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.

2

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

5

1 2 3 4 5 CHAPTERS EXECUTIVE SUMMERY SCOPE OF THE STUDY INDIAN INSURANCE SECTOR INSURANCE FRAUD TYPES OF INSURANCE FRAUD PAGE NO.. 50 52 FRAUD 13 DATA ANALYSIS FOR FRAUD DETECTION 6 57 .. 14 15 CHAPTERS DEDICATED “ANTI – FRAUD” DEPARTMENT DIFFERENT MEANS EMPLOYED TO DETECT PAGE NO.SR NO. REALISE…. REAL LIES AREAS THAT NEED MORE STRINGENT ANTI- 43 44 13 FRAUD REGULATION TYPES OF FRAUD AFFECTING INSURANCE 46 COMPANIES SR 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….

14 AUTOMATION LEVELS SUPPORTING FRAUD 63 15 DETECTION EMERGING TRENDS IN FRAUD MANAGEMENT 65 16 17 16 QUESTIONNAIRE CONCLUSION REFERANCE 69 70 75 7 .

8 financially. The industry has witnessed an increase in the number of fraud cases in the last one year. frauds related to commercial insurance claims and third-party claims are also on the rise. Although this survey focuses on retail insurance. However. there has also been an increased incidence of frauds in the country. Fraud impacts organizations in several areas including physiologically. companies need a more vigorous fraud management framework. with the exponential growth in the industry. which may there often their viability and also have a bearing on their profitability. Organizations are waking up to the fact that frauds are driving up the overall costs of insurance and premiums for policy holders. the insurance industry has grown at a Capital Annual Compounded Growth rate (CAGR) of around 20%. has risen in the demand for insurance products. Over the last 10 years. Insurance fraud encompasses a wide range of illicit practices and illegal acts involving intentional deception or misrepresentation. 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. one of the fastest growing economies in the world. EXECUTIVE SUMMERY India. operationally and . Hence.

goodwill and customer relations can be devastating. but then exaggerating the injuries or the time of recovery amounts to an insurance fraud. home. Its loss of reputation on an organization can be staggering.  IMPORTANCE OF THE STUDY Insurance premiums have increased due to false or exaggerated personal injury fraud claims. In some case claimants would suffer a genuine accident. Its loss of reputation. covering life. and motor and business accident policies. 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. 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. operationally and physiologically while the monitory loss can be staggering. 9 .

 It is imperative that he takes help of at least one more investigator when conducting mobile surveillance.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.  LIMITATIONS OF THE STUDY The topic “fraud in insurance” is a vast topic and confidential one.  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.  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. By utilizing this information I have completed my project. 10 . 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.

 PRIMARY DATA Primary data had been adopted by an informal interview to the development officer of life insurance Corporation of India. 11 . i. journals and magazines and current news from newspapers. e. primary data and secondary data. the names of secondary data has been specified in the Bibliography. RESERCH METHODOLOGY Research methodology is the technique of collecting the data sources for doing the project. websites of insurance sector and especially the LIC websites.  SECONDARY DATA Secondary data are adopted by collecting the information’s from different management books.

1938. 1956 and General Insurance Business (Nationalisation) Act. 1999 and other related Acts.CHAPTER 1 . Since then the insurance industry has gone through many sea changes . Together with banking services. The use of new distribution techniques and the IT tools has increased the scope of the industry in the longer run.INDIAN INSURANCE SECTOR  INTRODUCTION The Insurance sector in India governed by Insurance Act.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 Life Insurance Corporation Act. 1972.The competition LIC started facing from these companies were threatening to the existence of LIC . Today it stands as a business growing at the rate of 15-20 per cent annually. Insurance Regulatory and Development Authority (IRDA) Act. Nearly 80% of Indian populations are without Life insurance cover and the Health insurance. With such a large population and the untapped market area of this population Insurance happens to be a very big opportunity in India. 12 . The entry of the private players and the increased use of the new distribution are in the limelight today.In spite of all this growth the statistics of the penetration of the insurance in the country is very poor. This is an indicator that growth potential for the insurance sector is immense in India. it adds about 7 per cent to the country’s GDP . It was due to this immense growth that the regulations were introduced in the insurance sector.

5% are out of pocket expenditure (Berman. For the new life insurance companies. Most of the pension schemes are confined to government employees (and some large companies).  PENSION The pension system in India is in its infancy. much higher than most other countries with the same level of economic development.  HEALTH INSURANCE Health insurance expenditure in India is roughly 6% of GDP. As a result. Thus. This creates an opportunity for the new insurance companies.7% is private and the rest is public. 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. term life policies would be the main line of business. 4. gratuities and pension funds. What is even more striking is that 4. The vast majority of workers are in the informal sector. most workers do not 13 . SOME AREAS OF FUTURE GROWTH  LIFE INSURANCE The traditional life insurance business for the LIC has been a little more than a savings policy. There are generally three forms of plans: provident funds. Of that. 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. 2001). 1996). There has been an almost total failure of the public health care system in India.

2000).have any retirement benefits to fall back on after retirement. it is not clear whether such a wholesale privatization would really benefit India or not (Sinha. 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). there is a huge scope for the development of pension funds in India. Given all the pros and cons. Therefore. 14 . Total assets of all the pension plans in India amount to less than (USD) 40 billion.

have always seen life insurance as a tax saving device.  Direct selling  Corporate agents  Group selling  Brokers and cooperative societies  Bancassurance 15 . 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. 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.  Consumers remain the most important Centre of the insurance sector. The concept is very well established in the country like India but still the increasing use of other sources is imperative. The insurance sector in India has come to a position of very high potential and competitiveness in the market. Computerization of operations and updating of technology has become imperative in the current scenario. At present the distribution channels that are available in the market are listed below. PRESENT SCENARIO OF INSURANCE INDUSTRY  India with about 200 million middle class household shows a huge untapped potential for players in the insurance industry. are now suddenly turning to the private sector that are providing them new products and variety for their choice. Indians.

The perceived benefits of buying a life policy range from security of income bulk return in future. There is lots of saving and investment plans in the market. A research conducted exhibited that the rural consumers are willing to rule out anything between Rs 3. Customers are offered unbundled products with a variety of benefits as riders from which they can choose. but the consumers are also aware about motor. which is not considered very appropriate for long-term protection and savings.500 and Rs 2. Customers have tremendous choice from a large variety of products from pure term (risk) insurance to unit-linked investment products. daughter's marriage. in that order. However. there are still some key new products yet to be introduced . In the insurance the awareness level for life insurance is the highest in rural India. More customers are buying products and services based on their true needs and not just traditional money back policies.900 as premium each year. 16 . 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 adds. accidents and cattle insurance.  The rural consumer is now exhibiting an increasing propensity for insurance products. The study also pointed out the private companies have huge task to play in creating awareness and credibility among the rural populace.e.g. health products. children's education and good return on savings.

Major challenges that Indian insurance sector is facing. Size of the market and market share of life insurers. in INR (crore). Indian insurance market segmentation by products. REPORT HIGHTLIGHT             Gains of liberalization in Indian insurance sector. Policies and measures taken by IRDA to develop the insurance market.INSURANCE FRAUDS 17 . CHAPTER 2 . Market share of non – life insurers. Profiles of the major players. Market revenue of both public and private insurers. Research and development activities. Regulation of insurance and reinsurance companies. Forecast of non-life insurance growth up to 2012. Forecast of life insurance growth up to 2012.

Insurance fraud has existed ever since the beginning of insurance as a commercial enterprise. Insurance fraud poses a very significant problem. from slightly exaggerating claims to deliberately causing accidents or damage. both directly through accidental or purposeful injury or damage. Fraudulent activities also affect the lives of innocent people. and cost billions of dollars annually. and indirectly as these crimes cause insurance premiums to be higher. 18 .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. and occur in all areas of insurance. Insurance crimes also range in severity. 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. Fraudulent claims account for a significant portion of all claims received by insurers. Types of insurance fraud are very diverse. and governments and other organizations are making efforts to deter such activities. Depending on the specific issues involved. Insurance fraud is any act committed with the intent to fraudulently obtain payment from an insurer.

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. 19 .    TYPES OF INSURANCE FRAUD Insurance fraud can be classified as either hard fraud or soft fraud. Hard fraud often involves criminal activity and the intention of squeezing millions of dollars out of insurance companies. arson. or someone writing false bills to Medicare to illegally receive money from their insurance companies. This condition can be very difficult to avoid. 1) HARD FRAUD Hard fraud includes someone staging a car accident. This allows fraudsters to file claims for damages that never occurred. This type of fraud often receives more media attention and it’s easier to detect. especially since an insurance provider might sometimes encourage it in order to obtain greater profits. The most common form of insurance fraud is inflating of loss. injury. break-in. Insurance companies are also susceptible to fraud because false insurance claims can be made to appear like ordinary claims. and so obtain payment with little or no initial cost. loss. when the amount insured is greater than the actual value of the property insured. But. CAUSES The “chief motive in all insurance crimes is financial profit.” Insurance contracts provide both the insured and the insurer with opportunities for exploitation. the average person can also be found guilty of hard fraud. One reason that this opportunity arises is in the case of over-insurance.

It costs insurance companies millions of dollars a year. insurance fraud affects us. is sometimes also referred to as opportunistic fraud. Worker’s compensation claims is the most frequent and expensive type of soft fraud. insurance premiums are rising. Therefore. an individual misreports previous or existing conditions in order to obtain a lower premium on their insurance policy. The field of insurance is wide and fraud exists in every area. Soft fraud can also occur when. but they all center around four basic types. This type of fraud consists of policyholders exaggerating otherwise legitimate claims. 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.    TYPES OF LIFE INSURANCE FRAUD Whether we are a policyholder or a shareholder in an insurance company. TYPES OF SELLER FRAUD There are many variations of seller fraud. These are: 20 . which is far more common than hard fraud. seller fraud  Seller fraud occurs when the seller of a policy hijacks the usual process. Insurance fraud comes in two main categories 1. For example. while obtaining a new insurance policy.2) SOFT FRAUD Soft fraud. in a way that maximizes his or her profit. As a result. when involved in a collision an insured person might claim more damage than was really done to his or her car. 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. Yet.

PREMIUM THEFT The premium theft scenario is when the insurance rep accepts premiums. This type of insurance fraud often targets seniors and is driven by the agent's desire for larger commissions. GHOST COMPANIES In the ghost company scenario. the rep is trying to 21 . under or over coverage occurs when an insurance rep convinces customers to buy coverage they don't need. In either case.1. 3. Unfortunately. with the primary purpose of lining the advisor's pockets. These outright frauds are a type of boiler room operation. but it is still possible in some cases. policies are issued and premiums accepted from policyholders. in the event of his or her death. or sells a lesser policy and represents it as a complete policy. OVER OR UNDER COVERAGE Similar to churning. Premium theft has become less of an issue as more companies have moved towards direct deposit models. but doesn't submit them to the company underwriting the policy. thus invalidating the policy. instead of beneficial to the client. 4. CHURNING Churning refers to a situation where the insurance rep advises the customer to cancel. 2. In this case. Churning keeps a portfolio constantly in flux. where a team of high-pressure scam artists dial likely victims to sell them false policies. the agent essentially pockets the money. the fraud isn't usually discovered until someone tries to file a claim on the policy their family member thought was in effect. renew and open new policies in a way that is beneficial to him or her. but the company underwriting the policy isn't legitimate and often doesn't exist.

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

as the medical examiner has final say in accidental death. which combine non-insurable interest with falsified policies taken out on the terminally ill. This is just one of the case that life insurance come across involving forgery of death certificate. the same factors can lead people to commit suicide in a way so it looks accidental. medical reports. etc. so using it to gamble on lives for a financial gain is a perversion of the system. and would not have occurred if those proceeds did not exist.4. some people take it a step further and fake their own deaths. This constitutes fraud in that it is an intentional act for the purpose of collecting the insurance proceeds. Insurance is founded on the idea of protecting people from financial loss. According to survey by India forensic research. This includes vertical settlements. the claim centers on the state of mind. LACK OF INSURABLE INTEREST As with murder for proceeds. 23 . insuring people you shouldn't be insuring. life insurance frauds are the most prevalent after the motor and health insurance. at the time of suicide. the fraudster has to deal with the possibility of being discovered through an investigation. This can be a very difficult one to detect. However. with the attempt to avail of claim from the company. In both cases. constitutes fraud. 6. a MUMBAI based research agency. FAKING DEATH OR DISABILITY Many life insurance policies have riders for disability. Even if it is clearly a suicide. SUICIDAL ACCIDENT Just as financial hardship can lead otherwise rational people towards murder. rational or not. 5. in hopes that they will die. creating the temptation to fake one to get the payout.

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

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

pattern of issuance coverage availed i . Insurance is a business that is built on risk analysis and probabilities. on the whole. Avail covers which are not allowed for a particular age group. seller fraud can potentially hurt just the select few that experience it. as many shady outfits and practices become exposed sooner in the game. thus punishing seller fraud in a roundabout way. Every 26 . In a very real way. medical case sheets. When people engage in buyer fraud. Obtain the death benefit through the unfair means. However. in every essence of the word.investigation on fraudulent claims. every person who tries to stick it to the insurance company ultimately makes your policy cost more.  THE COST OF INSURANCE FRAUD Just as there are two main types of life insurance fraud. so they tweak their models to account for buyer fraud and then spread that cost across all their policyholders. The internet has also helped reduce seller fraud. time of death. Frauds in life insurance occurs mainly due to:    Fabrication of documents to save on premiums. there are also two consequences. at what age did customer started buying and within what span of time how much coverage was bought. insurance companies are really good at modeling. you will be tempted to move your capital to the better performing company. comments on postmortem report and co-relating the various sources of information often help to smell a wrong doing. As an investor. It is. every time the insurance company you invest in treats someone badly. The reason for this is very simple.e. The income / occupation details furnished at issuance stage and actual fraud at investigation stage. Some extreme cases have also found to involve murder by kin for monetary benefit. it raises the cost of insurance. In contrast. bad luck. it loses business to a company with a better reputation and controls on the agents.

many companies build generous contingency funds to protect them against fraud. as well as other unforeseen events. in a more honest world. For this reason. it does unfortunately lead to your personal life insurance premiums being higher than they otherwise would have been. whether seller or buyer fraud. 27 . While this is good from the investor's perspective.instance of insurance fraud puts pressure on the business.

FRAUD IN INSURANCE ON RISE India is one of the fastest growing economies among BRIC countries.CHAPTER 5 . The significant role fraud plays in negatively affecting the insurance sector is often under-reported or discounted. and so is the case with the country’s insurance sector. the economic impact and the industry practices to counter fraud risk.  There have been increased incidences of fraud over the last one year. Claims / surrender related fraud is the biggest concern for insurance companies. resulting in insurers losing to their competitors. Frauds increase the cost of insurance. policyholders paying higher premiums. LIFE INSURANCE CORPORATION OF INDIA has conducted the Insurance Fraud Survey to assess the fraud scenario. and the majority of respondents feel that more anti-fraud regulations are the need of the hour. It is a general consensus in the market that fraud cases have significantly increased in the last one year. and at the same time. Fraud risk in insurance is a complex matter. which affects both the parties — insurers as well as policyholders. 28 . the potential risk exposure.

The 29 .g.  Frauds are driving up overall costs for insurers and premiums for policyholders. build in checks and use new and advanced technology to avoid such issues. 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. but a proactive and dynamic approach can make a company ready to counter fraudsters and gain an edge over its competitors. External fraud risk can arise at various stages. Fraud risk poses a very big challenge for the insurance sector. no system can be foolproof. fraud risk management is going to be a major concern for insurers and business leaders. As India’s insurance industry matures.  It’s imperative to screen all the key vendors. The increasing number of frauds and the growing degree of risk necessitates that insurance companies regularly review their policies. Fraud risk in the insurance value chain can emanate from internal and external factors. Insurers will need to continuously reassess their processes and policies to manage and mitigate the risk of fraud. e.  There is a need for a more rebuts data analytics tools to effectively detect red flags. registration of clients. Fraud risk exposure from claims or surrender is a major concern area for industry players. The severity of fraud can range from a slight exaggeration to deliberately causing loss of insured assets. However.. They have emphasized the need for increased anti-fraud regulations in the area of claims management. reinsurance and the claims process. underwriting. but the lack of a comprehensive and integrated approach to fraud risk management continues to be a concern. Business leaders are aware of the need to address this risk.

fraud against insurer by employee on his / her own volition or in collusion with parties that are internal or external to insurer. These are related to –  Claims or surrender  Premiums 30 .  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. which mitigates such risks to a large extent.  The CBI registered a case against the Divisional Manager of the company for allegedly collecting money from customers and issuing cover notes to them.frauds by intermediaries against insurer and / or policyholders.  INTERMEDIARY FRAUD: . 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. Fraud detection and management should be a proactive process.  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. but neither the money nor the cover note was deposited with the Insurance Company. which includes identification of suspicious claims that have a high possibility of being fraudulent.essential components of fraud are the intent to deceive and the desire to induce an organization to pay more than it otherwise would. through a computerized statistical analysis. Approximately 8% of life high value policies to monitor and investigate fraud risk. It is also important for the industry to build a shared or centralized database to share information related to frauds.  INTERNAL FRAUD: .

.. According to an Indian association. and these pertain to overstating of claims or involve the manipulation of the documents of non-existing hospitals.REAL LIES… 31 .. a large number of frauds occur in health insurance. nearly 25% are fraudulent claims. Applications  Employee-related fraud  Vendor-related third party fraud In the business of general insurance. “Out of the total outgoings in health insurance.” CHAPTER 9 ..REALIZE. pharmacies. or to cover up nondisclosure of facts at the proposal stage. etc.REAL EYES. It has been observed that there are a higher number of fraudulent cases in the case of hospitalization benefits and personal accident policies..

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. 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. the people used by organized fraud groups to file false claims. These included consumers. 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. who were paying for fraud through their insurance premiums. given the fine line between investigating suspicious claims and harassing legitimate claimants. often the poor. 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.c o n s u m e r move. who sometimes found themselves on the wrong side of t h e l a w . some insurers were afraid that a concerted effort to eradicate fraud might be perceived as an t i .Short History of Antifraud Efforts Fraud in insurance has undoubtedly existed the industry’s beginnings in the seventeenth century. 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. prompted many insurers to reexamine the issue. And. 32 . Gradually.

FRAUD REGULATION Fraud risk arising from claims or surrender being the key concern for most insurance companies calls for more stringent regulations.CHAPTER 8 . If claims-related frauds can be detected in time. Apart from depleting the financial resources of insurance company’s fraudulent claims or surrender also affect policy holders 33 . It is estimated that India’s health insurance sector is losing around INR10 billion on false claims every year. 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 can help insurers save significantly cost.AREAS THAT NEED MORE STRINGENT ANTI.

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. To manage fraud. CHAPTER 9 . using a Combination of profiling rules to filter fraudulent transactions with advanced analytics software. 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. Insurance companies have so far taken a lenient approach on this aspect. since the latter have to pay higher premiums for insurance products.Adversely.FRAUD AFFECTING INSURANCE COMPANIES 34 . companies can adopt a hybrid approach to detection.

“A 74-yearold man was fraudulently sold four insurance policies and two pension plans by a clutch of bank executives.” Measures such as mystery shopping can provide some relief by identifying and eliminating miss-selling. 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. who obtained his personal details on the pretext of opening a bank account. 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. hospitals claim money for patients who have not actually been admitted to these hospitals. manipulation of documents is common in the segment. Recent media news highlights the prevalence of this kind of fraud. In other cases. 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. India Forensic Research indicates that medical bills are the most commonly forged documents 35 . The former mainly occurs in collusion with patients. which claim large amounts from insurance companies. In some cases. 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 “…. Such patients are paid a small amount by such hospitals.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. who are undergoing a particular treatment and are made to sign for more expensive procedures by hospitals.

 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. Therefore. 2002.In its quest to restrict unfair practices. 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. IRDA has formulated the Insurance Regulatory and Development Authority (Protection of Policyholders’ Interests) Regulations. IRDA has announced draft regulations for open market consultation. To counter the increase in the number and complexity of frauds.DEDICATED “ANTI – FRAUD” DEPARTMENT Fraud can be perpetrated in many ways. control and monitor fraud risk. to reduce “unfair practices” and the “information gap” in domestic insurance. measure. an insurer should adopt a holistic approach to adequately identify. 36 . IRDA has made it mandatory for all insurers to obtain a recent photograph of new customers. CHAPTER 10 .

companies will not only need to compete in terms of their product offerings.For an insurance organization. but will also be required to leverage business intelligence-enabled analytics to attain a competitive edge? CHAPTER 12 .  Regardless of the mode of implementing step one. 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.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 . its fraud management strategy should form part of its business strategy and be consistent with its overall mission and objectives. insurance companies can provide their stakeholders with a fraud reporting mechanism. 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. Additionally. manageable and correct?” In a data-driven industry such as insurance. “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. which was sent to insurance companies.

through to repetitive analysis of business processes where fraudulent activity is likely to more likely to occur. Whistleblower hotlines provide the means for people to report suspected fraudulent behavior but hotlines alone are not enough. To effectively test for fraud. Data analysis also provides an effective way to be more proactive in the fight against fraud. 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. all relevant transactions must be tested across all applicable business systems and applications. It ranges from point-in-time analysis conducted in an ad hoc context for one-off fraud investigation or exploration. Analyzing business transactions at the source level helps auditors provide better insight and a more complete view as to the likelihood of fraud occurring. There is a spectrum of analysis that can be deployed to detect fraud. Ultimately.  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 38 . Data analysis can be applied to just about anywhere in an organization where electronic transactions are recorded and stored. where the risk of fraud is high and the likelihood is as well.operating and to identify transactions that indicate fraudulent activity or the heightened risk of fraud. It helps focus investigative action to those transactions that are suspicious or illustrate control weaknesses that could be exploited by fraudsters. organizations can employ an “always on” or continuous approach to fraud detection – especially in those areas where preventative controls are not possible or effective.

to identify unusual (i.  Duplicate testing -to identify duplicate transactions such as payments.e.  Joining different diverse sources -to identify matching values (such as names.  Summing of numeric values-to identify control totals that may have been falsified.The following techniques are effective in detecting fraud.(e.  Validating entry dates-to identify suspicious or inappropriate times for postings or data entry.. standard deviations..g. ultimately.  Gap testing-to identifies missing values in sequential data where there should be none.  Classification – to find patterns amongst data elements. or expense report items. Auditors should ensure they use these. organizations can and should take a more hands-on approach to fraud detection. excessively high or low) entries. They include the following:  Calculation of statistical parameters. where appropriate. continually for those areas where the risk of fraud 39 . and account numbers) where they shouldn’t exist. averages. addresses.  Stratification of numbers . A fraud detection and prevention program should include a range of approaches – from point-in-time to recurring and. claims. high/low values) – to identify outliers that could indicate fraud.  Digital analysis using Bedford’s Law -to identify unexpected occurrences of digits in naturally occurring data sets.  FRAUD DETECTION PROGRAMME STRATEGY Instead of relying on reactive measures like whistleblowers.

 Identify missing. CHAPTER 14.  Calculate benefit payments paid for lapsed policies.  Report unauthorized policy changes.  Determine agents/brokers with statistically high numbers of claim payouts.  LIFE INSURANCE  Determine patterns of overpayment of premiums. If that testing reveals indicators of fraud.  Report multiple accounts to collect funds or payment to beneficiaries. point-in-time testing will help identify transactions to be investigated.EMERGING TRENDS IN FRAUD MANAGEMENT 40 . Based on key risk indicators.warrants. recurring testing or continuous analysis should be considered.  Report purchase of multiple products in a short period of time.  Find policy loans that are greater than face value.  Review beneficiaries with multiple policies. void or out of sequence check numbers. duplicate.  Isolate transactions for follow-up where employees that are beneficiaries.  Review transaction payments comprising more than one type of payment instrument.

To date. Experience and expert knowledge should be complemented with training and tailored general checklists to fuel success. 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. property and casualty insurance where IT helps to support a range of small damage claims. systematic examination procedures. 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. it makes faster triage possible and allows employees to concentrate on carrying out loss or benefit cases or even conducting the enquiry. The fraud management processes within these insurance companies are supported by bespoke software.Insurance fraud management has gained significant momentum within the past twenty years.  FOUR DIMENSIONS OF FRAUD MANAGEMENT 41 . decreasing margins and increasing innovation will all put pressure on insurers to strengthen this capability. A more modern and efficient approach to claims processing has a wide range of potential benefits it opens up the door to cost savings. Use of packaged software tends to be concentrated in the business divisions focused on motor. employees are seen as the essential success factor for efficient fraud management and the most important method for identifying potential insurance fraud. Growing competition.

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. THE ORGANIZATION 42 .Bearing Point offers efficient and integrated fraud management solutions. 1.

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. 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. EMPLOYEES Employees face many challenges regarding fraud. 4. 3. 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. Therefore input from the organization as well as responsibilities for this process need to be defined. they need to detect fraud. Clearly defined processes create security for your employees and enhance prospects of success for a new fraud management strategy. 2. Initially.The organization dimension contains the organizational structure and integration of fraud management within the overall company. 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. 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. INNOVATIVE TECHNOLOGIES 43 .

Innovative technologies are now being applied to the problem of fraud detection and investigation. By shortening the time it takes to carry out investigations the company can alleviate the pressure of a premature decision. In parallel. Selecting the right tools to support your optimized processes can allow you to pinpoint the right cases to investigate and reduce claim payments overall. unsuspicious claims can be paid faster. 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 45 .

insurance also has two faces. People have changed their attitude towards their insurance and new look from being an entry of luxury to an investment and necessity. is of which people deceive insurance companies for their undue advantage and cause intimidation to many others.Insurance. awfully. 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 of which is investments and getting regular returns from financial institutions for oneself and for loved ones. a very well-known concept today and many people could relate to in more than one ways. 46 . This is the influence of the changing times that have changed the concept of insurance in the minds of the young and the old. One knows that every coin has two sides. The other. Similarly.

One can either grumble about how things are all going wide of the mark o r swallow the consequences. it is very difficult to scam them. swindles. through the enduring and conscious endeavor of these institutions insurance fraud tempo has declined by an enormous a m o u n t . 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. 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 . 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. 47 . One cannot diminish frauds. 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) . One must know all the loop-holes of their business to scheme someone. etc. and an attitude for change amongst the humanity. One must be sensitive and offer their helping as much as they can. schemes. scams but can positively b e alert of them so as not be a victim of it themselves. 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 . Several have studied preceding and enduring market conditions to identify with the diverse frauds that take place and the reasons behind committing these frauds. Lack of knowledge and not knowing ones basic rights on behalf of prey could land them in scrambled scam bisque. Or put their foot down and m a k e a n attempt to change the immoral to the right. awareness.Though. T u m b l i n g fraudulent situations is a unremitting and collective effort of countless. there have been many laws and agencies all over the world to impede such criminal activity.

insurance fraud will remain a vast and dangerous criminal enterprise. Insurance fraud is a crime. one of America’s largest criminal industries. Insurance fraud occurs every day and in every state. 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. People of all races. 48 . These thieves are committing insurance fraud. Young people raised on the internet will be the vanguard of this crime wave. INSURANCE FRAUD : THE CRIME YOU PAY FOR Watch out.insurance crooks are picking your pocket in order to line theirs.  THE FUTURE.survey consumers buy from online insurance companies that may be virtually untraceable. incomes and ages are victimized. Insurance fraud against immigrants will remain a serious problem as diverse ethnic continue migrating. Tracking them across international borders will pose a big problem. honest consumers and businesses pay the price. Here are several fraud trends consumers should know about: The internet will hatch new insurance swindles as computer. Many fraud crimes will be committed by fraud rings or organized mafias of immigrants themselves. The global economy is igniting huge insurance money – laundering schemes. often involving fake insurers that bilk people out of millions. and one way or another.STILL DANGEROUS Despite the encouraging progress.

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.  Keep your insurance identification number secret. Insurance fraud will disappear only when criminals realize fraud is a fast highway to jail.The elderly will remain one of the largest targets of insurance swindles. 49 . Consumers. lawyers and many more must be part of the answer.  EVERYONE’S SOLUTION Everyone pays for a insurance fraud. insurance.  Be suspicious if the price of insurance seems too low to be true.  Make sure “free services” aren’t actually hidden in insurance bill. Check closely for accuracy. Many seniors also are investing in fake promissory notes sold by insurance agents and guaranteed by non.  Be wary of buying insurance from door-to-door or telephone sales people.  Never sign blank insurance claim forms  Demand detailed bills for repair and medical services. doctors. insurance crooks can steal it and involve you inn scams. lawmakers. companies.existent insurance companies.  PROTECT YOURSELF: STAY ALERT You can protect yourself against insurance scams: stay alert. and so everyone must join in stamping out these swindles. not an easy road to riches. and go slow or back out if an insurance transaction seems suspicious. ask questions.  Contact your state insurance department to make sure the agent and company are licensed.

 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 50 .

 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. 51 . Primary data had been adopted by an informal interview to agent of life insurance.