- Deepak Bhawnani
The Indian insurance industry is expected to touch US$280 billion by 2020 owing to economic growth, increasing awareness and stronger distribution channels. In terms of gross premiums generated by a country, India ranks 10th for Life Insurance and 15th for Non-Life insurance products.
Size and Potential
For FY2019, up to October 2018, gross direct premiums of non-life insurers reached Rs.962.05 billion (US$13.71 billion), showing a year-on-year growth rate of 12.40%, according to an IBEF report. These numbers are clear indicators of the fact that there is a strong demand for insurance (both Life & Non-Life) in India. The overall penetration (premium as a % of GDP) is 3.69% (as of 2017) which is low compared to developed nations, thus showing huge potential for the key players in the Indian market.
With such strong growth in this industry, cases of fraud have also increased over the past few years. Insurance fraud occurs when an individual or group of individuals attempt to earn profit either through non-compliance or through finding ways and means to exploit loopholes in the terms and conditions of the insurance agreement. The perpetration of these frauds is committed by the likes of insurance agents, existing and prospective policyholders, claimants and in certain scenarios, employees.
A few scenarios of Insurance frauds brought to the notice of companies, regulators and whistleblowers:
- Producing forged documents
- Non-disclosure of critical information
- Buying of policies in the name of a dead person or a person with a terminal illness
- Stating false reasons for claims
- Misappropriating assets
- Inflating expenses
- Manipulating pre-policy health check-up records
- Staged accidents and fake disability claims
Key Statistics – Insurance Fraud
- India’s insurance premium in 2018 for Life Insurance was US$73.74 billion and Non-Life Insurance was US$26.10 billion totalling US$99.84 billion
- In FY2017-18 claims repudiated were 0.74, claims rejected were 0.43 of Life Insurance claims
- According to a report, Insurance companies lose over US$6.25 billion to frauds which results in higher premiums for genuine consumers.
- A media report stated that over 10% of claims in general insurance are fraudulent
The numbers highlight the immediate need for an effective fraud management system.
IRDA Fraud Policy
According to the Insurance Regulatory and Development Authority (IRDA), every insurance company is required to set up a Fraud Monitoring Framework. The framework shall include measures to protect, prevent, detect and mitigate the risk of fraud from policyholders/claimants, intermediaries and employees of the insurance companies.
Anti- Fraud Policies
Insurers are expected to adopt a holistic approach to adequately identify, measure, control and monitor fraud risk and accordingly lay down appropriate risk management policies and procedures. The Insurance company Board of Directors are mandated by the IRDA to review their respective Anti-Fraud Policies on an annual basis, and at such other intervals as it may be considered necessary. Such policies need to provide a comprehensive guideline on fraud monitoring procedures, identification of potential avenues of fraud, guidelines to cooperate and coordinate with State and Claw enforcement agencies for identifying the act of fraud as well as the perpetrators.
These policies also guide in building a framework that will allow them to exchange information with other insurance companies with regard to sharing intelligence on the occurrence of incidents and scenarios of such frauds so that these can be red-flagged within the insurance ecosystem.
Fraud Monitoring Function
Every Insurance company is mandated to have the Fraud Monitoring Function as a separate vertical that shall ensure effective implementation of the anti-fraud policies. They shall be responsible for laying down procedures for internal reporting from/and to various departments, to educate employees, intermediaries and policyholders on identification and prevention of frauds. Further, they must regularly update regulatory authorities on such incidents as well as steps taken to contain such scenarios within a stipulated time. Lastly, they must furnish periodic reports to their respective Boards for review and course correction.
Insurers are liable to inform both potential and existing clients about their anti-fraud policies. Insurers include necessary cautions in the insurance contracts and relevant documents, duly highlighting the consequences of submitting a false statement and/or incomplete statement, for the benefit of the policyholder, claimants and their beneficiaries.
Control by means of identifying triggers
One of the ways to control fraud is to identify triggers for early detection. The fraud monitoring function needs to be instrumental in identifying vulnerable and susceptible areas in their customer association to identify triggers to detect fraud.
According to a FICCI report common triggers observed to detect frauds are:
- Claim from a policy with only one member at minimum sum insured amount.
- Multiple claims with repeated hospitalisation and multiple claims towards the end of the policy period, close proximity of claims.
- Any claims made immediately after a policy sum insured enhancement.
- Claims from a member with the history of frequent change of insurer or gap in the previous insurance policy.
- Policy claims with evidence of significant over/under insurance as compared to the insured’s income/lifestyle.
- Claims from a non-traceable person or where courier/cheque have been returned from insured’s documented address
- The second claim in the same year for an acute medical illness/surgical minor illness/orthopaedic minor illness in the same policy period for main claim. Young males between 25-35 years getting admitted for acute medical illness
- Claims from members with no claim free years, i.e. regular claim history
It is the need of the hour to have laws that can provide swift recourse against such frauds. In today’s scenario, stringent laws and strict punishment are required for those guilty of having committed these frauds which will also act as a deterrent for others looking to exploit this industry.
These initiatives can serve as options for redressal:
- Stringent laws and regulation to punish the guilty
- Insurers reporting every suspected fraudulent claim to the fraud division.
- Enhancement of common databases which shares fraud data
Insurance entities continue to curtail fraud, yet a lot needs to be done to make the existing framework more robust and comprehensive. Perpetrators have the creativity to identify ways of subverting the system, so staying ahead needs constant software upgradation and monitoring by seasoned professionals!
Deepak Bhawnani is Founder & CEO of Alea Consulting. Views expressed are the author’s personal.