One of the discussion topics at the 43rd Organisation of Eastern and Southern Africa Insurers (OESAI) Conference that was held from the 21st to the 25th of August 2021 in Mombasa, Kenya was titled, “Leadership in times of crisis: Managing key Underwriting and Claims Reputation Risks for Re/insurers”.
The paper was presented by Ezekiel Abiola Ekundayo, Waica RE group CEO. The main take-away from the discussion was that there was a need for insurance players to make use of technology based tools to manage the risk of fraud and cyber-attacks.
According to the Insurance and Pensions Commission of Zimbabwe (IPEC), insurance fraud can be said to occur when an insured or someone in relation to an insurance process, knowingly makes a falsified claim or misrepresents facts in relation to an insurance claim or process.
The key insight here is that anyone involved in the insurance process can commit insurance fraud. It should be highlighted that insurance is plagued by fraud because it is mired in asymmetric information, that is, one party always has more information than the other. This knowledge mismatch results in the insurance industry’s susceptibility to two complex avenues of risk, namely moral hazard (deliberate uptake of risk by the insured) and adverse selection (poor client selection by insurers due to inaccurate assessments of risk).
The Fraud Triangle
Research in white-collar offences (financially motivated nonviolent crimes such as insurance fraud, corporate fraud, financial statements fraud) has been undertaken predominantly to explain white-collar crime in many studies. The fraud triangle, a theory developed by Cressey (1971) explains the factors that push people to commit fraud.
The model provides a valuable framework to analyse the fraudulent behaviours of players in the insurance industry. The constituents of the fraud triangle are explained below;
- Motivation/incentive/pressure to commit fraud
This is where pressure or incentive motivates an individual (employee, consumer and intermediary) to behave illegally against the insurer. Pressure comes in the following forms: financial pressures; vices; work-related pressures; and other pressures such as a desire for material possession that reflects their more affluent counterparts.
- Opportunities to commit fraud
An opportunity to commit fraud, to conceal it and to avoid being punished is the second critical factor that pushes people to commit fraud against an insurer. Factors that enhance opportunity vary from weak internal controls to a failure to discipline perpetrators.
- Rationalisations toward fraud
A typical feature of insurance fraud and all white-collar crime is the lack of feelings or the indifference expressed by offenders stemming from a series of excuses or rationalisations to rid themselves of the guilt arising from deviant behaviour. People justify the fraud they commit against the insurer with their own opinionated feelings or beliefs.
Generally, the insurance industry has so many players and each tends to outwit the other for self-gain. The aim of every insurance company is to maximise profit for growth, whereas the policyholders’ aim is to get value for their money, and, if not forthcoming, they will use some unorthodox means to recover. Employees, brokers and insurance agents on the other hand may find themselves involved in fraud. Looking at the Zimbabwean context, IPEC has highlighted the following as the most common types of insurance fraud in the country;
- Premium Fraud
- Fictitious Death Claims
- Exaggerated Claims Amount
- Insuring terminally ill patient
- Intermediary (Insurance broker) Fraud
- Internal/Employee Fraud
How is Zimbabwe tackling insurance fraud?
The Insurance Council of Zimbabwe, a representative of short-term, long term insurers and reinsurers administers the Zimbabwe Insurance Crime Bureau (ZCIB) whose job is to assist the insurance community in preventing insurance fraud and investigating various cases as they occur. The major aim of the Bureau is to educate and increase public awareness of fraudulent behaviour. ZCIB’s effectiveness remains to be seen but its creation is most certainly a step in the right direction.
All in all, the onus is on the insurer to lean towards more tech savvy fraud prevention systems beyond the more traditional approaches which make use of automated red flags and predictive modelling. For instance, the use of machine learning—which is part of artificial intelligence— can go a long way in preventing insurance fraud. According to Accenture, the advantage of machine learning compared to the traditional approaches is that it can analyse unstructured and semi-structured data such as claims notes and documents, as well as structured data. Hence, the technology can more easily identify obscurities associated with claims thereby preventing actual fraud from occurring. Indian insurance firm Chola MS makes use of mobile technology to store auto survey data in one database instead of manually matching survey notes with relevant emails and photographs on a case-by-case basis. The result is a more efficient claims settlement process, higher surveyor productivity and improved fraud prevention.