Ignoring the threat from within: Simon Heptinstall finds that surprisingly few companies insure against internal theft

BUSINESSES are facing huge increases in the cost of insuring themselves against the soaring risk of fraud by their own employees.

Premium increases of up to 100 per cent are likely following a large rise in the number of claims on 'fidelity insurance' policies that cover against internal theft.

The Guarantee Society, the fidelity insurance market leader, says claims are up 50 per cent on last year. With premium income static across the market, or even falling in some cases, big price increases are inevitable, according to Simon Carman, assistant manager.

Tim Wilmshurst, commercial property insurance manager at Guardian Royal Exchange, said: 'The loss experience is poor with one or two very large claims indeed so premiums face big increases.'

At the same time, leading insurers are puzzled over the low sales of fidelity insurance at a time when employee fraud is widespread.

Internal thefts cost UK businesses an estimated pounds 14m a day, more than robberies or arson. But the bulk of this is uninsured loss. Most companies will automatically insure against fire and burglary but not against internal fraud. Insurers do not understand why British bosses allow their faith in employees to cost them pounds 5bn a year.

'Considering the risk to companies, it should be our biggest class of business,' one insurance manager said. 'We've made efforts to market fidelity insurance with our brokers, but people just won't buy it.'

The longest-standing fidelity insurance specialist is The Guarantee Society, a subsidiary of General Accident. According to Don Grant, the society's manager, the average cost of a fidelity claim is up 50 per cent on a year ago, the number of claims is rising, and more and more claims are exceeding pounds 250,000. One claim of more than pounds 1m has just been settled, part of a pounds 4m internal corporate fraud in which some of the loss is still being discovered. Several multi-million- pound claims are still outstanding.

The Association of British Insurers says 'all types of claims involving dishonesty are on the up and up'. General Accident estimates one in three firms have been the victim of a fraud costing at least pounds 50,000 in the past three years. But only one in seven thinks it worth insuring against. Around a quarter of British companies could have suffered a serious loss from fraud and been forced to write off the loss without any recourse to insurance.

Michael Levi, Professor of Criminology at Cardiff University, agrees with the estimates of the level of internal company fraud, but warns of marketing problems.

'People perceive crime as coming from without rather than within because it makes them feel uncomfortable,' he said.

His research matches the figures. Total UK fidelity insurance premium income, worth some tens of millions a year, has probably fallen over the past two years, according to The Guarantee Society.

Clients were being wooed by recession-hit insurers wielding premium reductions but the number of clients had refused to budge. What did change was the explosion in claims. So now premiums 'should harden dramatically', Mr Carman said.

Some large companies are covered for pounds 50m worth of losses, while a financial institution may be covered for double that. Excesses of pounds 1m are evidence of some companies' willingness to write off internal fraud to keep premiums low.

A more common policy might be a pounds 10m cover with an excess of pounds 25,000, saving the company around pounds 4,000 on an pounds 80,000 premium. At the other end of the scale, a British Legion club with only one employee, the bar steward, might request pounds 1,000 cover with no excess at all, just to guard against till fiddles or stray petty cash. In that case, the minimum premium would be around pounds 75.

A policy normally has accounting controls written in, like taking up written references on new employees, needing two signatures on cheques over pounds 1,000, and using computer passwords properly. But fidelity insurers do not insist on clients calling in the police.

A report for the Home Office by the accountants Arthur Young found almost half the main companies in Britain admitted being victims of at least one fraud worth more than pounds 50,000, but most (62 per cent) did not tell the police because of fears of bad publicity. In the survey, three-quarters of frauds were committed by employees. Of these, managers (29 per cent) were the most likely culprits, and directors and partners were guilty in one case in 10. Accounts staff (19 per cent), computer operators (3 per cent), sales and shop staff (13 per cent) and distributors and drivers (7 per cent) were other likely thieves.

The commonest category was cheque and credit card fraud (24 per cent), followed by expenses embezzlement (19 per cent).