Life Insurance Fraud-project

UNIVERSITY OF MUMBAI PROJECT ON “STUDY OF FRAUDS IN INSURANCE SECTOR”

BACHELOR OF COMMERCE (BANKING & INSURANCE) SEMESTER VI (2013-2014)

SUBMITTED BY LAXSHMI K. PASI ROLL NO. -10741

PROJECT GUIDE Prof. NANDINI JAGANNARAYAN

HINDI VIDYA PRACHAR SAMITI’S RAMNIRANJAN JHUNJHUNWALA COLLEGE, GHATKOPAR (WEST), MUMBAI-400 086. 1

“A FRAUDS IN INSURANCE SECTOR”

BACHELOR OF COMMERCE (BANKING & INSURANCE) SEMESTER VI (2011-2012)

SUBMITTED IN THE PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF DEGREE OF BACHELOR OF COMMERCE- BANKING & INSURANCE

BY VRUSHALI B. GHORPADE. ROLL NO: - 9

HINDI VIDYA PRACHAR SAMITI’S RAMNIRANJAN JHUNJHUNWALA COLLEGE GHATKOPAR (WEST), MUMBAI-400086.

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CERTIFICATE

THIS IS TO CERTIFY THAT Miss VRUSHALI B. GHORPADE OF B.COM. BANKING & INSURANCE SEMESTER VI (2011-12) HAS SUCCESSFULLY COMPLETED THE PROJECT ON “A FRAUDS IN INSURANCE SECTOR” UNDER THE GUIDANCE OF Prof. NANDINI JAGANNARAYAN.

PRINCIPAL

(DR. USHA MUKUNDAN)

PROJECT GUIDE/ INTERNAL EXAMINER (Prof. NANDINI JAGANNARAYAN)

EXTERNAL EXAMINER DECLARATION 3

I, Miss VRUSHALI B. GHORPADE THE STUDENT OF B.COM. BANKING & INSURANCE SEMESTER VI (2011-12) HEREBY DECLARES THAT I HAVE COMPLETED THE PROJECT ON “A FRAUDS IN INSURANCE SECTOR”

THE INFORMATION SUBMITTED IS TRUE AND ORIGINAL TO THE BEST OF MY KNOWLEDGE.

SIGNATURE OF STUDENT NAME OF THE STUDENT VRUSHALI B. GHORPADE ROLL NO. 9

ACKNOWLEDGEMENT 4

I would like to express my sincere gratitude to the almighty that has showered her blessing on me without which this project would have not been possible.

I would also like to express my heartfelt gratitude to our principal Dr .USHA MUKUNDAN, who has given me opportunity to conduct this study.

My guide Mrs. NANDINI JAGANNARAYAN also deserves sincere thanks that has given me her guidance throughout the project and made it a success.

I would also like to thank our madam Mrs. LAKSHMI CHANDRASHEKRAN who have cleared some of my doubts.

My parents have been a backbone to me in completing this project and my friends who extended their constant support during my study also deserve heartfelt thanks.

INDEX

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SR NO. 1 2 3 4 5

CHAPTERS EXECUTIVE SUMMERY SCOPE OF THE STUDY INDIAN INSURANCE SECTOR INSURANCE FRAUD

TYPES OF INSURANCE FRAUD

PAGE NO. 8 12 19 22

6 7

LIFE INSURANCE FRAUD IN INSURANCE ON RISE

29 34

8

(SURVEY 2010-2011) RISE IN THE NUMBER OF FRAUD CASES

37

IN LAST ONE YEAR 9

CLAIMS / SURRENDER RELATED FRAUD A

39

11 12

CONCERN FOR INSURERS REAL EYES….. REALISE….. REAL LIES AREAS THAT NEED MORE STRINGENT ANTI-

43 44

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FRAUD REGULATION TYPES OF FRAUD AFFECTING INSURANCE

46

COMPANIES

SR NO. 14 15

CHAPTERS DEDICATED “ANTI – FRAUD” DEPARTMENT DIFFERENT MEANS EMPLOYED TO DETECT

PAGE NO. 50 52

FRAUD 13

DATA ANALYSIS FOR FRAUD DETECTION 6

57

14

AUTOMATION LEVELS SUPPORTING FRAUD

63

15

DETECTION EMERGING TRENDS IN FRAUD MANAGEMENT

65

16 17 16

QUESTIONNAIRE CONCLUSION REFERANCE

69 70 75

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 EXECUTIVE SUMMERY

India, one of the fastest growing economies in the world, has risen in the demand for insurance products. Over the last 10 years, the insurance industry has grown at a Capital Annual Compounded Growth rate (CAGR) of around 20%. However, with the exponential growth in the industry, there has also been an increased incidence of frauds in the country. Insurance fraud encompasses a wide range of illicit

practices

and

illegal

acts

involving

intentional

deception

or

misrepresentation.

The industry has witnessed an increase in the number of fraud cases in the last one year. Organizations are waking up to the fact that frauds are driving up the overall costs of insurance and premiums for policy holders, which may there often their viability and also have a bearing on their profitability.

Hence, companies need a more vigorous fraud management framework. Although this survey focuses on retail insurance, frauds related to commercial insurance claims and third-party claims are also on the rise. The sophistication of fraudsters in the area of commercial insurance claims and third-part claims makes it all the more difficult for organizations to detect and control fraud in time. Fraud impacts organizations

in

several

areas

including

physiologically.

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financially,

operationally

and

 OBJECTIVE OF THE STUDY  To study about frauds in insurance  To examine the frauds taking place in insurance sector  To study the profile of “life insurance corporation of India” and the frauds taking place

 SCOPE OF THE STUDY Fraud impacts organizations in several areas including financially, operationally and physiologically while the monitory loss can be staggering. Its loss of reputation on an organization can be staggering. Its loss of reputation, goodwill and customer relations can be devastating. As fraud can be perpetrated by any employee within an organization or by those outside it, it is important for companies to have an effective fraud management program in place to safeguard their assets and reputation.

 IMPORTANCE OF THE STUDY Insurance premiums have increased due to false or exaggerated personal injury fraud claims, covering life, home, and motor and business accident policies. In some case claimants would suffer a genuine accident, but then exaggerating the injuries or the time of recovery amounts to an insurance fraud.

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Functions of insurance fraud surveillance specialist:  As an investigator or surveillance specialist the insurance fraud surveillance officer should validate these claims.  It is foremost duty of insurance fraud surveillance to see that genuine claimants do not suffer at the same time ensuring that cheats are found out and punished.  As surveillance specialist who regularly conduct observations on claimants a true account of the claimants day to day activities are reported and at no time should it be advantageous or disadvantageous to the client or the subject.  Also during an investigation he should not create any circumstances which may encourage or enforce any person’s subject of an enquiry to engage in any activity which may be harmful to their interests and at all times he should perform his duties in a lawful and ethical manner.  It is imperative that he takes help of at least one more investigator when conducting mobile surveillance.  When operations are conducted with the purpose of assessing the capabilities of the subject it is vital that these are carried out in a discreet manner and by taking cognizance of the relevant legislation.  LIMITATIONS OF THE STUDY The topic “fraud in insurance” is a vast topic and confidential one. I chose Life Insurance Corporation Of India to limit my study and to learn and also to acquire knowledge about the entire frauds taking place in the insurance industry in a specific branch. By utilizing this information I have completed my project.

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 RESERCH METHODOLOGY Research methodology is the technique of collecting the data sources for doing the project, i. e. primary data and secondary data.

 PRIMARY DATA Primary data had been adopted by an informal interview to the development officer of life insurance Corporation of India.

 SECONDARY DATA Secondary data are adopted by collecting the information’s from different management books, websites of insurance sector and especially the LIC websites, journals and magazines and current news from newspapers, the names of secondary data has been specified in the Bibliography.

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CHAPTER 1 - INDIAN INSURANCE SECTOR

 INTRODUCTION

The Insurance sector in India governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalisation) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related Acts. With such a large population and the untapped market area of this population Insurance happens to be a very big opportunity in India. Today it stands as a business growing at the rate of 15-20 per cent annually. Together with banking services, it adds about 7 per cent to the country’s GDP .In spite of all this growth the statistics of the penetration of the insurance in the country is very poor. Nearly 80% of Indian populations are without Life insurance cover and the Health insurance. This is an indicator that growth potential for the insurance sector is immense in India. It was due to this immense growth that the regulations were introduced in the insurance sector.

Since then the insurance industry has gone through many sea changes .The competition LIC started facing from these companies were threatening to the existence of LIC .since the liberalization of the industry the insurance industry has never looked back and today stand as the one of the most competitive and exploring industry in India. The entry of the private players and the increased use of the new distribution are in the limelight today. The use of new distribution techniques and the IT tools has increased the scope of the industry in the longer run.

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 SOME AREAS OF FUTURE GROWTH  LIFE INSURANCE The traditional life insurance business for the LIC has been a little more than a savings policy. Term life (where the insurance company pays a predetermined amount if the policyholder dies within a given time but it pays nothing if the policyholder does not die) has accounted for less than 2% of the insurance premium of the LIC (Mitra and Kayak, 2001). For the new life insurance companies, term life policies would be the main line of business.

 HEALTH INSURANCE Health insurance expenditure in India is roughly 6% of GDP, much higher than most other countries with the same level of economic development. Of that, 4.7% is private and the rest is public. What is even more striking is that 4.5% are out of pocket expenditure (Berman, 1996). There has been an almost total failure of the public health care system in India. This creates an opportunity for the new insurance companies. Thus, private insurance companies will be able to sell health insurance to a vast number of families who would like to have health care cover but do not have it.

 PENSION The pension system in India is in its infancy. There are generally three forms of plans: provident funds, gratuities and pension funds. Most of the pension schemes are confined to government employees (and some large companies). The vast majority of workers are in the informal sector. As a result, most workers do not

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have any retirement benefits to fall back on after retirement. Total assets of all the pension plans in India amount to less than (USD) 40 billion. Therefore, there is a huge scope for the development of pension funds in India. The finance minister of India has repeatedly asserted that a Latin American style reform of the privatized pension system in India would be welcome (Roy, 1997). Given all the pros and cons, it is not clear whether such a wholesale privatization would really benefit India or not (Sinha, 2000).

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 PRESENT SCENARIO OF INSURANCE INDUSTRY

 India with about 200 million middle class household shows a huge untapped potential for players in the insurance industry. The insurance sector in India has come to a position of very high potential and competitiveness in the market. Indians, have always seen life insurance as a tax saving device, are now suddenly turning to the private sector that are providing them new products and variety for their choice.

 Consumers remain the most important Centre of the insurance sector. After the entry of the foreign players the industry is seeing a lot of competition and thus improvement of the customer service in the industry. Computerization of operations and updating of technology has become imperative in the current scenario. Foreign players are bringing in international best practices in service through use of latest technologies

 The insurance agents still remain the main source through which insurance products are sold. The concept is very well established in the country like India but still the increasing use of other sources is imperative. At present the distribution channels that are available in the market are listed below.  Direct selling  Corporate agents  Group selling  Brokers and cooperative societies  Bancassurance

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 Customers have tremendous choice from a large variety of products from pure term (risk) insurance to unit-linked investment products. Customers are offered unbundled products with a variety of benefits as riders from which they can choose. More customers are buying products and services based on their true needs and not just traditional money back policies, which is not considered very appropriate for long-term protection and savings. There is lots of saving and investment plans in the market. However, there are still some key new products yet to be introduced - e.g. health products.

 The rural consumer is now exhibiting an increasing propensity for insurance products. A research conducted exhibited that the rural consumers are willing to rule out anything between Rs 3,500 and Rs 2,900 as premium each year. In the insurance the awareness level for life insurance is the highest in rural India, but the consumers are also aware about motor, accidents and cattle insurance. In a study conducted by MART the results showed that nearly one third said that they had purchased some kind of insurance with the maximum penetration skewed in favor of life insurance. The study also pointed out the private companies have huge task to play in creating awareness and credibility among the rural populace. The perceived benefits of buying a life policy range from security of income bulk return in future, daughter's marriage, children's education and good return on savings, in that order, the study adds.

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 REPORT HIGHTLIGHT            

Gains of liberalization in Indian insurance sector. Indian insurance market segmentation by products. Size of the market and market share of life insurers, in INR (crore). Market share of non – life insurers. Forecast of life insurance growth up to 2012. Forecast of non-life insurance growth up to 2012. Market revenue of both public and private insurers. Policies and measures taken by IRDA to develop the insurance market. Research and development activities. Regulation of insurance and reinsurance companies. Major challenges that Indian insurance sector is facing. Profiles of the major players.

CHAPTER 2 - INSURANCE FRAUDS

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Fraud occurs when someone knowingly lies to obtain some benefit or advantage to which they are not otherwise entitled or someone knowingly denies some benefit that is due and to which someone is entitled. Depending on the specific issues involved, an alleged wrongful act may be handled as an administrative action by the Department or the Fraud Division may handle it as a criminal matter. Insurance fraud is any act committed with the intent to fraudulently obtain payment from an insurer. Insurance fraud has existed ever since the beginning of insurance as a commercial enterprise. Fraudulent claims account for a significant portion of all claims received by insurers, and cost billions of dollars annually. Types of insurance fraud are very diverse, and occur in all areas of insurance. Insurance crimes also range in severity, from slightly exaggerating claims to deliberately causing accidents or damage. Fraudulent activities also affect the lives of innocent people, both directly through accidental or purposeful injury or damage, and indirectly as these crimes cause insurance premiums to be higher. Insurance fraud poses a very significant problem, and governments and other organizations are making efforts to deter such activities.

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 CAUSES The “chief motive in all insurance crimes is financial profit.” Insurance contracts provide both the insured and the insurer with opportunities for exploitation. One reason that this opportunity arises is in the case of over-insurance, when the amount insured is greater than the actual value of the property insured. This condition can be very difficult to avoid, especially since an insurance provider might sometimes encourage it in order to obtain greater profits. This allows fraudsters to make profits by destroying their property because the payment they receive from their insurers is of greater value than the property they destroy. Insurance companies are also susceptible to fraud because false insurance claims can be made to appear like ordinary claims. This allows fraudsters to file claims for damages that never occurred, and so obtain payment with little or no initial cost. The most common form of insurance fraud is inflating of loss.    TYPES OF INSURANCE FRAUD

Insurance fraud can be classified as either hard fraud or soft fraud. 1) HARD FRAUD Hard fraud includes someone staging a car accident, injury, arson, loss, break-in, or someone writing false bills to Medicare to illegally receive money from their insurance companies. This type of fraud often receives more media attention and it’s easier to detect. Hard fraud often involves criminal activity and the intention of squeezing millions of dollars out of insurance companies. But, the average person can also be found guilty of hard fraud. 19

2) SOFT FRAUD Soft fraud, which is far more common than hard fraud, is sometimes also referred to as opportunistic fraud. This type of fraud consists of policyholders exaggerating otherwise legitimate claims. Worker’s compensation claims is the most frequent and expensive type of soft fraud. It costs insurance companies millions of dollars a year. As a result, insurance premiums are rising. Yet, approximately up to one-third of consumers don’t see anything wrong with employees receiving worker’s compensation benefits even if they are healthy enough to go back to work. For example, when involved in a collision an insured person might claim more damage than was really done to his or her car. Soft fraud can also occur when, while obtaining a new insurance policy, an individual misreports previous or existing conditions in order to obtain a lower premium on their insurance policy.    TYPES OF LIFE INSURANCE FRAUD Whether we are a policyholder or a shareholder in an insurance company, insurance fraud affects us. The field of insurance is wide and fraud exists in every area. Therefore, there is a need to study the most important types of insurance – life insurance and major types of life insurance fraud and how they affect bottom line. Insurance fraud comes in two main categories

1. seller fraud  Seller fraud occurs when the seller of a policy hijacks the usual process, in a way that maximizes his or her profit. TYPES OF SELLER FRAUD There are many variations of seller fraud, but they all center around four basic types. These are: 20

1. GHOST COMPANIES In the ghost company scenario, policies are issued and premiums accepted from policyholders, but the company underwriting the policy isn't legitimate and often doesn't exist. These outright frauds are a type of boiler room operation, where a team of high-pressure scam artists dial likely victims to sell them false policies. Unfortunately, the fraud isn't usually discovered until someone tries to file a claim on the policy their family member thought was in effect, in the event of his or her death. 2. PREMIUM THEFT The premium theft scenario is when the insurance rep accepts premiums, but doesn't submit them to the company underwriting the policy, thus invalidating the policy. In this case, the agent essentially pockets the money. Premium theft has become less of an issue as more companies have moved towards direct deposit models, but it is still possible in some cases. 3. CHURNING Churning refers to a situation where the insurance rep advises the customer to cancel, renew and open new policies in a way that is beneficial to him or her, instead of beneficial to the client. This type of insurance fraud often targets seniors and is driven by the agent's desire for larger commissions. Churning keeps a portfolio constantly in flux, with the primary purpose of lining the advisor's pockets. 4. OVER OR UNDER COVERAGE Similar to churning, under or over coverage occurs when an insurance rep convinces customers to buy coverage they don't need, or sells a lesser policy and represents it as a complete policy. In either case, the rep is trying to

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maximize commissions and ensure the sale, rather than focusing on meeting the client's needs.

2. Buyer fraud.  Buyer fraud occurs when the buyer bends the process to obtain more coverage, or claim more cash, than he or she is rightly entitled to. TYPES OF BUYER FRAUD Buyer fraud also comes in a number of different flavors, but they all center on a theme of dishonesty. Basic types of buyer fraud include: 1. POST-DATED LIFE INSURANCE Post-dated life insurance refers to a policy that has been arranged after the death of the person being insured, but appears to have been issued before death. This type of fraud is usually carried out with the help of an insurance agent. It is also one of the easier types of fraud for insurance companies to detect, because record keeping has become more stringent. 2. FALSE MEDICAL HISTORY Falsifying medical history is one of the most common types of insurance fraud. By omitting details such as a smoking habit or a pre-existing condition, the buyer hopes to get the insurance policy for cheaper than he or she would have otherwise been able. 3. MURDER FOR PROCEEDS There are two versions of the murder for proceeds fraud. In the first, the insured doesn't know they are insured and are understandably surprised to be murdered. In the second, the policy is legitimate and was taken out in better times, however, financial hardships lead the perpetrator to decide that killing his or her spouse/family member/business partner, for the money, is the best way out of the problem. 22

4. LACK OF INSURABLE INTEREST As with murder for proceeds, insuring people you shouldn't be insuring, in hopes that they will die, constitutes fraud. Insurance is founded on the idea of protecting people from financial loss, so using it to gamble on lives for a financial gain is a perversion of the system. This includes vertical settlements, which combine non-insurable interest with falsified policies taken out on the terminally ill. 5. SUICIDAL ACCIDENT Just as financial hardship can lead otherwise rational people towards murder, the same factors can lead people to commit suicide in a way so it looks accidental. This constitutes fraud in that it is an intentional act for the purpose of collecting the insurance proceeds, and would not have occurred if those proceeds did not exist. This can be a very difficult one to detect, as the medical examiner has final say in accidental death. Even if it is clearly a suicide, the claim centers on the state of mind, rational or not, at the time of suicide. 6. FAKING DEATH OR DISABILITY Many life insurance policies have riders for disability, creating the temptation to fake one to get the payout. However, some people take it a step further and fake their own deaths. In both cases, the fraudster has to deal with the possibility of being discovered through an investigation. This is just one of the case that life insurance come across involving forgery of death certificate, medical reports, etc. with the attempt to avail of claim from the company. According to survey by India forensic research, a MUMBAI based research agency, life insurance frauds are the most prevalent after the motor and health insurance.

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Life insurance is a long term contract between a policyholder and an insurer, which assures the policyholder’s family / dependents’ a certain amount of money in the case of the death of the policyholder.  HINTS FOR LIFE INSURANCE FRAUD It is important to remember that the hints listed below are merely possible “red flags” that they may be some evidence consistent with an insurance fraud schemes. Any one or two of these by themselves may not raise your suspicion; however when you have several of these hints person or a pattern begins to emerge, you should investigate further or forward your suspicion to the insurance fraud prevention decision.  The policy’s effective date is close to the date of death.  The deceased is not well known by relatives and lived alone.  Policies tend to be for small coverage which is many times available in mass offerings, i.e. in magazines, mal- in and television and advertisement.  The agents “loss ratios” appear unusually skewed, considering the size of the market and types of people insured.  Policies requiring physical examinations are almost never used in these schemes.  Numerous life insurance policies were purchased on the victim.  Different carries were used in securing coverage for no apparent reason.  The coverage amount is not commensurate with the social position of the deceased; e.g. a loss income clerical worker has a life insurance estate of millions.  An unusually large number of death certificates ewer obtained by the beneficiary.  SOME OF THE COMMON FRAUDULENT ACTIVITIES ARE:1. AGE PROOF :All insurance policies have an eligible age at which the policy can be taken. To accommodate oneself into the product or enjoy a minimum premium, age proofs are modified to show a reduced age. 24

2. ADDRESS PROOF :Many issuers accept bank projects have a valid address proof. But these are often victim of manipulation to show a reduced age. 3. MEDICAL TESTS :Some cases require medical tests to issue the policy. However, to substantiate not disclosed or miss presented medical conditions, a different person may be sent at the time of the tests. While this may help to get the policy, it would create discrepancy at the time of claims, even leading to reputation. 4. FABRICATING DATE OF DEATH :The benefit of keeping your policy in force by paying regular premiums cannot be understated. Not doing so, results in the policy to lapse and becoming illegible to avail the death benefit on the policy. However cases have been seen where the date of death as on the death certificate has been fraudulently change to a death before the actual death when the policy was in force, so as to register claim. 5. FORGERY OF DEATH CERTIFICATE :To avail the death certificate, a false death benefited, a small death certificate is created on the name of living person. 6. MANIPULATING REASON OF DEATH :If a history of an aliment which has been diagnosed before or at the time of filling the proposal is deducted, the claim can be repudiated. To safeguard oneself from this situation, the reasons of death are modified so as to fabricate a genuine claim. Some of the frauds pertaining to age proofs, address proofs can be detected at the underwriting stage, while others may be detected during the policy term or at the time processing the claim. If detected at the underwriting stage, the proposal form is rejected and policy is not issued. If detected midterm, the policy can be cancelled.There are various factors which trigger suspicion and hence an 25

investigation on fraudulent claims. The income / occupation details furnished at issuance stage and actual fraud at investigation stage, pattern of issuance coverage availed i .e. at what age did customer started buying and within what span of time how much coverage was bought, time of death, medical case sheets, comments on postmortem report and co-relating the various sources of information often help to smell a wrong doing. Frauds in life insurance occurs mainly due to:   

Fabrication of documents to save on premiums. Avail covers which are not allowed for a particular age group. Obtain the death benefit through the unfair means. Some extreme cases have also found to involve murder by kin for monetary

benefit.  THE COST OF INSURANCE FRAUD Just as there are two main types of life insurance fraud, there are also two consequences. When people engage in buyer fraud, it raises the cost of insurance. The reason for this is very simple; insurance companies are really good at modeling, so they tweak their models to account for buyer fraud and then spread that cost across all their policyholders. In a very real way, every person who tries to stick it to the insurance company ultimately makes your policy cost more. In contrast, seller fraud can potentially hurt just the select few that experience it. It is, in every essence of the word, bad luck. However, on the whole, every time the insurance company you invest in treats someone badly, it loses business to a company with a better reputation and controls on the agents. As an investor, you will be tempted to move your capital to the better performing company, thus punishing seller fraud in a roundabout way. The internet has also helped reduce seller fraud, as many shady outfits and practices become exposed sooner in the game. Insurance is a business that is built on risk analysis and probabilities. Every 26

instance of insurance fraud puts pressure on the business, whether seller or buyer fraud. For this reason, many companies build generous contingency funds to protect them against fraud, as well as other unforeseen events. While this is good from the investor's perspective, it does unfortunately lead to your personal life insurance premiums being higher than they otherwise would have been, in a more honest world.

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CHAPTER 5 - FRAUD IN INSURANCE ON RISE

India is one of the fastest growing economies among BRIC countries, and so is the case with the country’s insurance sector. LIFE INSURANCE CORPORATION OF INDIA has conducted the Insurance Fraud Survey to assess the fraud scenario, the potential risk exposure, the economic impact and the industry practices to counter fraud risk.

The significant role fraud plays in negatively affecting the insurance sector is often under-reported or discounted. It is a general consensus in the market that fraud cases have significantly increased in the last one year. Claims / surrender related fraud is the biggest concern for insurance companies, and the majority of respondents feel that more anti-fraud regulations are the need of the hour. Fraud risk in insurance is a complex matter, which affects both the parties — insurers as well as policyholders. Frauds increase the cost of insurance, resulting in insurers losing to their competitors, and at the same time, policyholders paying higher premiums.  There have been increased incidences of fraud over the last one year. 28

 Fraud risk exposure from claims or surrender is a major concern area for industry players. They have emphasized the need for increased anti-fraud regulations in the area of claims management.  Frauds are driving up overall costs for insurers and premiums for policyholders.  There is a need for a more rebuts data analytics tools to effectively detect red flags.  It’s imperative to screen all the key vendors. Fraud risk poses a very big challenge for the insurance sector. Business leaders are aware of the need to address this risk, but the lack of a comprehensive and integrated approach to fraud risk management continues to be a concern. The increasing number of frauds and the growing degree of risk necessitates that insurance companies regularly review their policies, build in checks and use new and advanced technology to avoid such issues. However, no system can be foolproof, but a proactive and dynamic approach can make a company ready to counter fraudsters and gain an edge over its competitors. As India’s insurance industry matures, fraud risk management is going to be a major concern for insurers and business leaders. Insurers will need to continuously reassess their processes and policies to manage and mitigate the risk of fraud. Fraud risk in the insurance value chain can emanate from internal and external factors. The risk of employee’s misusing confidential information and colluding with fraudsters is on the rise and insurers will need to put in place internal checks and balances to minimize such issues. External fraud risk can arise at various stages, e.g., registration of clients, underwriting, reinsurance and the claims process. The severity of fraud can range from a slight exaggeration to deliberately causing loss of insured assets. The

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essential components of fraud are the intent to deceive and the desire to induce an organization to pay more than it otherwise would. Fraud detection and management should be a proactive process, which includes identification of suspicious claims that have a high possibility of being fraudulent, through a computerized statistical analysis. Approximately 8% of life high value policies to monitor and investigate fraud risk, which mitigates such risks to a large extent. Insurers need to put in place fraud investigation teams (with the right credentials) that work in tandem with law enforcement agencies to weed out fraudulent claims. It is also important for the industry to build a shared or centralized database to share information related to frauds.  THE THREE BROAD CATEGORIES OF FRAUD ARE: POLICY HOLDER AND CLAIMS FRAUD: fraud against insurer by policyholder and / or other parties in the purchase and / or execution of an insurance product.  INTERMEDIARY FRAUD: - frauds by intermediaries against insurer and / or policyholders.  INTERNAL FRAUD: - fraud against insurer by employee on his / her own volition or in collusion with parties that are internal or external to insurer.  The CBI registered a case against the Divisional Manager of the company for allegedly collecting money from customers and issuing cover notes to them, but neither the money nor the cover note was deposited with the Insurance Company.  A former employee of one of the biggest private life insurance companies allegedly cheated the company’s customers by issuing fake receipts Insurance companies have five key areas of risk exposure. These are related to –  Claims or surrender  Premiums 30

 Applications  Employee-related fraud  Vendor-related third party fraud In the business of general insurance, a large number of frauds occur in health insurance, and these pertain to overstating of claims or involve the manipulation of the documents of non-existing hospitals, pharmacies, etc., or to cover up nondisclosure of facts at the proposal stage. It has been observed that there are a higher number of fraudulent cases in the case of hospitalization benefits and personal accident policies. According to an Indian association, “Out of the total outgoings in health insurance, nearly 25% are fraudulent claims.”

CHAPTER 9 - REAL EYES...REALIZE...REAL LIES… 31

Short History of Antifraud Efforts Fraud in insurance has undoubtedly existed the industry’s beginnings in the seventeenth century, but it received little attention until t h e 1 9 8 0 s b e c a u s e l a w e n f o r c e m e n t a g e n c i e s h a d o t h e r p r i o r i t i e s a n d were reluctant to provide the training needed to investigate and prosecute cases of insurance fraud. And, given the fine line between investigating suspicious claims and harassing legitimate claimants, some insurers were afraid that a concerted effort to eradicate fraud might be perceived as an t i - c o n s u m e r move. I n a d d i t i o n t h e n e e d t o c o m p l y w i t h t h e t i m e requirements for Paying claims imposed by fair claim practice regulations i n m a n y s t a t e s made it difficult to adequately investigate suspicious claims. But by the mid-1980s the rising price of insurance, particularly auto and h e a l t h i n s u r a n c e t o g e t h e r w i t h t h e g r o w t h i n f r a u d c o m m i t t e d b y organized criminals, prompted many insurers to reexamine the issue. Gradually, insurers began to see the benefit of strengthening antifraud laws and more stringent enforcement as a means of controlling escalating c o s t s — a pro-consumer move — and they found ready allies among those who been adversely affected by fraud. These included consumers, who were paying for fraud through their insurance premiums; the people used by organized fraud groups to file false claims, often the poor, who sometimes found themselves on the wrong side of t h e l a w ; a n d chiropractors and other medical professionals who were concerned that t h e i r r e p u t a t i o n a s a g r o u p w a s b e i n g t a r n i s h e d b y o r g a n i z e d f r a u d ringleaders who had recruited their members to make fraudulent claims for treatment.

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CHAPTER 8 - AREAS THAT NEED MORE STRINGENT ANTI- FRAUD REGULATION

Fraud risk arising from claims or surrender being the key concern for most insurance companies calls for more stringent regulations. If claims-related frauds can be detected in time, it can help insurers save significantly cost. The survey indicates that almost one out of every two respondents feel that more strict antifraud regulations are needed for effective and transparent claims or surrender management.

It is estimated that India’s health insurance sector is losing around INR10 billion on false claims every year. Apart from depleting the financial resources of insurance company’s fraudulent claims or surrender also affect policy holders

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Adversely, since the latter have to pay higher premiums for insurance products. The respondents emphasized on the urgency of preventing fraudulent claims or surrender to plug revenue losses.

As claims or surrender is prone to fraud or value inflation handling of claims or surrender affects the long-term Sustainability of a company’s profits. To manage fraud, companies can adopt a hybrid approach to detection, using a Combination of profiling rules to filter fraudulent transactions with advanced analytics software.

Some measures taken by general insurance companies to check fraud in the reimbursement of medical policies is denial of the claims of policy holders if they fail to submit their papers after their discharge from hospitals within the stipulated timeframe. Insurance companies have so far taken a lenient approach on this aspect.

CHAPTER 9 - FRAUD AFFECTING INSURANCE COMPANIES

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Nearly 31% of the respondent indicates that insurance companies are most affected by miss-selling due to premeditated fabrication and / or fraudulent miss presentation of material information, as compared to the different types of frauds that affect insurance companies adversely. Insurance continues to be miss-sold with senior citizens being the softest targets as they do not understand new products. Recent media news highlights the prevalence of this kind of fraud, “A 74-yearold man was fraudulently sold four insurance policies and two pension plans by a clutch of bank executives, who obtained his personal details on the pretext of opening a bank account.” Measures such as mystery shopping can provide some relief by identifying and eliminating miss-selling. The Insurance Regulatory and Development Authority (IRDA) have put in place a significant role to bring about transparency in the selling process by stipulating that “…. All insurance companies (life and general) have to resolve complaints from policy holders within 14 days and any failure to do so will attract penalty. Any failure on the part of insurers to follow this procedure and time frame will attract penalties by the IRDA.” Collusion between parties and fake documentation are the other critical types of fraud that affect insurance companies. The former mainly occurs in collusion with patients, who are undergoing a particular treatment and are made to sign for more expensive procedures by hospitals. In some cases, hospitals claim money for patients who have not actually been admitted to these hospitals. Such patients are paid a small amount by such hospitals, which claim large amounts from insurance companies. In other cases, manipulation of documents is common in the segment. India Forensic Research indicates that medical bills are the most commonly forged documents

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In its quest to restrict unfair practices, IRDA has formulated the Insurance Regulatory and Development Authority (Protection of Policyholders’ Interests) Regulations, 2002. To counter the increase in the number and complexity of frauds, IRDA has announced draft regulations for open market consultation, to reduce “unfair practices” and the “information gap” in domestic insurance. Some of the proposed regulations: An amendment of IRDA’s regulations to protect policyholders’ interests and issuance of key feature  documents for insurance products  Guidelines on distance marketing and sale process verification of insurance products.  Standardization of terms and conditions on unit-linked insurance products  IRDA’s acquisition of a database for the distribution of insurance products In its bid to check financial fraud, IRDA has made it mandatory for all insurers to obtain a recent photograph of new customers.

CHAPTER 10 - DEDICATED “ANTI – FRAUD” DEPARTMENT Fraud can be perpetrated in many ways. Therefore, an insurer should adopt a holistic approach to adequately identify, measure, control and monitor fraud risk. 36

For an insurance organization, its fraud management strategy should form part of its business strategy and be consistent with its overall mission and objectives. Detection of insurance fraud should be in two steps: The first is to proactively identify suspicious claims or surrender that has a high possibility of being fraudulent. This can be done by conducting data analysis using various forensic tools or by putting in place an effective fraud risk assessment framework. Additionally, insurance companies can provide their stakeholders with a fraud reporting mechanism.  Regardless of the mode of implementing step one, the next step should be to investigate these fraud claims or surrender and conduct further analysis According to India’s Ministry of Labor and Employment’s advisory note, which was sent to insurance companies, “It is in the interest of insurance companies to spend time and effort on an effective monitoring mechanism to ensure that claim ratios are realistic, manageable and correct?” In a data-driven industry such as insurance, companies will not only need to compete in terms of their product offerings, but will also be required to leverage business intelligence-enabled analytics to attain a competitive edge?

CHAPTER 12 - DATA ANALYSIS FOR FRAUD DETECTION Data analysis technology enables auditors and fraud examiners to analyze an organization’s business data to gain insight into how well internal controls are 37

operating and to identify transactions that indicate fraudulent activity or the heightened risk of fraud. Data analysis can be applied to just about anywhere in an organization where electronic transactions are recorded and stored. Data analysis also provides an effective way to be more proactive in the fight against fraud. Whistleblower hotlines provide the means for people to report suspected fraudulent behavior but hotlines alone are not enough. To effectively test for fraud, all relevant transactions must be tested across all applicable business systems and applications. Analyzing business transactions at the source level helps auditors provide better insight and a more complete view as to the likelihood of fraud occurring. It helps focus investigative action to those transactions that are suspicious or illustrate control weaknesses that could be exploited by fraudsters. Follow-on tests should be performed to further that auditor’s understanding of the data and to search for symptoms of fraud in the data. There is a spectrum of analysis that can be deployed to detect fraud. It ranges from point-in-time analysis conducted in an ad hoc context for one-off fraud investigation or exploration, through to repetitive analysis of business processes where fraudulent activity is likely to more likely to occur. Ultimately, where the risk of fraud is high and the likelihood is as well, organizations can employ an “always on” or continuous approach to fraud detection – especially in those areas where preventative controls are not possible or effective.  ANALYTICAL TECHNIQUES FOR FRAUD DETECTION To get started requires an understanding of:  The areas in which fraud can occur  What fraudulent activity would look like in the data  What data sources are required to test for indicators of fraud

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The following techniques are effective in detecting fraud. Auditors should ensure they use these, where appropriate. They include the following:  Calculation of statistical parameters- (e.g., averages, standard deviations, high/low values) – to identify outliers that could indicate fraud.  Classification – to find patterns amongst data elements.  Stratification of numbers - to identify unusual (i.e., excessively high or low) entries.  Digital analysis using Bedford’s Law -to identify unexpected occurrences of digits in naturally occurring data sets.  Joining different diverse sources -to identify matching values (such as names, addresses, and account numbers) where they shouldn’t exist.  Duplicate testing -to identify duplicate transactions such as payments, claims, or expense report items.  Gap testing-to identifies missing values in sequential data where there should be none.  Summing of numeric values-to identify control totals that may have been falsified.  Validating entry dates-to identify suspicious or inappropriate times for postings or data entry.  FRAUD DETECTION PROGRAMME STRATEGY

Instead of relying on reactive measures like whistleblowers, organizations can and should take a more hands-on approach to fraud detection. A fraud detection and prevention program should include a range of approaches – from point-in-time to recurring and, ultimately, continually for those areas where the risk of fraud 39

warrants. Based on key risk indicators, point-in-time testing will help identify transactions to be investigated. If that testing reveals indicators of fraud, recurring testing or continuous analysis should be considered.

 LIFE INSURANCE  Determine patterns of overpayment of premiums.  Review transaction payments comprising more than one type of payment instrument.  Report multiple accounts to collect funds or payment to beneficiaries.  Report purchase of multiple products in a short period of time.  Review beneficiaries with multiple policies.  Isolate transactions for follow-up where employees that are beneficiaries.  Determine agents/brokers with statistically high numbers of claim payouts.  Calculate benefit payments paid for lapsed policies.  Find policy loans that are greater than face value.  Report unauthorized policy changes.  Identify missing, duplicate, void or out of sequence check numbers.

CHAPTER 14- EMERGING TRENDS IN FRAUD MANAGEMENT

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Insurance fraud management has gained significant momentum within the past twenty years. Growing competition, decreasing margins and increasing innovation will all put pressure on insurers to strengthen this capability. To date, employees are seen as the essential success factor for efficient fraud management and the most important method for identifying potential insurance fraud. Experience and expert knowledge should be complemented with training and tailored general checklists to fuel success.

The fraud management processes within these insurance companies are supported by bespoke software. Use of packaged software tends to be concentrated in the business divisions focused on motor, property and casualty insurance where IT helps to support a range of small damage claims. There is a persistent need for automated detection systems and workflows to improve fraud detection in these businesses as employees can be supported through automated, systematic examination procedures. Reliable packaged software solutions have already been implemented successfully.

Although more than half of the respondents expect to see an increase in the use of automated fraud detection and understands the technical possibilities of software tools to support fraud detection and fraud enquiry. A more modern and efficient approach to claims processing has a wide range of potential benefits it opens up the door to cost savings; it makes faster triage possible and allows employees to concentrate on carrying out loss or benefit cases or even conducting the enquiry.

 FOUR DIMENSIONS OF FRAUD MANAGEMENT

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Bearing Point offers efficient and integrated fraud management solutions, that:-

 Create clear responsibilities in the enterprise  Allocate cases to the right employees  Optimize processes in the organization  Show automation options which orientate themselves at the individual needs of our customers

Fraud management strategy within insurance companies needs to take into consideration four dimensions.

1. THE ORGANIZATION

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The organization dimension contains the organizational structure and integration of fraud management within the overall company. Roles and responsibilities within fraud management must be defined clearly to enable the processes within fraud investigation. It is important to learn from experience and develop strategies and measures for fraud prevention. Therefore input from the organization as well as responsibilities for this process need to be defined.

2. EMPLOYEES Employees face many challenges regarding fraud. Initially, they need to detect fraud, and in a suspicious case they need to investigate the claim fully and document reasons for rejecting a claim that would stand up in court if a law suit was brought against the company. The employee’s observations and experiences play a decisive role. The employee dimension is about abilities and competencies – managing existing skills through increased training as well as driving recruiting strategy.

3. THE PROCESSES The processes dimension allows companies to define efficient processes that support the detection and investigation of fraud in a standardized and systematic manner. Existing processes can be re-defined to optimize their impact: reducing time and costs while also releasing resources to focus on other value added tasks. Clearly defined processes create security for your employees and enhance prospects of success for a new fraud management strategy.

4. INNOVATIVE TECHNOLOGIES 43

Innovative technologies are now being applied to the problem of fraud detection and investigation. Selecting the right tools to support your optimized processes can allow you to pinpoint the right cases to investigate and reduce claim payments overall. In parallel, unsuspicious claims can be paid faster. By shortening the time it takes to carry out investigations the company can alleviate the pressure of a premature decision.

CHAPTER 15 – QUESTIONNAIRE 44

 Explain about the kinds of frauds in insurance sector?  How do you detect them?  What measures have you taken to protect them?  What is the maximum value of loss that you have face because of frauds? How do you make it good?

CHAPTER 16 – CONCLUSION

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Insurance, a very well-known concept today and many people could relate to in more than one ways. This is the influence of the changing times that have changed the concept of insurance in the minds of the young and the old. People have changed their attitude towards their insurance and new look from being an entry of luxury to an investment and necessity. The number of people taking insurance has increased considerably in the past few decades due to the entry of private players in the market.

One knows that every coin has two sides. Similarly, insurance also has two faces. One of which is investments and getting regular returns from financial institutions for oneself and for loved ones. The other, awfully, is of which people deceive insurance companies for their undue advantage and cause intimidation to many others.

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Though, there have been many laws and agencies all over the world to impede such criminal activity, it is not a full proof solution to all insurance frauds.

In a world today where every person seeks their right to information and demands the same, it is very difficult to scam them. One must know all the loop-holes of their business to scheme someone. Lack of knowledge and not knowing ones basic rights on behalf of prey could land them in scrambled scam bisque.

There have been many institutions and agencies formed all over the world t o detect fraud and penalize the one conscientious for such m i s h a p s . Th e r e i s d i v i s i o n o f i n s u r a n c e f r a u d , I N T E R N ATI O N A L A S S O C I ATI O N O F I N S U R A N C E F R A U D AG E N C I E S ( I A I FA) , etc. through the enduring and conscious endeavor of these institutions insurance fraud tempo has declined by an enormous a m o u n t . Several have studied preceding and enduring market conditions to identify with the diverse frauds that take place and the reasons behind committing these frauds.

One cannot diminish frauds, schemes, swindles, scams but can positively b e alert of them so as not be a victim of it themselves. T u m b l i n g fraudulent situations is a unremitting and collective effort of countless. One must be sensitive and offer their helping as much as they can. One can either grumble about how things are all going wide of the mark o r swallow the consequences. Or put their foot down and m a k e a n attempt to change the immoral to the right. The wrong w i l l c h a n g e a n d everyone will see the bright light of truth and right with the revolution of knowledge, awareness, and an attitude for change amongst the humanity.

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 INSURANCE FRAUD : THE CRIME YOU PAY FOR Watch out- insurance crooks are picking your pocket in order to line theirs. These thieves are committing insurance fraud, one of America’s largest criminal industries. Insurance fraud is a crime, and one way or another, honest consumers and businesses pay the price. Insurance fraud occurs every day and in every state. People of all races, incomes and ages are victimized.

 THE FUTURE- STILL DANGEROUS Despite the encouraging progress, insurance fraud will remain a vast and dangerous criminal enterprise. Here are several fraud trends consumers should know about: The internet will hatch new insurance swindles as computer- survey consumers buy from online insurance companies that may be virtually untraceable. Young people raised on the internet will be the vanguard of this crime wave. The global economy is igniting huge insurance money – laundering schemes, often involving fake insurers that bilk people out of millions. Tracking them across international borders will pose a big problem. The large population bulge og aging boomers needing more medical attention will keep health fraud near the forefront of the largest and costliest fraud crimes. Insurance fraud against immigrants will remain a serious problem as diverse ethnic continue migrating. Many fraud crimes will be committed by fraud rings or organized mafias of immigrants themselves.

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The elderly will remain one of the largest targets of insurance swindles. Investment schemes are among the newest approaches: thousands of seniors are investing in bogus verticals – life insurance policies that don’t exist or were obtained illegally. Many seniors also are investing in fake promissory notes sold by insurance agents and guaranteed by non- existent insurance companies.

 EVERYONE’S SOLUTION Everyone pays for a insurance fraud, and so everyone must join in stamping out these swindles. Consumers, lawmakers, insurance, companies, doctors, lawyers and many more must be part of the answer. Insurance fraud will disappear only when criminals realize fraud is a fast highway to jail, not an easy road to riches.

 PROTECT YOURSELF: STAY ALERT You can protect yourself against insurance scams: stay alert, ask questions, and go slow or back out if an insurance transaction seems suspicious.  Never sign blank insurance claim forms  Demand detailed bills for repair and medical services. Check closely for accuracy.  Make sure “free services” aren’t actually hidden in insurance bill.  Be wary of buying insurance from door-to-door or telephone sales people.  Be suspicious if the price of insurance seems too low to be true.  Contact your state insurance department to make sure the agent and company are licensed.  Keep your insurance identification number secret; insurance crooks can steal it and involve you inn scams.

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 Contacts you’re STATE INSURANCE DEPARTMENT and the NATIONAL INSURANCE CRIME BUREAU if you think you’re being scammed or someone asks you it take part in a fraud.

CHAPTER 17 – REFERANCE

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 Primary data had been adopted by an informal interview to agent of life insurance.  Secondary data are adopted by collecting the information’s from  different management books  websites of insurance sector and especially the LIC websites  Journals and magazines and news from newspapers.

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