Fraud – The dark side of insurance
Going back to the basic insurance idea, the motive to buy insurance is clear. In order to cope with unexpected negative events, people invest in insurance policies to mitigate the risks facing their health and assets. They will purchase a policy from an insurance company detailing all conditions, deductibles and exclusions under which they shall receive an indemnity following the occurrence of a real, unexpected and genuine claim under the moral insurance principle of “utmost good faith”. At the heart of the insurance concept, an insurance risk has to be random and unintentional.
Additionally, the insurance claim whenever it occurs has to be accurately reported in order not to distort actuarial calculations.Therefore,
insurance optimally performs and is meant to operate in the absence of any insurance fraud, which is intentional.
The challenge transcends into a nightmare for the industry when insurance companies unintentionally pay and compensate policyholders for doubtful, staged and fake claims.
Insurance fraud is an intrinsic phenomenon of global insurance markets. It has been estimated that fraud adds an extra £50 to every household’s annual insurance bill in UK. The UK insurance industry confirms that it is facing yearly £1.3 billion of detected fraud, with a further £2.1 billion undetected1
. In the United States, according to the “Coalition Against Insurance Fraud”, insurance fraud costs at least $80 billion every year; this figure compared with the U.S. insurance industry’s net premiums written of $1.2 trillion in 20152
, represents 6.7% of premiums. By analogy,
Source: Arab Re estimates
the General Arab Insurance Federation reported USD 33 billion insurance premiums for year 2015 in the Arab market of which USD 2.2 billion are channeled to fraud
assuming the same rate of fraud occurs in the Arab markets. However, we should bear in mind that the anti-fraud capabilities of US insurers must be stronger than Arab peers, which means that Arab insurance fraud could largely exceed USD 2.2 billion, given weaker resources to combat fraud.
Patterns have shown that fraudulent claims are increasing the cost of insurance as well as premiums for insured. When gross premiums increase, policyholders switch to other competitors. By paying huge cost, the insurer is compelled to increase premiums on policyholders (current or future ones) to compensate the inflated claims. To restate,
the amplified costs following settlements of fraudulent claims deprive the insurance company from the possibility of providing policyholders or targeted markets with affordable premiums.
Practically, the fraud phenomenon has many facets. Generally, the insured public tends to perceive paid premiums as lost money unless an amount greater than the premium paid can be claimed from the insurer.
Thus, many insureds would tend to believe that an insurance fraud is not a dishonest act.
This natural tendency toward insurance fraud therefore emanates from a low awareness on how insurance works and the role it plays in protecting assets and people in return for the paid premium.
Fraudulent claims are directed towards obtaining financial benefits after a claim occurs (or after reporting an invented claim) during the legal period of a signed contract between the policyholder and the insurance company. In general, we can identify two types of fraud status in any fraudulent claim activity: soft and hard fraud.
On one hand, soft fraud is when the insured reports a higher value than the market value intending to receive higher indemnity upon claiming. For example, when a doctor or a car shop bills more than usual for his own financial gain or when claims are exaggerated.
On the other hand, hard fraud is when an insured reports a claim that did not even occur. For instance, in property insurance, fraud can occur when an individual purchases a fire policy and overstates the property value at contract inception in order to later induce a loss, an act called arson. Moreover, in marine insurance, scuttling a ship, or deliberately causing it to sink, is another form of fraud. In medical insurance, fake claims are billed when a physician operates and performs unnecessary tests, surgeries or services that patients did not receive.
In this context, Mr. Abdel Raouf Kotb, Chairman, Insurance Federation of Egypt confirmed that abuse and fraud is practiced by all parties including hospitals, clinics, patients and urged the establishments to use unified electronic database3.
The same problem of abuse and fraud was largely experienced in compulsory health insurance in Saudi Arabia and triggered huge losses for insurers over the past decade.
When there is more than one individual who commit together a range of insurance frauds, the group of fraudsters is called a fraud ring, which represents an exacerbation of the insurance fraud phenomenon. These entities collaborate to make sure the amount paid from the insurer is justified and reasonable. More than 20,000 staged automobile accidents from 1999 to 2006 were reported by the Insurance Fraud Bureau in the UK. The latter gathered data and exposed a total of 74 fraud ring members.
Looking for solutions, there are many attempts and efforts to fight fraud. For instance, training staff members of an insurance organization helps to investigate, monitor, and audit fraud when dealing with clients. Engineer Saleh Bin Rashed Al Dhaheri, Chairman of the Executive Council of the GCC Insurance Federation (GIF) and Chairman of the Emirates Insurance Association (EIA) said that
new regulations could compel insurers to document all fraud and abuse cases with compulsory reports.
He added that specialized units should be established at insurance companies to combat fraud with the necessity of adopting suitable technology. Moreover, he advocated the development of procedure manuals to fight fraud as well as introducing regulatory fines on fraudsters4
In 1993, the USA gave birth to the “Coalition Against Insurance Fraud Organization”. In 1973, a peer was founded in Canada. In general, these organizations aim at promoting awareness, resistance, information and fraud fighting. The Organization's central operation consists in collecting data, researching and analyzing past patterns of fraudulent act in insurance as well as predicting any attempt or symptoms of intent inducing the fraud. Similarly, in France, “ALFA” is an agency with scientific capabilities fully dedicated to the investigation of insurance fraud cases. “ALFA” is financed and commissioned by French insurers. Against the phenomenon of motor insurance fraud,
a few Algerian insurers joined efforts to create an agency specifically dedicated to fight motor insurance fraud “Alfa”.
Each insurance market should rather build a central insurance intelligence database linked to all insurance companies in order to cooperate industry-wide against fraud. There have been attempts in Egypt and Lebanon to build such databases. The Insurance Federation of Egypt confirmed that it is building a “black-list” database in order to identify customers who commit insurance fraud and that it will first be implemented by life insurance companies5
In Lebanon, the insurance sector’s Motor Risk Center (MRC) is seeing increasing participation of Lebanese vehicle insurers and is already being used by motor insurers.
Insurers upload claims information to the MRC and can search the database when receiving a new client request to insure a vehicle.
Furthermore, law can be enforced in case of conviction in addition to ceasing and suspending any insurance benefits to any current interest insured on all insurance lines related to the convicted policyholder. An insured involved in a fraud in a specific line of business is more likely to commit fraud in other insurance lines. Judicially, referring to the US States code, a ten years sentence is charged to any insured attempting to engage in fraudulent action altering the indemnity of any insurance contract as stated under Section 1347 of Title 18.
At a country level, a systematic electronic transformation can radically transform the insurance fraud phenomenon.
In order to control electronically insurance contracts and better control fraud, the “Insurance Repository System” as an electronic insurance database was pioneered in India in 2013 by the Insurance Regulatory and Development Authority6
. This “Insurance Repository System” stores personal information, insurance data according to a single e-insurance account for each policyholder. This account will help in filling a different proposal or quote and will allow to analyze claims history, loss ratio as well as any fraudulent trend.
As a comparison in the Arab world so far, digitalization was first directed at fighting fake insurance contracts through a controlled nationwide electronic database in order to ensure complete implementation of compulsory insurance laws such as health insurance in Saudi Arabia.
However, digitalization can also help control motor insurance claims through the electronic integration of different parties such the traffic departments of the police and insurance companies as was the case in Qatar. Therefore,
an optimal streamlined electronic management can significantly reduce abuse in two major lines of insurance such as motor and health, which suffer traditionally from adverse profitability and large claims in the GCC and other Arab countries.
Finally, the insured can be controlled at the micro risk level given the availability of new technologies. In the motor insurance field, “telematics” work like a black box in the vehicle and enable an accurate risk assessment for every driver and vehicle and offer a powerful control mechanism to control motor insurance fraud given the precision of the tracking device7
As a concluding note, increasing digitalization and electronic insurance such as “Insurance Repository System” developed by India or the use of telematics in motor insurance will certainly help fight fraud along the process. Insurance industry blacklists and shared electronic databases can thus be exploited through simple or complex analytics to identify fraud cases.
Arab insurance markets have to also boost investments in technology and launch specialized industry bodies to fight fraud to help recover more than USD 2.2 billion of premiums lost on a yearly basis through fraud.
1 Insurance Fraud Taskforce: interim report – March 2015 – United Kingdom