Fraud is described as an intentional act of deceiving, concealing, or misrepresenting information that results in payment of unauthorized benefits to an individual or group who are otherwise not entitled. Like any other industry, Insurance is also prone to the risk of fraud and Insurance fraud cost millions of dollars annually.
Insurance, being a service industry, gains visibility only if the benefits flowing out of insurance industry is well understood by customers. However, the increasing complexity and lack of understanding by the customers makes it vulnerable to fraud.
Types of Insurance Fraud are very diverse and they occur in all areas and stages of Insurance. They also range in severity, from slightly exaggerating claims to deliberately causing accidents or damage.
Insurance fraud poses a very significant problem, and Insurance companies are making efforts to control such activities. Industry focus is primarily on external factors like provider and customer related fraud which accounts for a major share of Insurance frauds. Lesser attention is given to the leakage in its own system or processes, which gives birth to fraud and further encourages fraudsters.
There is a need for ensuring that the insurers put proper checks in place to weed out such fraudulent elements and also put best practices in place, so that even the slightest possibility of fraud does not occur, especially at such time when ombudsman/ courts quite often find fault with the insurance process and systems and hence favour the customers. It’s time to address the leakage in our own system and processes which if not corrected now, will only further train and encourage the fraudsters to commit fraud.
The article focus on the Insurance leakage with particular reference to fraud at various stages of Insurance or policy life which if prevented will control fraud to a major extent.
I] Leakage during Pre-login Stage:
— Certain locations identified as Negative locations (Locations with high propensity to fraud) in the industry. Sourcing policies from such locations have either stopped nor been subjected to stricter underwriting.
— Fraudsters whose proposals are rejected on the grounds of incomplete, non standard age proof or financial documents, are found to re-enter the company without complete verification on submission of alternate proofs.
— Fraudsters who were denied the policy either on financial or medical grounds, are found to re-enter the company as de-duplication, as the system is not equipped well enough to identify the customers even with minor changes.
— Data of declined proposals are not shared within the industry which makes it vulnerable to fraud. Fraudsters can enter other companies with fresh sets of medicals and financial documents and are accepted at standard rates.
— Nominee details are captured in the proposal without requirement of the signature and proof of identification.
II] Leakage Post Login stage:
— With increase in privatization and competition, underwriting has taken a backstage. From short forms, increase in non-medicals limits and waiving of financials, the relaxation of processes has opened the gates to fraudulent claims.
— Decrease in TAT [Turn around Time] to as low as 5 minutes per case has further hampered the quality of underwriting.
— Various contests, floated on month ends and year ends, are pushing in cases which are not acceptable in normal due course of time.
III] Leakage during Policy Servicing:
— Change in Beneficiary, post login stage is increasing. The numbers are alarming and found to be ignored and the fraudster gets an easy access to the policy benefits.
— Revival with most of the policies are accepted up to 6 months without any declaration of good health nor any proof of insurability. Such revivals are called simple revivals and have opened gates to fraudulent claims which are difficult to defend at the claims stage.
IV] Leakage at Claims Stage:
— Focus of the Insurance industry was towards development of Underwriting professionals so far and hence, there is lack of trained professionals in claims.
— Lack of claims systems/technology to detect fraud at the claims stage. Maintaining of claims manually on a spreadsheet leading to errors and open to Internal fraud by the employees.
— Competition within the industry to maintain “Zero Outstanding Claims” year on year, reducing the TAT to as low as 2 working days and settling the law value claims with least documents and no further investigations, has not only hampered the quality of claims assessment but also makes it vulnerable to fraudulent claims.
— Not following of standard clinical protocol and guidelines for all health claims.
V] Post Claims Stage:
— There are no follow ups or investigation post release of claims payout to the claimant. No company can confirm 100% receipt of claims payout by the right individual. There could be change in beneficiary during the policy life, open title cases or claims pertaining to remote locations wherein the details of the claimant is impossible to trace, the money can easily be credited in an account which could be created with fraudulent intention.
— New bank accounts after the death of the Life Assured have not been verified by the companies. Nominee details though captured at the proposal stage without any requirement of signature or any proof of identification, makes it easier for the fraudster to chip in during the claims stage.
— Representation of claims in courts of law by a non-technical person has only disturbed the hit to loss ratio of the company.
— Fear of asking questions or cross questioning the providers, medical attendants and the fear of repudiation as it may not stand in the court of law, only makes claim payable which is otherwise not acceptable.
— Releasing of warning letters or termination letters to the advisors or brokers does not stop them to source business for any other insurance companies.
— Though fraud is not defined under Indian Penal Code 1860, but it has provision for Forgery (Section 463 to 465), giving false evidence (Section 191) and fabricating false evidence (Section 192) and attempts to commit offences (section 511). However, the reluctance of going an extra mile by the industry makes it an invisible and victimless crime.
VI] General:
— Companies not budgeting enough for investigation expenses, which makes it difficult for claims and underwriting teams to combat fraud.
— Most of the companies do not have their own in-house Risk Control Unit which makes it vulnerable to fraud.
— Fear of reputation by the company with increase in repudiation numbers has further increased payment of invalid claims.
— Development of new products without the involvement of claims team can only impact pricing of the product.
— Lack of concurrent and retrospective audits of underwriting and claims files by the companies.
Fighting Leakages can Fight Fraud. There is a need for the management to identify all such weak areas and boost the procedures properly. One has to admit that the lack of deterrent punishment in whatever manner encourages such continued occurrence of frauds.
Steps to mitigate risk of fraud are as follows:
— Proposals from negative locations not to be accepted or should have stricter underwriting.
— Effective vigilance mechanism at Pre-login and Post-login stage to be implemented.
— Robust systems with business rules, weeding out risk of fraud.
— Re-examine sanctity of short TAT for underwriting and claims.
— Red-Flags to be identified and actioned upon.
— Following of standard clinical protocol and guidelines for all health claims.
— A robust concurrent and retrospective review by the management or the audit teams independently examining the processes and report weaknesses in control mechanism.
— Having maker-checker process, financial limits for approvals, periodic supervision by inter and intra department.
— Checks and controls post claims payout stage, to mitigate the element of fraud and ensuring genuine claimants receiving the benefits.
— Claims to be represented by a technical person, especially a claims person in the courts of law.
— Formation of strong Risk Control Unit guided by the management in building the risk control mechanism to mitigate and eliminate the risk.
— Strict adherence to SOP’s relating to underwriting and claims and not ignoring rules and regulations for business purposes.
— Punitive action against employees and intermediaries which will act as deterrent to others.
— Ensuring properly documented systems and procedures.
— Training on Fraud Management to every staff of the Insurance company.
— Sharing of common database and exchange of information within the industry.
— Common Investigation apparatus and sharing of cost within the industry.
— Pursue criminal proceedings against fraudsters.