted (courts now accept claims only after a written refusal of the insurance company; therefore it is mandatory first of all to notify the insurer of the claim).

At the same time, a unique claim estimation method after the accidents is being implemented. However, the situation with court litigations is still far from being solved - and therefore the lawyers-mediators and other fraudsters have enough space for their activity.

Unsolved problems

Another serious problem is a high latency of insurance crimes, a poor detection and even their registration.

Fraud insurance is not just there - it grows and reaches extremely dangerous proportions, it is recognized by almost all insurers. However, there is a lack of reliable statistical and analytical data on the insurance fraud (frequency, volume etc.). Since statistics are missing - the scale of the problem at the state level is not clear and it seems that it doesn't exist at all. Therefore, the impression is that the insurers are the ones to blame and they are guilty along law-enforcement bodies (forensics and road services), as well as the courts of law and the insurance supervisory authorities.

Another flaw in the insurers' approach is their unwillingness to protect their interests in the higher law courts. After losing in the first court and paying the claims awarded by the court, insurers rarely go to higher instances to seek cancellation on appeal or cassation of the decisions taken by the first court.

At the same time, police officers do not actively cooperate with insurers and are very reluctant to prosecute an insurance fraud. Even if they start a prosecution - it's not often going to the court and the prosecution finishes with the insurers' guilt.

A similar problem remains also related to the reporting of insurers' activities to the supervision bodies. Recently, the Central Bank began to develop a special reporting form, dedicated to the cases of insurance fraud. It is expected that they will be presented by the insurers on a quarterly basis among other reports to the Central Bank. However, this work is still at the very beginning, whilst the Bank of Russia blames insurers for the lack of reliable statistics on the subject.

Thus, we have a strange situation - there is no reliable source from which to get at least a rough summary data related to insurance fraud in Russia.

Insurance fraud by classes

Different insurance classes are exposed to fraud in varying degrees, and it is shown there in different ways. Here are some of the most striking examples.

Motor insurance

Considering its important share on the market, it obviously became the most vulnerable to fraudulent activities, and the claims are already seriously threatening the economy (or even its existence) of all types of motor insurance.

The high level of fraud has led, for example, to a significant drop in the volume of premiums for voluntary third part liability insurance of car owners (SMTPL - this policy offers an increased limit in comparison to those provided by MTPL - usually RUR 1.5-3 million) - from almost RUR 5 billion in 2012 to just over RUR 3 billion in 2015.


Insurance companies simply ceased to offer this type of insurance, as it is unprofitable due to fraudsters. Thus, a high frequency of fraud on the motor insurance classes inevitably leads to an increase in tariffs.

Personal insurance

Personal insurance is a target for fraudsters in all countries - and Russia is no exception. There are several explications for this:
  • For personal insurance it is very typical to have situations of mismatch between the insurer, the insured and those who might benefit from the policy. Also, there is a very flexible scheme for fixing the sum insured - in many cases the insurance sum is declared by the insured arbitrarily and the insurer has few ways to influence its amount;
  • There is no limit for the period when the insured can make claims notifications on bodily injuries and health;
  • The public character of the personal insurance policy - i.e, the insurance company simply cannot deny to insure a person (even if they know that this person is a fraudulent one) moreover, the insurer cannot charge him with a different tariff - they should be the same for all the insured persons;
  • Insurance contracts can be concluded with several insurance companies at the same time.
Agricultural insurance

The same fraudulent schemes are also present on this insurance line, but in comparison with the motor or personal classes we have a more complex mechanism related to the claims assessment and settlement, as well as with the use of state subsidies for agricultural insurance.

Lawyers-intermediaries are purchasing the claimant rights from the farmers - often fake ones or non-existent insurance cases as those insurance contracts have expired. Also, these claims are in most of the cases addressed to companies that have already left the market - therefore they are passes to the Guarantee Fund of the National Union of Agroinsurers (NUA).

When these cases are going to the law court - the decision often is to deduct the amount of loss claimed directly from the insurers or NUA bank account - in most cases the insurer does not know anything about the court decision. Afterwards, if the insurers go to the appeal court and the superior court decides in favor of the insurance companies and requires to return the received amount granted by the first court (and its value can be measured in tens of millions of rubles) - it turns out that the intermediary company that received the payment no longer exists and there is simply nobody to return it to.

According to the NUA estimations, in some Russian regions up to 15-20% of the claims requests do not come from the farmers but from the lawyers - mediators - thus, the situation is extremely serious.

Some steps and measures

The fight against fraud is carried out for a long time, but it is not yet systemically organized. Prevention measures and counteractions have a local character and a very limited impact on the situation, without changing the trend of the increasing fraud. The long-awaited decision of including the insurance fraud in a separate category in the Criminal Code did not lead to noticeable results.

As a result, the negative impact of fraud on the insured persons who have to pay out of their pocket for the unfair actions of the authorities, as well as for the poor organization and the low quality insurers' activity are not yet understood by the society or the state. A recent round table organized by the All Russian Insurers Association "Frontier-2016» had an important role in settling the needed steps to be taken against insurance fraud. Also, on November 9th, an international event, "Barrier-2016", will be organized in Moscow, which aims to bring into discussion some practical approaches related to fraud.