Posted on Mar 05, 2012 by Sergio Ulloa
As India's burgeoning insurance market continues to grow, fraud and other nefarious business practices have become more widespread, and this will likely necessitate further industry reforms on behalf on the South Asian country's insurance regulator going forward.
A new study released this week by Pune-based accounting firm Indiaforensic revealed that India's insurance companies incurred over INR300 billion (US$6 billion) in fraud-related losses last year, accounting for almost a tenth of the insurance industry's overall premium volume and market size in 2011. These losses were borne by the industry due to a variety of different kinds of insurance frauds. Indiaforesnic noted that collusion between insurance company employees and private clients, insider trading, document manipulation, and falsification of cause of death claims to receive benefits, have proven to be the most common kinds of insurance fraud in India thus far.
Indiaforensic, a 7 year old company, conducts routine fraud examination, risk management and forensic accounting research for some of India's top industry players. The company has also made headlines by helping India's principal investigating agencies like the Central Bureau of Investigation (CBI) on several high profile fraud cases in the past, the most notable perhaps being the Satyam Computer Services scandal in 2009. For their latest insurance market analysis, Indiaforensic scoured domestic insurance company and regulator databanks to determine the extent of the fraud problem India's insurance market is currently faced with.
In their study, titled 'Quantification of fraud losses to Insurance Sector
,' Indiaforensic pegged the net loss of insurance fraud at approximately INR304 billion (US$6.16 billion) in India during 2011. According to the latest Insurance Regulatory and Development Authority (IRDA) data, the country's total premium income comprising life, non-life and health insurance, was around INR3.5 trillion (US$70 billion) last year, so fraud losses would equate to a considerable 9 percent of the industry's overall size. This was up from the fraud loss total of INR152 billion (US$3.1 billion), of which INR131.5 billion (US$2.6 billion) was for life insurance and INR21.4 billion (US$433.6 million) for non-life, which was last recorded by Indian insurance companies in 2007.
Indiaforensic further noted that India's various insurance sectors had proven susceptible to differing volumes and types of fraud over the past year. According to the study, over 85 percent of fraud incidences took place in the country's life insurance market
last year, with the remaining 14 percent occurring in general insurance lines. Over the last five years the number of reported incidences of fraud in India's life insurance market has more than doubled (up by 103 percent approximately), while general insurance fraud losses (which include the country's auto, property and accidents risk lines etc) have risen by around 70 percent, according to Indiaforensic.
As the overall frauds numbers continue to escalate, the sophistication of these criminal schemes rises in tow. Indiaforensic noted that the Indian insurance industry was now home to many duplicitous actors, particularly in the life and health insurance markets
, who routinely defraud companies by inadequately or falsely disclosing medical conditions, family health history, and other prerequisite concerns when applying for policies. Indiaforensic found that this dishonesty would often occur throughout a policyholder's life. To stay within a certain age range on some coverage policies, or to remain within a lower premium threshold, birth certificates and other proofs were found to be frequently modified to show reduced ages for clients. Death certificates have also been subject to frequent manipulation. The Indiaforensic study highlighted cases where dates on death certificates had been fraudulently changed to ensure a death happened when an expired life insurance policy was actually in force in order to register a claim. The Indian accounting firm further explained that such practices were costing life insurance companies millions of dollars a year
, because even if they caught the perpetrators, the time and money spent investigating these fraudulent acts ate into their margins.
In the health insurance field meanwhile, medical bill forgery has fast become a rampant issue for insurers to contend with. Indiaforensic found that medical bills were now the most common target of frauds by external parties, accounting for almost a third of all falsified documentation schemes uncovered by authorities over the past year. Frequent manipulation of the necessary doctor credentials and recommendations on certain policies was also cited, with some policyholders going to extremes to subvert certain medical screening and pre-conditions tests. In order to substantiate non-disclosed or previously misrepresented medical conditions, Indiaforensic found that certain fraudsters would in fact send different people to file for certain medical tests. "While this may work to get the policy, it would create discrepancy at the time of claims," Indiaforensic commented.
While outright fraud and forgery has been widespread for life and health insurance lines, evasion and non-disclosure of vital facts has dogged general insurance business in India. According to the study, it has become almost commonplace for many Indian consumers to avoid stating necessary vehicle accident history before applying for a motor insurance policy. Mayur Joshi, Indiaforensic, closed the study by saying that this work highlighted a worrying trend in India and that there needs to be greater fraud control mechanisms put in place going forward to help the Indian insurance sector check its losses with greater scrutiny. "The insurance sector is susceptible to various frauds in the country. There is an urgent need to have strict measures including setting up of a dedicated unit to detect and check frauds in the companies," Joshi finished.
Whether India's chief market regulators
heed these warnings of course remains to be seen. Compared to most, the Indian insurance industry still relies heavily on third parties, be it as a distribution channel for selling insurance products or to conduct due diligence on behalf of clients and agents. As a result, insurer exposure to fraud risk is high, making it imperative for Indian companies to conduct greater due-diligence checks and do more otherwise to establish more robust and effective fraud risk management systems.
Started in 2005, Indiaforensic now serves more than 50 business brands around the world. The company works to solve global financial fraud and risk management related problems by providing clients with the necessary education and customized training solutions.