It's really quite simple. Before the damage, that car was an object worth x pounds. The repair would cost y pounds.
After the damage occured, the car is now worth x-y pounds.
Obviously second hand car values aren't as black and white as this, but let's take this example:
There are two cars, both identical in every single way - age, mileage, colour, specification etc. One is in absolutely pristine condition in every way possible, and the other one is every bit as good bar one small scuff on the bumper. The only difference between those two cars is that small amount of damage, so it stands to reason that the one with the damage is worth less than the perfect one by an amount equal to the cost of repairing the damage.
So it's not fraud by taking the the money equivalent to the repair cost and not having it repaired. Not in the slightest. The car has been devalued as a result, and that money compensates the owner of the car for their loss.
Hardly rocket science, is it?