Introduction
Good performance of an insurance company determines the position and the growth of the insurance company in its market. Profitability and prudence are the most important objectives of financial management and an important measure to determine the overall performance of an insurance company. Every insurance company is most concerned with their profitability. Profitability and prudence measures are important to the primary owners as well as to other stakeholders including company managers.
Since the insurance companies have outside investors putting in their money into the company, it is imperative for the primary owner to manage business performance to deliver and show profitability. Business leakage impacts profitability big time. While there are many types of business leakages, in this article we are focusing on the leakage due to insurance fraud and abuse.
As per the Insurance Fraud Monitoring Framework issued by Insurance Regulatory and Development Authority of India (IRDAI), Financial Fraud poses a serious risk to all segments of the financial sector. Fraud in insurance reduces consumer and shareholder confidence and can affect the reputation of individual insurers and the insurance sector as a whole. It also has the potential to impact economic stability.
What is an Insurance Fraud?
Fraud in insurance is defined as an act or omission intended to gain dishonest or unlawful advantage for a party committing the fraud or for other related parties. This may, for example, be achieved by means of misappropriating assets; deliberately misrepresenting, concealing, suppressing or not disclosing one or more material facts relevant to the financial decision, transaction or perception of the insurer’s status; abusing responsibility, a position of trust or a fiduciary relationship.
Fraud affects every type of insurance, whether it is non-life insurance, life or health insurance. Insurance fraud may be committed by the policyholder or by a third party claiming against an insurance policy. It can range from providing untruthful or incomplete information in applications, submitting a claim for a loss based on misleading or untruthful circumstances, exaggerating a genuine claim and misleading /being untruthful in dealings with an insurer with the intention of gaining a benefit under the insurance contract.
Similarly, an Abuse can be defined as a practice that is inconsistent with the business ethics, which results in unnecessary cost to claims and in turn to the company and is illegal. For example – hospitals charging fees from insurance companies for procedures and diagnostics which are not required.
What is the scale and extent of Fraud?
With the exponential growth in the insurance industry; the industry is also witnessing an increase in the number of frauds and abuse in the business. Detected and undetected fraud are estimated to represent up to 10% – 20% of all claims expenditure. The significant role fraud and abuse plays in negatively affecting the insurance sector are often under-reported or discounted.
Since the advent of privatization in the Life, Health & Non-Life Industry, the number of incidences of fraud & abuse have been observed/noticed, traced and proved but still in large number of incidences, the fraudsters go scotch free due to non-availability of credible documentary evidence, which can stand in the Court of Law and the indecisiveness/hesitancy of the companies to file Police Complaints against the fraudsters/abusers.
The worst hit policies are Motor (Own Damage, Theft & Third Party), Employers Liability, Personal Accident, Fire, Marine, etc. in the Non-Life Industry and in the Life & Health Industry, fraud and abuse is rampantly observed/noticed in claims related to Death, Hospitalization and Accidents.
It has been observed that the fraudsters follow a pattern in the incidences of fraud and abuse and it is not restricted to certain areas but is spread across the country. The fraudsters are well equipped and abreast with the Terms & Conditions of the various policies, Rights of the Insured, Latest trends in the Insurance Industry, Investigative measures adopted by the Insurance companies, Limitations & Constraints of the Insurance Companies, Actions taken by the Insurance Companies in fraudulent claims, Court proceedings and formalities, etc.
The fraudsters are well informed about the entire insurance ‘value chain’ (Refer to Figure 1) and are in continuous look-out for potential weakness. The moment they are able to identify the weakest link they strategize and attack. For example – if the sales force is not vigilant and does not act as primary underwriters, the fraudsters are going to target the sales force to achieve their plan to deceive the insurance companies.
In many cases it is observed and found that the fraudsters are supported and guided by a “Consultant”, who unfortunately, would be someone from the Insurance Industry, either a person from the Sales Team or an Agent or an ex-employee or a Surveyor or an Investigator working for some insurance companies or someone who has worked or had been related/known to them or an Advocate. These consultants aid in preparation of documents and creating situations fertile for putting up a fictitious & fraudulent claim with the concerned Insurance Company.
For e.g. in Health Insurance, unfortunately, it is observed that the treating doctor/family doctor or the Hospital/Nursing Home is fully aware of the condition of the health of the Insured person but they would aid in preparing hospitalization related fictitious documents for submission to the concerned Insurance Company, in connivance with the Insured & the Consultant. There are also instances wherein the fraudsters are the people who were ex-investigator.
What is the Cost of fraud?
Insurance fraud seems on the surface like a crime that doesn’t really hurt anyone. A few extra rupees squeezed out of an insurance company doesn’t seem like it would make much of an impact on a large and successful company. However, fraud impacts an organization financially, operationally and psychologically. While the monetary loss due to fraud is significant yet in real terms it is still the tip of the iceberg. The hidden loss that accompanies due to frauds is worth introspecting and includes loss of reputation, brand image, goodwill, customer relations, opting out by reinsurers etc.
The ‘visible loss’ due to insurance fraud comprises of increased premium to customers, financial loss to company, high re-insurance cost, and the investigation/litigation costs. The ‘invisible loss’ due to insurance fraud would include things like – productivity loss, long claim settlement cycle, lost sales, negative claim experience, loss of customer loyalty, low employee morale, high employee attrition and high cost of underwriting and process management. Both the visible and invisible loss can lead to competitive disadvantage for the insurance company.
What can insurance companies do to combat Fraud and Abuse?
Fraud and Abuse risk in insurance is complex in itself, add to it the sophistication of fraudsters and it becomes all the more difficult for organizations to detect and control fraud in time. Fraud and abuse can be perpetrated by any employee within an organization or by those outside it and hence it is important for companies to have an effective fraud management program in place to safeguard their assets and reputation. To address fraud and abuse, we suggest a four step framework to building a successful fraud management program.
The 1st step is to build a ‘zero tolerance’ culture. This could be initiated by institutionalizing a full proof “Zero Tolerance” Fraud & Abuse Control Policy. The policy should be promoted within the organization so as to develop a vibrant non-tolerant culture towards fraud & abuse, with active participation & involvement of all the stake holders viz. all the employees irrespective of their functions, job profile, locations, etc. including the Surveyors & Brokers/Agents associated with them and all their Vendors including their TPA’s conducting Pre Insurance Medical Tests & Claims and Investigators.
The Risk Framework for Fraud & Abuse Policy should clearly list the “Do’s & Don’ts” and Actions to be initiated in the event of any breach or irregularity done by all the concerned stakeholders. All the stakeholders should be made well aware of the “Zero Tolerance” policy of the organization towards Fraud & Abuse, by regularly publishing the “Do’s & Don’ts” vis-à-vis the Fraud & Abuse Control Policy & updating the same on regular intervals, arranging training programmes for the above mentioned stakeholders, since the time of their induction, & also conducting training programmes for them at regular intervals.
They should be encouraged to highlight any wrong doings or illegal or unethical practices, by bringing it to the notice of the management (of course with the assurance of maintaining the confidentiality of their identity & the source).
The second step is to build organization capacity that enhance key processes like investigation, claims processing, management of intermediaries, etc. It is generally observed that the Insurers in their urge to increase their bottom line, set targets for their Investigative units for savings to be made out of the claims being investigated. These Investigative Units in the pressure to perform and achieving the desired savings target, tend to investigate more claims, presuming that it might give them a chance to repudiate more claims and thus, in turn provide more savings for the company.
A word of caution for the Insurance Companies falling prey to such practices. In doing so, they might go overboard and repudiate claims on the basis of insufficient documentary evidences to prove the intent of fraud or abuse, which in turn will result in unwarranted law suits against the Insurers filed by their Insured/Claimants in the court of law and ultimately alienating the genuine customers from them.
The Management will have to appoint a person with experience, knowledge & exposure to the various frauds in the industry, who is high on integrity, passion and up to date on the emerging fraudulent techniques adopted by the fraudsters and their geographical locations, whose job would be to remain agile, vigilant, diligent, proactive and efficient in building a robust team to oversee and manage the introduction and implementation of the Fraud & Abuse Control Policy at the micro level.
The designated person will have to keep the management abreast, on regular intervals, with the findings & action taken reports in each case. This will enable the management to implement the policy in Letter & Spirit, which will act as a strong deterrent to the fraudsters planning to strike in the future.
In the case of breach of the Fraud & Abuse Policy by an employee/s, the Insurers should act swiftly without delay in identifying the wrong doing and immediately take steps to take the lid off the fraud and ensure punitive action is immediately initiated against the concerned employee/s. They should also try to identify whether the immoral act was committed by the employee/s individually or in connivance with some other stake holders viz. Surveyors, Brokers/Agents/TPA’s.
It is generally observed that the Insurers shy away from initiating action against Agents/Brokers by complaining to IRDA about their wrong doings or their involvement in unethical practices, as they are worried about the impact of such action on the amount of business flowing in from these entities but in the longer run it would have a very bad impact on the profitability of the company. Lately, Insurers have realised it and have started taking punitive action against the Agents by filing F.I.R’s against them but they are still found would waiting in course home of action against the Brokers.
The Broker, as an identity, is not an individual like an Agent (who has to promote and place business with a single insurance company) but is a firm or a company registered and recognised by IRDA. They have the flexibility to work with any Insurance company and would not be directly involved in the wrong doings and eventually can’t be held responsible for the illegal/fraudulent acts committed in the business routed through them but some individual overseeing and in charge of the operations & marketing in the broking company, would be involved in the immoral/illegal act & hence, it would in turn make the broking company responsible for any wrong doings of their employee/s or any authorised persons. It is definitely a very complex scenario but lately, many fraudsters are found to be taking advantage of the systemic flaw and are routing the fraudulent business through these broking companies.
Similarly, there have been instances of breach of the Fraud & Abuse Policy by the TPA’s or their employees in connivance with the employees of the Insurance company, Hospitals, Doctors, Agents or Brokers or the Consultants whilst servicing the customers of the Insurers while conducting the Pre Insurance Medicals and also, during the management of their claims. The Insurers should immediately act to curb this menace, as it adversely affects their bottom line due to the impact of paying fraudulent claims.
The TPA’s & the Broking companies should be held liable and responsible for the immoral act of their employee/s and punitive action should be initiated by the Insurance companies against them with the knowledge and guidance of IRDA.
The third and the fourth step is to build a data centric approach along with advanced and predictive modelling. Here, different forms of data should be captured, analyzed and reviewed at regular intervals.
“Red flags” should be developed to predict suspicious behavior across the insurance value chain. Tolls like ‘fraud-o-meter’ should be developed and used for predictive analytics. There should be mechanism in place to ensure the revision and enhancements of the rules engine on an on-going basis.
As markets mature, organization would get better at managing fraud, but we believe that CEO needs to strategize to increase their organization pace in identifying and mitigating frauds. While it may not be possible in the immediate future to iron out frauds completely, the goal is to reduce the scale and frequency of frauds. We believe, if CEOs pursue the four step framework as a solution, then the companies would be a much better placed to manage frauds and move towards a the ideal goal of elimination. The current situation warrants a wake-up call for all the CEO’s of the insurance companies so that they don’t become prey to menace of fraud and abuse.
