This post discusses insurance fraud, insurance fraud risk, and insurance fraud risk management. In this post, you will understand the meaning of fraud, insurance fraud and the management of insurance fraud risks.

WHAT IS A FRAUD? 

Fraud poses a severe risk to insurers and policyholders. Fraud is an act or omission intended to gain the dishonest or unlawful advantage of the party committing fraud or other related parties. In case of insurance fraud usually involves an exaggeration of an otherwise legitimate claim, premeditated fabrication of a claim, or fraudulent misrepresentation of material information. Fraudulent activities committed within or against an insurer can adversely affect the company’s financial soundness and reputation. 

Insurance frauds indirectly impact policyholders by increasing the premium payable due to increased claims handling costs and payment of fictitious claims by insurers. Insurance regulators should take a severe view of fraudulent activities and ensure that all insurers undertake sound risk management practices to effectively deter, prevent, detect, report and remedy insurance fraud.

WHY DO PEOPLE COMMIT FRAUD? 

There is no single reason for committing fraud, but there are several reasons people commit fraud. Reasons why people commit fraud, include: 

1) The motivation of potential offenders.

2) Opportunities to commit a crime. 

3) The technical ability of the fraudster. 

4) Actual consequences of discovery fraud activities. 

5) Expected and actual risk of discovery after the fraud.

6) Conditions under which people can rationalise their prospective crimes away.

7) Expectations of consequences of discovery (Including non-penal on sequences such as job loss and family stigma, proceeds of crime confiscation, and traditional criminal sanctions).

FRAUD TRIANGLE

A typical model that brings together various aspects of fraud is the Fraud Triangle. The fraud triangle model advocates that fraud results from financial pressure, opportunity, and rationalisation. 

1. OPPORTUNITY: Opportunity is a significant factor influencing people to commit fraud. 

2. FINANCIAL PRESSURE: Financial pressure is another factor influencing people to commit fraud. 

3. RATIONALISATION: Rationalisation is another factor influencing people to commit fraud. People who commit fraud tend to present rationales for their fraudulent acts.

INSURANCE FRAUD

Insurance is a contract between an insurer and an insured whereby the insurer undertakes to indemnify or compensate the insured (in exchange for premium payment) in the event of losses or damages insured. Insurance fraud exists when individuals attempt to profit by failing to comply with the terms of the insurance agreement. Besides tax fraud, insurance fraud is the most practised fraud in the world. By its very nature, the insurance business is susceptible to fraud; but insurance fraud can be mitigated through sound insurance fraud risk management.

IMPACTS OF FRAUD ON THE INSURANCE BUSINESS

The following are the potential impacts of fraud on the insurance business:

1) Cancellation of insurance policies.

2) Reduction of premium income.

3) Poor claims settlement results in not settling claims promptly.

4) Insolvency and winding up of insurance or reinsurance companies.

5) The poor rating of insurance companies by independent third parties. 

6) Poor corporate governance. 

7) Loss of business confidence and customer patronage. 

8) Negative impact on staff morale. 

9) Weak organisational risk culture.

PROFILES OF FRAUDSTERS

There are two general profiles of fraudsters: 

I. Opportunity, and

2. Professional fraudsters.

1. OPPORTUNITY FRAUDSTER

An opportunity fraudster is usually a law-abiding person who sees an opportunity to commit fraud. For example, this type of fraudster might imagine that insurers have limitless funds and might find it acceptable to make up claims to recover the costs of premiums paid in previous years when there have been no claims.

2. PROFESSIONAL FRAUDSTER

A professional fraudster earns or complements their income by committing fraud. They may continue committing fraud until detected and may target several insurers.

CLASSIFICATION OF INSURANCE FRAUD

Fraud comes in different shapes and sizes. It may be a simple act involving one person or a complex operation involving many people from within and outside the insurance company. 

Insurance frauds may be categorised into three based on the person or entity who perpetrates a fraud: 

1. Policyholder claims fraud, 

2. Intermediary fraud, and 

3. Insurance companies’ frauds.

1. POLICYHOLDERS CLAIM FRAUD: This includes frauds perpetrated by insurance policyholders, wholly or in collaboration with third parties, against insurance companies.

2. INTERMEDIARIES FRAUD: This includes fraud perpetrated by intermediaries against insurers, policyholders, customers, and beneficiaries. 

3. INSURANCE COMPANIES’ FRAUD: Illegitimate insurance companies and dishonest insurance agents can defraud consumers by collecting premiums for bogus policies without the intention or ability to pay claims. These “companies” may offer policies at costs significantly lower than the traditional market price to attract consumers trying to save money. In many cases, a fake insurance company will provide consumers with documents that look real. In other instances, these policies may be represented by legitimate insurance agents whom fraudulent companies have misled.

Insurance fraud can also be classified as 

1. Hard, and 

2. Soft frauds.

1. HARD FRAUD: occurs when a policyholder deliberately destroys property to collect on the insurance policy.  

2. SOFT FRAUD: which is more common, occurs when a policyholder exaggerates an otherwise legitimate claim or intentionally omits or lies about the information on an application to obtain a lower premium. Soft fraud is often considered a crime of opportunity.

TYPES OF INSURANCE FRAUD

Insurance fraudsters have found many ways to take advantage of people. Insurance fraud can occur by any party involved during any stage of the insurance transaction. Proposers, policyholders, third-party claimants, professionals who provide services to claimants, insurance brokers or agents – even companies – may attempt to commit some insurance fraud. There are several types of insurance fraud.

Here are the eight most common forms of insurance fraud:

1. Insurance application (proposer) fraud

2. Claims fraud, 

3. Fake death fraud, 

4. False claims fraud, 

5. Inflated claims, 

6. Forgery and identity theft frauds, 

7. False police reports, and 

8. Insurance company fraud.

INSURANCE FRAUD RISK MANAGEMENT PROCESS

Insurers should assess their business activities and internal processes for any vulnerability to fraud and determine the consequential impact of any potential fraud. The insurance fraud risk management process consists of three (3) stages: 

1. Insurance fraud risk identification.

2. Insurance fraud risk control and mitigation.

3. Insurance fraud risk monitoring and review.

PITFALLS IN INSURANCE FRAUD RISK MANAGEMENT

Insurers should regularly improve their operations (including underwriting and claims handling processes) to enhance their competitiveness and fraud management capabilities. 

Pitfalls in the insurance fraud risk management framework may be classified into five broad categories: 

1. Not in the focus of top management.

2. Limited importance of fraud in operational claims processing.

3. Insufficient specialisation.

4. Usage of obsolete or inadequate Information Technology systems.

5. Obsoleted investigation methods.

REDUCTION OF INSURANCE FRAUD BY INSURERS

Insurers can reduce fraud mainly by improving their fraud management. Generally, the market insurers association assist in reducing fraud risks in 3 significant ways: 

1. Optimise the fraud detection process,

2. Introduction of a triage function; and

3. Establishment of extended investigation methods.

FEATURES OF SUCCESSFUL INSURANCE FRAUD RISK MANAGEMENT

Insurers (including insurance and reinsurance companies) should enhance the quality of their insurance fraud risk management. 

It is beneficial to consider these two critical questions: 

1. How do I know if an insurance company has sound insurance fraud risk management?

2. What is the evidence of successful insurance fraud risk management?

These questions can be used to ascertain whether an insurance company has successful insurance fraud risk management. You should brainstorm on those questions personally.

ELEMENTS OF SOUND INSURANCE FRAUD RISK MANAGEMENT

Successful insurance fraud risk management should possess some features. Here are seven elements of successful insurance fraud management. 

1. Fraud management should be the top management agenda.

2. Clearly defined insurance fraud management policy.

3. Develop processes, Key Performance Indicators (KPIs) and roles rather than making significant information technology investments immediately. 

4. Initial pilot testing using a parallel insurance fraud management system.

5. Invest in skills/specialisation and in-house fraud specialists.

6. Pursue continuous improvement.

7. Optimise beyond the claim department or unit.

See the full video on Insurance Claims: https://youtu.be/mV8Hm5YaZNw