risk management in life insurance with...
TRANSCRIPT
SYNOPSIS OF Ph.D. THESIS ENTITLED
RISK MANAGEMENT IN LIFE INSURANCE WITH EMPHASIS ON LIFE INSURANCE FRAUD
SUBMITTED TO
KADI SARVA VISHWAVIDYALAYA,
GANDHINAGAR, GUJARAT, INDIA
FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY (Ph.D)
IN
MANAGEMENT
BY
DHARA CHUDGAR
UNDER THE SUPERVISION OF
DR. ANJANI KUMAR ASTHANA
Institute of Cooperative Management, Bhopal
JUNE, 2015
SYNOPSIS OF Ph.D. THESIS ENTITLED
RISK MANAGEMENT IN LIFE INSURANCE WITH EMPHASIS ON LIFE INSURANCE FRAUD
SUBMITTED TO : KADI SARVA VISHWAVIDYALAYA, GANDHINAGAR, GUJARAT, INDIA.
: MANAGEMENT
: FINANCE
: DHARA JITENDRA CHUDGAR
: DR. ANJANI KUMAR ASTHANA
: 11E0342
FACULTY
SUBJECT
RESEARCH STUDENT
RESEARCH GUIDE
REGISTRATION NO.
DATE OF REGISTRATION : 04/10/2011
SIGN OF GUIDE
SIGN OF STUDENT
DR. ANJANI KUMAR ASTHANA
RESEARCH SUPERVISOR
DHARA JITENDRA CHUDGAR
RESEARCH STUDENT
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Contents
1 Introduction .............................................................................................................................................. 3
1.1 Research Background ........................................................................................................................ 3
1.2 Research Problem .............................................................................................................................. 4
1.3 Purpose of the study .......................................................................................................................... 4
1.4 Objectives .......................................................................................................................................... 5
2 Literature review ...................................................................................................................................... 6
2.1 Industry overview .............................................................................................................................. 6
2.2 Risk Management .............................................................................................................................. 6
2.3 Life Insurance fraud .......................................................................................................................... 7
2.3.1 Life Insurance fraud – Defined.............................................................................................. 7 2.3.2 Types of fraud........................................................................................................................ 9
2.4 Impact of fraud............................................................................................................................ 10
2.4.1 Economical impact of fraud ................................................................................................ 10
2.4.2 Fraud Detection and Prevention .......................................................................................... 11 2.4.3 Customer’s perception for fraud .......................................................................................... 13
3 Research Gap ...................................................................................................................................... 14
4 Research Methodology ........................................................................................................................... 15
4.1 Research Design: ........................................................................................................................ 15
4.2 Sampling Frame............................................................................................................................... 15
4.2.1 Sampling Technique ................................................................................................................. 15 4.2.2 Sample size ............................................................................................................................... 15
4.2.3 Sample selection procedure ...................................................................................................... 15 4.3 Data Collection Tools ................................................................................................................. 16
4.4 Mode of data collection .............................................................................................................. 16
4.5 Method for data analysis ............................................................................................................. 16
5 Data Analysis..................................................................................................................................... 17
5.1 Types of Fraud ................................................................................................................................. 19
5.2 Typical fraud categories .................................................................................................................. 19
5.2.1 Proposal Stage: Fraud ............................................................................................................... 21
5.2.2 Claims Stage: Fraud ................................................................................................................. 24 5.3 Control on Life Insurance fraud ...................................................................................................... 25
5.3.1 Discussion and Analysis ........................................................................................................... 25 5.3.2 Review existing fraud control mechanism ............................................................................... 26
5.4 Customer’s perception ..................................................................................................................... 29
5.4.1 Four drivers that contribute to fraudulent activity. ................................................................... 30 5.4.2 Four Expressions : Tolerance level of customers for life insurance fraud ............................... 31 5.4.3 Attitudes towards Industry ....................................................................................................... 32
5.4.4 Reasons for life insurance fraud ............................................................................................... 33
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5.4.5 Ways insurance companies should prevent fraud .................................................................... 34
5.4.6 Punishments for life insurance fraud ........................................................................................ 34
5.4.7 Factors affecting various reasons ........................................................................................ 35 6 Findings ................................................................................................................................................. 37
7 Suggestions ............................................................................................................................................ 42
8 Limitations ............................................................................................................................................. 44
9 Conclusion ............................................................................................................................................. 45
10 Further scope of Research ................................................................................................................... 47
References ................................................................................................................................................. 48
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1 Introduction
1.1 Research Background
Risk Management has been acquiring monumental importance, especially over the last few years,
globally. Apart from the conventional areas that one has in mind with regard to risk management, there
is just no end to the challenges that emerge afresh from hitherto unknown areas. It is this dynamic nature
of business that puts an additional onus on risk management being thoroughly comprehensive. The
corporate world has been gearing itself up for these new challenges; and their risk management
strategies have been demonstrating the adoption of a wider coverage of business activity. As a natural
corollary, the risk management strategies of insurers would also need to take a fresh look at how they
are geared up for eventualities.
Risk Management is the process of measuring or assessing risk and then developing strategies to
manage the risk (George, 2003; Harringtion and Niehaus, 2004). Risk in life insurance could be
associated with sales, underwriting, medical network, claims, operations and finance. Risk management
is needed because of increasing instances of fraud, to have a framework in place to battle risk and fraud
issues, enhances company image, acts as a deterrent to frauds by its very existence and acts as a safety
net for the Organization.
There are various types of risks involved in life insurance which are discussed later; however the study
focuses on fraud risk. Instances of life insurance fraud are increasing since few years and therefore there
is a need to curtail life insurance fraud.
India is one of the fastest growing economies and so is the case with the country’s insurance sector. The
significant role that fraud plays negatively affects the insurance sector is often under-reported or
discounted. There is a general consensus in the market that fraud cases have been significantly
increasing. Frauds increase the cost of insurance, resulting in insurers losing to their competitors, and at
the same time, the policyholders end up paying higher premiums. As India’s insurance industry matures,
fraud risk management is going to be a major concern for insurers and business leaders. Insurers will
need to continuously reassess their processes and policies to manage and mitigate the risk of fraud. (Bali
et al., 2010)
The amounts involved in insurance fraud have certainly increased as insurance made its transition into
modern consumer society. The industry has been a problem of increasing prevalence and of sizeable
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proportions. Insurers who have long passed the cost of fraud onto their policyholders in the form of
increased premium rates, as well as other stakeholders such as legislators, prosecutors, judges and
consumer interest groups, have started to realize that the fraud problem can no longer be ignored.
(Dedene, G., & Viaene, S., 2004).
Insurance fraud is relatively simple to commit, easy to get away with, and seemingly considered ‘fair
game’—and even legitimate—by a significant minority of the population. But it is illegal, costs the
insurance companies millions of pounds, and is by no means ‘victimless’. (Gill 2001)
1.2 Research Problem
Insurance fraud is one of the most serious problems facing insurers, insurance consumers and regulators.
Its existence not only increases the cost of insurance, but also threatens the financial strength of insurers
and negatively affects the availability of insurance. Insurance fraud encompasses a wide range of illicit
practices and illegal acts involving intentional deception or misrepresentation. The industry has
witnessed an increase in the number of fraud cases in the last couple of years. Organizations are
realizing that frauds are driving up the overall costs of insurers and premiums for policyholders, which
may threaten their viability and also have a bearing on their profitability. Hence, companies need a more
vigorous fraud management framework. Larger insurers, which spend more on the investigation and
settlement of claims and on medical exam and inspection fees, are better at detecting fraud. (Bali et al.,
2010)
1.3 Purpose of the study
The purpose of the study is to explore the magnitude of the problem including the industry’s and
regulatory authority’s responses in tackling the menace in India. As mentioned in the literature review
increase in life insurance fraud is hindering the revenues of insurance companies which in turn affect the
growth of the industry and in turn to the economy as whole. The competition is good at the sales level in
the Insurance Industry but insurers need to be united to fight the frauds. The main purpose of this study
is to analyze various types of life insurance frauds, assess the risks associated with these frauds and
finally frame an ideal risk management strategy to curtail or minimize the frauds associated with life
insurance. The existing literature on life insurance fraud is used to explore the fraud risk management
and internal control system of various organizations.
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1.4 Objectives
1) To identify different types of frauds in life insurance
2) To review existing fraud control mechanism in life insurance in India
i) To analyze that fraud risk exposure faced by insurance companies and areas that need more
stringent anti-fraud regulations are independent of each other
ii) To check the most widely used mechanism by the companies to discover life insurance fraud
iii) To check the most widely used mechanism to condense life insurance fraud
iv) To study whether the source of receiving insurance and insurer complaints are identical
3) Suggest preventive and fraud control measures with the help of research data analysis
i)To study whether there is significant correlation between the characteristics for committing insurer
fraud scheme and insurance fraud scheme
ii) To analyse the parameters which help in implementing effective fraud control policy
iii) To understand the most demanding ways insurance companies should use to prevent life
insurance fraud from customers perspective
iv) To rate a series of possible consequences or punishments for fraud from customers
perspective.
4) Perception of fraud by customers in the market
i) To measure customer’s tolerance level for life insurance fraud. Four groups will be divided
i.e. Pragmatists, Traditionalists, Moralists and Columnists. Which groups of people are
highest?
ii) To rate the overall experience towards life insurance. Whether the same is negative, positive
or neutral.
iii) To know the perception of people with regard to understand the capability of insurance
companies in identifying or preventing life insurance fraud
5) To identify the drivers that contribute to fraudulent activity (life insurance fraud)
i) To identify various reasons which compel people to commit life insurance fraud
ii) To check whether poor control and economic recession have significant effect on various
reasons which compel people to commit life insurance fraud
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2 Literature review
2.1 Industry overview
As per the annual report of IRDA, Indian Insurance in the global scenario, the share of life insurance
business in total premium was 56.2 per cent. However, the share of life insurance business for India was
very high at 79.6 per cent while the share of non-life insurance business was small at 20.4 per cent. In
life insurance business, India is ranked 11th among the 88 countries, for which data is published by
Swiss Re. India’s share in global life insurance market was 2.00 per cent during 2013. However, during
2013, the life insurance premium in India declined by 0.5 per cent (inflation adjusted) when global life
insurance premium increased by 0.7 per cent.
At the end of March 2014, there are 53 insurance companies operating in India; of which 24 are in the
life insurance business and 28 are in non-life insurance business. In addition, GIC is the sole national
reinsurer. Of the 53 companies presently in operation, eight are in the public sector - two are specialized
insurers, namely ECGC and AIC, one in life insurance namely LIC, four in non-life insurance and one in
reinsurance. The remaining forty five companies are in the private sector.
Life insurance industry recorded a premium income of `3,14,283 crore during 2013-14 as against
`2,87,202 crore in the previous financial year, registering a growth of 9.43 per cent (0.05 per cent growth
in previous year). While private sector insurers posted 1.35 per cent decline (6.87 per cent decline in
previous year) in their premium income, LIC recorded 13.48 per cent growth (2.92 per cent growth in
previous year). While renewal premium accounted for 61.72 per cent (62.62 per cent in 2012-13) of the
total premium received by the life insurers, first year premium contributed the remaining 38.28 per cent
(37.38 per cent in 2012-13). During 2013-14, the growth in renewal premium was 7.85 per cent (3.88
per cent in 2012-13). First year premium registered a growth of 12.07 per cent in comparison to a
decline of 5.78 per cent during 2012-13.
Overall, the industry witnessed a 7.50 per cent decline (0.01 per cent decline in 2012-13) in the number
of new policies issued.
2.2 Risk Management
Risk management is viewed as a corner stone of good corporate governance and therefore results in
better service delivery, more efficient and effective use of scarce resources and better project
management (Collier et al., 2007). It has to do with identification, analysis and control of such risks that
threaten resources, assets, personnel and the earning capacity of a company.
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According to Dorfman (2007), risk management is the logical development and implementation of a
plan to deal with potential losses. It is important for an organization to put in place risk management
programs so as to manage its exposure to risks as well as protect its assets. The essence is to prepare
ahead of time on how to control and finance losses before they occur. Dorfman continues to say that risk
management is a strategy of pre-loss planning for pre-loss resources.
Risk management is: “a process of understanding and managing the risks that the entity is inevitably
subject to in attempting to achieve its corporate objectives. For management purposes, risks are usually
divided into categories such as operational, financial, legal compliance, information and personnel. One
example of an integrated solution to risk management is enterprise risk management” (CIMA, 2005).
The Institute of Risk Management also provided a more detailed definition of risk management as: the
processes by which organizations methodologically address the risks to their activities with the goal of
achieving sustained benefit within each activity and across the portfolio of all activities (IRM et al.,
2002).
Risk management is an integral part of an organisation’s strategic management. Enterprise Risk
management forays into an efficient Corporate Governance as a tool to measure the exposure of
uncertainties and to design sensible mitigation plans.
COSO’s Enterprise Risk Management defined Enterprise risk management is a process, effected by an
entity’s board of directors, management and other personnel, applied in strategy setting and across the
enterprise, designed to identify potential events that may affect the entity, and manage risk to be within
its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives
2.3 Life Insurance fraud
Practically all of the literature regarding insurer fraud is in the insurance trade press. Only in the trade
press can one find stories detailing various types of insurer fraud and describing specific legal cases.
2.3.1 Life Insurance fraud – Defined
Richard A. Derrig, V. Z. (2002) explained that the term “fraud” carried the connotation that the activity
was illegal and, hence, that prosecution and conviction were potential outcomes of a specific fraud.
Accepting that premise allows us to adopt the legal definition of fraud in the insurance context and to
examine the experience of dealing with insurance fraud in terms of property-liability insurance lines.
Specifically, ten years of data on referrals and disposals of incidents of suspected fraud as processed by
the Insurance Fraud Bureau of Massachusetts to provide estimates of the distribution of types of people
who perpetrate a variety of insurance frauds were examined.
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Karen Ann Gill. (2001) in the thesis quoted, Although insurance fraud is defined under the Theft Act
(1969) there are in practice a number of uncertainties about how the law should be interpreted. Section
16 (1) of the Act states that:
A person who by any deception dishonestly obtains for himself or another, any pecuniary advantage
shall, on conviction on indictment, be liable to imprisonment for a term not exceeding five years.
Section 16 (2) of the Act defines situations where pecuniary advantage might be taken and section 16 (2)
(b) gives the example of an individual who takes out ‘any policy of insurance or annuity contract’.
According to the India forensic research, the Insurance Sector in India loses Rs 30401 Crore in the year
2011 due to frauds. In other words every insurance company loses 9 percent of its revenues to the
frauds. Figures indicating such loss are listed in Table 1
Insurance fraud
INR-
Billion
US $
Billion
304 6.16
Table 1 Total Insurance fraud 2011
Source : Indiaforensic- Premier Organisation in forensic accounting education. (2012). 6th Annual Anti Fraud Conference .
Fraud express.
Life insurance sector contributes maximum to the frauds i.e. 86 percent which is more than 6 times of
General Insurance which contributes 14 percent as given in Table 2
Insurance Fraud Percentage INR-Billion
Types of Life Insurance Fraud 86% 261
1 Misselling 36% 94
2 Fake Documentation 33% 86
3 Others 31% 81
General Insurance 14% 43
1 Falsification of documents 70% 30
2 Other fraud 30% 13
Table 2 Comparison of Fraud in Life and Non-life Insurance
Source : Indiaforensic- Premier Organisation in forensic accounting education. (2012). 6th Annual Anti Fraud Conference .
Fraud express.
70 percent of the total frauds committed in the general insurance sector are of the nature of falsification
of the documents. Medical Bills / Certificates top the list with 31 percent followed by Driving License
(16 percent) and FIR (13 percent) which is actually a government document. It is depicted in Table 3
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Table 3 Distortion of documents in General Insurance
Source : Indiaforensic- Premier Organisation in forensic accounting education. (2012). 6th Annual Anti Fraud Conference .
Fraud express.
2.3.2 Types of fraud
Dedene, G., & Viaene, S. (2004) critically examined the essence and types of insurance fraud. It was
divided into three broad categories i.e. underwriting vs. claim, soft vs. hard and internal vs. external.
Authors in their study also stated that it was very difficult to actually compute the total cost of insurance
fraud but the pressure of rising costs and competition itself put across the insurers to fight against the
insurance fraud.
Baradhwaj, C. (June 2011) discussed various types of frauds. Customer related frauds could take place
by submitting false documents at the proposal stage, Misrepresentation on health, family history,
occupation, etc in the proposal form, money laundering, fake claims by submitting fake claim
documents. Distributor related frauds could take place by submitting false/forged documents and
information, misappropriation of funds, issue of fake receipts/policies and lastly employee related frauds
were discussed.
Rose, S. (2008) discusses about many faces of insurance fraud and also highlights the key techniques for
detecting and preventing fraud. The author discusses about two distinct types of fraud one is
opportunistic fraud which is committed by an individual who simply exaggerates claim and other type of
fraud is professional fraud which is committed by an organized group. They very well know how the
fraud detection system works and loopholes of the system. The key techniques described in the paper for
detecting frauds are rules and red flags that mean one should identify definite patterns and highlight all
the activities that look doubtful, database searching i.e. share data with other database subscribers to
widen claims investigations, exception reporting which means to create KPI (Key Performance
Indicator) - claims benchmark and report all the events that exceed claims benchmarks. Another
Major contribution in falsification of documents
for General Insurance Fraud
Percentage INR-Billion
Medical bills
certificate 31% 9
Driving license 16% 5
FIR 13% 4
Others 40% 12
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technique explained in the paper is predictive modeling which means to use data mining tools to build
models to produce fraud prosperity scores.
2.4 Impact of fraud
2.4.1 Economical impact of fraud
Dixon, M. (2007) clarified that effects of fraud on the industry in the USA has caused an overwhelming
endorsement of the exchange of information not only between insurance companies but with
Governmental and other organizations. If companies in the UK fail to follow their lead, this will no
doubt result in an escalation of problems of insurance fraud in this country.
Anonymous. (2011) stated that over the last 10 years, the Indian insurance industry has grown at a
compounded annual growth rate of around 20 percent. However, with the exponential growth in the
industry, there has also been an increased incidence of frauds. Insurance fraud encompasses a wide
range of illicit practices and illegal acts involving intentional deception or misrepresentation. The
industry has witnessed an increase in the number of fraud cases in the last one year. Organizations are
waking up to the fact that frauds are driving up the overall costs of insurers and premiums for
policyholders, which may threaten their viability and also have a bearing on their profitability. Hence,
companies need a more vigorous fraud management framework. Although this survey focuses on retail
insurance, frauds related to commercial insurance claims and third-party claims are also on the rise. The
sophistication of fraudsters in the area of commercial insurance claims and third-party claims makes it
all the more difficult for organizations to detect and control fraud in time.
Gupta, A., & Venugopal, R. (July 2011) revealed the fact that In USA, the cost of insurance frauds was
more than 100 billion USD in the year 2003 working out to 950 USD per family. In 2001, 73percent of
the US Property & Commercial insurers rated fraud as a serious problem - 4.6 on a scale of 5. In U.K.
the fraud is in excess of four million pounds per week. The yearly figures are one billion pounds. In
Canada, it is 1.3 billion Can Dollars. Survey done by India forensic revealed the fact that the insurance
industry is losing close to 15000 Crores rupees every year! That is almost 9percent of revenues of an
insurance company. This clearly indicates the seriousness of the problem According to a PwCSurvey,
more than a third of Indian companies do nothing about the frauds. 32 percent of the fraudsters (internal)
are simply warned/ transferred /reprimanded. 28 percent are dismissed. 60 percent are criminally
charged/civil action taken. Mostly the fraudster is a person who has a long standing relationship with the
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victim company. 31 percent are Agent-hackers, 19 percent are external suppliers, 15 percent top and
middle management; and 8 percent are customers.
2.4.2 Fraud Detection and Prevention
Aart, C. V., & Tamma, V. (2008) presented two business templates which can help to decrease risk and
costs in the insurance market. Risks can be decreased by having agents gather evidence for (possible)
fraud chains. At this moment fraud detection is still performed manually and therefore a time consuming
and imprecise process. When using fraud detection agents, every damage report can be investigated on a
large scale looking for black listed drivers, stolen cars and known types of fraud.
Colquit, L. L., & Hoytt, R. E. (1997) evaluated the reasons given by insurers for resisting fraudulent
claims. The author also investigated specific characteristics such as claims, demographic, economic and
insurer that were related to the nature and level of life insurance fraud. Also larger insurers and insurers
that spend more on the investigation, settlement of claims, medical exam and inspection fees were
considered to be better fraud detectors. Findings suggest that frauds were higher in the states where
unemployment was high and where public attitude’s to accept the fraud was higher.
Holmes, S. A., Todd, J. D., Welch, S. T., Welch, O. J., & Holmes, S. A. (1999) concluded that insurance
industry was more careful than other industries with regard to internal control systems in order to reduce
the effect of fraud. Auditors of insurance industry could detect only customer fraud and not even a single
case of insurer fraud was detected by them. Insurer fraud was detected either through suspicion or
through internal or outside complaint. The schemes used by insurer fraud perpetrators were simpler,
affecting fewer accounts and involving fewer violations of internal control mechanisms, than those of
other industries. Insurers were also more likely to act against their employees for fraud compared to
other industries. Internal whistle-blowing in other organizations compared to insurance industry was
strong. Significant differences were observed in the formal fraud investigation in case of insurance
industry compared to financial and other industries. Insurers rely on outside examination where as
financial and other industries rely on internal investigation. Insurer and other financial institution wanted
criminal prosecution of their employees compared to other industries.
Derrig, R. A. (2002) revealed that the fundamental problem for insurers coping with both fraud and
systemic abuse was to devise a mechanism that efficiently sorts claims into categories that require the
acquisition of additional information at a cost. Measurement, detection, and deterrence of fraud were
advanced through statistical models, intelligent technologies were applied to informative databases to
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provide for efficient claim sorts, and strategic analysis was applied to property-liability and health
insurance situations.
Boyer, M. M. (2007) contributed to the crime and punishment debate by looking at the impact of
prevention and punishment in an insurance fraud context. More to the point, the author developed a
theoretical approach in which stiffer penalties and increased prevention could have no impact on the
amount of fraud when the proportion of criminal elements in society was too high. The principal–agent
model which the author presented introduced agents that could be of two possible types that differ only
with respect to the propensity to commit fraud: Truths never do whereas Dares have no moral objection
to it. If the proportion of Dares was large enough, then the amount of fraud and the number of agents
found to have committed fraud was independent of their exact proportion. Finally, investment in
prevention would be useless if the proportion of Dares was large enough because then investing in
prevention becomes a waste of resources. This last result holds when the proportion of Dares was large.
When their proportion was small, investing in prevention reduced fraud.
Bali, S., Singh, A., Parekh, A., Indge, R., & Torpey, D. (2010) revealed the findings that there have been
increased incidences of fraud over the last one year. Fraud risk exposure from claims or surrender was a
major concern area for industry players. They have emphasized the need for increased anti-fraud
regulations in the area of claims management. According to the survey report, there were various types
of insurance frauds, which occurred in all the areas of insurance, e.g., as claims and surrenders, fake
documentation, misselling, collusion between parties, etc. Today, when India’s insurance industry is
working toward reducing costs, one of its main focus areas to control or reduce costs is by proactively
arresting fraud, which can be achieved through an effective fraud risk assessment (FRA) program i.e.
Effective policy holder and vendor due diligence process, Effective claims validation, Mystery
shopping, i.e., gathering market intelligence relating to tied and corporate agents, brokers, etc., Channel
reviews pertaining to tied agency, bancassurance and tele calling, Contract compliance reviews
including review of advertising expenses, intellectual property (IP) compliance, etc., Effective fraud
analytics and electronic dashboards.
BRAMLET, C. (2012) revealed the fact that going after fraud simply doesn’t fall on the shoulders of
SIU alone. There must be a companywide commitment and training throughout all layers of the
corporation. Staff must be apprised of proper data-mining techniques, and the insurer must be willing to
cultivate a system-wide awareness of fraud at all levels of the company and programs for identifying and
disseminating clues to the special investigative unit (SIU).
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Swaby, G. (2011) finds that the current state of the law allows for the insurer to claim damages from an
insured when a fraudulent claim is made to recover the cost of any investigations. Second the insurer can
refuse to meet a claim that is tainted by fraud. Third the insurer can have the right to avoid the policy
obligations upon the discovery of a fraud, but subject to some limitations. Fourth there is a need for the
insured to be protected against an insurer’s unjustified allegations of fraud.
2.4.3 Customer’s perception for fraud
Coalition against insurance fraud. (1997) conducted a study which was designed on understanding the
customer's perception on unethical behavior and suggested various measures to curtail insurance fraud
such as-proper scrutiny of applications, proper investigation of claims and rejecting false claims or
application
Tennyson, S. (2002) examined whether consumers’ level of experience with insurance was related to
their attitudes toward insurance fraud. Such a relationship could arise because inexperienced consumers
may have misperceptions about insurance contracts and institutional rules, which could result in
accepting attitudes towards actions that are in fact fraudulent. Survey data shows that respondents who
owned more types of insurance and those who had recent insurance claiming experience were less likely
to find insurance fraud to be acceptable.
Michael Costonis, J. B. (2010) conducted an insurance consumer fraud survey. Insurance consumer
attitudes and behaviors toward fraud greatly influence insurance companies’ claims volumes and cost.
Results from the Accenture Insurance Consumer Fraud Survey 2010 point to four overall key findings
that contribute to the slowdown of claims performance: • Poor control was more likely to encourage
fraud. • Claims filing frequency and fraud increase in a difficult economy. • Fraudsters believe they can
get away with it. • Consumers expect insurers to continue their investments to prevent fraud. Based on
the survey results, Accenture believes that insurers can drive high performance through claims by taking
a hybrid approach to addressing fraud. In a hybrid approach, a carrier has a two-fold aim to: 1. Provide
better service on the policy and claim sides for a more positive, consistent customer experience that
builds customer loyalty and dissuades potential individual insurance fraud, and engage analytics tools to
more sharply focus on, detect and tackle organized fraud. Insurers should strive for better customer
service on the whole as a way to reduce potentially fraudulent individual behavior, given that survey
respondents were clear in suggesting that individual customers may be less inclined to commit fraud if
they believe a carrier has their best interest in mind and aims to restore them to their pre-claim situation.
Examples of customer service improvements include: Ensuring that non-claims personnel are adequately
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trained on the claims process to advice customers properly during sales and service transactions. • Doing
a better job of setting policyholder expectations of what happens when a claim is filed, and then •
Meeting those expectations during claim fulfillment. • Demonstrating care and concern for the insured in
a more consistent manner.
Miyazaki, A. D. (2009) conducted an experimental study which showed that higher deductible amounts
result in stronger perceptions that insurance claim padding is fair to the insurance company, weaker
perceptions that the behavior is unethical, and higher proposed claim award amounts. The study also
shows, however, that the deductible amount effects are attenuated for consumers who display higher
ethical standards as reflected by their scores on the consumer ethics scale. The study also shows,
however, that the deductible amount effects are attenuated for consumers who display higher ethical
standards as reflected by their scores on the consumer ethics scale. Implications are discussed with
respect to the insurance industry, deviant consumer behavior, and general business ethics theory.
3 Research Gap
There have been a number of valuable studies of insurance fraud (Gupta, A., & Venugopal, R.
(2011), Lesch, Dedene, G., & Viaene, S. (2004) all of which present evidence of insurance
fraud on the entire industry in general. However, none of these studies considers only life
insurance.
While there has been some research on fraudulent activities related to claims (Rose, S. (2008),
Swaby, G. (2011), Miyazaki, A. D. (2009)), where in the focus is only on claims fraud and little
has been written about all the fraudulent activities.
There are several papers which focus on measures to curtail insurance fraud (Dixon, M. I.
(1996), Holmes, et al. (1999) but little focus is on what should be the fraud control mechanism
for life insurance fraud or how to curtail fraud. Which are the characteristics for committing for
insurance and insurer fraud, whether it is same for both and what should be the punishments to
the perpetrators for life insurance fraud and drivers that contribute to fraudulent activity?
There are several papers which focus on risk management (George, E. (2003) in insurance but
hardly any paper talk about the fraud risk, how to do fraud risk assessment and the risk
management
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4 Research Methodology
4.1 Research Design:
Exploratory Research: This comprises of secondary data analysis as well as primary. Primary data
comprise of qualitative research – expert interview and advice was taken. These experts comprised of
manager and above cadre (risk profile) from life insurance companies as well as investigating agencies
which were 6 in number and also 4 academicians’ interview were taken. Questionnaire was circulated
via email to industry experts and proof checking of the content of the questionnaire was done and the
questions were modified as per the expert’s advice. This helped us to gather information such as actual
practices followed by them to review fraud and the measures taken by them to control it.
Descriptive Research: Two surveys i.e. employees and consumer survey was conducted in order to study
the customer’s perception and practices followed by the life insurance companies. This helped us to
know how a customer would rate their company as well as agent, personal experience of the consumer
with fraud, curtailing and punishing fraud. Detail description is given below.
4.2 Sampling Frame
4.2.1 Sampling Technique
Survey 1 - Method of sampling used was judgmental and convenience. Survey 2 - method of sampling was
convenience.
4.2.2 Sample size
Survey 1 – 50 industry experts.
Survey 2 - Total 500 respondents.
4.2.3 Sample selection procedure
Survey 1 - Total seven life insurance companies (LIC, Reliance, Bajaj, ICICI, Kotak, Aviva and Birla )
were selected on the basis of status of grievances reported for the year 2010-11 in the annual report of
IRDA. Three departments were taken i.e. risk/audit and compliance, claims and operation working in
Ahmedabad, Mumbai, Delhi and Chennai.
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Survey 2 – Respondents were selected and mostly walk in customers in the insurance companies and
banks were taken.
4.3 Data Collection Tools
The secondary data was collected from various online database, journals and books available in the
library. Primary data was collected through survey by administering questionnaire. Personal as well as
telephonic interview were taken of experts. Telephonic mode was selected in order to meet wider
geographic reach. Online as well as personal survey was taken. Online was again selected in order to
meet wider geographic reach.
4.4 Mode of data collection
Data pertaining to research has been collected with the help of questionnaire
4.5 Method for data analysis
Statistical tool i.e. SPSS is used in order to analyse the data. Various statistical tests were used i.e.
frequency distribution, cross tab, chi-square test, one sample independent t test, two sample independent
t test, correlation and regression were applied.
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5 Data Analysis
This chapter discusses about the analysis done i.e secondary and primary. First the secondary data
analysis is discussed. Brief description about risk management process:
The risk management process starts with key incident reporting which means receipt of Case/ Issue
/Incident. The process starts with receiving request from Referee Unit for Investigation. Referee unit
will be one who will refer the case. It can be operations team while processing the application, claims
team while processing the claims, risk team while conducting the branch audit, doctor audit, mystery
shopping or complaints. Further step of the process is to assign the case for investigation to the risk
consultant. Investigation is then conducted with the help of outsourced team. Risk consultant will then
receive the report and will give final recommendation on the basis of report. Side by side it is also
forwarded to control committee to plan risk mitigation and present it to control committee. Risk
management process which is explained above is inferred from the below mentioned diagram. This
process map was made after meeting various industry experts during the visit to company.
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5.1 Types of Fraud
Thus from the literature review available and experience the types of fraud can be broadly divided as
follows:
Internal Fraud: Internal frauds are those perpetrated against a company or its policyholders by agents,
managers, executives, or other employees.
External Fraud: External frauds are directed against the company by individual or entities as diverse as
medical providers, policy holders, beneficiaries, vendors and career criminals.
An internal fraud often involves theft of proprietary information, improper relationships with vendors or
consultants involving conflicts of interest, diversion of policyholder or company funds by employees,
use of confidential information for investment purposes, intentional misrepresentation by agents to
prospective customers about the characteristics or future performance of company products and any
other unethical activity that might put the business interest at risk. External fraud can involve such
schemes as fraudulent automobile, life, health or disability claims, the use of tax-advantaged insurance
products for concealing the origins of illicit funds, or the negotiation of counterfeit checks. Internal
frauds are those perpetrated against a company or its policyholders by agents, managers, executives, or
other employees.
5.2 Typical fraud categories
There are three major parties involved in perpetrating life insurance fraud. One is the internal employees
or the agents of the company, second is the policyholder i.e. the customers and third is not direct fraud
but indirect fraud i.e. involvement of doctors. Figure 1 depicts the types of fraud committed by the
perpetrators
Figure 1 Types of Fraud
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Some of the frauds are listed below with case studies
Table 4 Categories of frauds
1 Non-Disclosure: The failure by the insured or his broker to disclose a material fact or circumstance to
the underwriter before entering into a policy.
Category Case Study
Misrepresentation-Misrepresentation of
critical information relating to profile
(includes incorrect income, educational
qualification, occupation, etc)
Proposal form mentioned that the client had
a shop in the market, investigations revealed
that the client was a vegetable vendor sitting
on the foot path
Forgery/ Tampered Documents: Forging
the customer’s signature in any document /
proposal or any supporting document
Client staying in Nagpur, working as a
surgeon, counter signature required on the
application form for some corrections, form
comes back within one hour; Signature was
forged by the advisor, who was client’s
brother.
Bogus Business: Proposal Forms submitted
for nonexistent customers (bogus business)
In one location the Sales Manager had
logged in a proposal of a nonexistent client
Cash Defalcation: Delayed Deposit of
Premium
Advisor had collected the premiums from
the customer and had not deposited the same
for almost a month, it came to the insurer’s
notice when the customer was sent the
lapsed letter, and was complaining. Later
advisor deposited the cash. He said he used
the cash as he had a financial problem.
Misselling : Product Misinformation –
Selling Practice wherein the complete,
detailed and factual information of products
is not given to the Customer: Incomplete /
Incorrect representation on: Guaranteed
Returns, Rider Features, Charges, Linked
Product vs. Endowment etc., Facility of
Top-up vs. Regular premium, Premium
Holiday
Customer was not told about the
administrative charges, a customer was
given a cover of 1lakh and premium was
5lakhs. This was a clear case of misselling as
even the facility of a Top Up was not
explained to the client
Pre Signed Forms: Obtaining pre signed
blank forms and filling up of the ACR/CCR
without actually physically seeing the
client/ satisfying oneself about the client.
SM had not met the customers , proposal
form mentioned that customers were
working in an electronic agency , however in
reality they were working in a Tabela (Cow
Shed)
Nexus: Doctor’s nexus means he getting
involved with other perpetrators in
committing life insurance fraud
Doctor gave clean medical reports.
Influenced the Doctor to conceal
information, alternatively coercing the
Doctor to submit report without conducting
Tests
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2 Misrepresentation: A ‘misrepresentation’ is a false statement of fact made by one party to another
party and has the effect of inducing that party into the contract. For example, under certain
circumstances, false statements or promises made by a seller of goods regarding the quality or nature
of the product that the seller has may constitute misrepresentation.
3 Mis-selling: The ethically questionable practice of a salesperson misrepresenting or misleading an
investor about the characteristics of a product or service. In an effort to make a sale to a potential
customer, a financial products salesperson could leave out certain information or describe a financial
product as something the investor urgently needs, even though sound financial judgment would
come to the opposite conclusion.
A good example of misselling can be seen in the life insurance industry. Consider an investor who
has a large amount of savings and investments but no dependent children and a deceased spouse.
This investor would arguably have little need for whole life insurance and, therefore, an insurance
salesperson describing the product as something the investor urgently needed to protect his or
her assets in the event of death could be considered a case of misselling.
4 Cheque dishonor: Where any cheque drawn by a person on an account maintained by him with a
banker for payment of any amount of money to another person from out of that account for the
discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either
because of the amount of money standing to the credit of that account is insufficient to honor the
cheque or that it exceeds the amount arranged to be paid from that account by an agreement made
with that bank.
5 Paying premium for customers – rebating: Giving a premium reduction or another financial
advantage not stated in the policy as an inducement to purchase the policy. The offer of sharing
commissions with the applicant is an inducement that is not part of the insurance policy and,
therefore, is considered rebating. Rebates include not only cash but also personal services and items
of value. Rebating is considered a violation of the Unfair Trade Practices Acts in most states.
5.2.1 Proposal Stage: Fraud
This chapter reports the research findings on fraud at the proposal stage. It looks at the two main factors
which facilitate fraud: first, the system of selling through unaccountable agents, who put sales above all
other considerations; and second, the features of policies which expose them to fraud. While these
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factors are discussed separately, in reality they overlap. Three case studies are discussed, focusing on the
three types of insurance fraud by customers most common at this stage.
Deficiencies of current methods of sale:
As previously noted, most insurance is sold through agents, and this can lead to two main problems:
first, insurers have little control over the type of person they are insuring; and second, they have little
control over the types of policies that are sold.
Insurers admit that often banks or building societies take total control of policies, from issue through to
the claim or renewal process. Because of this insurers rely on their agents to detect fraud at the proposal
stage. But agents are encouraged by large commissions to sell insurance, and it is not necessarily in their
interests to expose fraudulent intent. If they identify a prospective fraudster at the proposal stage, and
refuse to insure him/her, they lose a sale and the commission on that sale. The commissions that agents
receive for the sale of insurance policies are often a very important source of income. Reports in the
insurance press suggest those travel agents’ and tour operators’ profit margins on the policies they sell
are between 30 and 60 per cent (Wheal 1997). It has even been suggested that travel agents obtain
bigger mark-ups on insurance, to compensate for their low margins on holiday sales (Wheal 1997). In
this way insurers are actively motivating their agents to sell policies, but there is no incentive to prevent
fraud.
Agents sometimes sell insurance as a secondary product, in the form of a standard package. As a result,
applicants may have little choice as to the type of insurance they purchase, and the outcome may be that
their policies are unsuitable or provide inadequate cover. If a policy is not suitable, and a loss occurs,
some policyholders are likely to lie on their claims form and misrepresent the circumstances of the loss
in order to ensure that the insurer pays out on the claim. In order to understand the life insurance fraud at
the proposal stage four case studies were studied. These case studies were shared by one of the life
insurance company. Out of four case studies one case study is explained in detail below:
Case Study 1
A proposal form was signed on 9/2/2006 was submitted at the branch on 14/2/2006. It reached
underwriter's desk on 16/2/2006 and policy was issued on 20/2/2006. The policy was dispatched to the
customer and was returned undelivered to HO. Hence it was resent to branch to be personally handed
over to the customer. By that time, branch was intimated about the death of Life Assured. Life Assured
died on 24/2/2006, just 4 days after RCD. Entire set of medical reports was submitted to the company at
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the time of claim, which brought to light distressing facts. Life Assured was under treatment from as
early as 27/12/2004 and she was tested HIV positive on 31/1/2005.
As per the proposal form she was keeping good health. Same was confirmed by the confidential report
given by Advisor who knows LA for 7 years. The report was also countersigned by the SM. With Height
159 cms and weight 65 kgs, as mentioned in the proposal form, BMI was standard. But, the medical
reports presented an altogether different picture regarding Life Assured's weight. On 4/2/2006, she was
weighing 37 kgs and on 9/2/2006, the day she signed proposal form, her weight was 36 kgs, making
BMI as non standard. Moreover, the day the proposal form was signed i.e. 9/2/2006; Life Assured was
under treatment in hospital.
Being a clear case of misrepresentation and non disclosure of material facts, the claim was repudiated
and as a goodwill gesture fund value was paid to claimant. Learning from the case study was to make
sure that discreet enquiries are made about the proposer before a policy is issued, so as to ensure fair
selection of lives. In this case advisor knew LA for seven years and she was under treatment on the day
proposal form was signed. Whenever, a countersign is done by SM, it is the responsibility of SM to
reconfirm the facts relating to health, age and occupation directly with the customer at least through a
telephonic call. Not long ago, executives believed that a hallmark of the well-run enterprise was its
ability to actively avoid risk while pursuing objectives devoid of danger.
Risks emerge from a potent mix of factors, including regulatory compliance, competitive pressure,
environmental impacts, security and privacy concerns, business continuity, strategic planning, reporting
protocols, operational processes, sustainability, and more. Companies of differing sizes, industries, and
geographies will face a varied and unique arrangement of risk factors.
Risk management, as currently practiced, is often a one-time, internally disruptive event. Despite fancy
analytical capability and dedicated professionals, many companies deploy a risk management system
that is more theoretical than practical, based on anecdotal rather than empirical evidence, and one that is
fragmented across jurisdictions, industries, and frameworks. The result is less risk management and
more risk recognition. It's a good start but only a start.
Developing a Risk Strategy with reference to this case study is as under :
Risk intelligence, on the other hand, requires a real time, ongoing process capable of engaging external
risks and opportunities to fulfill stated company objectives within accepted risk-taking parameters. To
attain this state requires, first, executives who actually understand the nature of risk and, second, a well
defined strategy to guide an organization's risk management program.
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Strategic risk management is not merely identifying risks, nor is it listing objectives to be achieved in
dealing with identified risk. Both the identification and the elucidation are necessary-but not sufficient-
to complete the optimum risk management program.
Strategy is key. An effective strategy will include the following procedures to deal with the full
spectrum of risk defined above:
Risk assessment should begin by identifying a company's most basic strategic assumptions
followed by questioning their veracity.
Understand the difference between unrewarded and rewarded risk and allocate resources
accordingly. For example, compliance with regulatory requirements is necessary but won't result
in a reward. Acquiring a competitor might.
Focus on finite effects instead of infinite causes. Understand critical assets and dependencies and
plan for their independent functioning when necessary.
Test organizational resilience under different scenarios. Improve flexibility to deal with
uncertainties.
Harmonize (ensure risk managers all speak the same language), synchronize (coordinate across
institutional boundaries), and rationalize (eliminate duplication of effort) existing risk
management functions to drive down the cost of good risk management.
Effective strategic risk management should enable companies to state unequivocally and document
clearly the organization's risk exposure. Most importantly, with an appropriate risk strategy in place, the
decision to accept risk exposure will be informed, deliberate, and justified.
5.2.2 Claims Stage: Fraud
This chapter summarizes the research findings on fraud at the claims stage. The present chapter focuses
on four main facilitators of insurance fraud, i.e. the factors which make fraud possible. These include:
the difficulty of proving that a fraud has occurred; the involvement of people willing to help fraudsters;
the awareness that insurers do not investigate some cases of suspected fraud, as they find it quicker and
cheaper to pay out on a claim; and the process of ‘fast tracking’, which leaves insurers little time to look
for fraud. In order to understand claims stage fraud total three case studies were studied, out of which
one is listed below. These case studies were shared by one of the life insurance company.
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Case Study 2
The proposal amounted for 150K and the age of the insured was 42 years. The term plan was taken for
25 yrs. Occupation was driver and annual income was 75K. Family history was good. BMI was normal
and personal health detail was good. Age proof was standard. The LA was known to the advisor for last
1 year. The underwriting decision was to accept at ordinary rate and policy was issued on 27/01/03. LA
died on 31/01/2003 and the cause of death submitted in claim form was heart attack.
Investigation was first done by SM that LA visited one of the neighbor states about light treatment for
some time. Detail investigation revealed that LA was suffering from Cancer for last one year and
undergoing treatment at Cancer Institute. On 27/01/03 also he went for treatment to the Hospital.
Decision taken was claim to be repudiated and action was to be taken against Advisor.
Whatever the type of case, we have to begin with the basics, carefully building from there. Every
investigation is a detailed and systematic examination to uncover the facts and determine the truth.
Every investigation follows a set process starting from collecting evidence and information, ascertaining
conclusions and acting on them.
5.3 Control on Life Insurance fraud
This chapter focuses on the primary survey done with the industry experts. The assessment was done in two
phases. The first phase involved selection of variables, selection of scale of measurement and designing
questionnaire, testing and piloting of the questionnaire. The second phase involved online and telephonic survey
based on the questionnaire, cross checking, data entry, data analysis and preparation of final report. A set of
variables were selected on the basis of literature review and discussion with the risk personnel of different life
insurance companies. The sampling profile displays 32 percent of the valid responses falls in risk profile. 28
percent fall in operations profile and 20 percent fall in both claims and audit or compliance.
5.3.1 Discussion and Analysis
Data obtained from the questionnaires were tested using nonparametric means. The Chi square test of
independence was used to measure the independence of two variables. Independent Sample T test was
used to measure the significant differences between two variables. Multiple responses set in SPSS were
created to group different variables into one. Correlation was also used. Cross tabulation and frequency
distribution were also used.
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5.3.2 Review existing fraud control mechanism
5.3.2.1 Research Hypothesis
H1o: Fraud risk exposure faced by insurance companies and areas that need more stringent anti fraud regulation
are independent of each other
Life insurance fraud arises because of four major types of risk : Operational Risk is defined as the risk of loss
resulting from inadequate or failed internal processes, people and systems or from external events, Insurance Risk
refers generally to the uncertainty about the ultimate amount of net cash flows from premiums, commissions,
claims and claims-settlement expenses emanating from a cession of contractually defined liabilities (Actuarial and
Underwriting Risk) and the timing of the receipt and payment of those cash flows, Legal and Reputational Risk
refers generally to the risk resulting from institution’s failure to enact appropriate policies, procedures, or controls
to ensure it conforms to laws, regulations, contractual arrangements, and other legally binding agreements and
requirements and Financial Risk refers generally to the risk resulting from having inadequate definition of
accounting policies, material misstatement and cash defalcation. We wanted to check whether four key areas of
risk exposure and the areas that needs more stringent anti fraud regulation are independent of each other. These
four areas are operational risk, financial risk, legal and reputational risk and insurance risk. Respondents were
asked two separate questions and requested to give ranking from one to four. Options for both questions were
common. To check the hypothesis non-parametric test i.e. chi-square test of independence was applied at
significance level of 0.05. Results depicted p value equal to 0.000 which is less than 0.05 and therefore null
hypothesis is rejected. This means that key areas of risk exposure and the areas that need more stringent anti fraud
regulation are dependent on each other.
5.3.2.2 Mechanism used by life insurance companies to discover life insurance fraud
It is very much important for any life insurance company to have a proper mechanism to discover life insurance
fraud. It is found with the help of survey that 33 percent of the respondents indicated that fraud risk assessment
framework consisting of a dedicated risk department and internal audit both are the mostly used mechanism to
discover fraud. It is followed by whistleblower policy i.e. 28 percent and 5 percent of the respondents expressed
that external audit is used as a mechanism. None of the respondents have told that external database search is used
to discover life insurance fraud.
H2o: The selection mechanism used for discovering life insurance fraud is independent of the individual profile
There are various mechanisms which are used by the life insurance companies to discover life insurance fraud.
They are having a fraud risk assessment framework i.e. a dedicated risk department, whistleblower policy,
conducting external audits, conducting internal audits and external database search. Hypothesis addresses whether
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the selection of these mechanisms are independent of the individual profile of the respondents. Profile consists of
personnel from risk, audit/compliance, claims and operations department. Chi square test of independence was
used at significance level of 0.05. P value computed is 0.140 which is more than 0.05 and therefore null
hypothesis is not rejected. Hence we can conclude that the selection for mechanism used for discovering life
insurance fraud is independent of the individual profile.
H3o: The selection methods used by life insurance companies to condense life insurance fraud is independent of
the individual profile
There are various methods used by life insurance companies to condense life insurance fraud which are
screening, sampling, mathematical tools, psychometric tests and investigation on suspicion. Hypothesis
addresses whether the selection for methods used by life insurance companies to condense life insurance
fraud is independent of the individual profile. Chi square test of independence was used at significance
level of 0.05. P value computed is 0.001 which is less than 0.05 and therefore null hypothesis is rejected.
Hence we can conclude that the selection for methods used by life insurance companies to condense life
insurance fraud is dependent on the individual profile.
5.3.2.3 Insurance complaints
There are two major types of life insurance frauds one is Insurer fraud which means an internal fraud i.e. that
committed by agents or employees and second is Insurance fraud which means a fraud perpetrated by
policyholders. Majority of insurer and insurance fraud are depicted from the complaints or grievances received.
These complaints can be received from inside the organization or outside the organization. 88 percent of insurer
complaints are received from inside the organization and 12 percent outside the organization similarly
88 percent of insurance complaints are received from outside the organization and 12 percent from
inside the organization.
5.3.2.4 Preventive and fraud control measures
5.3.2.4.1 Characteristics for committing fraud
There were seven characteristics identified for committing insurance fraud and insurer fraud. We wanted to check
whether there is any correlation between the characteristics for committing insurer fraud and insurance fraud.
H4o: There is no significant correlation between the characteristics for committing insurer fraud scheme and
insurance fraud scheme
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We have checked the assumptions for correlation that both the variables are in interval scale, there is
linear relationship which was observed with the help of scatter diagram, data was normally distributed
and there were no significant outliers. A Pearson product-moment correlation was run to determine the
relationship between characteristics for committing insurer fraud and insurance fraud. There were in
total seven characteristics identified for committing insurer and insurance fraud. The data showed no
violation of normality, linearity assumption except for 1, 2 and 6th characteristics. Hence these were
excluded and the remaining four characteristics were Perpetrator takes advantage of lax organizational
attitude, Exploitation due to lack of separation of duties, Exploitation due to untrained personnel and
Exploitation due to failure to conduct periodic checks. There was a strong, positive correlation for
exploitation due to lack of separation of duties for insurer and insurance fraud (r = 0.662, n = 50, p <
.0005). Thus it can be concluded that out of seven different characteristics for committing insurer fraud
and insurance fraud there is significant positive correlation in three characteristics. This also confers that
different characteristics are adopted for committing insurer and insurance fraud. Taking advantage of
lax organizational attitude, exploitation due to lack of separation of duties and failure to conduct
periodic checks all this leads to lack of internal control system. Since there is a significant correlation in
the characteristics for these three, it can be concluded that lack of internal control leads to both insurer
and insurance fraud.
If there are vital differences or similarities, however, information of those differences or similarities
could be particularly helpful to insurer-fraud avoidance and detection units in achieving their missions.
Regarding characteristics of schemes, we would expect employees to develop, through their daily
activities, an understanding of company internal controls and to become familiar with any weaknesses
inherent in their execution.
Internal controls are policies and procedures designed to protect assets from damage or theft and to
prevent concealment of fraudulent activity through modification of the information system that tracks
assets and transactions. Examples of good control mechanisms would include separation of duties so
that one employee cannot have both the custody of cash and authorize its removal from the company;
protection of documents from alteration or destruction so that the validity of transactions can be
ascertained; and periodically taking an inventory of both assets and the documents that vouch for
transactions to make sure neither has been removed during the period to conceal a fraud. Employees,
through their knowledge and ongoing relationship with the company, would tend to be in a position to
use multiple schemes to perpetrate a fraud. In contrast, multiple schemes should be somewhat less
prevalent where fraud-detection processes are in greatest use e.g., insurance fraud. Finally, regarding
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methods of detection and investigation, it can be expected claims examinations to be the major vehicle
whereby insurance fraud is detected and investigated, because this form of fraudulent activity is
considered the primary target for insurers. Consequently, employee fraud most likely will be detected
and investigated by alternative methods.
5.3.2.4.2 Parameters for an effective Fraud control Policy
As discussed above, it is vital for any life insurance company to have an effective fraud control policy
but the question is what will help the insurer in implementing an effective fraud control policy. The
results of the survey are given below:
23 percent of the respondents indicated that management involvement and awareness and training
workshop will help in implementing an effective fraud control policy equally. 22 percent of the
respondents expressed that stringent action on fraud identified will help to implement such policy. 14
percent feel enabling employees to report and deal with life insurance fraud will help. 10 percent of the
respondents feel that walk the talk will help. 10 percent of the respondents feel that all of the parameters
listed will help in implementing an effective fraud control policy.
5.4 Customer’s perception
This chapter focuses on the perception of customer with regard to life insurance fraud. Customer survey
was conducted to know their perception with regard to life insurance fraud. Direct survey as well as
online Survey was conducted for the same using the website esurveyspro.com. Data collection for the
same is done and data analysis is under process. The collected data was edited, coded, tabulated,
grouped and organized according to the requirement of the study and then it was entered into SPSS
(statistical package for social sciences) for analysis.
This study was conducted to gain insight on why public tolerance of insurance fraud seems to be
increasing. Both qualitative and quantitative research was used to attempt to understand how public
attitudes about fraud are formed and what factors influence them. Among the areas explored in the
survey include opinions about insurance fraud and insurance providers. The frequency distribution
displays 45 percent female and 55 percent male respondents.
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5.4.1 Four drivers that contribute to fraudulent activity.
After conducting the survey it was observed and found that broadly there are four drivers which
contribute to the fraudulent activity in life insurance fraud. 1) Poor control (Internal control of the
company) 2) Difficult economy 3) Fraudster’s attitude( I can get away with it) and 4) Consumer’s
attitude (Fraud is unacceptable).
The respondents were asked to what degree they agree that poor control from an insurance company
might make a person more likely to commit fraud against that company. The respondents were asked to
what degree they agree that poor control is likely to contribute to life insurance fraud and it was
observed that more than half that is 55 percent of the respondents believe that poor control is responsible
for driving insurance fraud.
Further creating a market atmosphere conducive to fraud is the current slow economy. Consumers agree
that people are more likely to commit insurance fraud during economic downturns. 61 percent of the
respondents agree that in difficult economy that is during recession there are more chances of
committing life insurance frauds.
More than 55 percent of respondents believe insurance fraud occurs because people believe they can get
away with it and that they need money. This clearly describes the fraudster’s attitude for driving up the
insurance fraud.
Around 70 percent of the respondents have shown the likelyhood to report a case for life insurance
fraud
It is evident from the analysis that around 80 percent of the respondents feel that insurance companies
are capable of detecting fraud. But amongst those it is clear that 52 percent of them think that insurance
companies are only somewhat capable, which is concern. There are 20 percent of the respondents who
still feel that insurers are not capable of detecting life insurance fraud. Fraud can be perpetrated in many
ways. Therefore, an insurer should adopt a holistic approach to adequately identify, measure, control and
monitor fraud risk. For an insurance organization, its fraud management strategy should form part of its
business strategy and be consistent with its overall mission and objectives. Detection of insurance fraud
should be in two steps: The first is to proactively identify suspicious claims or surrender that has a high
possibility of being fraudulent. This can be done by conducting data analysis using various forensic tools
or by putting in place an effective fraud risk assessment framework. Additionally, insurance companies
can provide their stakeholders with a fraud reporting mechanism and second is regardless of the mode
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of implementing step one, the next step should be to investigate these fraud claims or surrender and
conduct further analysis.s
5.4.2 Four Expressions : Tolerance level of customers for life insurance fraud
All the respondents were grouped into one of the subgroups depending on their levels of tolerance and
certain perceptions of why people commit insurance fraud. For the purposes of this study, the subgroups
are identified as Pragmatists, Traditionalist, Moralists and Columnist.
The Pragmatists have a low tolerance for insurance fraud but realize it occurs. They may feel some
behaviors are justified depending on the circumstances; they don t advocate strong punishment. This
group represents 16 percent of the survey s respondents.
The Traditionalists are fairly tolerant of insurance fraud, largely because they believe many people do it,
making it more acceptable. For that reason, they tend to believe in more moderate forms of punishment.
This group makes up 27 percent of the survey s respondents.
The Moralists have the least tolerance of insurance fraud. They believe there s no excuse for this
behavior and are the most willing to punish perpetrators severely. This is the largest group of
respondents 47 percent of the surveyed population.
The Columnists have the highest tolerance for fraud and tend to blame the insurance industry for people
s behaviors because they believe insurers don t conduct business fairly. They want little or no
punishment for perpetrators. This group represents 10 percent of the survey s respondents.
For analyzing the hypothesis, Pearson Chi-Square is the most common test for significance of the
relationships between categorical variables. The Chi-Square test is not appropriate if any of the expected
values are small; as a rule of thumb, the Chi-Square test is reliable only if all expected values are 5 or
more. Therefore the assumption was checked and it was found that the same was not violated.
H5o: Gender and tolerance level are independent.
Since the P-value (0.030) is less than the significance level (0.05), we cannot accept the null hypothesis.
Thus, we conclude that gender and tolerance level are not independent and there is a relationship
between gender and tolerance level. This tells us that there is a statistically significant association
between Gender and Tolerance level. That is, both Males and Females do not equally prefer same
tolerance level. Whether the association is strong or weak can be known with the help of Cramer’s V
test. It suggests a weak association between gender and tolerance level as cramer’s V value is 0.134
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H6o: Age and tolerance level are independent.
Since the P-value (0.000) is less than the significance level (0.05), we cannot accept the null hypothesis.
Thus, we conclude that age and tolerance level are not independent and there is a relationship between
age and tolerance level. This tells us that there is a statistically significant association between age and
Tolerance level. That is, different age groups do not equally prefer same tolerance level. Whether the
association is strong or weak can be known with the help of Cramer’s V test. Since the value of cramer’s
V test is 0.204 it suggests a moderate association between age and tolerance level.
5.4.3 Attitudes towards Industry
Respondents were asked to rate the insurance industry in general, as well as their own insurer, agent and
premium from positive to negative. Nearly three-quarters of respondents 59 percent rate their company
on neutral basis and 29 percent are very positive. 72 percent have similar feelings about the industry and
19 percent are positive. On the other hand, 34 percent highest amongst the all parameters rate the
insurance agent as negative and only 22 percent are positive. With regard to the insurance premiums
they are of the opinion that the same are levied properly. Thus it can be concluded that the overall
attitude towards the industry, company and premium is towards positive but with regard to insurance
agent it is negative. Thus we can conclude that major malpractices are done by the insurance agents.
Further one sample t test was also conducted. Assumptions of one sample t test were checked. There
were no outliers in the data, as assessed by inspection of a box plot.
Normality is defined as the "shape of the data distribution or an individual metric variable and its
correspondence to the normal distribution, which is the benchmark for statistical methods" (Hair et al.,
2006; p. 79). Violation of normality might affect the estimation process or the interpretation of results.
For instance, it may increase the chi-square value and may possibly cause underestimation of fit indices
and standard errors of parameter estimates (Hair et al., 2006).
Beside the shape of distribution, normality can also be inspected by two multivariate indexes i.e.
skewness and kurtosis. The skewness portrays the symmetry of distribution whereas the kurtosis refers
to the measure of the heaviness of the tails in a distribution (also known as peakdness or flatness of the
distribution) compared with the normal distribution. In normal distribution, the scores of skewness and
kurtosis are zero. Hair et al (2006) point out that skewness scores outside the -1 to +1 range demonstrate
substantially skewed distribution. However, West et al. (1995) and Kline (2005) suggest that values of
the skew index greater than three (3.0) are indicated as extremely skewed and score of the kurtosis index
33
from about 8.0 to over 20.0 describe extreme kurtosis. The skewness and kurtosis statistics were found
to be within the accepted limits, which indicated no deviation from data normality.
On a three point Scale, the middle part was considered as Neutral for all the four statements and was
given an equivalent number of 2. Hence, value of = 2.5 shows a positive approach towards agreeing to
the statement. It was, therefore, thought fit to take a value of equal to 2.5. For testing the H70
hypothesis one sample t‘ test (with a Test Value = 2.5) was carried out on the responses of four items.
There was a statistically significant difference between means (p < 0.05) and therefore, we can reject the
null hypothesis and accept the alternative hypothesis. Also the mean value of experience towards
insurance agent is significantly lower than the test value therefore it is concluded that respondents are
having negative attitude towards the insurance agent. When they are having negative attitude towards
the insurance agent it means that they are doing malpractices in conducting the life insurance business.
5.4.4 Reasons for life insurance fraud
Respondents were asked to rate on likert scale of 1 to 5 that to what degree they agree for the reasons
which compel people to commit life insurance fraud. The average of each reason shows the following
results: 1) Fraudsters think they can get away with insurance fraud 3.204 , 2) Fraudsters need money
3.308, 3) Fraudsters think they are paying excessively for insurance 3.020, 4) Fraudsters want to
compensate for the deductible expenses they would have to pay 2.636 , 5) Their insurance agents,
friends, family or doctor(s) influence them 2.508 , 6) Insurers make undue profits 2.704 , 7) Everybody
lies on applications or everybody is not honest with their applications 2.668
The respondents have shown a higher amount of disagreement for the last four reasons. Last four
reasons are ranging from 40 to 50 percent of disagreement. Also the averages of all these reasons are
less than 3. So we can conclude that first three are the major reasons which would compel one to commit
life insurance fraud. The last reason i.e. fraudsters think they can get away with life insurance fraud is a
serious point to be taken into consideration. It indicates that there are loopholes in the fraud detection
technique of life insurance and it also indicates lack of internal control system of the insurance
companies. That is why the fraudsters think that they can easily get away with life insurance fraud.
34
5.4.5 Ways insurance companies should prevent fraud
Various possible ways were identified which would help in preventing life insurance fraud.
The ways are: -
1) Fraud warnings are a useful tool – these warnings will help the insurer to curtail fraud as people will
be afraid of these warnings.
2) Management involvement – Unless and until the management involves in curtailing the life insurance
fraud, it will be indeed very difficult for any insurer to prevent life insurance fraud. If the management is
only concerned about its sales growth and is not getting involved in these practices then it will hinder its
own business.
3) Stringent action on fraud identified: This is the most effective way of preventing fraud. As the
perpetrators will come to know that action such as warning or termination is given for doing the fraud
then they themselves will not get into such practices.
4) Awareness and training workshops: This will be a whistleblower policy wherein it will sensitize the
employees regarding the risk factor of life insurance fraud
5) Enabling employees to report and deal with fraud: This will enable the employees to report and deal
with fraud which will in turn help in preventing life insurance fraud
6) Verify information on applications: This is the first step of any policy which will get issue. If the first
step is taken care of then it will definitely help in preventing life insurance fraud and some more are
lower premiums for customers with few/no claims, investigate claims more rigorously, require more
documentation, offer rewards.
It is evident from the analysis that customers believe that almost all ways will help in preventing help as
they have shown higher amount of agreement than disagreement. Except for two reasons, one is lower
premiums for customers with few or no claims and requires more documentation. They have shown
higher amount of disagreement than agreement because the average of both the statements are lowest
amongst all i.e. 3.3 and 3.09 respectively.
5.4.6 Punishments for life insurance fraud
The study also focuses on the possible consequences or punishments to be given to the perpetrators for
committing life insurance fraud. Four punishments or consequences to be given to perpetrators for
committing life insurance fraud are prosecute for lying and submitting wrong information, rejecting
unjustified portion of claim; paythe remainder, rejecting insurance to claimants who have filed false
35
claims, rejecting all claims in cases of fraud applications. We wanted to check whether there are
significant differences in the punishments with regard to gender.
H8o: There is no significant difference in the punishments to be given for life insurance fraud for male
and female
There were no outliers and the data was normally distributed for each group, as assessed by box plot and
Shapiro Wilk test (P< 0.05). When using t-test we need to decide if we can assume equal variances.
Therefore Levene’s test for equality of variance was run in order to check whether equal variances can
be assumed or not.
Independent sample t test is used to check the differences at significance level of 0.05. It is evident from
the analysis that null hypothesis H8Bo and H8Do are accepted since the p value is greater than 0.05 and
therefore there are no significant differences in these punishments for male and female for second and
fourth punishment as p value is greater than 0.05. Whereas in case of null hypothesis of first and third
punishment are rejected since p value is less than 0.05 and there are significant differences in
punishments with regard to gender. First case mean is 5 for male and 6 for female. Second 7 for both
and third 7 for male and 8 for female. Fourth 7 for both.
Amongst those who knew of anybody who had committed life insurance fraud it was further asked to
them whether they have reported the same or not. It was found that out of 38 who knew somebody who
had committed life insurance fraud only 16 have been reported i.e. less than 50 percent. This clearly
indicates that people are least bothered in reporting life insurance fraud. May be they would not like to
get into anything or they must be afraid of the systems. But this can also be a hinder in preventing or
curtailing life insurance fraud.
5.4.7 Factors affecting various reasons
By using the multiple regression technique, it was examined whether two factors poor control and
economic recession have significant effect on various reasons which compel people to commit life
insurance fraud. All the assumptions of regression were met.
Our analysis is performed in two stages. First it is identified and selected that poor control and
economic recession are significantly correlated with different reasons which compel people to commit
life insurance fraud. The test is used to check the significance of individual regression coefficients in the
multiple linear regression models. Adding a significant variable to a regression model makes the model
more effective, while adding an unimportant variable may make the model worse.
36
The assumptions of linearity, independence of errors, homoscedasticity, unusual points and normality of
residuals were met. From the analysis it is evident that whether variables statistically significantly
predicted all the reasons. Tick mark signifies that various reasons are affected by poor control and
economic recession. Thus it can be concluded that poor control of any insurance company affects only
one reason which compel people to commit life insurance fraud whereas economic recession affects
majority of the reasons which compel people to commit life insurance fraud.
Table 5 Regression Table
s
Poor control Economic
Recession
Fraudsters think they can get away with insurance
fraud
√
Fraudsters need money √
Fraudsters think they are paying excessively for
insurance √ √
Fraudsters want to compensate for the deductible
expenses they would have to pay
√
Their insurance agents, friends, family or doctor(s)
influence them
√
Insurers make undue profits - -
Everybody lies on applications or everybody is not
honest with their applications
√
37
6 Findings
The researcher has used primary and secondary data to derive its objectives as through applying
appropriate research methodology as described in Chapter 4.
Data Source
1. Secondary data for the study are collected from the Annual Report and web resources of
the companies, articles, papers, lecture notes, news and other documents published. We
also referred summary proceedings of seminars and conferences and related websites.
2. Two Questionnaires were developed, pilot tested and subsequently administered to
collect primary data. The questionnaire was structured and mainly contained closed
ended questions. The response was recorded and measured by using Nominal Scale and
Likert Scale.
Data Preparation
Data preparation was first checked preliminary to testify its completeness. The collected data was then
edited, coded, tabulated, grouped and organized according to the requirement of the study and then it
was tabulated into SPSS (statistical package for social sciences) for analysis.
Analysis and Interpretation of Data
For analyzing the hypothesis, parametric as well as non-parametric tests was used in this research. Chi-
Square test used to test the statistical significance of observed association in a cross-tabulation and to
analyze the data because Pearson Chi-Square is the most common test for significance of the
relationships between categorical variables. Along with Chi –Square, Cramer’s V, used where ever
required for measuring strength of association between the two variables, T-test, one sample T test,
correlation and regression were used.
6.1 Findings related to types of fraud
There are two types of life insurance fraud internal and external. Internal frauds are those perpetrated
against a company or its policyholders by agents, managers, executives, or other employees. External
frauds are directed against the company by individual or entities as diverse as medical providers, policy
holders, beneficiaries, vendors and career criminals. (Chapter 5.1)
38
6.2 Findings related to fraud categories
There are three major parties involved in perpetrating life insurance fraud. One is the internal employees
or the agents of the company, second is the policyholder i.e. the customers and third is not direct fraud
but indirect fraud i.e. involvement of doctors. Agents are involved in committing life insurance fraud
through misrepresentation of the facts, tampering of the documents, and nexus with related parties,
logging bogus business, cash defalcation and intentional concealment of the facts. Customers are
involved in doctoring the documents, bogus business and intentional concealment of the facts. Doctor
are involved in helping the agents or policyholders by providing clean medical reports. (Chapter 5.2)
6.3 Findings related to fraud risk exposure
The hypothesis of whether four key areas of risk exposure and the areas that needs more stringent anti fraud
regulation are independent of each other was checked with the help of chi square test. It is evident from H1o.
Results depicted p value equal to 0.000 which is less than 0.05 and therefore null hypothesis is rejected. This
means that key areas of risk exposure and the areas that need more stringent anti fraud regulation are dependent
on each other. (Chapter 5.3.2.1)
6.4 Findings related to selection mechanism to discover and condense fraud
1) Chi square test of independence was applied to check whether the selection mechanism to discover life
insurance fraud is independent of individual profile. It is evident from H2o. P value computed is 0.140 which is
more than 0.05 and therefore null hypothesis is not rejected. Hence we can conclude that the selection for
mechanism used for discovering life insurance fraud is independent of the individual profile.
2) Chi square test of independence was used at significance level of 0.05. P value computed is 0.001
which is less than 0.05 and therefore null hypothesis is rejected. It is evident from H3o. Hence we can
conclude that the selection for methods used by life insurance companies to condense life insurance
fraud is dependent on the individual profile.
3) It is evident from the data analysis section that 33 percent of the respondents indicated that fraud risk
assessment framework consisting of a dedicated risk department and internal audit both are the mostly used
mechanism to discover life insurance fraud. It is followed by whistleblower policy i.e. 28 percent and 5 percent of
the respondents expressed that external audit is used as a mechanism. External database search is used by none of
the respondents. (Chapter 5.3.2.2)
39
6.5 Findings related to insurance fraud complaints
Insurer complaints are received from within the organization and insurance complaints are received
from external sources. If a proper risk assessment framework is adopted within the organization and
stringent action is taken against the perpetrator then it will at least help in curtailing insurer fraud.
Therefore the control and reduction of insurer fraud is within the control of the insurance company.
(Chapter 5.3.2.3)
6.6 Findings related to insurance fraud scheme
There was a strong, positive correlation for exploitation due to lack of separation of duties for insurer
and insurance fraud (r = 0.662, n = 50, p < .0005). Thus it can be concluded that out of seven different
characteristics for committing insurer fraud and insurance fraud there is significant positive correlation
in three characteristics as stated in the chapter. This also confers that different characteristics are adopted
for committing insurer and insurance fraud. Taking advantage of lax organizational attitude,
exploitation due to lack of separation of duties and failure to conduct periodic checks all this leads to
lack of internal control system. (Chapter 5.3.2.4.1)
6.7 Findings based upon effective fraud control policy
23 percent of the respondents indicated management involvement and awareness and training workshop
will help in implementing an effective fraud control policy equally. 21 percent indicated that stringent
action like warnings and termination should be taken against perpetrators. All these will help in
implementing an effective fraud control policy. Lastly an open ended question was asked to the
respondents whether other countries are having better fraud control mechanism and it was found that
only few of the respondents expressed their views that countries other than India are having better fraud
control mechanism. Reason given by them was that since they are more developed they are having better
mechanism. Also a country like the US is having state level regulation which helps in aiding fraud
control. Special institutions like coalition against insurance fraud are involved in research activity for
insurance fraud. Stringent actions against the fraudsters are also taken immediately in other countries.
(Chapter 5.3.2.4.2)
40
6.8 Findings based upon customer’s perception
With reference to chapter no 5.4.1 it was found that four drivers that contribute to fraudulent activity
were poor control, difficult economy, fraudster’s attitude and consumer’s attitude. More than half that is
55 percent of the respondents believe that poor control is responsible for driving insurance fraud and 61
percent of the respondents agree that in difficult economy that is during recession there are more
chances of committing life insurance frauds. More than 55 percent of respondents believe insurance
fraud occurs because people believe they can get away with it and that they need money. This clearly
describes the fraudster’s attitude for driving up the insurance fraud. In order to check whether
consumer’s attitude is driving fraudulent activity or not, it was asked whether it is acceptable for people
to commit life inssurance fraud. Only 24 percents of the respondents were of the opinion that it is
acceptable for the people to commit life insurance fraud. Therefore, an insurer should adopt a holistic
approach to adequately identify, measure, control and monitor fraud risk. (Chapter 5.4.1)
6.9 Findings based upon tolerance level of customers
All the respondents were grouped into one of the subgroups depending on their levels of tolerance and
certain perceptions of why people commit insurance fraud. For the purposes of this study, the subgroups
are identified as Pragmatists, Traditionalist, Moralists and Columnist. Highest percentage of customers
falls into the group of moralists who have the least tolerance of insurance fraud. They believe there is
no excuse for this behavior and are the most willing to punish perpetrators severely. This is the largest
group of respondents 47 percent of the surveyed population. Hence we can conclude that majority of the
respondents believe in punishment for fraud. There is a small group of low tolerance for life insurance
fraud i.e. 16 percent who don’t believe in strong punishment
Respondents were asked to rate their tolerance level and with the help of that we have found that
whether there is a statistically significant association between Gender and Tolerance level. Chi-square
test of independence was applied. Since the P-value (0.030) is less than the significance level (0.05), we
cannot accept the null hypothesis. Thus, we conclude that gender and tolerance level are not independent
and there is a relationship between gender and tolerance level. This tells us that there is a statistically
significant association between Gender and Tolerance level. That is, both Males and Females do not
equally prefer same tolerance level. (Chapter 5.4.2)
6.10 Findings based upon customer’s attitude
41
Respondents were asked to rate the insurance industry in general, as well as their own insurer, agent and
premium from positive to negative. Thus it can be concluded that for insurance agent majority of
customers are having neutral attitude but it is followed by 34 spercent of respondents who are having
negative attitude. This indicates that there is some loophole in the functioning of insurance agent and
that is why people are having negative attitude. One sample t test was also conducted to check the
differences in means and it was found that there was a statistically significant difference between means
(p < 0.05) and therefore, we can reject the null hypothesis and accept the alternative hypothesis. Also the
mean value of experience towards insurance agent is significantly lower than the test value therefore it is
concluded that respondents are having negative attitude towards the insurance agent. (Chapter 5.4.3)
6.11 Findings allied with reasons to commit fraud
The major reasons as per customer’s perception for life insurance fraud are paying excessively for
premiums, perpetrators need money and fraudsters think they can get away with fraud. The last reason
i.e. fraudsters think they can get away with life insurance fraud is a serious point to be taken into
consideration. It indicates that there are loopholes in the fraud detection technique of life insurance. That
is why the fraudsters think that they can easily get away with life insurance fraud. (Chapter 5.4.4)
6.12 Findings allied with punishments for committing fraud
Respondents were asked to rate the possible punishments to perpetrators for committing life insurance
fraud. We have applied independent sample t test and it is evident that punishments like prosecuting for
lying and submitting wrong information and rejecting insurance to claimants who have filed false
claims, there are significant differences in the means for male and female. Whereas for other two
possible punishments both males and females have same preference. (Chapter 5.4.6)
6.13 Lastly it was found that out of two factors i.e. poor control and economic recession, economic
recession affects majority of the reasons which compel people to commit life insurance fraud. (Chapter
5.4.7)
42
7 Suggestions
Findings suggest that the insurance industry develop and fund an intensive, ongoing public information
campaign to educate the public about insurance fraud. This campaign should include messages
addressing consumers.
Consumers believe that a strong sense of right and wrong, more than any other single factor, deters
people from committing insurance fraud. Therefore, the public information campaign should include
messages that appeal to individual’s sense of right and wrong, demonstrating that committing insurance
fraud is tantamount to stealing from others.
The most admired segment of the industry is the insurance agents themselves. Therefore, it is
recommended to enlist the major agent groups to assist in this campaign. The agent groups could be a
source of mass media messages and also provide a grassroots level of credible anti-fraud education from
the individual agent directly to the consumer. In addition, insurers should enlist their own agents to
assist in this campaign through fraud awareness training and by providing them the materials they will
need to educate consumers.
Part of a public outreach campaign must seek to convince consumers that they will benefit economically
from fraud fighting efforts. Insurers and others should publicize any evidence that anti-fraud efforts are
affecting rates, whether such efforts are reducing rates, helping to maintain existing levels or helping to
slow the rise of rates.
In addition, consumers clearly stated they wished to see stronger measures taken to deter and detect
fraud. Therefore, the following aspects are also recommended :
Careful and cost-effective verification of applications targeting material misrepresentations should be a
standard practice by all insurance companies, especially with the advent of new databases and computer
technology. This practice also should be communicated to applicants to dispel any possible notion that
insurers do not check applications thoroughly.
Claim submissions should be scrutinized for evidence of potential fraud and investigated accordingly.
Company anti-fraud activities should be widely publicized so consumers know the risk of committing
fraud and are aware of what insurers are doing to protect their customers from the cost of this crime.
Diligent efforts need to be undertaken to uncover situations where anti-fraud efforts have led to reduced
rates for consumers. Such cause-and-effect relationships need to be publicized as broadly as possible to
convince consumers that they will benefit from antifraud efforts.
43
In assessing which claims practices engender the most customer satisfaction, companies should consider
the potential positive implications for attitudes about insurance fraud. The claims process should be
viewed as an opportunity to build credibility with insured, which may help to lower their tolerance for
fraud.
The insurance industry should explore the feasibility of a reward system to encourage the reporting of
fraud, such as funding a program like Crime Stoppers, or expanding the awareness Fraud bureaus, which
are most familiar with fraud s warning signs, should play the lead role in consumer outreach and
education about the nature and extent of insurance fraud.
There are many institutions like the coalition and/or other organizations in other countries which are
monitoring the anti-fraud outreach programs. Such institutions should be introduced in India as well.
Today, when India’s insurance industry is working toward reducing costs, one of its main focus areas to
control or reduce costs is by proactively arresting fraud, which can be achieved through an effective
fraud risk assessment (FRA) program.
Effective policy holder and vendor due diligence process
Effective claims validation
Mystery shopping, i.e., gathering market intelligence relating to tied and corporate agents,
brokers, etc.
Doctor Audit
Channel reviews pertaining to tied agency, bancassurance and tele calling
Contract compliance reviews including
Effective fraud analytics and electronic dashboards
Some recommendations to allay mounting concerns relating to money laundering:-
a centralized KYC database,
a risk-based approach
The use of intelligent software for transaction monitoring and screening against negative lists
and third party databases.
44
8 Limitations
All efforts have been made to ensure that the research is designed and conducted to optimize the ability
to achieve the research objectives. However there are some constraints that may not validate the research
but needs to be acknowledged.
1. One of the assumptions is that these consumers have a more informed idea about what their
expectations and perceptions are for life insurance fraud. Certain issues in the study concentrate
on both perceptions and attitude of respondents. The major tool, used for evaluation, is 5-point
scale known as Likert scale and Nominal Scale and thus it has its own limitation.
2. This evaluation is based on the primary data generated through questionnaire and collected and
as such its findings depend entirely on the accuracy of such data.
3. Different experts have different views on evaluating attitude and perceptions hence the views
that will be used in the study for the present purpose cannot be treated as the absolute and
perfect.
4. Sample taken for customer’s perception is from Ahmedabad city only. The results of this study
cannot be generalized to consumers of other regions. Expert survey taken is also not done for all
the life insurance companies so again it cannot be generalized to all the experts.
45
9 Conclusion
A very vital challenge for the life insurance sector is due to the ‘fraud risk’. Insurers are conscious of the
need to tackle this risk, but lack of an integrated approach to fraud risk management is a major concern
for them. The increasing instances of frauds and the growing scale of risk demand that insurance
companies regularly evaluate their policies, conducts checks and adopt new and advanced techniques to
curtail such issues. However, no system can wipe out such frauds, but a proactive and dynamic approach
can make a company ready to counter fraudsters and gain an edge over its competitors.
As India’s insurance industry matures, fraud risk management is going to be a major concern for
insurers and business leaders. Insurers will need to continuously reassess their processes and policies to
manage and mitigate the risk of fraud. Fraud risk in the insurance value chain can emanate from internal
and external factors. The risk of employees misusing confidential information and colluding with
fraudsters is on the rise and insurers will need to put in place internal checks and balances to minimize
such issues. External fraud risk can arise at various stages, e.g., registration of clients, underwriting,
reinsurance and the claims process. The severity of fraud can range from a slight exaggeration to
deliberately causing loss of insured assets. The essential components of fraud are the intent to deceive
and the desire to induce an organization to pay more than it otherwise would.
India is one of the fastest growing economies and so is the case with the country’s insurance sector. We
have conducted the Insurance Fraud Survey to assess the fraud scenario, the potential risk exposure, the
economic impact and the industry practices to counter fraud risk. The significant role fraud plays is
negatively affecting the insurance sector is often under-reported or discounted. It is a general consensus
in the market that fraud cases have been significantly increasing. Fraud risk in insurance is a complex
matter, which affects both the parties — insurers as well as policyholders. Frauds increase the cost of
insurance, resulting in insurers losing to their competitors, and at the same time, policyholders paying
higher premiums.
The study recognized life insurance fraud as a serious crime, and insurers are striving to place effective
measures to identify, penalize, and more importantly, avert this kind of practice. Life insurance risk
exposure from insurance risk is a major concern for industry players. Respondents have highlighted the
need for anti-fraud regulations in the area of insurance risk. The internal audit and a dedicated risk
department of the company were considered to be the chief mechanism utilized for detecting life
46
insurance fraud. The truth was that insurer fraud was more compound and involved more defiance of
internal control mechanisms. The schemes used by insurer fraud perpetrators were significantly different
than those used by insurance fraud. External audits and external database search for discovering life
insurance fraud were not prevalent in the life insurance companies. Today, when India’s life insurance
companies are working toward controlling costs, one of its key focus areas to reduce costs is by
proactively detecting fraud, which can be attained through an effective fraud risk framework i.e. - due
diligence process for vendor and policyholder, efficient claims validation, mystery doctor shopping,
channel reviews, compliance reviews, effective fraud analysis and maintenance of efficient dashboards.
Lastly some of the respondents also expressed that other countries are having better fraud control
mechanism compared to India and therefore Indian life insurance companies should learn from other
developed countries to adopt some of the best fraud control mechanisms which are already practiced by
them.
It is evident from the study that major group of respondents comprises of moralists who are least tolerant against
life insurance fraud. This clearly indicates this segment of customers is highly concerned for life insurance fraud
and they are ready to punish the fraudsters. Majority of the customers also perceive that the major reason for
committing life insurance fraud is that fraudsters think they can get away with life insurance fraud. This indicates
the lack of a comprehensive and integrated approach to fraud risk management. Fraud risk poses a very big
challenge for the insurance sector. The increasing number of frauds and the growing degree of risk necessitates
that insurance companies regularly review their policies, build in checks and use new and advanced technology to
avoid such issues. However, no system can be foolproof, but a proactive and dynamic approach can make a
company ready to counter fraudsters and gain an edge over its competitors. Currenty the life insurance companies
are using various mechanism to prevent life insurance fraud such as external audit, a dedicated risk team, internal
audit and whistleblower policy. Some recommendations to allay mounting concerns relating to money laundering
include: a centralized KYC database, a risk-based approach, and the use of intelligent software for transaction
monitoring and screening against negative lists and third party databases. These recommendations were given by
two customers during the survey. KYC database means Know Your Customer database which will help to
understand the identity of the customers and identify duplicate application. Risk based approach means having a
dedicated risk management team who will only focus on identifying and curtailing life insurance fraud. Intelligent
software and negative database list will focus on those names who have already done frauds in the past.
47
10 Further scope of Research
Future studies should apply the life insurance fraud study in other states and with different types of
tertiary institutions in order to test whether the results obtained are general and consistent across
different samples.
Additional research should be done to obtain a clearer understanding of the effect that claims
experience can have on consumer’s attitudes toward the insurance industry, insurance companies and
insurance agents. This study should incorporate additional research into possible links between
consumer’s attitudes toward the insurance industry and their attitudes toward insurance fraud. This
research should include an effort to uncover ways in which positive attitudes can be generated in support
of the goal of reducing fraud.
Special Investigation Units also play important role in the investigation of life insurance fraud, therefore
additional research should be done where in the perception and working of these units are also studied.
48
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