The Australian general insurance industry should develop a set of best practice standards for external investigators whom it hires to detect and avoid paying out fraudulent claims, says the sector's independent monitor.

The Code Governance Committee, says in a new report that when insurers outsourced claims-related functions to "service suppliers" such as investigators, compliance with the Code of Practice was "unpredictable" and the degree of oversight they exercised in some cases was "inadequate", reported the Sydney Morning Herald.

While there is a need to stamp out fraud, which Australian insurers say costs them A$2 billion (US$1.5 billion) a year, consumer advocates say the lack of rules for investigators has seen them bully, threaten and intimidate claimants.

The Code Governance Committee chairperson Ms Lynelle Briggs said: "As well, there is not enough guidance provided to external Investigators when interviewing consumers.

"We also found that some respondents have authorised [investigators] to handle complaints when [insurance companies] are required to perform this function [and] some respondents' contracts with [investigators] do not align with the code's requirements."

The Committee has made 30 recommendations, including that interview questions be "relevant, fair and transparent", that interviews not exceed two hours, that investigators assess whether claimants have special needs and provide additional support such as an interpreter, and that guidelines be established for interviewing minors, such as setting an age limit.