Thomson Reuters
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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.
The up-tick
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.”
Global spread
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.
