Whether its Billy Wilder’s classics like Double Indemnity (1944) or The Apartment (1960) or a more recent Francis Ford Coppola’s 1997 thriller The Rainmaker—the idea of insurance frauds have been explored by leading Hollywood directors time and again.
Back home, enough examples are available on the subject, which can help our Bollywood directors make moolahs.
Yes, in a country like India where crime rates are substantially high, insurance frauds are pretty much a commonplace activity.
In fact, the game has a certain geographical angle to it as well. Around three years’ ago, leading insurerers marked certain regions spanning across few Indian states that reported maximum insurance frauds. These included Gujarat, Andhra Pradesh, Uttar Pradesh and the eastern states of Bihar, Odisha and West Bengal. Among these, insurers further marked certain neck of the wood such as Meerut and Moradabad in Uttar Pradesh; Darbhanga, Begusarai and Bhagalpur in Bihar. Other pockets comprised Kurnool, Guntur and Vishakaptnam in Andhra Pradesh and parts of Bengal.
What made the companies take such a move was the complaints they received from the high claims ratio of the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), government-sponsored policy targeted at the economically backward that offers a renewable life cover of Rs2 lakh for a premium of Rs330 a year.
Digging deep into the episode, data further revealed that 30 per cent of the claims came within the first 30 days of the person getting insured under this scheme. Corrupt practices and fraud were suspected as in most of these cases the insured person died within a month of taking the insurance cover!
Needless to say, such scams ended up taking a toll on almost all leading insurance companies. Some companies, based on their internal assessment, have marked certain pockets as red zones, especially in Gujarat and West Bengal from where such activities have been reported frequently. Even extensive frauds in smaller towns such as Ganjam in Odisha and Kubernagar in Gujarat have prompted leading insurers like LIC, ICICI Prudential Life and HDFC Life to ban their agents from selling policies in over 60 such localities to prevent fraudulent claims.
It goes without saying that, such activities have not only impacted the insurance sector’s expansion plans, but has also stirred faith among loyal customers. While the financial sector has witnessed exponential growth, it has not been without its pitfalls. Fraudulent activities have increased manifold in the recent past and insurance sector has been its victim. In fact, industry experts estimate that there has been more than 40 per cent increase in corrupt practices within the insurance industry compared to a few years’ ago.
However, what is insurance fraud? In simpler terms, a claimant misrepresenting facts in order to claim benefits that he or she is not entitled to can be defined as insurance fraud. And such a fraud not only includes an insured making a false claim but also providing wrong information as well as hiding facts at the time of claim.
There are various estimates about how frauds make the insurance sector bleed. A study conducted by EY in 2018 revealed that 56 per cent of life insurers reported a 30 per cent increase in fraud over the last two years. As far as amount is concerned, V. Manickam, Secretary General of Life Insurance Council said, that as of December 2018, the industry lost around Rs40,000 crore to frauds, which is around 8.5 per cent of the total revenue it generates.
By now, it is clear that insurance fraud is an omnipresent matter and has overbearing presence over all its segments including life, health and general. In fact, health insurance frauds score the maximum among the lot. Sharing his views on health insurance frauds, Anand Roy, joint MD, Star Health and Allied Insurance said, “Any kind of fraud in health insurance has tremendous impact on the system. Health insurance is a risk-sharing mechanism and frauds affect the basic foundation of the mechanism.”
While acts of fraud adversely affect the industry, it also has a negative impact on common peoples’ affordability. “Non-detection of fraud claims do cost the organisation in terms of higher claims ratio and genuine customers with higher premium rates,” Roy further added.
If just frauds were not enough, there is more to it. Just as there are types of crimes, there exists a multiple variants of insurance frauds. While it can be broadly divided into two – internal and external categories, there are other various types that fall under these divisions.
“We come across cases where the applicant or policy holder is suffering from serious ailments or on their death bed but does not disclose the fact at the time of purchase of policy. Another type of fraud is called Insurance Shopping, wherein the applicant, buys multiple policies from various companies by concealing their health or financial status. In both such cases we observe that there are early death claims lodged with the insurance companies,” said Ashwin B, Chief Operating Officer (COO), Exide Life Insurance.
It is evident that most insurance frauds are committed at buyer-seller level. Insurers are often unaware what their intermediaries are up to.
But, how do insurers detect frauds? Harshvardhan Roongta, Certified Financial Planner, Roongta Securities, said insurers deploy various methods to address frauds. If companies receive application for early claims settlement, they sound an alarm and put these suspicious claims under crosshairs. “There are risk assessors in insurance companies who conduct risk assessment and scrutinise the claim submitted by the policyholder,” Roongta added.
So, how do insurance companies go about investigating such acts? Is there any particular procedure? Melvyn Joseph, Founder and Chief Financial Planner, Finvin Financial Planners said, “The insurer will conduct claim investigation in case of doubtful claims. If there is a death claim due to heart attack immediately after the purchase of the policy, the company will ask for the medical papers of the treatment.”
Joseph went on to explain that the investigating officer will visit the hospital and verify the treatment records. If there is any mention about a pre-existing disease, which was not mentioned before purchasing the policy the company can reject the death claim. For example, if the policyholder is showing `50 lakh loss, then the assessor will dig out the exact amount. Every suspicious claim is subject to insurance investigation and insurers take no time in raising red flags, he added.
If the above was just a micro cosm of the investigation process, then what about the bigger picture? How is the entire industry addressing the issue and what measures are they taking?
The rapid rise in fraud cases, and growing losses due to the same have forced insurers to look out for various methods to cut the undesired practices.
“Many companies are starting up with the separate departments just to assess or identify the risk and loss related to these frauds or scams,” said Prasun Sikdar, MD and CEO of Manipal Cigna Health Insurance.
The use of technology is the preferred method. Investment is being done on forming up analytical models that allow insurers to detect potentially suspicious claims. In a lot of these cases, further help from different methods are taken to uncover the truth including working with multiple investigative agencies to ascertain the genuineness of the claim including document verification, neighbourhood check, government authority verification.
Roongta said investigation should be finished within claim settlement period. Most insurers allot 45 days for the same. Also if the companies are taking more time or delaying the same, then they have to cite reasons. “If a delay is infinite, then the policyholder can go to the court,” he added.
One of the biggest reasons for insurance frauds, according to industry experts, is the role of middlemen in selling policies. For example if Life Insurance Corporation of India (LIC) is selling a policy, it will not go and meet the prospective buyer directly and rather resort to an intermediary who acts as the first level of underwriting and most often considered eyes and ears of the insurance company.
“These intermediaries also work under so much of pressure of selling policies that they sometimes overlook insurance rules,” Roongta said.
If insurance companies want to take a stance, Joseph feels that they can put in place a number of safeguards. For example, they can educate their sales force to be vigilant while selling policies.
In recent years, many insurers have turned to technology like predictive modeling processes, reducing the need for tedious hands-on account management. Other cutting-edge technologies such as Artificial Intelligence (AI) and Machine Learning (ML) combined are already being deployed as frontline defense. Such advanced analytics can prove to be an all-important weapon with the ability to use historical data intelligently and detect fraud prospectively. The only way insurance companies can guard themselves against these fraudulent practices is through keeping a tab on data patterns and refining validation rules.
However, it must be understood that customers also equally suffer. This is because, an honest customer often ends up paying for any sort of frauds that takes place and this is largely because of pooling of the risk but this is not the cost an insured has to pay.
Fraud cases have also impacted the claim ratio of insurance companies. It’s only natural that delay in claim approvals, rejections lead to poor claim ratio apart from creating hassle for all parties involved.
“Fraudulent claims adversely impact the claim ratio and company profits,” said Sanjay Datta, Chief, Underwriting, Claims, Reinsurance and Actuary, ICICI Lombard General Insurance.
However, the biggest loss, which the insurance industry would like to avoid at any cost, is the cynical image about insurance as this impacts business.
Are authorities turning a deaf ear? Well, definitely no. In order to tackle the issue at hand, the Insurance Regulatory and Development Authority of India (IRDAI) launched Insurance Fraud Monitoring Framework in 2013. According to it, insurance companies are mandated to set up a risk management committee and are also required to disclose adequacy of the systems put in place as safeguard against frauds.
IRDAI also mandates that companies should have fraud risk management for reinsurers. In order to stem out the fraud at the very beginning, IRDAI is also in the process of setting up fraud repository.
Sikdar said, “Anti-fraud policies have improved knowledge dissemination and hence help early detection of such cases.”
Insurance companies need to adopt a multi-pronged approach to strike that perfect balance including technologies such as predictive modelling, AI and ML. Having a common fraud repository where insurers can share data will help players to significantly reduce the burden. In addition, incident management procedures need to be well defined, in order to protect organisations from any legal or reputational risks. Forensic tools can also turn out to be great. Such means can help a company’s legal counsels to prepare for a suit to be filed against the fraudster.
Apart from internal controls, the industry needs to also educate customers. Since the manoeuvres used by cyber-criminals to target sensitive financial data are sophisticated and constantly changing, the insurance industry must look at existing security controls with a new approach and risk appetite.
Robust Prevention Framework: Need Of The Hour
Frauds in the insurance sector espcially pertaining to claims are commonplace. While it happens across all segments including health and motor, the life insurance segment is the most affected. Experts are of the opinion that a robust preventaion framework is required to address the issue. Vibha Padalkar, MD and CEO, HDFC Life, shares her viewpoint regarding this in a conversation with Nirmala Konjengbam
Frauds have almost become a run-of-the-mill activity. How are insurers dealing with this?
Quite literally, dead men are walking in the insurance industry. The life insurance industry has come to acknowledge that claims fraud is one of the highest impact fraud types. Unarguably, one of the biggest concerns, is the fact that the cost of a fraudulent claim is being paid by other policyholders. This is due to pooling of risks in insurance, as the protection costs increase with an increase in the instances of fraud.
So, while we definitely focus on simplifying the customer journey, it won’t be at the cost of an increase in the risk of fraud of any kind. In my opinion, curtailing insurance frauds would mean a combination of the following:
Improve the quality of information that you receive – genuine customers are typically happy to share information.
How are insurers combating both internal and external frauds?
In modern times while technology-driven data analytics do help combat fraud, I also believe that punitive measures by insurers are also needed. In addition, some of the things that have worked are:
How will technology help fight frauds?
The impact of technological advances in insurance is felt much more in the backend. So, while jazzy user interfaces can be a definite outcome of these advances, insurers who make the most of these technologies to strengthen their backend will also be the ones who figure out how to bring an exponential improvement in their ability to detect and manage fraud.
There are three vectors to leverage the same
The first is leveraging the digital footprint. Fast-paced digitisation is resulting in significant digital footprints for events, transactions, behaviour and attitudes that can now be used to understand and effectively mitigate fraud.
Today, fraud management is increasingly relying on analytics like Big Data supported by AI and ML to predict frauds by leveraging data from multiple sources. These techniques are now moving in the direction of allowing machines to learn from past experiences and improve their predictive powers.
Predictive analytics can help determine whether claim intimation needs further investigation. This expedites processing of legitimate claims, leading to enhanced customer satisfaction, while deterring payouts for fraudulent claims.
An efficient underwriting function supported by innovative data analytics tools will ensure that any potential cases of fraudulent claims are mitigated at the issuance stage itself.
For example, conducting a dedupe by leveraging data available with strategic partners to check whether the customer has already taken a policy under a different alias, will help nip the issue in the bud.
Technology like Big Data enables machines to make sense from images, text, voice and Internet Of Things (IoT) such as telematics, wearables and drones further augment traditional tabular data.
Finally, an enterprise-related view is needed of fraud and digital enablement to capture data from each touch point and feed it into a ‘fraud intelligence system’. Each touch point thus becomes an opportunity to collect data to mitigate or manage fraud.