Mr. Gopal Balachandran – CFO & CRO, ICICI Lombard on Insurance Fraud Risk management   

How serious is the fraud in the Insurance sector? 

Insurance companies have been impacted by fraudulent activities, suffering financial losses as a result. Most industry experts believe that fraud exists anywhere between 10-15% and they are being discovered across lines of business.

The Insurance Regulatory and Development Authority of India (IRDAI) sets out 3 broad categories of fraud –Policyholder Fraud and/or Claims Fraud, Intermediary Fraud and Internal Fraud.

It has been observed that in motor claims; motor OD/ theft/ personal accident/ third party frauds occur on account of misrepresentation of facts, fabrication of documents and or implantation of driver or vehicle to get undue gain from Insurance Company.

In property claims we observe misrepresentation of quantity and quality of material lost or destroyed. Arson is represented as fire loss.

In health indemnity, we observe frauds on account of fake/ fabricated treatment records, fabrication of bills/ medical documents, misrepresentation of facts like increase in length of stay, outdoor patient treatment converted to indoor patient department, formation of fake Small & Medium Enterprises (SME) entities for the purpose of Insurance claims etc.

In Personal accident claims we observe frauds on account of forged and or fabricated Police records, medical records for cause of death including post-mortem reports, forged treatment records for disability and on account of misrepresentation of facts around the cause of death to get benefit of Insurance.

We also observe fraud on account of dishonesty of employees or intermediary in form of premium siphoning or fake/ forged reimbursement claims, claims fraud, issuance of fake policy by external entities.  

What step companies are taking to stop this? 

 IRDAI in its circular dated January 2013 introduced the “Insurance Fraud Monitoring Framework”. All Insurance Companies are required to put in place an ‘Anti-Fraud Policy’ which would categorize various types of frauds

We have invested in loss minimization to design process and system to prevent occurrence of frauds in line with ‘’ZERO TOLERANCE towards FRAUDS’’ philosophy. A dedicated vertical ICLM (Internal control and loss minimization) independent of claims function, reporting to the Chief Risk Officer of the Company exists to manage frauds and leakages in the system.

Within ICLM function there are specialized teams focussed towards managing various risks arising from multiple lines of business. They engage with skilled professionals like doctors, advocates, automobile engineers, analytics resources within the Company and outside too. Claims processing system has been enabled with fraud alerts ranging from machine learning models, rule engines to trigger claims on real time basis for loss minimization. Another unit within ICLM focusses on loss minimization resulting from acts committed by employees/ intermediaries and third parties.

On identification and establishment of fraudulent claims; they are repudiated. Appropriate punitive measures are taken with respect to hard core fraud cases which includes filing Police complaints against insured, drivers, claimants, other entities involved in fraud. For health claims, in addition we have reported irregularities to various health authorities like state medical council for further action.

Insight from new pattern of frauds observed are utilized to run analytics on the portfolio with action bias. We have leveraged the new age technologies in fraud risk mitigation effectively. AI/ ML based models have been built using the loss minimization experience and integrated with our claims processing systems in Motor and Health for generating real time alerts during claim processing. Algorithm trained with past fraud data are enabled to detect patterns or outlier behaviour real-time during claim processing there by reducing the miss-outs and improved referral quality and outcome with minimal human intervention in identifying high risk claims. These models undergo regular upgradation.

 ICLM function utilizes various forensic tests and tools to understand the cause of loss/ fire etc.

To build awareness on anti-fraud policy and to emphasise “ZERO TOLERANCE” to fraud each employee undergoes an induction program; thus creating each employee as an anti-fraud crusader. In addition regular circulation of case studies/ fraud awareness mailers, acts as continuous learning.

Company has invested in ICLM function to continuously monitor and refine process and systems to prevent occurrence of frauds. In conclusion, a sound ethical culture and an effective system of internal control are essential elements of an anti-fraud strategy. Effective internal controls reduce exposure to financial / reputational risks and contribute towards safeguarding of assets, including the prevention and detection of fraud.

 Can you tell us about some case studies where companies faced big challenges to deal with fraud?

Healthcare providers often attempt to inflate health claims by unbundling procedures, increasing length of stay, going for unwanted medical treatments, utilization of unwarranted higher antibiotics. This inflation ranges anywhere between 15% to 35% in the medical cost of treatment for genuine cases and this is a large cause of concern to be addressed by the industry. IRDAI’s new move to empanel all health providers under GI Council should hopefully  address these issues to a large extent.

Multiple nexuses running around the country have created policy banks and have their clandestine tie ups with healthcare providers to either fake health claims or generate highly exaggerated claims.

On the motor third party claims implanting a vehicle with legitimate insurance cover is the single largest cause of concern and the root cause lies in the high number of uninsured vehicles in our country.  We also observe sometimes non RTA (Road traffic accident) cases do get converted to either motor TP or motor PA or the standard PA claims under health.

Multiple cartels operate across the country and they sell stolen vehicle to unsuspecting customers.

Garages often misguide customers to pad up/ jack up claims with existing damages and or try to cover earlier damages.

SME facing financial crunch are vulnerable and get lured to arson their own assets and cook-up fake fire claim.

 The Insurance industry, in particular, is plagued with frauds and in the absence of any safeguard for the Insurers against these rampant illegal and immoral activities, the Insurers are left with no avenue to address their pleas. There is no mechanism for penalizing the fraudsters, as a combat measure.

While the negative financial impact of fraud on the insurance industry is understood, the corresponding impact of the fraud on the genuine customers and economy of the country also needs to be taken into account. Insurance frauds leads to increase in premium on one side and may also impact the insurance penetration adversely on the other side due to rate increase on account of frauds.

Therefore, insurance frauds need to be defined and classified as a punishable offense in the Insurance Act, 1938, in order to protect the interest of insurers and the policyholders.