Lloyd's takes a fresh approach to crime insurance

Record losses
Employee theft is on the rise, according to the most recent Marquet Report on Embezzlement. The study found that embezzlement cost US companies some $473m in 2010, up more than 13% on 2009.

There is no question that crime losses increase during economic downturns, says Stephen Burnhope of broker AJ Gallagher in London. “Financial pressures often cause corners to be cut, rules to be bent and temptations to prevail. Also, when deals go wrong, or loans go bad, fraudulent behaviour will often become apparent that might otherwise not have come out. All in all, that means we are experiencing riskier times.”

Who can you trust?
The average employee theft is just under $1m, according to Marquet. The largest theft in 2010 was the $42.6m embezzlement perpetrated by 58 year old Melissa King, who misappropriated union funds over a seven year period to fund her lavish life style.

According to Marquet, women are more likely to be major embezzlers than men, although men stole significantly more than women. The report also found that fraudsters, like King were, mainly motivated by greed.

Typically an employee would steal, for example to cover gambling debts or support a lavish life style. They may start by stealing a little, but it mushrooms from there, says Bill Jennings, an underwriter at Beazley.

Financial services tend to be the main victims of commercial crime and fidelity, although the armoured car and casino sectors are also big buyers of insurance, according to Jennings. Not for profit and charitable organisations are also vulnerable to crime and fidelity losses because they often lack the internal controls and are seen as fertile ground to fraudsters, he says.

“Fraud and employee fidelity is a bigger problem than most people realise. There is an element of embarrassment that results in many companies often sweeping employee crime under the rug.”

Old habits die hard
Employee fraud has remained relatively unchanged over the years, says Jennings. Over two thirds of commercial crime is from employees in financing or book keeping. Forging paper cheques is still one of the biggest sources of embezzlement for banks, he adds.

Even multi million dollar frauds like the Ponzi scheme perpetrated by Bernard Madoff at the height of the global financial crisis are not that far removed from the world of a hundred years ago, says Jennings. Pyramid schemes like that of Madoff go back centuries - Charles Ponzi, who gave his name to such schemes in the early 1900s, promised clients a 50% profit within 45 days, or 100% profit within 90 days.

Lone operators
While the image of organised criminal gangs targeting banks and companies for sophisticated multi-million dollar frauds is exciting, there is actually little evidence of this in practice. “Most frauds are perpetrated by individuals acting alone, although the largest multi-million dollar frauds typically include some collusion with a third party,” says Jennings.

One area that has changed since the early 1900s is the use of technology by banks and financial institutions, says Jennings.

“Historically, there has always been a cat and mouse game between embezzlers and those trying to catch them,” he says. “Technology is a double-edged sword: while the white hats have developed some pretty sophisticated software to detect the tell-tale patterns of fraud, the black hats have raised their level of technical sophistication to increase the speed and magnitude of their attacks.”

Beazley extends its offering
US insurers have been offering restrictive cover since the savings and loans crisis of the 1980s. “Some insurers have thrown out the baby with the bath water – applying tighter and more specific definitions of dishonesty and increased retentions,” he says. “My concern is that if we tighten restrictions too far, companies will question why they should buy the cover,” says Jennings.

Beazley launched a commercial crime and fidelity offering earlier in 2011, recruiting Bill Jennings to head the team.

“If you know what you are doing it is a good time to get into the commercial crime and fidelity insurance market,” says Jennings, who has over forty years of experience in the business. “There are solid rocks in the stream that make this a good time for Beazley to get into this niche.”

Fresh approach
Beazley is offering a fresh approach says, Jennings. “We’re setting up the foundations of the business, but once they are in place we will bring a new concept to crime and fidelity insurance in the US.”

For example standard commercial crime and fidelity policies are largely unchanged since the 1980s and 1990s, and so need up dating to account for computer fraud. “We will be looking at cyber liability issues and how they overlap with employee dishonesty and develop a holistic solution.”

Financial crime is a complex area that resists commoditization and standardisation, says Burnhope. “There is an inherent ‘devil in the detail’ compared to many other lines of insurance. As a result, expertise is at a premium,” he says.

“The subject knowledge, experience and ability to understand the client that Bill Jennings brings to the table are invaluable qualities in this field and his contribution will be widely welcomed by brokers and clients.”

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