Insurance Fraud

How to reduce Insurance Frauds

Group 6 Unity

What is Insurance Fraud

Definition

Insurance fraud is any act committed with the intent to obtain a fraudulent outcome from an insurance process. 

Types of Insurance Frauds

Hard fraud vs Soft fraud

Hard fraud occurs when someone deliberately plans or invents a loss, such as a collision, auto theft, or fire that is covered by their insurance policy in order to receive payment for damages.

Soft fraud, which is far more common than hard fraud, is sometimes also referred to as opportunistic fraud. This type of fraud consists of policyholders exaggerating otherwise legitimate claims. Soft fraud can also occur when, while obtaining a new insurance policy, an individual misreports previous or existing conditions in order to obtain a lower premium on their insurance policy.

Fraud by false representation

Where a person makes any representation as to fact or law which they know to be untrue or misleading.

Fraud by failing to disclose information

Where a person fails to disclose any information to a third party when they are under a legal duty to disclose such information.

Fraud by abuse of position

Where a person occupies a position where they are expected to safeguard the financial interests of another person, and abuses that position; this includes cases where the abuse consisted of an omission rather than an overt act.

Policy holder and claims fraud

Fraud against insurer by policyholder and/or other parties in the purchase and/or execution of an insurance product.

Intermediary fraud

Fraud by intermediaries against insurer and/or policyholders.

Internal fraud

Fraud against insurer by employee on his/her own volition or in collusion with parties that are internal or external to insurer.

Key fraud trends in Insurance Industry According to a survey conducted by Ernst & Young, key fraud risks faced by Insurance Companies are:

Insurance fraud can increase costs for the insurer by at least 1% and can go up by more than 5%

Impact of Insurance Fraud

Higher insurance premiums

Rising cost of goods & services

Jeopardize health, lives and property

Lost personal income and savings

Lost jobs

Diverts government resources

Personal costs

Diverts from essential services

Overall financial cost

Current action against fraud

No Fraud management policy documented

Action limited to:

Rejection of claims for serious fraud – all the cases

Cancelation of policy – in serious fraud cases and not

abuse or mis-declaration

Most companies do not have an underwriting loop for

cases of mis-declaration and non-declaration

Action against agents limited

Legal action against fraud not very common

Recoveries rare

Legal provisions under IPC

No specific provisions in IPC for insurance fraud

Action at best is limited to:

Section 205. Cheat by personation

Section 420. Cheating and dishonestly inducing delivery of

property

Section 464: making a false document including signs and seals

and forgery

Section 405. Criminal breach of trust – suited to life insurance

All these legal provisions are not adequate to

prosecute an individual legally due of time and

cost involved

Fraud management policy

Every Insurance company to have a

comprehensive Fraud and Abuse management

policy, to contain:

Definition of types of fraud and abuse

Policies, procedures and controls to be documented

Companies action to be documented and inline with

severity of fraud

Review mechanism

Fraud and Abuse Management to be a company

wide activity rather than a claims function activity

Claims, UW, HR, Agency team, legal, operations, etc

Sharing of knowledge and data

It was suggested to share:

Fraud patterns and case studies

Fraud customer list

Fraudulent intermediaries (agents)

Fraudulent investigators

Due legal process to be followed before reporting a

case

External reporting to MCI, IRDA, corporate HR,

IRDAI requirements on Fraud Monitoring

Anti-Fraud Policy: There should be an Anti Fraud Policy containing well defined procedures to identify, detect, investigate and report insurance frauds.

Fraud Monitoring Function: There should be a Fraud Monitoring Function to ensure effective implementation of Anti Fraud Policy across all lines of business.

Independence: Function of fraud monitoring should be either an independent function or merged with existing functions - risk, audit etc.

Risk Management Committee: The Corporate Governance guidelines mandate insurance companies to set up a Risk Management Committee (RMC). The RMC is required to lay down the company-wide Risk Management Strategy.

Periodic reporting to IRDAI: Insurance Companies need to put in place as part of Corporate Governance Structure, Fraud detection and mitigation measures and submit Periodic reports to Authority . Statistics on fraudulent cases need to be reported to IRDA within 30 days of the close of financial year.

ANTI FRAUD STRATEGY

ANTI FRAUD STRATEGY PREVENTION Fraud risk Assessment

• Developing a sound ethical culture

• Sound internal control systems

• Training and awareness

DETECTION Detection methods

• Offsite fraud control monitoring

RESPONSE Anti-Fraud Program

• Investigation

• Consequence Management

Thank You