INSURANCE FRAUD CRIME WITHOUT VICTIMS

INSURANCE FRAUD CRIME WITHOUT VICTIMS CA. Durgesh Pandey Partner - DKMS & Associates, Chartered Accountants Research Scholar - GTU durgesh.pandey@gmail.com Dr. K N Sheth Director, Venues International College of Technology Dean, Interdisciplinary Research, GTU director@venusict.org ABSTRACT Exaggeration of loss, claim for of pre-existing illness, and claims for staged accidents are few of trivial claims which are prevalent or customary in the Insurance industry. Fraud in Insurance sector is as old as the Insurance sector itself. A 2010 Survey of Accenture found that 68% of respondents felt that people commit fraud because detection of such fraud is highly unlikely. Several innovative and new technique of committal of frauds has come to light. Frauds reduce profits. The victim companies are put to competitive disadvantage due to fraudulent activity. Also the policy holders carry the deadweight of the fraudster in form of increase of premium. The paper aims to analyse efficacy of contemporary methods used by perpetrators and concludes that a holistic approach is needed to address the problem. With increase in fraudulent activities human mind and imagination seem to be only limiting factor for frauds. The traditional age old methods should be blended with innovative and technology driven tools such as SNA Social Networking Analysis, predictive analysis and data mining. However there is no one bullet proof fraud detection technique. Multiple techniques working in concert together offers best chance of detection of fraud. Establishment of Fraud Bureau and education of policyholders is the road ahead. The bureau should be focal point for dissemination of all fraud related information. Keywords: Frauds, Insurance, Claims, IRDA 1. INTRODUCTION Fraud in insurance sector is much dissertated topic. An exaggerated loss, a claim for of preexisting illness or a claim for staged accidents are few trivial claims which one comes across on regular basis. These are so prevalent that they have become customary in the Insurance industry. A 2010 Survey of Accenture found that 68% of respondents felt that people commit fraud because it is highly likely that it will be undetected. Thankfully 92% felt that all frauds however fiddle-faddle it may be, should be investigated. Insurance is a systematic transfer of the risk of loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. The Insurance sector has seen a phenomenal growth in India post to opening up for private players. Life insurance industry has grown at a compounded annual growth rate (CAGR) of 16.6% and the non-life industry has grown at 15.4% (CAGR) during this period. Majority of this growth can be contributed to the private sector which have opened new dimension in service and product sale. The Government of India, following the recommendation of the Malhotra committee constituted Insurance and Regulatory Development Authority IRDA in 1999. The IRDA is an autonomous body incorporated to promote and regulate the insurance sector in India. IRDA opened up the sector in 2000 prior to which state owned Life Insurance Corporation (LIC) was the sole insurer for life in India. For non-life insurance there were four Centre for Financial Services Gujarat Technological University CCFS2014 237

companies namely United India Insurance Co, Oriental Insurance Co., New India Assurance Co and National Insurance Co. The revised list of players in the insurance sector has increased to fifty two from mere five in the pre liberalization era. With the increase in the market of the Insurance sector there has been considerable increase in nature and type of fraudulent activities. There has been innovation and leveraging of technology for perpetrating illicit activity and having undue gain. The basic essence of an Insurance contract is to protect oneself and his dependents from uncertainties of life. However as in all sectors here too, there are certain sophisticated brains working against industry indulging into fraudulent activities and putting deadweight on the genuine insurance customers. Insurance is said to be victimless crime. It leaves no apparent victim. But the notion is an incorrect one as cost of fraudulent activity is added to the cost of the insurance company thereby increasing the premium of the normal insurance products be it life or general. There are three basic components to contribute to fraud viz. Motivation, opportunity and rationalization of act. Popularly this is known as the fraud triangle as given below in figure 1. Figure 1 As stated above to commit fraud there has to be motive. The motive is to be strong enough to persuade the fraudster to commit crime without disquiet. These motives may be in any forms like financial pressure to unrealistic performance targets or financial crunch. Once the motive is established, the perpetrator starts hunting for suitable opportunity to commit the crime. After committal of crime there comes rationalization stage in the mind of the fraudster. This rationalization may be in form of self-assurance of entitlement of fraudulent proceeds for justification of premium paid. It can even be in form of everyone does it attitude. However the possibility of the frauds will be reduced by introducing checks and balances in the entire process. 2. HISTORY The technique of hedging or transferring risk has been practiced as long as 2 nd and 3 rd millennia. However more organised and structured forms of insurance developed in the 17 th Century. Fraud in Insurance sector is as old as the Insurance sector itself. In 19 th Century organised fakers slipped on banana peels, feigned paralysis and extracted hundreds of dollars from the railway companies (Dornstein). Doctors went to the extent of identifying a new aliment as Railway Spine where the traveller suffered from microscopic injury in spine that could not be seen. These brought new sort of claims which were, if not fraudulent, camouflaged with illicit colour. Thankfully the Insurance sector has not developed enough to cover personal injury in India as in western world. However here we have our own set of fraudulent activities. From the basic crime of exaggerating the claim to sophisticated crime of using information technology to create fraudulent policy and siphoning off money of the policy holder are prevalent. Insurance is soft crime as penalties and ramification of fraudulent activities in insurance are far more liberal than normal criminal activity. One of the parties in the insurance related frauds is always large corporate (Insurance Company) which does not 238 Centre for Financial Services Gujarat Technological University CCFS2014

vigorously pursue the case as in case of individual victim. Further the corporate has to follow rule book and laid down procedures which in certain cases may be expensive that the cost of the fraud itself. 3. TYPES OF FRAUD Frauds in Insurance sector may be hard frauds or soft frauds where hard fraud refers to situation when perpetrator deliberately plans and invents loss whereas soft fraud are more common and includes exaggeration of claims by policy holders. Though when it comes to innovative fraudulent practice, the human mind is most inventive and imaginative, yet an attempt is made to broadly classify the nature of the insurance frauds. Broadly the frauds can be classified in two categories general insurance frauds and Life insurance frauds. Further popularly general insurance is taken for medical/workmen and auto or motor vehicle. The broad nature of the frauds can be explained as in Table 1 below. Table 1- Types of Fraud Auto vs. Personal Injury/Workers Compensation (WC) Auto Policy and Other insurance Personal Injury 1. Staged Accident 1. Deliberate Injury 2. Claimant Not involved in accident 2.Fake Injury (Multiple Claimants) 3. Duplicate Claim for Same Injury 3. Multiple Claims (Aliases) 4. Bill Submitted not Given 4. Fabricated Treatments 5. Real Injury Unrelated to Accident 5. Non Work Related (Prior Injuries) 6. Fictitious Injury 6. Fake Injury (Single Claimant) 7. Misrepresentation of Wage Loss 7. Misrepresentation of Wage Loss 8. Other Material Misrepresentation 8. Other Material Misrepresentation Source: The Journal of Risk and Insurance While each of the elements of table is self-explanatory, all of methods lead to exaggeration of the claims. The biggest contributing factor in general insurance is exaggeration of claims. Though several policies have been laid down, there is still need and scope to bolster the existing mechanism and intermediary structure. This amplification in the amount of claims is termed as opportunistic frauds as these frauds are committed only on ensue of accidents. The concepts of staged accidents are also one of the popular forms to defraud insurance companies. The quantum and frequency of frauds have only one limiting factor, limitation of human imagination and thought. The involvement of human element has deterred in creation of accurate model for detection of crime, nevertheless several models have been developed using information technology services to raise red flags in suspicious transactions. Life Insurance frauds are relatively difficult to perpetrate however broadly they can be of several types as listed in Table 2 Table 2- Type of Life Insurance Frauds Life Insurance Frauds 1. Fake Death 2. Fake Policyholder 3. Forge Nomination 4. Forge Claimants 5. Suicidal Accidents 6. Lack of Insurable Interest Centre for Financial Services Gujarat Technological University CCFS2014 239

The table above cites few of the several ways which are used by fraudsters to defraud companies. Faking death was a phenomenon used by earlier perpetrators as it involves elaborate planning and execution further any of the parties amongst the fraudster may be disgruntled and blow the lid depicting the frauds. Fake policyholder is relatively simple as it can be managed by single fraudster; however elaborate documentation of existence of person has been a clear deterrent to this crime. Insurance companies have reported certain cases of suicidal accidents where the deceased in connivance with the claimant has deliberately staged his suicide to colour it as an accident, high debt trap and failure to come out of such trap are common causes of such frauds. Another popular method espoused for fraud is insuring a person with lack of insurable interest. In this case a terminally ill patient may be insured for colossal amount which will be claimed once the evitable event of death of the patient happens. Out of methods specified in Table 2falsifying nominee or beneficiary and illegitimate claimants forms substantial volume of frauds in life insurance business. This precedence is so because of the easier nature of creation of forged documents and relationships. However these can be checked with help of technology driven tools and creating healthy environment amongst the insurers, intermediaries and policyholders. Despite this the Industry has to be vigilant about the suspicious activities observed. There are certain fraudulent activities common to all types of insurance, be it life or non-life Table 3. Table 3- Common Insurance Frauds Insurance Frauds 1. Fictitious Policies/ Agent Fraud 2.Premium Siphoning 3. Churning 4. Sliding The illustrative list of practices in table 3 is most common practices adopted by fraudster. The foremost includes Fictitious polices and Fraudulent agents, here either person selling the policy is fraud or the policy document is fictitious. Premium siphoning is another menace faced by the insurance industry. Payment of premium in cash or cheques in personal name leads to increase in these types of practices. Churning and Sliding are other types of malpractices, relatively softer than the above but affecting the total premium payable by the policyholder. In churning the perpetrator churns polices, one unnecessarily buys new polices by surrendering the old policies thereby increasing his commission where as in sliding, one loads the basic policy with unsolicited add-ons which again increases the premium. However basic vigilance can counter all the above activities. 4. PREVENTIVE STEPS The efficacy of mitigation steps shall have direct bearing on the degree and quantum of fraudulent practices. As the industry is grappling with major frauds, there has been attempt to address the menace. There is no one bullet proof fraud detection technique. Multiple techniques working in concert together offers best chance of detection of fraud. With advent of informational technology tools the task has become easier than before. Data analytics and data mining techniques have proved to be boon to the industry. With rapid use of data analytics the companies are able to establish patterns and raise red flags for suspicious transactions. Some of the popular and common methods used for fraud prevention are listed in Table 4 240 Centre for Financial Services Gujarat Technological University CCFS2014

Table 4 - Preventive techniques Statistical Tool Other Techniques 1. Statistical Parameters (Averages Standard 1. Joining different diverse resources deviation, High low values) 2. Classifications 2. Duplicate Testing 3. Stratification 3. Gap Testing 4. Digital Analysis 4. Summing of Numeric Values 5. Patterning 5. Validating Entry Dates The statistical tools as stated in table 4 can be widely used for determining the fraudulent claims. Averages, standard deviation and high low values of any claim shall enable the company to get detailed insight about the claim. Classification of similar data items in claim process will enable to form pattern thereby facilitating detailed analysis. Further stratification of number and digital analysis tools such as Bedford analysis can be done to red flag the suspicious events. The purpose of all statistical tools is to sort the clutter. Often it is seen that the cost to retrieve the data exceeds the value provided by such retrieved data. All statistical tools help in achieving optimum sample rather than random sample. Other techniques like joining different diverse resources means to identify matching resources viz name and address where they should not exist. Further duplicate testing helps in identifying duplicate claims and payments. Gap Testing and validating entry dates are techniques of finding gaps in chronological series of events where an event of claim should have definitive preceding or succeeding event to make the claim logical. Summing of numeric totals is classic technique where the control totals have been falsified for illegitimate gain. The emergence of information and technology have thrown up some very interesting and innovative methods for analysis and pattern determination for fraudulent activities Table 5 presents those methods Table 5 Innovative methods Insurance Frauds 1. SNA Social Network Analysis 2. Predictive Analysis for Big data 3. Text mining The method stated in table 5 SNA- Social Network Analysis is usage of data from both structured and unstructured medium and to establish relation and pattern. Large volume of unrelated data can throw interesting results when applied SNA technique for example It may show multiple claim in short period from members of single family. Predictive analysis is a technique where big data is sieved to get meaningful result. Consider a situation of claim of a car accident where all important things in the car were taken out prior to accident. Predictive analysis can throw light on such situation. Text mining refers to analysis of the unstructured and structured text to make sense. In an insurance claim process nearly 80% of the data is unstructured form. With help of text mining relationship can be established for example in claim of loss due to natural calamity the claimant s neighbour s interview or interview of all person residing in similar area can either corroborate or disprove the claim. However fact is irrespective of number of tools or techniques certain proportion of frauds will go undetected. That the inherent nature of frauds. Centre for Financial Services Gujarat Technological University CCFS2014 241

5. CONCLUSION The diversity of frauds and the varied background of the fraudsters are significant challenges to companies and fraud examiners to unearth these illicit activities. With the usage of technological tools there has been significant improvement in detection and prevention scenario, however fraudster are adapting to techniques fast. Sometime faster than development of the deterrent tools. It is clear that frauds drain profit and put the company to a competitive disadvantage. Further fraudster piggy back on the legitimate policyholders there by increasing the cost of insurance. Companies must invest in technological resources to leverage best out of it. Detection of frauds must be blended in the concurrent function of the company rather than retrospective analysis. Retrospective analysis may help the company to update the knowledgebase however it shall fail in prevention of fraudulent activities. Companies should invest in educating the policyholders to beware and vigilant in all their dealings. In a country like India regulator IRDA should contemplate establishing a Fraud Information Bureau of which all the insurance companies should be member. All companies should be mandated to share their suspicious and fraudulent activities on periodic basis. This information should be used to create knowledge bank and should be disseminated to all members of the bureau and public at large. As stated earlier majority of the frauds go undetected as the cost of detection of the fraudulent claim far exceeds the cost of the claim. Companies therefore are reluctant to invest in this area. Instead of fighting the menace they have accepted it as an industry norm. However concurrent examination of claims using all the above traditional and innovative techniques should be applied to combat and deter the fraudster. REFERENCES 1. India Brand equity foundation. March 2014 ibef.org. 2. IRDA.October 2013. Annual Report 2012-13, 3. Dornstein, K.1999. Accidently on Purpose, (New York Street Martin s Press). 209-219 4. Derrig, R.2002. Insurance Fraud, Journal of Risk and Insurance, Vol 69 No3, 271-287 5. Association of Certified Fraud Examiners, 2009. Insurance Fraud Handbook 6. Müller, K. Schmeiser, H. Wagner, J 2011. Insurance Claims Fraud: Optimal Auditing Strategies in Insurance Companies, Working Papers on Risk Management and Insurance No. 92, 7. SAS The Power to Know, 2012. How to recognize and reduce opportunistic and organised claim fraud, Combating Insurance claim Fraud White Paper 8. ACL Transforming audit and Risk, Fraud detection using data analytics in insurance industry, Discussion Paper, www.acl.com 9. Verma, R. Mani, SR 2013, Using Analytics for Insurance Fraud detection, Digital Transformation, FIN sight 10. Todd, J et al. 1999. Insurer vs. Insurance Fraud: Characteristics and Detection, Journal of Insurance Issues, 22, 2, pp. 103 124. 11. www.wikipedia.org. Retrieved from http://en.wikipedia.org/wiki/insurance on 14-07-2014 242 Centre for Financial Services Gujarat Technological University CCFS2014