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
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