Insurance frauds are taking place on a large scale. ‘ India Forensic Research' has calculated that the insurance industry is losing over Rs 15,000 crore annually due to fraud.

As of December, 2010, the health insurance industry's loss ratio increased to 110-140 per cent from 78 in 2003 according to ‘ The Insurance Times' . Recently held surveys indicate that the rising incidence of insurance frauds escalates the cost of insurance companies and the premiums to the policy holders.

After privatisation in 2000, there are more than 45 insurance companies in the country with different products and marketing strategies, functioning from more than 10,000 offices, engaging about 2.7 million agents.

Multifarious frauds

Experts classify frauds in insurance industry into customer-related, distribution-related, vendor-related, and employee related frauds; incorrect declarations on health, family history, and occupation for the customer; and providing false features and benefits to persuade the client to buy the products.

Insurance frauds also include money laundering through marine insurance, by faking policies and submitting forged documents, misappropriation and misapplication of funds, issue of fabricated receipts, policy insurance covers, fraudulent expense claims, underwriting, post acceptance, claims proposal forms left blank intentionally, or not available on record.

In many cases, the fraudsters collude with concerned agencies for passing fraudulent claim , claimants, hospitals, advocates and claim-passing authorities.

Risk identification

Reasons for rising trend in frauds can be poor customer services from the companies, difficult economic conditions, laxity in regulation, absence of effective fraud detection, control and prevention measures and an environment where fraudsters can get away.

Many companies do not have effective fraud risk management system in place, nor do they have dedicated anti-fraud department. Red flags are detected manually. Most of the companies do not screen their vendors and employees. Lack of third party due diligence and absence of robust anti-fraud processes and systems in place obviously increase the incidence of frauds.

An integrated database of all insured lives should help in tracking the particulars of the insured, analysing the history of claims, pattern and nature of claims and likelihood of frauds. Introduction of Unique identification number (UID) of the insured lives may help in tracking fraud. Health insurance policies must insist on require certification stating that all treatments are medically necessary. An effective fraud control frame work should be in place.

Internal checks and controls including maker-checker process, financial ceiling for approval for various levels, periodic supervision, and internal audit, inspection by the supervising officers, risk assessment and risk management are critical for fraud mitigation and management. Internal controls have to be adequately geared up, keeping in pace with the nature and complexity of the business and new products.

Internal audit should be strengthened by trained, skilled manpower in fraud detecting techniques, software and tools.

A zero tolerance to fraud coupled with a robust database, effective procedures and processes, a disciplinary action framework, a robust internal risk control team performing surveillance, oversight and inspection functions at regular intervals may reduce fraud risk.

(The author is Director-General, CAG Office)

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