Insurance companies concerned about rising incidents of fraud
Mumbai, 2 June 2011 – EY's insurance fraud survey has revealed that the rising incidence of fraud is driving up costs for insurance companies and premiums for policy holders. Insurance companies are waking up to this grim reality, which may threaten their viability and profitability. According to 80% of the survey respondents, representing India's largest public and private insurance companies, fraud in insurance can increase costs for insurers by at least 1% and can rise by more than 5% in certain cases. Further, more than 50% of the respondents believe that fraud directly impacts premium, in some cases increasing premiums by more than 3%. This adversely affects innocent consumers who end up paying a higher premium.
The survey was conducted to assess the fraud scenario in the Indian insurance industry, the potential risk exposure, the economic impact of rising incidents of fraud, and industry practices to counter fraud. Of the survey’s respondents, 50% expressed the need for heightened and more stringent anti-fraud regulations in the area of claims and surrender. This area is most prone to fraud, with nearly 27% respondents rating it among the topmost fraud risks in the insurance sector.
Insurance sector regulator, the Insurance Regulatory and Development Authority (IRDA), appears to share the concern of most of the respondents. According to public media sources, the IRDA has reportedly decided to appoint reputed firms to develop effective reporting on industry-wide fraud within health care insurance.*
The survey findings should cause concern among insurance company directors. Complacency around fraud, bribery and corruption, combined with cost-cutting initiatives at many companies, creates additional exposure. With new legislation such as the UK Bribery Act giving regulators stronger enforcement powers, management, in particular, should demonstrate greater commitment to ethical conduct through their actions, including making tough choices regarding departmental budgets and disciplinary measures.
As Arpinder Singh, EY’s India Fraud Investigation & Disputes Services Leader states, “It is management’s job to set the tone and frame the controls and programs to mitigate the fraud risk.”
Companies: not prepared to counter fraud risks
Many companies have to do more to establish a robust and effective fraud risk management process. As much as 40% of the respondents expressed concern that their organizations do not have a dedicated anti-fraud department. Worse still, around 43% said that manual red flags are used to detect fraud in their organizations. Given the quantum of data these insurance companies have to handle, this method may not be effective enough as a measure.
Lack of third-party due diligence
The Indian insurance industry relies heavily on third parties, be it as a distribution channel for selling its products or to conduct due diligence. As a result, the exposure to fraud risk increases, which makes it imperative for a company to conduct due-diligence checks before associating itself with any third party for business. Yet, according to the survey, one-third of the respondents reported that their company does not screen all key vendors and employees.
Arpinder Singh adds, “The survey provides a wake-up call for insurance companies. Lack of third-party due diligence and focus on anti-fraud measures; and a continued reliance on manual methods to detect fraud inevitably increases the risk exposure. The adoption of a definite methodology and a comprehensive and integrated approach to fraud risk can help companies address the rising risk of fraud in the insurance sector.”
Proactive fraud monitoring: the need of the hour
The results of the survey indicate that business leaders are aware of the need to address fraud risk. Some of the more successful organizations have already begun focusing on this area and have consequently benefitted from improved profitability.
Arpinder Singh concludes, “Some of the points that companies must include in their fight against fraud are a well-defined whistle-blowing policy, periodic fraud risk assessment, third-party due diligence, data analytics tools to identify red flags, and the automation of processes.”
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