Stemming the rot
Insurance companies will now have to put in place a risk-management function to monitor risks across all lines of business on a continuing basis and initiate measures to address them. The anti-fraud policy will have to be approved by the board of all insurance and reinsurance companies and an annual review of the policy will have to be undertaken.
The Insurance Regulatory and Development Authority (Irda) has issued a circular where insurers will have to put in place measures to protect from policyholder, claims, intermediary and internal frauds. In the circular, the regulator has said that financial fraud poses a serious risk to all segments of the financial sector. “Fraud in insurance reduces consumer and shareholder confidence and can affect the reputation of individual insurers and the insurance sector as a whole. It also has the potential to impact economic stability. It is, therefore, required that insurers understand the nature of fraud and take steps to minimise the vulnerability of their operations to fraud,” says Irda.
The regulator says reinsurers can reduce their exposure to fraudulent claims from ceding insurers and reinsurance intermediaries by understanding the fraud risk management systems these counterparties have in place.
An act or omission intended to gain dishonest or unlawful advantage for a party committing the fraud, or for other related parties, may be achieved through misappropriating assets, deliberately misrepresenting, concealing, suppressing or not disclosing one or more material facts relevant to the financial decision, transaction or perception of the insurer's status.
Irda says the anti-fraud policy should cover the procedures for fraud monitoring, identify potential areas of fraud and cover coordination with law enforcement agencies. A well-defined procedures to identify, detect, investigate and report insurance frauds will have to be laid out by insurers. Fraud monitoring will have to be either an independent function or could be merged with existing functions like risk, audit, etc. The head of this function should be placed at a sufficiently senior management level and be able to operate independently.
Insurers will have to identify areas of business and the specific departments in the organisation that are potentially prone to fraud and lay down a detailed department-wise anti-fraud procedures. These procedures should also lay down the framework for prevention and identification of frauds and mitigation measures. Also, insurers will have to lay down procedures to coordinate with law enforcement agencies for reporting frauds on timely and expeditious basis and follow-up processes.
The regulator says insurers will have to inform both potential and existing clients about their anti-fraud policies. The insurers will include necessary caution in the insurance contracts/relevant documents, duly highlighting the consequences of submitting a false statement for the benefit of the policyholders, claimants and beneficiaries.
The insurers will have to pursue with the CBI the final disposal of pending fraud cases, especially where the insurers have completed the staff-side action. Similarly, insurers will have to vigorously follow up with the police or courts on final disposal of fraud cases.
A Ficci sub-group on health insurance fraud has highlighted the concern that insurance fraud is not defined under the Indian Insurance Act. Even other instruments with the Indian legal system, such as the Indian Penal Code (IPC) or the Indian Contract Act, do not offer specific laws. “Sections of the IPC, which deal with issues of fraudulent act, forgery and cheating, are sometimes applied, but none of them are specifically targeted at insurance fraud and are inadequate for acting as an effective deterrent,” says the Ficci working paper on health insurance fraud.
Fraud and dishonest claims are not only a major hazard for the insurance industry, but also for the country's economy. According to an E&Y survey on frauds in insurance, the Indian insurance sector incurs a loss of more than 8% of its total revenue collection in a fiscal year and the average ticket size of a single fraud ranges between R25,000 and R75,000. Analysts say insurers will have to be proactive in putting in place anti-fraud policies and ensure that the quantum of fraud is reduced.
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