leaders cognition: minding risks INSURANCE published by q&a with Amanda Blanc, AXA catcher if you can by D.I David Hindmarsh, The Metropolitan Police

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1 leaders autumn 2013 INSURANCE cognition: minding risks published by q&a with Amanda Blanc, AXA catcher if you can by D.I David Hindmarsh, The Metropolitan Police pain in the neck by Rob Cummings, ABI

2 welcome In this issue of INSURANCE leaders we hear from two British Insurance Award winners: Amanda Blanc, CEO of Commercial Lines of AXA, shares her views on professionalism and Dave Hindmarsh D.I. gives a flavour of the 25 million reasons why the efforts of the Metropolitan Police were recognised by the BIA judging panel recently. We also take a look at Lloyd s recent Cognition minding risks report, which examines the psychological influences and subjective decisions faced by underwriters and consider how insurance products are evolving to protect businesses following what has been deemed the biggest cyberattack in history. We also explore how the intellectual capital of the Victorians continues to underpin many transactions in today s insurance market and Rob Cummings, motor insurance policy adviser at the ABI, and a number of other leading industry figures share comment on the implementation of the Jackson reforms. Many thanks to all of our contributors, Ruth Lawrence Partner & Head of Insurance Hill Dickinson LLP The Hill Dickinson Group offers a comprehensive range of legal services from offices in Manchester, Liverpool, London, Chester, Sheffield, Piraeus, Singapore and Monaco. Collectively the firms have more than 1350 people including 175 partners. 2

3 contents q&a with Amanda Blanc consequences: expected and unexpected by Nik Rochez the industry s pain in the neck by Rob Cummings the reform of insurance contract law by Rhys Clift new careless driving fixed penalties by Derek Millard-Smith coming up for air by Alison Moss 12 the art of cyberwar by Jamie Monck-Mason 29 doom and gloom by Ruth Lawrence 17 catcher if you can by D.I David Hindmarsh 32 science of risk prize entries are now being accepted 18 cognition: minding risks by Mario Weick, Tim Hopthrow, Dominic Abrams and Peter Taylor-Gooby 34 view from the market key questions answered by our expert panel

4 We speak to Amanda Blanc, CEO of AXA Commercial Lines and Personal Intermediary. I think as a whole, the industry is responding very positively. Interview by Michelle Hurst Di Pasquale 4

5 q. Who are you and what do you do? Amanda Blanc, CEO of AXA Commercial Lines and Personal Intermediary. q. What do you see as the biggest challenge facing the insurance industry in the next 12 months? Regardless of whether we in insurance think it is fair or not, our reputation as a sector has been dragged down with banking and the other financial services. Consumer confidence in what we do is at an all time low. As a starting point, consumers tend to think we are out to fleece them and you can understand that based on what they see in the media. We ve also had our own issues around PPI and rising motor premiums as a result of our growing compensation culture, so we are not immune to this. We really have a job to do in improving and managing our reputation, but I wonder if some in our industry realise just what a big job that could be. q. How well is the insurance industry responding to the Jackson reforms? Will the reforms have a positive impact upon the claims culture? I think, as a whole, the industry is responding very positively and most insurers are fully contributing through the ABI and individual company representatives to devise the implementation and the detailed process rules. The principle behind it has to be positive as the reforms will bring stakeholder focus to the process and provide opportunities to significantly reduce legal costs. But let s not get too idealistic about this. There are significant financial implications for organisations across the market, so I expect we will see attempts to find compliant ways and this is already happening, to maintain income levels. So I don t think we have seen this fully settle down as we may see a number of changes over time to close emerging loopholes that frustrate the original principles of the reforms q. What is your proudest career achievement to date? Being appointed to my current position was a real high point. But undoubtedly my proudest professional achievement to date was being elected President of the CII. It is a real honour to be permitted to represent the CII at that level and real recognition of your achievements and abilities. One of the real highlights of my tenure was being given the platform to push the professionalism agenda. It is something that means a lot to me personally and is a very important part of how we do business at AXA but to be able to discuss it on a much broader level was very satisfying. q. Why is this professionalism initiative so important to you? It s got to be a starting point in this day and age. It s 2013 for goodness sake! As an industry, we can t keep polishing the veneer and pretend it s OK for us to continue operating in a way that, let s face it, hasn t changed fundamentally since the 1980s. The way remuneration works, the way we interact with customers, the way we deal with each other and the way our internal operations work all has to change. We aren t going to do this overnight we do have to make a start and I am convinced that chartered status, which insists upon businesses and individuals reaching certain standards, is the way forward. Chartered status works on two levels: firstly, the public understand it as a concept and a kite mark, so we are using a benchmark that they understand and can relate to. Secondly, it establishes a starting point for businesses and people wishing to operate in insurance. It s not about creating an exclusive club but pushing people to attain higher standards. q. With whom would you least like to be stuck in a lift with and why? My little girl Rhiannon, aged six. Usually I can find an excuse to escape her constant chattering and moaning but to be trapped in a lift with her doesn t bear thinking about! q. Which mistake have you learned most from in business (either your own or those of others)? There have been many mistakes, both my own and others. But I think for some people the worse moves they make are bad career decisions. Get the wrong move and it can take you years to get out of it or recover from any damage to your reputation. I have seen it from afar plenty of times and certainly made one myself. I once made the decision to move in to consultancy which was a big mistake, as I sorely missed the leadership and accountability of a profit and loss role. But you learn from your mistakes and I have certainly learned that consultancy just doesn t satisfy me as much as running a business does. q. If you hadn t followed a career in insurance, what would you have liked to have done? It would have been far removed from insurance. I would like to think I would have become a professional musician as I played piano, clarinet and sung when I was younger. I always wanted to do this for a living! If you would like to be featured, please contact Michelle Hurst Di Pasquale:

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7 consequences: expected and unexpected Change leads to consequences. The aim of change is to bring about expected consequences. However, with expected consequences comes the possibility of unexpected consequences. by Nik Rochez So it was with the last major set of legal reforms. Indeed, there were significant unexpected consequences with the Woolf reforms, some of which became the catalyst for the Jackson reforms. The question now facing not just the legal profession, and those who are regular users of the judicial system, but society as a whole, is the difficult question alongside the expected consequences: what will the unexpected consequences from the Jackson reforms be? The last significant round of litigation changes started with the introduction of the Courts of Legal Services Act 1990 which introduced a new regime for funding litigation and in particular personal injury litigation. Its purpose was to address what had come to be acknowledged as the defects of the 1949 Legal Aid regime. More radical change came with the Woolf reforms, introduced through the Access to Justice Act Three laudable aims were set out. The first was to contain the soaring legal aid bill, with public funds being directed to causes with the greatest need. The second was to look beyond legal aid and provide to a wider part of the public access to justice to pursue what were considered to be meritorious claims. The third aim was to control the rise of weak claims. Those three aims were met first by a significant reduction of legal aid. The other two aims were met by the introduction of conditional fee arrangements with a possibility of obtaining after the event insurance. The combination of CFAs and ATE insurance had the intended consequence of providing access to justice to all appropriate claims, but at the same time protecting a claimant from the very significant potential exposure that exists under the costs shifting rule. These arrangements enabled claimants to protect themselves against liability for paying the costs of both those who were acting for them and/or the other sides costs in the event of being unsuccessful. Some dozen years on, those laudable intended consequences can now be seen to bring with them very significant unintended consequences. The two most significant unintended consequences have led to a significant change of perceptions: first by the introduction of funding and secondly as >>>

8 continued >>> a result of the behaviour of some of the providers of ATE insurance. The introduction of third party funders, particularly those who require the benefits of ATE insurance to be in place, has significantly altered the checks and balances that had previously been imposed in litigation. A claimant with the benefit of the above no longer faced any downside risk and, in short, had no skin in the game. The funder of low value claims relied upon a combination of the assessment of the claimant s solicitor as to the merits of the claim, together with the availability to play the numbers game. In short, back sufficient cases where the prospects had been assessed as being reasonable and they were all but guaranteed a healthy return on the cohort of cases they had backed. Much the same applied to the ATE market - despite the increasing preponderance of deferring and, in effect, wrapping the premium into the cover. Claimant s solicitors handling such volume litigation were immediately provided with volumes of further cases that, under the previous arrangements, could never have been pursued. Others saw their opportunities in this new world and assisted the new market by seeking out and sourcing the potential claims. Such claims farmers had no interest in the merits of the litigation and their focus was, in effect, on the need to increase the volume of matters taken on and so increase their own return. Unintended consequences 1. The net result of all this, and the first unintended consequence of the Woolf reforms, was in effect to so shift the balance of responsibility within the litigation framework as to create potential conflicts of interest. No longer had the claimant the downside risk that reduced the potential level of responsibility that the solicitor owed to an individual client. At the same time, the solicitors interests were further influenced by the desire to first obtain more of these new instructions, but secondly to pursue as many claims as possible under CFA arrangements which provided significant, usually 100%, mark up on their fees if successful. In theory, the solicitor would have some responsibility to the ATE provider to A rise, perhaps a significant rise, in calls upon professional indemnity insurers only pursue cases considered viable. That was an almost impossible position for solicitors, torn between building a business, discharging their duties appropriately and knowing full well that litigation can never be a matter of certainty with their perception of chance no doubt being significantly influenced by this new order. 2. The second unintended consequence was that the above shifting of perception, and perhaps even responsibility, has led to conflict between solicitor, third party funder and ATE provider. In complex matters with significant funding, the third party funder can and will afford to take a significant interest in the litigation itself. In volume personal injury matters, the third party funder is forced to rely upon the assessment of the solicitor. As explained above, the solicitor in his new world, has a vested interest in building a book of business and undoubtedly in a significant number of cases that would influence the solicitor s assessment of the merits. In short, a solicitor has a vested interest in viewing the potential of any, and indeed all, such litigation through a different lens. Without a doubt, that has led to less meritorious claims being pursued, an increase in failed cases and the resulting conflict with the third party funder. Similar considerations arise with the ATE provider who in volume matters is also forced to rely upon the solicitors assessment. However, in the case of failed cases with an ATE provider, more serious issues have arisen with ATE providers refusing to pay not just individual claims, but whole books of business. The net result of these unintended consequences has been a significant increase over the past several years of circumstances and subsequently claims being presented to solicitors professional indemnity insurers. Aggrieved funders have pressed solicitors for repayment, aggrieved ATE insurers have refused to pay out and solicitors and their notional client have turned to the professional indemnity insurer. 3. The unintended consequence of all that is that litigation firms, particularly claimant litigation firms, which were previously viewed as relatively safe prospects for PI insurers, are now finding it increasingly difficult to obtain cover. If that difficulty persists, then the likelihood is that there will be fewer such firms in the future with a real possibility that one of the central aims of the Woolf reforms, access to justice to those of moderate means, will be undermined. 8

9 Significant reforms For obvious reasons it is difficult to predict the unintended consequences from the civil justice reforms. These reforms are the most significant and most far ranging that the civil justice system has ever introduced. Fundamental changes are being introduced to the funding of litigation, the level of general damages recoverable and, finally, the ability to recover costs if successful. We are only in the foothills of these changes, but already their impact is being felt in the conduct of litigation. Struck out The management of cases by the court has intensified, with judges applying rules with a strictness that has hitherto only singled out what was considered to be the unreasonable judge. Several cases have already been struck out as a result of a failure, often the claimant s solicitors failure, to meet deadlines imposed in the case management process. The view is that these decisions are unlikely to be overturned by any appeal process. The result being that meritorious claims have been lost through the failure of solicitors to meet the new zeal with which case management is to be applied. An intended consequence of this new approach is the laudable aim that litigation proceeds smoothly and swiftly to a conclusion with increased judicial intervention through the case management system. Satellite litigation The now obvious unintended consequence is the likely increase in satellite litigation where the struck out claimant, instructing a new firm of solicitors, seeks to bring a claim against his previous solicitors for their failure. The further result of that is likely to be, at least in the short term, a rise, perhaps a significant rise, in calls upon professional indemnity insurers and the possibility of even fewer firms being willing and able to take on litigation. One of the main drivers in the latest round of reforms relates to both saving costs and reducing the life cycle of claims. It is clearly intended that the introduction of fixed costs in the portal, and on the fast track for most personal injury work, will drive down costs and due to ending, in most cases, the usual battle over costs, it is thought that coupled with the efficiencies in time, the portal will bring claims would be settled quicker. Fixed costs An unintended result of fixed costs, and indeed of having budgets in larger cases, may be that actually defendants feel more empowered to fight claims that previously they may have simply settled for commercial reasons regardless of the merits. This was largely due to a fear of receiving a large costs bill. With cost estimates often not accurate, with hidden extras such as ATE premiums and success fees, often the true level of a bill of costs was difficult to judge and made reserving difficult, nigh impossible at times. With reserves now capable of being generally accurate to within only a few hundred pounds, it is thought that the focus returns to the merits of the case and that more cases may be taken to trial, due to the reduced risk. This may actually lead to an increase in litigation rates and actually cause claims to take longer than hoped to resolve and minimise the expected level of savings. One of the hopes that the banning of referral fees and the drive to see claims conducted more efficiently with quality throughout the process, was that claims farmers This may actually lead to an increase in litigation rates and actually cause claims to take longer than hoped to resolve and minimise the expected level of savings. would be less involved in the claims industry. Looking ahead, it is not an unreasonable prediction that in 2014 the personal injury limit for the small claims track will increase, perhaps up to With no costs attributable to a significant percentage of all litigation there is a danger that, firstly, we will see inflation in terms of the valuation of damages and claims management companies seeking to fill the funding vacuum via the use of damage based agreements. Indeed, on many cases, the use of a DBA in an increased small claims track would see claimants representatives earn more money than if the claim were brought through the portal. Nik Rochez Partner, Hill Dickinson LLP +44 (0)

10 whiplash the industry s pain in the neck The UK has the unenviable title of the whiplash capital of Europe. With four out of five low value bodily injury claims insurers receive for whiplash, what action can we take to tackle this epidemic? by Rob Cummings With whiplash claims costing the industry well over 2 billion a year, and insurers receiving a whiplash claim, on average, every minute of every day, there is little surprise that the UK has the unfortunate title of whiplash capital of Europe. The UK is in the middle of a whiplash epidemic, with RTA personal injury claims increasing by 60% in the past five years, while the number of reported RTA falling by 20% in a similar period. Aggressive marketing by claims management companies (CMCs) and referral fees paid by claimant solicitors (the latter was banned from 1 April 2013), have led to an increasing number of personal injury claims in general, and whiplash claims specifically. The graph (page 11) demonstrates that approximately four out five low value bodily injury claims insurers receive are for whiplash. This compares with an EU average of 48%. Given the significant impact whiplash claims are having on the cost of both personal and commercial motor insurance, there is now consensus that action is required to tackle the UK s whiplash epidemic. This is why the Prime Minister held an insurance summit at Downing Street last year to look at the issue of the cost of motor insurance. Following the summit, the Government made a public commitment to work with the industry to tackle the whiplash epidemic and in return the industry made a commitment to pass on savings from legal changes to customers. This commitment resulted in the Ministry of Justice consulting on increasing the small claims track (SCT) limit from 1000 to 5000 and reforming the medico-legal reporting system. The insurance industry fully supports increasing the SCT. It has not been raised since 1991, when it was set at Since then, in addition to general claims inflation, there has been a substantial rise in low-value, straight forward whiplash claims. Now, even the most minor whiplash injuries have fallen out of the SCT and are dealt with in the fast track. With the average whiplash claim costing around 2000, less than 9% of personal injury claims came in under the current SCT limit in

11 The SCT is a user-friendly, simple route for settling straight forward low-value claims. Claimant lawyers have argued that increasing the SCT will impede access to justice. This is little more than the voice of self-interest. Increasing the SCT limit would not restrict access to justice. The small claims court is familiar with situations where there is potential for inequality of arms, and can guide and assist the claimant during the claims process. The insurance industry can assist self-represented claimants in understanding their rights under any new system. There are already a number of guides available from the Civil Justice Council, Bar Council, and the ABI s third party assistance guide. The ABI guide explains how the defendant s insurer or appointed claims handler can assist a self-represented claimant. Claimant lawyers are concerned that claimants will not have the expertise to value their claim and that insurers will under settle claims but this is not backed by the available evidence. Research commissioned by the ABI has found little difference between the average compensation received by claimants with or without representation. Claims with legal representation also took substantially longer to settle. The FSA carried out a review in 2010 and found no evidence of under settlement. Any potential concerns about the under settlement of a claim would be addressed if Lord Justice Jackson s recommendations on predictable damages were to be implemented alongside an increase in the SCT. There is also software available that allows damages to be accurately assessed. A transparent and independently controlled and regulated system of predictable damages should address the problem of self-represented claimants having to assess their own claim for general damages. An increase in the SCT should go hand in hand with improvements to the medico-reporting system. The current system does not allow for sufficient independence or transparency in the way in which medical reports are obtained, which leads to concerns over the reports that are produced. The proposals to introduce greater independence and transparency into the system are welcomed by the industry and should help to address some of these concerns. Increasing the SCT limit and reforming the medico-legal reporting system will help industry to combat the rising tide of frivolous whiplash claims, producing costs savings which will be passed onto consumers and businesses in the form of lower premiums. Rob Cummings is motor insurance policy adviser at the ABI

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13 cyberwar by Jamie Monck-Mason Cyber criminals launch more than 7000 attacks each day. We take a look at how insurance products are evolving to protect businesses. The cyber arms race is hotting up. The headline-grabbing distributed denial of service (DDoS) attack against Spamhaus, a spam-fighting charity, earlier this year, was described as the biggest cyber attack in history. The volume and scale of recent attacks provide a stark reminder that computer systems and electronic data stored on those systems remain vulnerable to disruption, unauthorised access and misuse. Hill Dickinson partner Jamie Monck-Mason considers the increasing threat DDoS attacks pose to businesses that are increasingly reliant on their IT infrastructure and how insurance products are evolving to protect businesses from these emerging risks. What is a DDoS attack? Comment: EJ Hilbert, EMEA cyber head of the investigations firm, Kroll, says: We have seen a dramatic and significant rise in the number of DDoS attacks by cybercriminals worldwide, knocking companies offline, severing client communication and halting commercial transactions. DDoS attacks are used to harm companies and cost millions in damage and lost revenue. DDoS attacks consist of floods of nuisance traffic, which slows or crashes the intended victim s website, leaving it offline and thereby rendering it unable to complete routine tasks such as sending s, processing orders or completing bank transactions. DDoS attacks are by no means a new phenomenon. According to Prolexic, the world s leading DDoS mitigation provider, cyber criminals now launch more than 7000 DDoS attacks each day around the world. They also report that DDoS attacks have increased by over 20% in the last year. What is most concerning, however, is the increase in the scale of those attacks. In the latter part of 2012, the average bandwidth attack was 5.9gbps - as of 2013, the average bandwidth attack totalled 48.25gbps, a 718% increase. This trend indicates that cybercriminals are increasingly looking to utilise DDoS attack to cause maximum destruction. >>>

14 >>> What are the implications of a DDoS attack? The most obvious threat arising from a DDoS attack is website downtime - resulting in lost profit. The potential financial loss stemming from being offline can include: brand reputation and customer perception an organisation s reputation for stability and technical expertise can suffer from a DDoS attack, causing potential brand damage while granting a competitive advantage to rivals. DDoS attacks reported in the press are likely to compromise customer confidence; and call centres when network infrastructure is targeted, DDoS attacks can bring down and customer service call centres resulting in a customer communication blackout; stock price and investor confidence organisations hit by DDoS attacks may see stock prices temporarily fall and/or experience volatile fluctuations due to investor concerns; and search engine rankings an outage of any length of time may jeopardise a website s search engine ranking. Search engine providers do not want to direct users to sites that are down or performing slowly. The scope of DDoS attacks is also evolving. Cyber extortion, for example, is thriving - the criminal demands payment of a ransom otherwise they will continue to knock your computer system offline. Legitimate businesses may even turn to cyber criminals to assist with industrial espionage against its rivals in order to take down its site (a favourite tactic with the online gaming industry). Rivals can also take down a competitor s website during critical periods, for example in the case of retailers, during the sales. Protecting against a DDoS attack Firewalls and Intrusion and Detection Protection Systems (IDPS) While firewalls and IDPSs are essential in the fight against unauthorised access to computer systems, neither device is designed to deal with modern-day DDoS attacks. IDPSs, for example, may be able to detect attacks to the computer network, but the attacks can still easily overwhelm servers and cause them to crash. DDoS mitigation software This is a good step provided there are trained experts on site who can configure the software in response to shifting attack methods. The difficulty is that cyber attacks are constantly evolving. As soon as defences harden, so the cybercriminals rise to the challenge and overcome them. The cloud For many organisations, the cloud may seem like the perfect answer to protecting its own computer systems. Cloud-based defences are capable Comment: Tom Allen, head of technology liability at Aspen Insurance UK Limited, says: Such policies are designed to fill the gaps in cover left by traditional policies. There does, however, remain a great deal of confusion amongst businesses as to what risks such a policy is actually intended to cover. It is accepted that computer systems are vulnerable to attacks of one form or another, which can result in significant financial loss. The challenge for the insurance industry is to offer policies that are both clear in terms of the cover they provide and address the risks actually faced by businesses operating in a world increasingly reliant on technology for day to day activities, as those risks continue to evolve. 14

15 of defusing DDoS attacks before they even reach an organisation s own network. However, the terms of business with cloud service providers (CSPs) should be reviewed carefully. More often than not, CSPs disclaim any liability to their customers arising out of unauthorised access to their data or following interrupted access to data (e.g. following a DDoS attack) including liability for any loss of business, profit or data. The role of insurance It is abundantly clear that network security alone, however sophisticated it may be, cannot entirely address the various cyber threats, including DDoS attacks. Neither are CSPs going to readily absorb their customers liabilities following a network security incident. Insurance, therefore, can play a critical role as part of an organisation s risk management strategy. It should not, however, be taken for granted that existing insurance cover will cover cyber risks. Cyber policies have been specifically developed to cover third party liabilities arising from denial of third party access to the insured s computer networks together with various other security threats to networks. Cyber policies may also cover first party losses including those arising from the following: damage to the insured s own computer hardware or data; PR costs following a DDoS attack; business interruption following, amongst other threats, a DDoS attack; and cyber extortion, including payments made to a cyber criminal to not carry out a threatened attack or to withdraw an attack. Conclusion It is critical in light of the increased threat of attack to computer systems that companies carefully evaluate cover for cyber risks under their existing suite of insurance polices in order to assess what level of cover they have for computer systems risks. No organisation can render itself completely immune from cyber attacks. However, a robust risk management strategy aimed at minimising the potential for cyber threats, together with an insurance program that is sufficiently comprehensive to cover cyber risks in the event the worst does happen, is now increasingly essential for any business. Jamie Monck-Mason Partner Hill Dickinson LLP +44 (0)

16 catcher if you can by D.I. David Hindmarsh The incident investigation crime board was established three years ago. Its goal? To respond to the threat of organised criminal gangs and their links to crash for cash. The teams of the incident investigation crime board were established about three years ago in response to the growing threat to road users in London. This threat manifested itself in the form of organised criminal gangs (OCG), often with links to other serious forms of criminality, which induce collisions to commit insurance fraud, commonly referred to as crash for cash. The team, dubbed Operation Catcher, has seen a series of staff cuts due to restructuring of policing budgets and currently consists of a detective sergeant and six detective constables both from traffic and CID backgrounds. Their main objective is to reduce the total of killed and seriously injured on the London road network and is divided into two strategies: the first is our disruption/ prosecution strategy, achieved by instigating intelligence-led, proactive and reactive operations against the organised criminal gangs operating within London. The second one is our education strategy which is addressed by Operation Catcher involvement with the media and delivering presentations on crash for cash. Fraudulent insurance claims uncovered by insurers have topped 1.1 billion a year as the industry clamps down on insurance cheats Source: ABI The team work closely with many stakeholders, including Hill Dickinson LLP, in order to identify those persons committing this type of fraud. Since the team s inception, tactics have constantly developed, with the initial focus being upon the gang members who are inducing the collisions, to recent operations focusing upon the corrupt enablers, such as claims management companies/engineers/ solicitors and medical professionals. 16

17 Upon receiving a referral of fraud, Operation Catcher seeks to develop the information identifying the key subjects who will become the focus of attention... The subjects will have full intelligence dockets raised utilising police and external databases. The tactics open to police are vast and varied, by way of some examples the team have employed the services of the police helicopter, surveillance teams and also more covert methods, which can be quite intrusive and resource intensive. A typical operation from inception to charge will take around months, so no quick results, but the benefits outweigh this extended time as the majority of suspects plead guilty, negating the need for any lengthy or expensive trials. In the time that the team has been formed, only three contested trials have occurred. However, all have eventually resulted in convictions and the team have executed over 50 operations with over 300 arrests - this is estimated at around 25 million in fraud savings. OPERATION FRAGOR This investigation centred on the corrupt activities of a North London Accident management company. It was identified that the main affected were three leading insurers and a major supermarket chain. The team worked closely with the IFB and the insurers, gaining valuable intelligence while being supplied by one of the insurers in the form of a laptop on loan in order to set up covert monitoring points. The investigation resulted in a number of search warrants being executed, including one on the accident management company. Also present on the raids were representatives from the IFB and MOJ. The final result was the closure of an accident management company, three custodial convictions, and a saving to the industry of approx 12.4 million. OPERATION VARNA The team worked with a leading insurer who brought to their attention an induced collision which had occurred just outside of London - but featured the third party as residing within London. The customers on this operation were three leading insurers. The investigation identified an AMC based in South Yorkshire and this was prevented from trading as a result of the team executing a search warrant. The insurers worked with the team and identified a number of collisions throughout London and the Home Counties which were fraudulent. The result of the investigation was the permanent closure of the AMC, and four convictions, a saving to the insurance industry of around 100,000.

18 Risk identification is one of the keys to successful risk management, but we are not equally aware of all risks. Because the brain filters information, people make decisions based on a subset of the available evidence. This fundamental principle of cognition can cause problems in a context, such as underwriting, where subjective judgments are important. In their recent report, Cognitionminding risks, Lloyd s discuss how human factors can affect risk perception. It draws on psychology and related disciplines to highlight potential biases in risk perception. cognition: minding risks a Lloyd s report by Mario Weick, Tim Hopthrow, Dominic Abrams and Peter Taylor-Gooby The report is a follow-up to Lloyd s: Behaviour: Bear, Bull or Lemming, which provides an overview of behavioural theory and discusses the benefits to insurance professionals of being aware of behavioural biases. Expectations can hinder or facilitate the identification of risks Expectations can lead people to overlook events that are not part of the normal routine. Accurate expectations rely on prompt and accurate feedback: if feedback is inaccurate, delayed or diffused, faulty mental models can develop. People s expectations are strongly influenced by personal experience and current events: frequent exposure to risks may also make it easier to lose sight of infrequent losses. Unexpected losses can arise from interrelated risks, 18

19 from the way the public responds to a disaster or hazard, and from events that are not captured in risk models. Risk perception is context dependent People cannot attend to all risks they have to prioritise some over others. Risk priorities are culturally transmitted. Re/insurers may focus more on risks that are easier to evaluate, which can draw attention away from those that are more difficult to assess. This is because people prefer to focus on wellstructured problems and veer away from more difficult ones. People are also inclined to take greater risks in environments that encourage ambition. The spatial concentration of expertise in the London market has many benefits, but it also provides a context that can lead to biases arising from social interactions. Risks may be overlooked when many people rely on the perceptions and actions of a few experts and/or align themselves with commonly held beliefs. Power affects risk perception Organisations are characterised by hierarchies, often beyond the formal roles assigned to individuals. People in power tend to be more confident and this can lead them to minimise risks. Power can also reduce willingness to adopt different viewpoints and enhance the tendency to seek information that reinforces already held views, which may cause problems in an underwriting context. Incentives which encourage a low risk appetite can counteract these behaviours and make power holders more averse to risks. Risk perceptions vary over different timescales People often under-emphasise the history of previous similar events, which can increase forecasting error. Short-term incentives can reduce foresight and risks which are likely to happen in the long-term future can be more easily overlooked. People tend to be more optimistic about future events or activities, but as these events draw nearer their attention turns to potential drawbacks or losses. Sometimes events or activities that were once desirable are no longer appealing when viewed from a closer perspective. Finally, losses associated with concrete events are often more compelling than those associated with more abstract events. Organisational practices can increase risk awareness Analyses of organisations have highlighted factors which can increase risk awareness and improve risk management outcomes. These include fostering mindfulness and analytic thinking among staff, embracing diversity, giving people a licence to think and the ability to make decisions. Organisational practices should also encourage people to use alternative ways of analysing problems. >>>

20 >>> Risk experts need to be aware of how uncertainty affects their decision making Signs of potential hazards are not always clear-cut and can be hard to interpret. A low risk appetite can increase false alarms and a high risk appetite increases misses. Neither attitude helps to identify threats when the evidence is uncertain and re/insurers need to keep up with the pace of developments. With uncertainty people tend to rationalise their decisions, reducing their awareness of their own bias. Human factors are an important part of managing risks Re/insurers can benefit from research conducted in the social sciences and humanities. There is a need for more front line research and interaction between academia and the industry. There are limitations to the identification of risks and unknowns need to be acknowledged and managed carefully. Questions that re/insurers can ask to counteract some of the issues that arise from the way expectations affect risk perceptions Habitual thinking Missing feedback Desensitisation Exploration bias Media Do established routines miss out on important pieces of information? Do processes lead to habits that prevent people from asking important questions? Have the parameters changed? Do routines no longer cover all angles? Is there enough information to verify your assumptions? How robust are your models? What kind of information would make them more robust? Can you use auxiliary variables as substitutes for missing information? How does your company feed information back to you? How timely and relevant is the feedback? Have some risks lost their bite? Have some of your colleagues become so familiar with certain risks that they have been caught out? Could you be in the same situation one day? If so, how can you prevent that from happening? Are some events forgotten? Is everyone talking about the same thing, with recent or current events consuming all the attention? If you could go back or forwards a few months in time how would that affect how much attention you devote to different risks? The media is selective. Does the media influence your underwriting decisions? Media coverage can bias risk assessments. Is there relevant information that has not received media attention? How does the public respond to the media coverage? Are there any risks associated with the public s response? What if you are underwriting a risk that suddenly receives a lot of media attention? Could this increase the number of claims and exacerbate the losses? Amplification Some disasters can cause costly shockwaves. Do your models account for the way people may respond to a disaster or accident? People s actions can create dependencies between seemingly unrelated risks. Is it possible, or indeed worthwhile, to account for those? Risk dependencies Dependencies can make some risks unaffordable. Do you have guidelines whether or not your premiums should account for dependencies? Do you know how dependencies affect your solvency capital requirement? Is it possible that a line of business is lucrative considered alone, but not in your portfolio? 20

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