CHAPTER 1 – INTRODUCTION

1.1THE INDIAN INSURANCE SECTOR:

 The Indian Insurance Sector is basically divided into two categories – Life Insurance and
Non-life Insurance. The Non-life Insurance sector is also termed as General Insurance. Both
the Life Insurance and the Non-life Insurance is governed by the IRDAI (Insurance
Regulatory and Development Authority of India).

The role of IRDA is to thoroughly monitor the entire insurance sector in India and also act
like a custodian of all the insurance consumer rights. This is the reason all the insurers have
to abide by the rules and regulations of the IRDAI.

The Insurance sector in India consists of total 57 insurance companies. Out of which 24
companies are the life insurance providers and the remaining 33 are non-life insurers. Out
which there are seven public sector companies.

Life insurance companies offer coverage to the life of the individuals, whereas the non-life
insurance companies offer coverage with our day-to-day living like travel, health, our car and
bikes, and home insurance. Not only this, but the non-life insurance companies provide
coverage for our industrial equipment’s as well. Crop insurance for our farmers, gadget
insurance for mobiles, pet insurance etc. are some more insurance products being made
available by the general insurance companies in India.

The life insurance companies have gained an investment prospectus in the recent times with
an idea of providing insurance along with a growth of your savings. But, the general
insurance companies remain reluctant to offer pure risk cover to the individuals.

Insurance industry in India has seen a major growth in the last decade along with an
introduction of a huge number of advanced products. This has led to a tough competition with
a positive and healthy outcome.

Insurance sector in India plays a dynamic role in the wellbeing of its economy. It
substantially increases the opportunities for savings amongst the individuals, safeguards their
future and helps the insurance sector form a massive pool of funds.
With the help of these funds, the insurance sector highly contributes to the capital markets,
thereby increasing large infrastructure developments in India.

1.2History of Insurance in India in brief:

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya (  Arthasastra ). The
writings talk in terms of pooling of resources that could be re-distributed in times of
calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to
modern day insurance. Ancient Indian history has preserved the earliest traces of
insurance in the form of marine trade loans and carriers’ contracts. Insurance in India has
evolved over time heavily drawing from other countries, England in particular.
 
  In 1818 saw the advent of life insurance business in India with the establishment of the
Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In
1829, the Madras Equitable had begun transacting life insurance business in the Madras
Presidency. 1870 saw the enactment of the British Insurance Act and in the last three
decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and
Empire of India (1897) were started in the Bombay Residency. This era, however, was
dominated by foreign insurance offices which did good business in India, namely Albert
Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian
offices were up for hard competition from the foreign companies.
 
In 1914, the Government of India started publishing returns of Insurance Companies
in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure
to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to
enable the Government to collect statistical information about both life and non-life
business transacted in India by Indian and foreign insurers including provident insurance
societies. In 1938, with a view to protecting the interest of the Insurance public, the
earlier legislation was consolidated and amended by the Insurance Act, 1938 with
comprehensive provisions for effective control over the activities of insurers.
 
 The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were
a large number of insurance companies and the level of competition was high. There were
also allegations of unfair trade practices. The Government of India, therefore, decided to
nationalize insurance business.
 
      An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector
and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154
Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign
insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was
reopened to the private sector.
 
     The history of general insurance dates back to the Industrial Revolution in the west and
the consequent growth of sea-faring trade and commerce in the 17 th century. It came to India
as a legacy of British occupation. General Insurance in India has its roots in the establishment
of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the
Indian Mercantile Insurance Ltd, was set up. This was the first company to transact all classes
of general insurance business.
1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton
of India. The General Insurance Council framed a code of conduct for ensuring fair conduct
and sound business practices.
 
    In 1968, the Insurance Act was amended to regulate investments and set minimum
solvency margins. The Tariff Advisory Committee was also set up then.
 
    In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general
insurance business was nationalized with effect from 1st January, 1973. 107 insurers were
amalgamated and grouped into four companies, namely National Insurance Company Ltd.,
the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United
India Insurance Company Ltd. The General Insurance Corporation of India was incorporated
as a company in 1971 and it commence business on January 1sst 1973.
 
The Past of Insurance Sector In India

In the history of the Indian insurance sector, a decade back LIC was the only life insurance
provider. Other public sector companies like the National Insurance, United India Insurance,
Oriental Insurance and New India Assurance provided non-life insurance or say general
insurance in India.

However, with the introduction of new private sector companies, the insurance sector in India
gained a momentum in the year 2000. Currently, 24 life insurance companies and 30 non-life
insurance companies have been aggressive enough to rule the insurance sector in India.

But, there are yet many more insurers who are awaiting for IRDAI approvals to start both life
insurance and non-life insurance sectors in India.

The Present of Insurance Sector In India

So far as the industry goes, LIC, New India, National Insurance, United insurance and
Oriental are the only government ruled entity that stands high both in the market share as well
as their contribution to the Insurance sector in India. There are two specialized insurers –
Agriculture Insurance Company Ltd catering to Crop Insurance and Export Credit Guarantee
of India catering to Credit Insurance. Whereas, others are the private insurers (both life and
general) who have done a joint venture with foreign insurance companies to start their
insurance businesses in India.

1.3 Meaning and Definition of Insurance Fraud:

What is Insurance Fraud?

Insurance fraud is any act committed to defraud an insurance process. This occurs when a
claimant attempts to obtain some benefit or advantage they are not entitled to, or when an
insurer knowingly denies some benefit that is due. According to the United States Federal
Bureau of Investigation, the most common schemes include: premium diversion, fee
churning, asset diversion, and workers compensation fraud. Perpetrators in these schemes can
be insurance company employees or claimants.[1] False insurance claims are insurance claims
filed with the fraudulent intention towards an insurance provider.
Insurance fraud has existed since the beginning of insurance as a commercial enterprise. [2]
Fraudulent claims account for a significant portion of all claims received by insurers, and cost
billions of dollars annually. Types of insurance fraud are diverse, and occur in all areas of
insurance. Insurance crimes also range in severity, from slightly exaggerating claims to
deliberately causing accidents or damage. Fraudulent activities affect the lives of innocent
people, both directly through accidental or intentional injury or damage, and indirectly as
these crimes lead to higher insurance premiums. Insurance fraud poses a significant problem,
and governments and other organizations try to deter such activity.

Definition of Fraud in Insurance Sector:

Fraud can be generally defined as an act or omission intended to gain dishonest or
unlawful advantage for a party (the “frauster”)or other parties. This could be achieved, for
example, by:

1. Misappropriating assets;
2. Abusing responsibilities, position of trust or a fiduciary responsibilities;
3. Deliberately misrepresenting ,concealing ,suppressing or not disclosing material facts
relevant to a financial decision ,transaction or perception of an insurer’s status.

Section 17 of The Indian Contract Act, 1872 deals with fraud. It read as:

“Fraud” means and includes any of the following acts committed by a party to a contract, or
with his connivance, or by his agent, with intent to deceive another party thereto or his agent,
or to induce him to enter into the contract:-
 1. the suggestion, as a fact, of that which is not true, by one who does not believe it to
be true;
2. the active concealment of a fact by one having knowledge or belief of the fact;
3. a promise made without any intention of performing it;
4. any other act fitted to deceive;
5. any such act or omission as the law specially declares to be fraudulent.

1.4Classification of Insurance Fraud:

Hard vs. soft fraud:

Insurance fraud can be classified as either hard fraud or soft fraud.

Hard fraud occurs when someone deliberately plans or invents a loss, such as a

collision, auto theft, or fire that is covered by their insurance policy so they can
claim payment for damages. Criminal rings are sometimes involved in hard fraud
schemes that can steal millions of dollars.

Soft fraud, which is far more common than hard fraud, is sometimes also referred
to as opportunistic fraud. This type of fraud consists of policyholders exaggerating
otherwise-legitimate claims. For example, when involved in an automotive
collision an insured person might claim more damage than actually occurred. Soft
fraud can also occur when, while obtaining a new health insurance policy, an
individual misreports previous or existing conditions to obtain a lower premium on
the insurance policy.

1.4 Types of insurance:

Life Insurance:

Life insurance is different from other insurance, in that sense, the subject matter of insurance
is the life of a human. The insurer will pay a certain amount of insurance at the time of death
or at the end of a fixed term. At present, life insurance enjoys the maximum scope, because
life is the most important asset of a person.

“Life insurance is a contract under which the insurance company – in consideration of a premium paid in
lump sum or periodical installments undertakes to pay a pre-fixed sum of money on the death of the
insured or on his attaining a certain age, whichever is earlier.”

Everyone needs insurance. This insurance provides protection to the family prematurely or
provides adequate amounts in old age when reducing the capacity. Under Personal Insurance,
the payment is made in the accident. Insurance is not only security but it is a type of
investment because a certain amount can return the assured to the end of death or term.

SL.NO NAME OF THE LIFE INSURANCE COMPANIES

1 BAJAJ ALLIANZ LIFE INSURANCE CO. LTD.
2 BIRLA SUN LIFE INSURANCE CO. LTD
3 HDFC STANDARD LIFE INSURANCE CO. LTD
4 ICICI PRUDENTIAL LIFE INSURANCE CO. LTD
5 EXIDE LIFE INSURANCE CO. LTD.
6 LIFE INSURANCE CORPORATION OF INDIA
7 MAX LIFE INSURANCE CO. LTD
8 PNB METLIFE INDIA INSURANCE CO. LTD.
9 KOTAK MAHINDRA OLD MUTUAL LIFE INSURANCE CO. LTD
10 SBI LIFE INSURANCE CO. LTD
11 TATA AIA LIFE INSURANCE CO. LTD.
12 RELIANCE NIPPON LIFE INSURANCE CO. LTD.
13 AVIVA LIFE INSURANCE COMPANY INDIA LIMITED
14 SAHARA INDIA LIFE INSURANCE CO. LTD.
15 SHRIRAM LIFE INSURANCE CO. LTD.
16 BHARTI AXA LIFE INSURANCE CO. LTD.
17 FUTURE GENERALI INDIA LIFE INSURANCE CO. LTD.
18 IDBI FEDERAL LIFE INSURANCE CO. LTD.
19 CANARA HSBC ORIENTAL BANK OF COMMERCE LIFE INSURANCE CO. LTD.
20 AEGON  LIFE INSURANCE CO. LTD.

General Insurance:

General insurance includes property insurance, liability insurance, and other forms of
insurance. Fire and marine insurance are strictly called property insurance. Motor, theft,
loyalty and machine insurance involve a certain extent of liability insurance. The strict form
of liability insurance is fidelity insurance, from which the insurer compensates the insured for
losses when he is subject to payment liability to the third party.

Sr .No NAME OF THE GENERAL INSURANCE COMPANIES.

1 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD.
2 ICICI LOMBARD GENERAL INSURANCE CO. LTD.
3 IFFCO TOKIO GENERAL INSURANCE CO. LTD.
4 NATIONAL INSURANCE CO. LTD.
5 THE NEW INDIA ASSURANCE CO. LTD.
6 THE ORIENTAL INSURANCE CO. LTD.
7 UNITED INDIA INSURANCE CO. LTD.
8 RELIANCE GENERAL INSURANCE CO. LTD.
9 ROYAL SUNDARAM GENERAL INSURANCE CO. LIMITED
10 TATA AIG GENERAL INSURANCE CO. LTD.
11 CHOLAMANDALAM MS GENERAL INSURANCE CO. LTD.
12 HDFC ERGO GENERAL INSURANCE CO. LTD.
13 EXPORT CREDIT GUARANTEE CORPORATION OF INDIA LTD.
14 AGRICULTURE INSURANCE CO. OF INDIA LTD.
15 STAR HEALTH AND ALLIED INSURANCE COMPANY LIMITED
16 APOLLO MUNICH HEALTH INSURANCE COMPANY LIMITED
17 FUTURE GENERALI INDIA INSURANCE COMPANY LIMITED
18 UNIVERSAL SOMPO GENERAL INSURANCE CO. LTD.
19 SHRIRAM GENERAL INSURANCE COMPANY LIMITED,
20 BHARTI AXA GENERAL INSURANCE COMPANY LIMITED

Property Insurance:

Under the property, the insured property of the person/person is insured against a certain
specified risk. Risk can damage property in fire or marine hazard, property theft or accident.
Property of any person and society is insured against the loss of insurance and marine
hazards, the unexpected decline in the crop reduction, the unexpected death of the animals
engaged in the trade, the destruction of the machines and property theft is insured and goods.

Marine Insurance:

The Marine insurance provides protection against the loss of sea threats. In threats are
confronting with a rock, or ship, enemies, fire, and captured by the pirate etc. There is no
reason for ship, goods and freight traffic and disappearances in these hazards. So, marine
insurance ship (plow), goods and freight.

“A contract of marine insurance is a contract under which the insurance company undertakes to indemnify
the insured against losses which are incidental to the marine adventure.”

Earlier only some minor risks were insured, but now the scope of marine insurance was
divided into two parts; Ocean marine insurance and inland marine insurance. The former only
ensures the sea threats, while later the insured perils are included which can produce by the
insured’s well-known delivery of the cargo (gods) and can increase the cargo by the buyer
(importer) Go down

Fire Insurance:

Fire insurance involves the risk of fire. In the absence of fire insurance, fire waste will not
only increase the person but also the society. With the help of fire insurance, damages caused
by fire are compensated and society is not much lost. The person is given prioritization of
such loss and his property or business or industry will remain in the same condition in which
it was before the loss. Fire insurance does not only protect the loss, but it also provides some
resulting loss, under this insurance war risk, upheaval, riots etc. can also insure.

“Fire insurance is a contract, under which the insurance company, in consideration of a premium payable
by the insured, agrees to indemnify the assured for the loss or damage to the property insured against fire,
during a specified period of time and up to an agreed amount.”

Liability insurance:

General insurance also includes liability insurance, from which the insured is liable to pay the
loss of property or to compensate for the loss of personality; Injury or death is seen as
insurance fidelity insurance, automobile insurance, and machine insurance etc.
Social insurance:

Social insurance is to provide security to the weaker sections of the society who are unable to
pay the premium for adequate insurance. Pension schemes, disability benefits, unemployment
benefits, sickness insurance, and industrial insurance are different forms of social insurance.
Insurance can classify into four categories from the risk point.

Personal Insurance:

Personal insurance includes insurance of human life which can cause damage due to death,
accident, and illness. Therefore, individual insurance is further classifying by life insurance,
personal accident insurance, and health insurance.

Guaranteed Insurance:

Guarantee insurance includes losses caused by dishonesty, disappearance, and employee or

other party’s loyalty. The party must be a party to the contract. Their failure damages the first
party. For example, in export insurance, the insurer will compensate the importer on the
failure to pay the amount of loan.

Miscellaneous insurance:

Property, goods, machines, furniture, automobiles, valuable articles etc. maybe insure against
damage or destruction due to accident or disappearance due to theft. There are different forms
of insurance for each type of property, which not only provides property insurance but also
liability insurance and personal injury is also insurers.
Other forms of insurance:

In addition to property and liability insurance, there is other insurance which is including in
general insurance. Examples of such insurance are export-credit insurance, state employee
insurance so that the insurer guarantees to pay a certain amount on certain events.

1.5Principles of Insurance:

The main objective of every insurance contract is to give financial security and protection to
the insured from any future uncertainties. Insured must never ever try to misuse this safe
financial cover .Seeking profit opportunities by reporting false occurrences violates the terms
and conditions of an insurance contract. This breaks trust, results in breaching of a contract
and invites legal penalties. An insurer must always investigate any doubtable insurance
claims. It is also a duty of the insurer to accept and approve all genuine insurance claims
made, as early as possible without any further delays and annoying hindrances.

1. Principle of Utmost Good Faith

Principle of Uberrimae fidei (a Latin phrase), or in simple english words, the Principle of
Utmost Good Faith, is a very basic and first primary principle of insurance. According to
this principle, the insurance contract must be signed by both parties (i.e insurer and insured)
in an absolute good faith or belief or trust.

The person getting insured must willingly disclose and surrender to the insurer his complete
true information regarding the subject matter of insurance. The insurer's liability gets void (i.e
legally revoked or cancelled) if any facts, about the subject matter of insurance are either
omitted, hidden, falsified or presented in a wrong manner by the insured.

2. Principle of Insurable Interest

The principle of insurable interest states that the person getting insured must have insurable
interest in the object of insurance. A person has an insurable interest when the physical
existence of the insured object gives him some gain but its non-existence will give him a loss.
In simple words, the insured person must suffer some financial loss by the damage of the
insured object.

For example :- The owner of a taxicab has insurable interest in the taxicab because he is
getting income from it. But, if he sells it, he will not have an insurable interest left in that
taxicab.

3. Principle of Indemnity

Indemnity means security, protection and compensation given against damage, loss or injury.

According to the principle of indemnity, an insurance contract is signed only for getting
protection against unpredicted financial losses arising due to future uncertainties. Insurance
contract is not made for making profit else its sole purpose is to give compensation in case of
any damage or loss.

In an insurance contract, the amount of compensations paid is in proportion to the incurred

losses. The amount of compensations is limited to the amount assured or the actual losses,
whichever is less. The compensation must not be less or more than the actual damage.
Compensation is not paid if the specified loss does not happen due to a particular reason
during a specific time period. Thus, insurance is only for giving protection against losses and
not for making profit.

However, in case of life insurance, the principle of indemnity does not apply because the
value of human life cannot be measured in terms of money

4. Principle of Contribution

Principle of Contribution is a corollary of the principle of indemnity. It applies to all contracts

of indemnity, if the insured has taken out more than one policy on the same subject matter.
According to this principle, the insured can claim the compensation only to the extent of
actual loss either from all insurers or from any one insurer. If one insurer pays full
compensation then that insurer can claim proportionate claim from the other insurers.

For example :- Mr. John insures his property worth $ 100,000 with two insurers "AIG
Ltd." for $ 90,000 and "MetLife Ltd." for $ 60,000. John's actual property destroyed is worth
$ 60,000, then Mr. John can claim the full loss of $ 60,000 either from AIG Ltd. or MetLife
Ltd., or he can claim $ 36,000 from AIG Ltd. and $ 24,000 from Metlife Ltd.

So, if the insured claims full amount of compensation from one insurer then he cannot claim
the same compensation from other insurer and make a profit. Secondly, if one insurance
company pays the full compensation then it can recover the proportionate contribution from
the other insurance company

5. Principle of Subrogation

Subrogation means substituting one creditor for another.

Principle of Subrogation is an extension and another corollary of the principle of indemnity.

It also applies to all contracts of indemnity.

According to the principle of subrogation, when the insured is compensated for the losses due
to damage to his insured property, then the ownership right of such property shifts to the
insurer.

This principle is applicable only when the damaged property has any value after the event
causing the damage. The insurer can benefit out of subrogation rights only to the extent of the
amount he has paid to the insured as compensation.

For example :- Mr. John insures his house for $ 1 million. The house is totally destroyed
by the negligence of his neighbour Mr.Tom. The insurance company shall settle the claim of
Mr. John for $ 1 million. At the same time, it can file a law suit against Mr.Tom for $ 1.2
million, the market value of the house. If insurance company wins the case and collects $ 1.2
million from Mr. Tom, then the insurance company will retain $ 1 million (which it has
already paid to Mr. John) plus other expenses such as court fees. The balance amount, if any
will be given to Mr. John, the insured.

6. Principle of Loss Minimization

According to the Principle of Loss Minimization, insured must always try his level best to
minimize the loss of his insured property, in case of uncertain events like a fire outbreak or
blast, etc. The insured must take all possible measures and necessary steps to control and
reduce the losses in such a scenario. The insured must not neglect and behave irresponsibly
during such events just because the property is insured. Hence it is a responsibility of the
insured to protect his insured property and avoid further losses.

For example :- Assume, Mr. John's house is set on fire due to an electric short-circuit. In
this tragic scenario, Mr. John must try his level best to stop fire by all possible means, like
first calling nearest fire department office, asking neighbours for emergency fire
extinguishers, etc. He must not remain inactive and watch his house burning hoping, "Why
should I worry? I've insured my house."

7. Principle of Causa Proxima (Nearest Cause)

Principle of Causa Proxima (a Latin phrase), or in simple english words, the Principle of
Proximate (i.e Nearest) Cause, means when a loss is caused by more than one causes, the
proximate or the nearest or the closest cause should be taken into consideration to decide the
liability of the insurer.

The principle states that to find out whether the insurer is liable for the loss or not, the
proximate (closest) and not the remote (farest) must be looked into.

For example:- A cargo ship's base was punctured due to rats and so sea water entered and
cargo was damaged. Here there are two causes for the damage of the cargo ship - (i) The
cargo ship getting punctured beacuse of rats, and (ii) The sea water entering ship through
puncture. The risk of sea water is insured but the first cause is not. The nearest cause of
damage is sea water which is insured and therefore the insurer must pay the compensation.

However, in case of life insurance, the principle of Causa Proxima does not apply. Whatever
may be the reason of death (whether a natural death or an unnatural death) the insurer is
liable to pay the amount of insurance.

1.6LIFE INSURANCE CORPORATION

Life Insurance Corporation of India (abbreviated as LIC) is an Indian state-

owned insurance group and investment corporation owned by the Government of India.
The Life insurance Corporation of India was founded on September 1, 1956 when
the Parliament of India passed the Life Insurance of India Act that nationalized the insurance
industry in India. Over 245 insurance companies and provident societies were merged to
create the state-owned Life Insurance Corporation of India.[2][1]

As of 2019, Life Insurance Corporation of India had total life fund of ₹28.3 trillion .The total
value of sold policies in the year 2018-19 is ₹21.4 million. Life Insurance Corporation of
India settled 26 million claims in 2018-19. It has 290 million policy holders.

Nationalization in 1956:

In 1955, parliamentarian Feroz Gandhi raised the matter of insurance fraud by owners of
private insurance agencies. In the ensuing investigations, one of India's wealthiest
businessmen, Ramkrishna Dalmia, owner of the Times of India newspaper, was sent to prison
for two years.

The Parliament of India passed the Life Insurance of India Act on 19 June 1956 creating the
Life Insurance Corporation of India, which started operating in September of that year. It
consolidated the business of 245 private life insurers and other entities offering life insurance
services; this consisted of 154 life insurance companies, 16 foreign companies and 75
provident companies. The nationalization of the life insurance business in India was a result
of the Industrial Policy Resolution of 1956, which had created a policy framework for
extending state control over at least 17 sectors of the economy, including life insurance.

1.6.1 Types of Life Insurance Policies in India:

1.6.2 Areas of Frauds in Insurance:

Frauds can occur in any area of insurance sector. Basically, the areas of frauds detected so
far are as follows:

Application: Application is the first stage on the insurance policy where in the insured
applies for the insurance .In the application stage frauds occur when

a. The insured conceals certain important facts

b. Giving partial or wrong information

Premium: Premium is a periodical instalment paid by the insured to the insurer for covering
the risk. Frequently occurring frauds at this stage are:

a. Paying the premium in cash

Surrender: Surrender is voluntarily terminating the insurance policy by the insured before
the maturity or the insured event occurs. Frequently occurring frauds at this stage:

a. Forcing the insured to surrender the policy and take a new policy

b. By not disclosing the facts relating to surrender to the insured at the time of taking the
insurance policy
 Claims: An insurance claim is a formal request to an insurance company asking for a
payment based on the terms of the insurance policy. Frequently occurring frauds at this stage:

a. Fraudulent activities done by the insured to get the claim amount

Employee related frauds: The frauds done by the employee through collusion with the
insured or
misleading the insured. Frequently occurring frauds at this stage:

a. Helping the insured to exaggerate the level of income earned prior to the incident

b. Making false policies

According to the research done by Ernst & Young, the frauds risk exposure faced by
insurance companies is as follows:

Fig 1. Fraud risk exposure faced by insurance companies.

Life Insurance Companies related frauds and their measures:
Life insurance: Insurance that pays out a sum of money either on the death of the insured
person or after a set
period.

Frauds in life insurance business: According to the research done by us claims is the area
where the maximum
frauds occur.

1.7 Types of Frauds in Life Insurance :

Typical fraud categories:

There are three major parties involve in perpetrating life insurance fraud.
 One is the internal employees or the agents of the company
 Second is the policyholder i.e. the customer and
 Third is not a direct found but an indirect fraud i.e. involvement of doctors.
Some types of frauds are explained below

1. Misrepresentation-Misrepresentation of critical information relating to profile (includes

incorrect income, educational qualification, occupation, etc. This leads to early claims.

2. Forgery/ Tampered Documents: Forging the customer’s signature in any document /

proposal or any supporting document or submitting wrong documents.

3. Bogus Business: Proposal Forms submitted for nonexistent customers (bogus business)

4. Cash Defalcation: Delayed Deposit of Premium

5. Misselling: Product Misinformation – Selling Practice wherein the complete, detailed

and factual information of products is not given to the Customer: Incomplete / Incorrect
representation on: Guaranteed Returns, Rider Features, Charges, Linked Product vs.
Endowment etc., Facility of Top-up vs. Regular premium, Premium Holiday

6. Pre Signed Forms: Obtaining pre signed blank forms and filling up of the ACR/CCR
without actually physically seeing the client/ satisfying oneself about the client.

7. Nexus: Doctor’s nexus means he getting involved with other perpetrators in committing
life insurance fraud
8. Fake Death: Faking one’s death to cash in on a life-insurance policy is a long, time
honoured practice.

Some schemes are amateurish and easily detectable. Others are quite sophisticated and
involve elaborate planning in staging the fake death with accomplices, oftentimes family
members. Funeral directors also have been convicted of aiding such scams.
Another way of doing fraud is to create a policy after the death of a particular person by
manipulating the death certificates and claiming the benefit.

Claim Settlement
Claim settlement is not a straight forward process. The basic premise is to pay all “right”
claims and reject all “wrong” claims. However, deciding on what is right and what is wrong
is not an easy task. A company’s reputation is also based on the claim settlement ratio which
is nothing but the number of claims settled for every 100 claims. In the following paragraphs,
the issues the companies face in determining what fair claims are given below:

1. Understanding of the Product: This is probably the first problematic area. In majority of
the cases, the customer doesn’t know what he has purchased and what the benefits are. Very
few people read the actual policy contract and understand its requirements and implications.
If this applies to the literate group in the Indian Society, the problems are compounded for the
poorer sections of the society, which forms a vast majority of the country.

2. Proposal Form: If problems in claims settlement were to be given a rating, then probably
this parameter would be rated at 99%. This is the most critical problem. A large number of
proposal forms are not filled in with the spirit required Many Proposal Forms are filled in just
for the sake satisfying the insurer’s needs to issue the policy – due regard and truthfulness is
not given to the questions. A Life Insurance Proposal Form is filled in like a credit card
application, where just the basic address etc. is given and then signed off without even
pondering over the other fields in the larger proposal form. Questions are just ticked for the
sake of completeness without an iota of a thought given to the facts required thereunder. At
the time of claim, when the actual facts are revealed, then it is the Proposal Form which
indicts the customer at a time when they don’t want to accept the facts. Moreover, illiteracy
causes more problems, whereby policyholders say that they were not aware of what was
supposed to be given.

3. Non-Disclosures & Misrepresentations: This is a continuation of the previous point. It is

not that the customer is always ignorant and has just committed errors unknowingly. Many
times the customer does not want to disclose the facts and problems. Hence he purposely
does not disclose information in the proposal form.

1.8 Life Insurance Fraud Schemes:

 Fraudulent Death Claims

To obtain reimbursement for life insurance, a death certificate is required. However, phony
death certificates are not that difficult to obtain. The person might be very much alive and
missing or the person might be dead, and the death is past posted. With small settlements,
death claims aren’t closely scrutinized and are paid relatively easily.

 Murder for Profit

This scheme involves the killing (or arranging for the killing) of a person in order to collect
insurance.

The death might be made to look like it was an accident or a random killing.

 Liability Schemes
In a liability scheme the claimant has claimed an injury that did not occur. The slip and fall
scam is the most common, and involves a person claiming to fall as the result of negligence
on behalf of the insured.

1.9 RED FLAGES FOR LIFE INSURANCE POLICY:

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. Any one or two of
these by themselves may not raise your suspicion; 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.

 The policy’s effective date is close to the date of death.

 The deceased is not well known by relatives and lived alone.
 Policies tend to be for small coverage which is many times available in mass
offerings, i.e. in magazines, mal- in and television and advertisement.
 The agents “loss ratios” appear unusually skewed, considering the size of the market
and types of people insured.
 Policies requiring physical examinations are almost never used in these schemes.
 Numerous life insurance policies were purchased on the victim.
 Different carries were used in securing coverage for no apparent reason.
 The coverage amount is not commensurate with the social position of the deceased;
e.g. a loss income clerical worker has a life insurance estate of millions.
 An unusually large number of death certificates ewer obtained by the beneficiary.

1.9.1 SOME OF THE COMMON FRAUDULENT ACTIVITIES ARE:-

1. AGE PROOF :-
All insurance policies have an eligible age at which the policy can be taken. To accommodate
oneself into the product or enjoy a minimum premium, age proofs are modified to show a
reduced age.
 2. ADDRESS PROOF :-
Many issuers accept bank projects have a valid address proof. But these are often victim of
manipulation to show a reduced age.
3. MEDICAL TESTS :-
Some cases require medical tests to issue the policy. However, to substantiate not disclosed
or miss presented medical conditions, a different person may be sent at the time of the tests.
While this may help to get the policy, it would create discrepancy at the time of claims, even
leading to reputation

4. FABRICATING DATE OF DEATH :-

The benefit of keeping your policy in force by paying regular premiums cannot be
understated. Not doing so, results in the policy to lapse and becoming illegible to avail the
death benefit on the policy. 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, so as to register claim.
5. FORGERY OF DEATH CERTIFICATE :-
To avail the death certificate, a false death benefited, a small death certificate is created on
the name of living person.
6. 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, the claim can be repudiated. To safeguard oneself from this situation,
the reasons of death are modified so as to fabricate a genuine claim.
Some of the frauds pertaining to age proofs, address proofs can be detected at the
underwriting stage, while others may be detected during the policy term or at the time
processing the claim. If detected at the underwriting stage, the proposal form is rejected and
policy is not issued. If detected midterm, the policy can be cancelled.There are various
factors which trigger suspicion and hence an investigation on fraudulent claims. The income /
occupation details furnished at issuance stage and actual fraud at investigation stage, pattern
of issuance coverage availed i .e. at what age did customer started buying and within what
span of time how much coverage was bought, time of death, medical case sheets, comments
on postmortem report and co-relating the various sources of information often help to smell a
wrong doing.
Frauds in life insurance occurs mainly due to:-
  Fabrication of documents to save on premiums.
 Avail covers which are not allowed for a particular age group.
 Obtain the death benefit through the unfair means.
 Some extreme cases have also found to involve murder by kin for monetary benefit.

1.9.2 Areas that need more stringent anti-fraud regulation

Fraud risk arising from claims or surrender being the key concern for most insurance
companies calls for more stringent regulations. If claims-related frauds can be detected in
time, it can help insurers save significantly cost. The survey indicates that almost one out of
every two respondents feel that more strict anti-fraud regulations are needed for effective and
transparent claims or surrender management.

1.9.3 FRAUD DETECTION PROGRAMME STRATEGY

Instead of relying on reactive measures like whistleblowers, organizations can and should
take a more hands-on approach to fraud detection. A fraud detection and prevention program
should include a range of approaches – from point-in-time to recurring and, ultimately,
continually for those areas where the risk of fraud warrants. Based on key risk indicators,
point-in-time testing will help identify transactions to be investigated. If that testing reveals
indicators of fraud, recurring testing or continuous analysis should be considered.

 LIFE INSURANCE
 Determine patterns of overpayment of premiums.
 Review transaction payments comprising more than one type of payment instrument.
 Report multiple accounts to collect funds or payment to beneficiaries.
 Report purchase of multiple products in a short period of time.
 Review beneficiaries with multiple policies.
 Isolate transactions for follow-up where employees that are beneficiaries.
 Determine agents/brokers with statistically high numbers of claim payouts.
 Calculate benefit payments paid for lapsed policies.
 Find policy loans that are greater than face value.
 Report unauthorized policy changes.
 Identify missing, duplicate, void or out of sequence check numbers.

1.10Measures to prevent Life Insurance Fraud:

 Confirming from the customer that the policy has been taken without any coercion.

 To confirm that the premium is paid by the policy holder, name of the policy holder
should be mentioned on the cheque given by him/her at the time of paying premium.

 Salary bill and bank statement must be scrutinized at the time of issuing the policy.

 Human life value must be calculated appropriately at the time of giving the policy.

 Not encouraging politically exposed persons for the policy.

  Creating awareness to the general public regarding the insurance.

CHAPTER 2 - RESEARCH METHODOLOGY

2.1 Introduction
It involves the collection, organization, and analysis of information to increase our
understanding of a topic or issue .A research project may also be an expansion on past work
in the field. Research projects can be used to develop further knowledge on a topic, or in the
example of a school research project, they can be used to further a student's research prowess
to prepare them for future jobs or reports. To test the validity of instruments, procedures, or
experiments, research may replicate elements of prior projects or the project as a whole.

2.2 Importance of the study

Insurance premiums have increased due to false or exaggerated personal injury fraud claims,
covering life, home, and motor and business accident policies. In some case claimants would
suffer a genuine accident, but then exaggerating the injuries or the time of recovery amounts
to an insurance fraud.

2.3 Objectives 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.

2.4 Scope of the study

Fraud impacts organizations in several areas including financially, operationally and

physiologically while the monitory loss can be staggering. Its loss of reputation on an
organization can be staggering. Its loss of reputation, goodwill and customer relations can be
devastating. 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.

2.5 Research Methodology

Research methodology is the technique of collecting the data sources for doing the project
and also used to identify, select, process , and analyse information about a project topic, i.e
primary data and secondary data.

2.6 Data Collection

Here the data/information is collected through secondary method of data collection. Data
collection is an extremely challenging work which needs exhaustive planning, diligent work
understanding, determination and more to have the capacity to complete the assignment
effectively. Data collection begins with figuring out what sort of data is needed, followed by
the collection of the sample. You have to utilize a certain tool to gather the data from the
chosen sample.

 Primary Data

As the name suggests, are first-hand information collected by the surveyor. The data so
collected are pure and original and collected for specific purpose. They have never undergone
any statistical treatment before. The collected data may be published as well. The census is an
example of primary data.

 Secondary Data      

Secondary data are opposite to primary data. They are collected and published already
(by some organisation, for instance). They can be used as a source of data and used by
surveyors to collect data from and conduct analysis. Secondary data are impure in the sense
that they have undergone statistical treatment at least once.

This study used the secondary data to analysis and interpretation of life Insurance
Corporation (LIC). Data is collected from various sources such as IRDA, Insurance
magazines , newspapers ,books reports on LIC frauds and obtaining information from net
surfing.

2.7 Tabulation of the data

Statistical analysis of data is an integral and vital part of research report. The following
statistical technique used in the study e.g. f-test, z-test, chi-square test etc.

 For the purpose of various analysis editing, coding, tabulation etc. of data is used as a
technique 
 Charts and diagram were used for better understanding the data collected.

CHAPTER 3- REVIEW OF LITERATURE

Derrig,R.A.(2002)1says that insurance fraud is a major problem in the United States at the
beginning of the 21st century. It has no doubt existed wherever insurance policies are written,
taking different forms to suit the economic time and coverage available. The
term fraud carries the connotation that the activity is illegal with prosecution and sanctions as
the threatened outcomes. The reality of current discourse is a much more expanded notion of
fraud that covers many unnecessary, unwanted, and opportunistic manipulations of the
system that fall short of criminal behaviour .

Arjan Reurink (2018)2 This paper describes the empirical universe of financial fraud as it has
been documented in the academic literature. Specifically, it describes the different forms of
fraudulent behaviour in the context of financial market activities, the prevalence and
consequences of such behaviour as identified by previous research, and the economic and
market structures that scholars believe facilitate it. The findings of the literature review
highlight a number of recent developments that scholars think have facilitated the occurrence
of financial fraud

Salleh ,Fauzilh(2018)3;says that the frauds are the factors influencing the attitudes of
consumers towards insurance claim fraud. In this research, data review was conducted on 60
articles associated with this study’s objectives according to experts’ views and researchers’
experience. It was shown in this research’s primary finding that economic issues, moral
hazard, and perceived fairness are the elements which will result in insurance claim fraud.
This has validated the influence posed by consumer behaviour on insurance claim fraud.

Jou.S.&Hebenton.B.(2017)4 says that the nature and prevalence of insurance fraud has been
studied only to a limited extent, even in the USA and Europe. Nevertheless, national
authorities have pressed ahead with various approaches to control such fraud. This paper
briefly outlines the nature and difficulties around measurement of insurance fraud and
reviews key international trends in the regulation of fraud. It analyses these findings in the
context of actual practices of insurance companies which give evidence to the idea that
‘moral hazard’ is embedded in the institutional arrangements, social relationships, and moral
economies of private insurance.

Derrig.Richard.A.&Valerie,Zicko(2000)5says that there is widespread agreement that

insurance fraud is a major problem in the United States. There is little agreement, however, in
what constitutes insurance fraud in the many articles and research papers published on the
subject during the past ten years. The term ‘‘fraud’’ carries the connotation that the activity is
illegal and, hence, that prosecution and conviction are potential outcomes of a specific fraud.
We compile conviction rates, sentencing outcomes, and recidivism rates in detail to
illuminate the law enforcement process and to gauge the deterrent effect of prosecuting
insurance fraud in the criminal courts.
Chudgar,Dhara&Anjani Kumar Asthana(2016)6 says that life insurance fraud is posing a big
challenge for the entire industry because the number of life insurance frauds are increasing.
These increasing frauds are driving up the costs and premium for the companies. In order to
curtail fraudulent activities in life insurance fraud it is very much important to identify the
drivers that contribute to this activity. Both qualitative and quantitative research was used to
identify various drivers, reasons which compel people to commit life insurance fraud and
finally understand the significant effect of external drivers i.e poor control and economic
recession on internal drivers that is fraudsters attitude

Sullivan Carol& Heather Hull(2000)7,indicated that healthcare fraud, waste, and abuse losses
are estimated to be as much as $700 billion per year. These losses contribute to rapidly
increasing healthcare costs for all Americans and have led Americans to approach healthcare
from a money motivation standpoint. This money motivation can lead to a lack of healthcare
or the malpractice of healthcare which can actually result in death.. With a better
understanding of the type of frauds that can take place, auditors can help prevent these frauds
with better internal controls and protect society from both skyrocketing healthcare costs and
unnecessary medical problems.

Crocker, Keith&Sharon Tennyson(2000)8,says that claims auditing is not a possible deterrent

to fraud, and the settlement strategy consists of an indemnification profile that relates the
insurance payment to the claimed amount of loss. The optimal indemnification profile is
shown to involve systematic underpayment of claims at the margin as a means to deter loss
exaggeration, with the extent of underpayment limited by expected litigation costs and
potential bad‐faith claims. This suggests that liability insurers optimally choose claims
payment strategies to lessen a claimant's incentive to exaggerate losses.

Picard Pierre (2000)9,says that he survey recent developments in the economic analysis of
insurance fraud. The paper first sets out the two main approaches to insurance fraud that
have been developed in the literature, namely the costly state verification and the costly
state falsification. Under costly state verification, the insurer can verify claims at some cost.
Claims’ verification may be deterministic or random. Under costly state falsification, the
policyholder expends resources for the building-up of his or her claim not to be detected.

Picard Pierre(1996)10,says that this paper characterizes the equilibrium of an insurance market
where opportunist policyholders may file fraudulent claims. We assume that insurance
policies are traded in a competitive market where insurers cannot distinguish honest
policyholders from opportunists. The insurer-policyholder relationship is modelled as an
incomplete information game, in which the insurer decides to audit or not.

Sparrow ,(2008)11 says that existing literature on fraud analytics in insurance sector is very
thinly documented. Fraud is considered as a second category of white-collar crime in United
States declared by The U.S department of Justice, second only to violent cases (Sparrow,
2008). Fraud is relatively an invisible crime and difficult to quantify and detect is argued by
Sparrow . He also remarked that it is one of the most serious and important area to be
explored for future research. Insurance fraud is costly to individuals and the insuring
companies. Insurance companies also lose investment income when a fraudulent claim is
filed.

Palasinski ;Wilson,(2009)12 remarked that insurance fraud presents financial, societal and
humanitarian costs. Out of all types of insurance fraud, the maximum cases are of automobile
fraud. It is observed and estimated that 10% to 20% of the automobile insurance claims are
fraudulent. It is also observed that the current approaches of preventing fraud are broad and
ineffective. The automobile premiums in the United States total $110 billion, this would
correlate to an approximate insurance fraud issue of $11 billion annually.

Furlan et al.,( 2011)13says that the way it is shown that approximately 49% believe that they
would not be caught if they filed a fraudulent claim, 24% of the population believes that it is
acceptable to exaggerate the value of an insurance claim, and 11% believe that it is
acceptable to submit a claim for damages not actually lost and 30% agree that fraudulent
activity will increase during downward economic growth.

Jay (2013)14research that the insurance fraud is difficult to predict and quantify. Though the
insurance frauds are subjective in nature and are of different types, the methods and process
adopted by different insurers to study and measure fraud is also not alike (Jay, 2012).

Button et al (2013)15 profiled the household insurance fraudster from close to 40,000
insurance claimants retained on a database (specifically that of VFM Services). They found
the household insurance fraudster to be almost as likely male as female (54:46), aged 30-50
years with a mean age of 44, and from a variety of occupations.8 While they suggest caution
at generalising too much from their data, the findings lead the authors to suggest that some
types of fraud, at least, were determined by opportunity.

Gill et al’s (1994)16 work on home insurance fraudsters found that those under 30 years of age
were disproportionately more likely to make a fraudulent claim, and 60.8 per cent of those
under 45 years of age knew of someone who had committed insurance fraud, with little
difference between genders. The vast majority of the small number of people who admitted
an insurance fraud also reported knowing someone else who had committed the same
offence.

Levi (2008)17 has noted of fraud generally, but it is equally applicable to insurance fraud, that
some types require specialist skills (and to this may be added access to networks of suitably
qualified co–offenders), while other types of fraud, involving low levels of skill, may be
committed by ordinary people, for example by adding items to others legitimately taken in a
burglary.

Gill (2005)18, In his study of occupational fraudsters, reports on the case of Robert who
worked for an insurer in the claims department. Because he had working knowledge of the
insurer’s weak internal processes for checking claims and was aware of auditors’ practices
(specifically the types of files and cases they did not check), Robert was able to make false
payments so they looked like they were being paid to a third party but in fact were paid to
him (or someone working with him). He fraudulently obtained money over a two-year period
before he was caught.

McGuire et al (2012)19 indicated that considerations to be put in place by insurers before

pricing include the age of the plan members, size of the group to be covered and the past
claims experience if available. He supported his arguments by indicating that on the basis of
age, more premiums are charged on the older members to take care of the chronic diseases
and their low immunity. From this the insurer will be able to pre-determine how the claims
utilization of the members will look like and this will assist them when pricing and in turn be
able to pay for any claims that occur and at the same time be able to make profits.

Baradhiway .C. (2011)20 enumerated different frauds. Some are clients related and involves
falsifying documents at different stages, giving false information on ones health, money
laundering over exaggeration of claims or even fake claims .Also highlighted various types of
insurance fraud and their manifestation as well as measures of detecting, mitigating and
finally for prevention of fraud.

Sunita Mall(2018)21:says that frauds in insurance are typically where a fraudster tries to gain
undue benefit from the insurance contract by ignorance or wilful manipulation.

Nicola J.Morley, Linden J Ball&Thomas C.Ormerod Lancaster University,uk(2011) 22:argues

that insurance fraud is a serious and growing problem ,and there is widespread recognition
that traditional approach to tackling fraud are inadequate .An alternative approach is to be
done to understand and then to optimize existing practices in the detection of fraud.

H.Lookman Sithic, T Balasubramanian (2013)23:says that with an increase in financial

accounting fraud in the current economic scenario experienced , financial fraud is a deliberate
act that is contrary to law ,rule or policy with intent to obtain unauthorized financial benefit.
Data mining techniques are providing great aid in financial fraud i e. bank fraud ,insurance
fraud and security fraud is nothing but wrongful and criminal trick planned to result in
financial or personal gains.

Faseela,V.S,&D.P.Thangam(2015)24:argues that health care frauds to substantial losses of

money each year in every country. Effective fraud detection is very important for reducing
the cost of health care system. so to make health insurance feasible there is need to focus on
eliminating fraudulent claims.

Dhara Shah & Anjani Kumar Ashtana (2013)25:says that insurance fraud is one of the most
serious problem threatening viability of insurance companies .Insurance companies have
witnessed increase in the number of fraud cases since couple of years .insurance frauds are
driving up the overall cost of insurers and premiums for policyholders .it encompasses a wide
range of illicit practises and illegal acts.
 CHAPTER 4- DATA ANALYSIS AND INTERPRETATION

4.1 ANALYSIS OF DATA

4.1.1 MEANING

Data analysis is defined as a process of cleaning, transformation and modelling data to

discover useful information for business decision making. The purpose of data analysis is
exact useful information from data and taking the decision based upon the data analysis.

 4.1.2 TOOLS OF DATA ANALYSIS 

Data analysis tools make it easier for user to process and manipulate data, analyse the
relationships and correlation between data sets and it also helps to identify patterns and trends
for interpretation, here is a complete list of tools.

 EDITING:

The editing of data is a process of examining the raw data to detect errors and
omission and to correct the, if possible, so as to ensure legibility, completeness
consistency and accuracy. 
  CODING:

Coding is the process of assigning some symbols (either) alphabetical or numerals or

(both0 to the answers so that the responses can be recorded into a limited number of
classes or categories. The classes should be appropriate to the research problem being

 CLASSIFICATION:

In most research studies, voluminous raw data collected through a survey need to be
reduced into homogenous groups for any meaningful analysis. This necessitates
classification of data, which in simple terms is the process of arranging data in groups
or classes on the basis of some characteristics.

 TABULATION :
The tabulation is used for summarization and condensation of data. it aids in analysis
of relationships, trends and other summarization of the given data. The tabulation may
be simple or complex. Simple tabulation results in one way tables, which can be used
to answer the questions related to one characteristic of the data. The complex
tabulation usually results in two way tables, which give information about two
interrelated characteristics of the data.

 GRAPH :

Graph representation is another way of analysing numerical data. A graph is a sort of

chart through which statistical data are represented in the form of lines or curves
drawn across the coordinated points plotted on its surface. Graphs enable us in
studying the cause and effect relationship between two variables.

4.1.3 TEST OF DATA ANALYSIS