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The Association of British Insurers (ABI) estimates that 15 fraudulent insurance claims are exposed every hour of every day in the United Kingdom. In 2011, insurers uncovered 139,000 fraudulent claims worth an estimated $1.5 billion. But despite such success in detection – up 7 percent on the previous year - and the sector investing some $300 million annually to prevent fraud, an estimated $3 billion in insurance fraud goes undetected.
That is just in the UK. In India insurance fraud is estimated at $5.63 bn a year, in New Zealand anywhere between $1.6 bn to $6.49 bn, in Germany $5 bn, in Australia $1.94 bn, and in the United States upwards of $80 bn to $100 bn. Add on undetected fraud losses and the figures run into further billions. It would not be sensational to estimate that thousands of cases of insurance fraud are happening every hour of every day across the globe.
While insurers will investigate and uncover a good percentage of fraudulent cases, many will go undetected, costing the sector and customers additional expense and higher premiums. Indeed, in the US, insurance fraud is now considered to be the second largest economic crime after tax evasion, according to the National Insurance Crime Bureau (NICB).
Mature financial markets are more exposed to risks in general, and insurance is no exception. Insurance fraud figures are highest in the areas with higher insurance penetration, reflected in the global market breakdown, with Europe accounting for 35.9 percent of the global insurance market in 2011, North America 28.9 percent, and Asia 28.2 percent, according to Swiss Re in 2012. The Middle East and Central Asia by comparison accounts for 0.9 percent of global share, Africa 1.5 percent and Latin America 3.4 percent.
However, while emerging markets in general have lower insurance penetration rates – in the Middle East for instance it is 1.55 percent compared to the global average of 6.6 percent – insurance fraud is considered to be equally on the rise. Insurance fraud is not a country or region specific phenomenon, it is truly global and projected to rise.
Insurance fraud is arguably as old as the sector itself, and its pervasiveness has increased over the years, as have techniques and sophistication. The US-based Coalition Against Insurance Fraud (CAIF) defines fraud as “a deliberate deception perpetrated against or by an insurance company or agent for the purpose of financial gain.”
However, Leonard Brimson, EMEA Regional Head of Global Investigative Services at insurer AIG, urges caution in using the term too loosely. “When we talk about fraud it can be a dangerous word to use, as unless someone has been tried and convicted, it is only suspicious activity. The terminology is important,” he said.
What has caused an up-tick in insurance fraud – and suspected insurance fraud - in recent years is the increased focus by regulators on the banking sector to curb financial crimes, notably money laundering, and this has correspondingly driven fraudsters towards the insurance sector.
“The rise in insurance fraud is fuelled by the tightening of bank regulations, which has made it tougher for fraudsters to get money from banks. Criminals do not change jobs, they look for organisational weaknesses and exploit them,” said Anne Green, Head of Fraud for Underwriting, Pricing and Product at Aviva in the UK.
But the rise in insurance fraud is not solely down to organized criminals and “professional” fraudsters. It is prevalent at a nationwide, cross-the-spectrum level, and is likely to be attributed to the ongoing ramifications of the 2008 financial crisis and austerity measures, certainly in Europe.
For example, in the UK-based Insurance Fraud Investigators Group’s (IFIG) ‘Insurance Fraud 2012’ report, “the evidence suggests that the recession is already driving an increase in opportunistic claims from policyholders, with 85 percent of respondents reporting an increase in inflated or exaggerated claims [in 2012] and 76 percent reporting an increase in completely bogus claims. ”
In three surveys carried out by IFIG in 2009, 2010 and 2012, the top concern of respondents was that the “recession was fueling fraud,” with another top answer: “increased fraud at policy inception.” A further top concern for insurers was having adequate resources to tackle fraud. Indicative of this was that “70 percent of companies have moved fraud up the agenda in the last year and 74.5 percent have increased investment in fraud detection.”
As Green observed: “The insurance industry needs to take a strong stance against fraud, looking across the life cycle of the relationship with the customer, from the point at which the policy is sold right through to the claims process.”
The concerns highlighted by the IFIG are being reflected by insurers, associations and financial bodies around the world. “The trend (of insurance fraud) is certainly upwards, and I deal with 48 countries,” said Brimson.
“If you compare one country with another, some policies are more prone to fraud, and in countries where insurance is less prevalent, it is typically life insurance fraud. We see a huge difference in value and volumes on a country basis. Most crimes that are common tend to be perpetuated that have been successful in the past. If we see something in one country that is profitable for fraudsters, we will see that happening in a neighbouring country and then spread across the continent.”
Evident of this is the rise in general claims and life insurance fraud in emerging markets. Indian insurance companies lost $5.63 bn to fraud in 2011, equivalent to an estimated 9 percent of the total insurance industry, according to a 2012 study by Indiaforensic.
The life insurance segment accounted for as much as 86 percent of the fraud and the remainder in the general insurance sector, with life insurance fraud more than doubling over the past five years and general insurance fraud surging by 70 percent, according to figures by India’s Insurance Regulatory and Development Authority (IRDA).
According to Vietnam’s Insurance Management and Supervision Department, between 2007 and 2011 over 44,700 cases of insurance fraud were reported worth $19.7 million, with the lion’s share being life insurance cases at 40,700.
In the Middle East, insurance fraud could be as high as 30 to 40 percent of all claims, while estimated at $1.5 billion a year, and has been exacerbated by recent regional unrest and political transformation. “There is a noticeable increase in the claims trend in our region. We are seeing more and more incidents relating to fraudulent claims recently and are becoming more cautious about each and every claim,” said Ronald Chidiac, general manager of the Arab Reinsurance Company in Lebanon. “Fraud
has taken on many new faces from the usual suspects. This is clearly noted in life and medical insurance where fraud exists from the initial stages of delivering the data, to managing the portfolio and the claims. The parties involved are not dealing properly with the mitigation of risk and are not getting involved in the analysis required to catch these fraudulent claims, relying on a third party to compensate them for their losses.”
Fraud across all classes
The scale of insurance fraud cases can be massive. In March, 2013, federal investigators in North Carolina, USA, uncovered the country’s largest ever insurance fraud crop scheme, which involved 41 people, including insurance agents, claims adjusters, brokers and farmers, and could have cost a government-backed crop insurance programme some $100 million. Such a scheme can be described as “hard” fraud: deliberately faked claims or of the more complex variety, involving several parties, such as insurance agents, witnesses and “professional enablers” like lawyers and doctors.
But the vast majority of fraud can be termed “soft”, such as exaggerating the value of a legitimate claim and providing false information to pay lower insurance premium prices. Indeed, in the UK and the US, motor, personal injury and property insurance have experienced the greatest rise in fraudulent activities. That said, there has been a notable rise in the UK in bogus claims over the past few years, and in the US medical insurance fraud is still the biggest form of fraud, estimated at over $60 billion a year.
“Some areas of insurance fraud are growing more exponentially than others. The growth in bodily injuries has been quite dramatic and is a major concern for the industry. There are a few reasons for that, such as compensation culture increasing and higher value pay outs, even for minor injuries. It is not just the volume of the suspicious activity, it is the value as well, as it seems to be linked,” said Brimson.
With insurance fraud on the rise and diversifying as the industry offers more products and, in cases, better pay outs, there is a heightened need for carrying out due diligence to reduce the risk of fraudulent claims and losses within the sector from the outset, be they from inside a company or from policy holders.
The need for enhanced due diligence
Within a month of signing up to an anti-fraud database, British insurer Ageas had identified two large fraud rings with over 100 people involved; one ring affected 26 other insurers.
Technology is playing an increasing role in curbing fraud, from anti-fraud and identity software to databases that list sanctioned individuals, listed terrorists and criminals, to carry out enhanced due diligence (EDD).
“Technology and computer infrastructure is critical. It allows us to put together bodies of data, sometimes obscure, quickly. There have also been huge strides in recent years in predictive analytical possibilities, which allows us to spot anomalies very quickly,” said Brimson.
A risk-based approach to taking on clients requires investigating who a person or company legitimately is, and assessing what risks are involved with doing a transaction.
Enhanced due diligence goes further than basic due diligence in investigating an entity more thoroughly, such as looking into an entity’s background, finding out the actual ownership structure of an organization and those linked to it – such as politically exposed persons (PEPs) or sanctioned individuals that carry with them heightened risk – and looking into businesses with which an entity works, including government ties. EDD, also known as special due diligence, is typically carried out as a one off investigation, but can be followed up with ongoing due diligence to ensure a client will not pose potential risk down the road.
“Carrying out EDD when a policy is taken out means the insurer has a better understanding of the risk it takes on,” said Green. “In addition, it can protect the innocent customer by tackling organised crimes such as ghost broking or ‘crash for cash’ scams as well as helping customers understand the importance of honesty, not just when they take out a policy but also if they need to make a claim. Ghost Broking is a common trend and is made easier in the absence of EDD.”
In the general absence of specific due diligence activities available to the financial and banking sector such as Know Your Customer (KYC) forms to carry out compliance– the feeling in the insurance sector is largely that it would be too invasive and customers would balk at the idea of disclosing extra information – EDD through investigations and utilizing appropriate software gains further credence. “Would people sign up to greater scrutiny within our industry? I doubt it very much. I don’t see any will of the client to provide that kind of data, unless it was mandatory. There is a need to be careful in not going too far, and close off people to insurance,” said Brimson.
Not a panacea
Adopting anti-fraud and risk intelligence software cannot be viewed as a panacea for doing effective due diligence. Indeed, when it comes to technology, not all companies are utilising it effectively, as the US-based Coalition Against Insurance Fraud found in a study published in 2012 to better understand insurer adoption and use of technology in America.
The study found that while nearly 90 percent of insurers surveyed used anti-fraud technology, most only used basic tools such as automated red flags, claims scoring and link analysis. Less than half of insurers surveyed used predictive modeling, text mining, geographic data mapping and other advanced analytics, while only about 14 percent used any automated tools to detect underwriting or point-of-sale fraud.
There is also the danger of technology being viewed as a solution to fraud and due diligence, and that human input is not required to the same degree as before. Indeed, in emerging markets there is a need for improvement in tackling fraud beyond just adopting anti-fraud and other technologies to get appropriate EDD.
“It is not an issue of software, it is an issue of culture first. Companies are looking at technology to automate the business processes and not analyse anymore,” said Chidiac. “It is not about simply installing a software for risk management, it is about the culture of dealing with fraud, as basic due diligence doesn’t even exist in much of the Middle East. Few companies have proper internal audits or due diligence.”
As Chidiac observed, a culture of compliance is prevalent among multinational insurance firms and bigger players, yet often comes up short in smaller and medium sized firms, especially in emerging markets. Developing such a compliance culture in-house is essential to curbing fraud from the get-go, which requires not only employing the right people, but making sure training is up to par, and there is regular training and development of staff. If the human element is not up to scratch, then technology cannot compensate for such shortcomings.
Software that features global watch lists of sanctioned individuals, PEPs, designated terrorists and so on, also need to be used judiciously.
That said, there are a handful of risk intelligence databases worldwide that assist companies in their compliance obligations with anti- corruption legislation like the US Foreign Corrupt Practices Act (FCPA), as well as anti-money laundering and counter terrorist financing regulations. To increase the accuracy of results, it’s a good idea to choose high quality, well structured risk intelligence that offers an EDD component. Enhanced due diligence should include details like the company’s shareholders and litigation history, as well as background information on management, decision makers, potential conflicts of interest, and potential political and criminal ties.
Indeed, not using databases or checking watch lists in addition to not doing due diligence can pose easily avoided risks for insurers. “It is amazing how few professionals care about the insurer’s ability to assess the risk and apply due diligence in their everyday functions,” said Chidiac. “For instance, despite some sanctions imposed in the region (such as on Syria), we still find risk carriers giving support to some of these sanctioned insurers and clients.”
On top of introducing a culture of due diligence and compliance at insurance companies, dedicated teams need to carry on from where EDD left off. “EDD will not cover opportunistic fraud, people taking advantage of a situation to exaggerate a claim, to cover excesses or make a profit from a risk event. Nor will it combat third party fraud. However, it should be noted that EDD is not the only tool employed to help tackle fraud,” said Green.
Indeed, the human element needs to be retained in addition to technology to counter fraud. “A large part of the solution needs to be hand in glove with people as well,” said Brimson. “To me, I think fraud and counter fraud will always be a people business, as people commit fraud for different reasons.”
The global struggle against insurance fraud will clearly continue, and prevention will have a measure of success or failure in different markets and regions, depending in part on their adoption of EDD. While regions like the Middle East have a way to go, and the Asia markets are in general bringing systems up to speed to tackle rising fraud, more advanced insurance markets are moving ahead.
“Detection of fraud is moving in the right direction, the focus on being reactive and having counter fraud measures at the claims stage has moved on and now includes more upfront EDD and prevention methods when a policy is taken out,” said Green.