Acfe bangalore pdm 2 fraud risk - parag deodhar

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Acfe bangalore pdm 2 fraud risk - parag deodhar

  1. 1. Fraud Risk in General Insurance Industry Parag Deodhar ACFE – Professional Development Meet Bangalore –24 th January 2011 Parag Deodhar
  2. 2. Indian General Insurance Industry - Overview <ul><li>Regulatory Evolution of GI Industry in India </li></ul><ul><li>GI penetration is at 0.60% of India’s GDP. </li></ul><ul><li>Top six players accounting for 75% of the total business, the industry remains fairly concentrated. </li></ul><ul><li>Price-based competition has been intense in the post de-tariff scenario with concern for market share overriding price discipline in the industry. </li></ul><ul><li>In the short to medium term, competitive pressures are likely to have a significant impact on profitability and capital requirements. Expenses for business acquisition rising due to intense competition. </li></ul><ul><li>Long term business outlook for the industry remains positive, due to low levels of penetration, especially in the retail segments like motor and health. </li></ul>Parag Deodhar
  3. 3. Indian General Insurance Industry - Overview <ul><li>There are 23 market players in the Indian P&C market currently (including SBI General and MAX Bupa which commenced operations in 2010-11): </li></ul><ul><ul><li>6 government-owned players </li></ul></ul><ul><ul><li>17 private players, of which 15 are joint ventures with foreign partners </li></ul></ul><ul><ul><li>ECGC, AIC, Star Health, Apollo DKV and MAX Bupa are niche players operating in Credit, Rural, & Health domains respectively. </li></ul></ul><ul><li>Apollo DKV, Future Generali , Universal Sompo, Sriram Sanlam , Bharti AXA,QBE Raheja, SBI General and MAX Bupa are recent entrants </li></ul><ul><li>Of the 6 government owned players, 4 of the companies still dominate the market. However, the private players have been gaining significant market share. </li></ul><ul><li>Share of top 3 insurers- 45% </li></ul><ul><li>Share of top 5 insurers- 68% </li></ul><ul><li>In the latest financial year 2009-2010, the private players control 41% of the market. </li></ul><ul><li>The overall non-life insurance industry (excluding specialized insurers) has grown by 13 % in the year 2009-10 (Private players @ 13%) </li></ul><ul><li>Many new player are keen on entering Indian market- Travellers, Liberty, HDI Gerling , etc. </li></ul>Notes: * Government-owned Company Source: IRDA Parag Deodhar
  4. 4. Deterring opportunistic general insurance fraud Source: August 2010 Parag Deodhar
  5. 5. Internal Fraud Risks Deliberate disclosure of confidential information Unauthorised trading Inappropriate financial reporting Embezzlement from a distributor / Misappropriation of cash 1 2 3 4 <ul><li>The communication of M&A confidential information to the acquired company or to a competitor having views on the same acquisition may increase the final price of the acquisition. </li></ul><ul><li>IT Staff steals client records to sell them to a third party. </li></ul><ul><li>Staff misappropriate client record for his own benefit or to harm the Company. </li></ul><ul><li>A salaried sales representative issues fake general insurance contracts over a period of time. Insurance company is liable to compensate the clients in such cases. </li></ul><ul><li>A broker runs a Ponzi scheme and misappropriates customer funds from contracts. </li></ul><ul><li>A manager at investment division intentionally performs a trade exceeding set investment parameters and risk limits in order to compensate an initial loss. </li></ul><ul><li>A manager conceals transactions to cover market losses resulting from failures in investment decisions. </li></ul><ul><li>The financial results of the Company are not aligned with shareholders' expectation and fraud is originated at a senior management level in order to overstate assets or understate liabilities. </li></ul>Examples Most critical risks Bribery in procurement 5 <ul><li>An Employee with the ability to select suppliers and the amount of service required by them, accepts kick backs and can align with the external company in order to profit personally in prejudice of the Company or Company’s client's assets. </li></ul><ul><li>An officer receives kick-backs from a supplier to select its solution and or services. The risk for the company is the payment of goods and services are at inflated price. </li></ul>Parag Deodhar
  6. 6. Internal Fraud – Loss Data Internal Fraud events reported in Fitch First database Parag Deodhar
  7. 7. External Fraud Risks Investment in fraudulent investment vehicle Fraud by a broker/agent Fraudulent claim Health and P&C Breach in data security / data protection 1 2 3 4 <ul><li>Purchase of fraudulent investment vehicle linked to complexity and lack of transparency of these financial instruments. </li></ul><ul><li>Fraudulent bankruptcy from a fund, failure in the due diligence process leading to invest in a fraudulent fund. </li></ul><ul><li>A hacker breaches IT security and obtains credit card details by accessing database containing client card details. </li></ul><ul><li>In spite of robust information security controls, a successful virus attack compromises confidential client information leading to lost client accounts, investigation costs, regulatory fines, etc </li></ul><ul><li>A theft of large database of client data by a trusted vendor. </li></ul><ul><li>Fraudulent use of delegated authority by broker / partner. Breach of authority or use of stolen cover note to write a fraudulent policy. </li></ul><ul><li>a distributor leaves the company and when he is out of the company sells fake policies. </li></ul><ul><li>Different types of fraud schemes occur in Health retail business: - False declarations - Underwriting of policies after the occurrence of a claim, - Repetitive claim of the same laboratory studies, medical prescriptions, etc - Forged documents, disease, etc. </li></ul><ul><li>A corporate client reports a fire. The fraud can not be proved and the claim has to be paid. </li></ul>Examples Most critical risks Underwriting of Fraudulent applications 5 <ul><li>Incorrect underwriter decision when approving the issuance of a policy based on a fraudulent application. </li></ul><ul><li>Collusion between Underwriter and Sales to approve declined risks </li></ul>Parag Deodhar
  8. 8. External Fraud – Loss Data External Fraud events reported in Fitch First database Parag Deodhar
  9. 9. Generic Process Flow – Policy Issuance Client / Intermediary Underwriter Sales Team Operations Team Possibility of Frauds in the Process: Stage 1 & 2 : Concealment / misrepresentation of information about the risk Stage 2: Collusion between underwriter and sales team for acceptance of risk. Stage 3: Though the risk is rejected sales staff issues fake contracts by use of (say) false cover notes. Stage 5: Misappropriation of company’s funds by late submission of cheques to the Company. / Forged approvals. Stage 6: Misappropriation of information or selling the information to a third party. Proposal from client/intermediary sent to sales team. 1. Prepare quote slip and send to Underwriter Accept Risk? Communicate to sales about the acceptance of risk. Sales to gather further information / decline the business. Submission of approved quote slip / proposal/ cheque to Ops. Data entry in the core insurance system. Policy issued and sent to the insured. 2. 4. 3. 5. 6. 7. Yes No Parag Deodhar
  10. 10. Generic Process Flow – Claims Payment Possibility of Frauds in the Process: Stage 1: False statements about the loss – inflated amounts or reporting of loss when no loss has actually occurred. Stage 2 & 3: Collusion between claims staff and client to approve fraudulent claims. Stage 4: Collusion between surveyor – customer - claims staff for false survey report. Stage 6 &7 : Change beneficiary details for approved claims Claimant Claims Team Finance Team 1. Does initial scrutiny & make entry in system. Investigation Required? 2. 3. 4. 5. 6. 7. No Yes Claim intimation at branch / call center / sales. Refer to claims manager. Get survey report Claim Accepted? Repudiate claim Send to Finance to issue cheque. Yes No Cheque dispatched to operations team which forwards the same to the client along with claim letter. Parag Deodhar
  11. 11. Claims Fraud – On an Increase <ul><li>Claims Fraud may comprise: </li></ul><ul><ul><li>Deliberately inflating claims. </li></ul></ul><ul><ul><li>Claims where no loss has occurred at all. </li></ul></ul><ul><ul><li>False statements about the circumstances of the loss. </li></ul></ul><ul><ul><li>False statements regarding compliance with contractual conditions. </li></ul></ul><ul><ul><li>False descriptions of the subject matter of the insurance. </li></ul></ul><ul><li>Association of British Insurers (ABI) figures show that in 2008: </li></ul><ul><li>107,000 fraudulent insurance claims were exposed, a rise of 17% on 2007. The value of these claims, at £730 million, rose by 30% on the previous year. </li></ul><ul><li>Dishonest claims on home insurance were the most common, with 55,000 false or exaggerated claims detected. </li></ul><ul><li>By value, fraudulent motor insurance claims were the highest, with £360 million saved from 35,300 fraudulent claims. </li></ul><ul><li>4% of all claims by value (excluding life insurance) were fraudulent, compared to 3% in 2007. </li></ul>Parag Deodhar
  12. 12. Claims Fraud – On an Increase Parag Deodhar
  13. 13. Insurance Frauds in India Source: Indiaforensic Research Parag Deodhar
  14. 14. Case Studies Parag Deodhar
  15. 15. Case Study I – “Crash for Cash” scams Parag Deodhar Fraud Description <ul><ul><li>During the latter part of 2005 a number of third party motor claims were presented to insurers relating to collisions that occurred at the Eden Point Roundabout on the A34, Greater Manchester. All of the claims presented were low speed collisions caused when the lead private motor vehicle entered the roundabout but immediately stopped causing the following vehicle to collide with the rear end of the lead vehicle. </li></ul></ul>How was the Fraud detected? <ul><ul><li>A policyholder involved in such a collision contacted Motor claims team advising he had received information from the occupants of an office overlooking the roundabout, suggesting he had been the victim of a deliberately induced collision and availability of photographic evidence. </li></ul></ul><ul><ul><li>Frauds team contacted and interviewed all witnesses and recovered digital photographs taken of the aftermath of eight separate collisions that occurred at the same spot on the roundabout. </li></ul></ul><ul><ul><li>Following additional lines of enquiry the company was able to identify other insurers involved in these incidents and examination of insurer’s claims files was undertaken against the photographic evidence which highlighted further discrepancies. A private forensic analyst was engaged to examine the digital photographs which verified and validated the same person as the driver of the lead vehicle. </li></ul></ul><ul><ul><li>Frauds team along with the help of Insurance Fraud Bureau submitted evidence file to Greater Manchester police in March 2007 who widened their investigation to cover all collisions emanating from the Eden Point roundabout. </li></ul></ul>Outcome <ul><ul><li>To date convictions have been achieved on a total of 93 claims at an average cost of £17,500 resulting in a total saving of £1.6m. </li></ul></ul><ul><ul><li>73 arrests and 45 convictions have been made connected with the fraud. In October 2009 the main perpetrator Mohammed Patel was jailed for 4½ years after admitting 17 charges including conspiracy to defraud, dangerous driving and disqualified driving. </li></ul></ul>Learnings <ul><ul><li>The success of this investigation was based on close interaction, innovative and collaborative approach with the industry and authorities to protect the threat to public safety. </li></ul></ul>
  16. 16. “ Crash for Cash” – Growing Wave <ul><li>UK </li></ul><ul><li>Criminals who deliberately crash cars into others to claim the insurance are behind a growing wave of bogus claims that are pushing up premiums. </li></ul><ul><li>So-called &quot;crash for cash&quot; gangs are even setting up claims management companies where the &quot;doctor'', the &quot;solicitor'' and the collision &quot;victim'' are all members of the same crime family. </li></ul><ul><li>The Insurance Fraud Bureau claimed that approximately 30,000 crashes were staged in 2010, with each claim averaging about £17,000. They cost insurers about £350 million and added £44 to the premium of every driver. </li></ul><ul><li>In April 2010, 35-year-old Rehan Javed and his brother Rezwan, 33, from Burnley, were convicted of a £12 million fraud. They processed many of the claims themselves through their own claims management company. Also, Darren Duvall, 38, was jailed for leading a gang of 25 which conned Allianz Cornhill out of £175,000 with a series of faked road crashes. </li></ul><ul><li>Canada </li></ul><ul><li>Industry experts say automobile insurance fraud rings have become a booming business in Canada. The rings are sophisticated, highly profitable, and almost untouchable, thanks to poor government regulation, weak law enforcement and the absence of a national database to track suspect claims. </li></ul><ul><li>Insurance companies themselves are seen as partly to blame for not sharing information in a collective data base and as in India there have been concerns in the past around privacy of data that insurers may conceive as a competitive advantage. </li></ul><ul><li>In 2009, insurance fraud accounted for between 10 and 15 percent of premiums -- or an estimated 1.3 billion dollars, according to the Insurance Bureau of Canada (IBC), the industry watchdog. </li></ul>Parag Deodhar
  17. 17. Case Study II – Baggage Loss Claim Parag Deodhar Fraud Description <ul><ul><li>The insured reported claim of baggage loss, having taken 4 claims earlier. As usual the fifth time, he claimed he had gone on a business trip and had lost the baggage at the foreign airport. Airlines searched & searched but found no trace of it, taken out most likely as it was by a companion of the insured. It gave a certificate to that effect and a cheque for an amount they were liable for. Armed with the certificate and cheque, the insured promptly lodged a claim. </li></ul></ul>How was the Fraud detected? <ul><ul><li>SIU initiated information exchange with various insurers on the claim and realized the man was adept at taking multiple travel policies – mostly 2; sometimes, even 3 – for the same travel from multiple insurers and taking payments from all the insurers for the same losses. </li></ul></ul><ul><ul><li>It was also observed that in one particular loss, the details of material lost that was filed with 2 insurers and airline were at significant variance – giving important circumstantial evidence that he hadn’t lost the baggage. </li></ul></ul>Outcome <ul><ul><li>The claim was denied on account of material misrepresentation of facts. </li></ul></ul><ul><ul><li>The fallout of the claim has been that, many such serial claimants have been identified by the concerned insurance company. On being lead by SIU, other company officials agreed to file complaints against various such persons, at various locations and it is hoped that such a nationwide effort would continue to have a deterrent effect. </li></ul></ul>Learnings <ul><ul><li>This case highlights the importance of having a Vigilance Team comprising of trained professionals like SIU, within the Company. </li></ul></ul>
  18. 18. Case Study III – Cattle Insurance Parag Deodhar Fraud Description <ul><ul><li>The humble bullock may be at the heart of rural economy. But for bankers and general insurance companies, it had been a nightmare. For the former, the challenge had been to prevent the security of a pair of bullocks being offered to succession of banks for fresh loans. For managers in the insurance industry, it was a case of how to prevent bogus insurance claims. </li></ul></ul><ul><ul><li>The currently used external plastic tags were easily tampered and could be transferred to other cattle. In many instances, local veterinary officers in Gujarat, in cahoots with village cooperative, would insure 100 cattle but never tag the animals and the farmers would claim insurance for their dead cattle as per their convenience. </li></ul></ul>Fraud Prevention Methodology <ul><ul><li>The Gujarat State Government implanted cattle with these a microchip (Radio Frequency Identification tag or RFID tag) to prevent fraudulent applications for loans or claims against cattle insurance policies. </li></ul></ul><ul><ul><li>The microchip was based on WORM (write once and read many) technology making it tamper resistant and giving a unique 15-digit identification number for the cattle sporting it. </li></ul></ul>Outcome <ul><ul><li>The RFID tags would be very difficult to remove and the farmers would have had to take the help of a surgeon to remove it. </li></ul></ul><ul><ul><li>Any kind of tampering or effort to insert a new tag by the cattle owner resulted in loss of coverage. </li></ul></ul><ul><ul><li>A cattle that was brought to the insurer and sporting an RFID identification that is currently not in their data base would be counted as a new cattle </li></ul></ul>Learnings <ul><ul><li>Efficient use of technology can go a long way in helping prevent frauds. </li></ul></ul>
  19. 19. Case Study IV – Medical Insurance Parag Deodhar Fraud Description <ul><ul><li>At 25, it was a surgery Ms M.K. least expected. She had complaints of an irregular menstrual cycle last year. A Chennai-based private hospital then diagnosed a small fibroid as the problem and removed her uterus. Covered as she was by the government employees’ health insurance scheme, the hospital sent a Rs 40,000-bill to the insurance company. </li></ul></ul>How was the Fraud detected? <ul><ul><li>On submission of the claim, MK’s surgery was termed ‘needless’ by an expert panel of doctors of the insurance company. On an investigation it came to light in what could be an indication of medical ethic violation that may have left several women medically unfit to conceive, more than 30% of the hysterectomies done under the insurance scheme were termed “unwarranted’’ not just by the doctors employed by the insurance company but also by senior private practitioners. </li></ul></ul><ul><ul><li>Records available with the insurance companies showed that under the government employees’ health scheme, at least 540 women in the age group of 25-35, more than 100 of them in the 20-30 age group, had their uterus or ovaries removed. </li></ul></ul>Outcome <ul><ul><li>The insurance company removed two private hospitals in Nagercoil and Kanyakumari for charging extra from beneficiaries of the government health insurance scheme. </li></ul></ul>Learnings <ul><ul><li>A strong audit mechanism is essential for any organization. Regular claim audits can lead to identification of malpractices by the business partners. </li></ul></ul>
  20. 20. Case Study V – Cover Note Control Parag Deodhar Fraud Description <ul><ul><li>An insurance company received various motor claim intimation for policies of which it had no records. It was interesting to note, however, that none of these claimants had received the policy document from the Company and all cited the cover note details at the time of registration of claim. </li></ul></ul>How was the Fraud detected? <ul><ul><li>It was observed that several claimants cited the same cover note number. </li></ul></ul><ul><ul><li>The cases were immediately forwarded to the internal audit team which conducted a check and (i) observed several claimants cited the same cover note number, (ii) interviewed claimants to find out that all of them were sold cover by the same sales staff of the company. </li></ul></ul><ul><ul><li>Please note that each cover note typically has 4 copies – one for the customer, one for office use, one for the intermediary and one as a counterfoil copy. It was soon detected that one sales officer of the Company was selling each copy of the same cover note to different people thereby exposing the company to huge risks and sharing only some proportion of the premium collected from the clients. </li></ul></ul>Outcome <ul><ul><li>The sales officer of the company was terminated immediately from the Company and fraud charges were levied against him. </li></ul></ul><ul><ul><li>The insurance company was liable to pay the claims to the claimant as the sales officer in all his dealings with the clients represented the Company, and hence the Company is responsible for the sales officer’s actions. </li></ul></ul>Learnings <ul><ul><li>Often frauds can be prevented by implementation of very simple controls – in this case printing of “Customer Copy” / “Office Copy” / “Intermediary Copy” / “Counterfoil Copy” in each of the copies was all that was required. </li></ul></ul><ul><ul><li>Cover Note reconciliation is a must. </li></ul></ul>
  21. 21. Motivation for frauds Parag Deodhar
  22. 22. Motivation for frauds <ul><li>Response to the ABI’s fraud research who admitted to committing insurance fraud: </li></ul><ul><li>Almost 40% exaggerated a genuine claim to cover the excess. </li></ul><ul><li>“ I feel I pay enough to cover the whole of the loss yet insurance companies seem to have a lot of get outs. Paying an excess feels like I am paying twice for my cover” </li></ul><ul><li>“ To cover the excess so that I do not make a loss overall on something that is not my fault.” </li></ul><ul><li>25% exaggerated a claim/completely invented a claim, to replace worn or outdated items or to make good other damage that was unrelated to a genuine claim: </li></ul><ul><li>“ My laptop was getting past its best and I needed a new one and couldn't afford it.” </li></ul><ul><li>“ To cover the cost of another broken item that the insurance wouldn’t cover.” </li></ul><ul><li>“ I made a claim that I was hit in the rear and the driver never stopped. But really I was reversing and hit a gate! (My husband would not have understood and gone mad.)” </li></ul><ul><li>25% had exaggerated or invented claims to get back premiums they had paid over time. </li></ul><ul><li>“ To get more money from the insurance company - they can afford it. Nearly everyone else does it.” </li></ul><ul><li>“ Having paid out thousands of pounds in vehicle insurance over the last 20 years, I want something back.” </li></ul><ul><li>10% said they had exaggerated or invented claims out of financial hardship – some added that insurance fraud was an easy way to get money. </li></ul><ul><li>“ It was an opportunity that was too good not to take up.” </li></ul>Parag Deodhar
  23. 23. Fraud Control Mechanism Anti – Fraud House of Excellence Parag Deodhar
  24. 24. Fraud Control Mechanism - Foundation Parag Deodhar
  25. 25. Fraud Control Mechanism – Core Process Parag Deodhar
  26. 26. Fraud Control Mechanism - Enablers Continuous Improvement ……… is indispensable Parag Deodhar
  27. 27. Insurance Fraud Control in India <ul><li>Very few insurers in India have a unit like Risk Management or Investigations Unit (IU), which came in existence in the US in the 1970s. </li></ul><ul><ul><li>Most of the companies, however, do not have the skills or approach required to tackle the serious nature of insurance fraud. </li></ul></ul><ul><ul><li>Vigilance Wings typically look inward and busy themselves handling complaints against employees. </li></ul></ul><ul><ul><li>They do not have experience of investigation and develop expertise in conducting disciplinary proceedings. They end up scratching only the surface and do not have the skill sets required for a thorough investigation. </li></ul></ul><ul><li>When it comes to special laws to criminalize insurance fraud, there are none. Further, there is no specialized agency like Insurance Fraud Bureau (created in more mature markets that has police powers to search, seize and arrest fraudsters) to investigate cases of insurance frauds. It may be noted here that, the Central Bureau of Investigation (CBI) – the premier law enforcement agency of the country – has a wing to deal with bank frauds – the Bank Securities and Frauds Cell – but none for insurance. </li></ul><ul><li>The insurance companies have also not gone for creation of claims history databases, which are powerful tools to detect frauds. </li></ul><ul><li>Lastly, companies – both life as well as non-life – have not adopted technology in detecting frauds. This is an area that is receiving great attention worldwide and, as mentioned earlier, has tremendous potential to detect frauds. </li></ul>Parag Deodhar
  28. 28. Credits <ul><li>AXA Group Database </li></ul><ul><li>Insurance Regulatory and Development Authority </li></ul><ul><li>Association of British Insurers </li></ul><ul><li>Indiaforensic Research </li></ul><ul><li>Kennedys Crawford’s Fraud Guide 2009 </li></ul><ul><li>Paper on Magnitude of Fraud & State of anti-fraud efforts in the Insurance Sector in India – Ashish Joshi, CFE </li></ul><ul><li>IASIU Europe Insurance Fraud Seminar 2010 presentation by Roland B, Warner – Head of Global Claims Recovery, Zurich Ins. </li></ul><ul><li>Guidelines on Risk Management Practices for Insurance Business – Monetary Authority of Singapore </li></ul><ul><li>Various news websites </li></ul>Parag Deodhar
  29. 29. Thank You Parag Deodhar

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