Modernising Fraud Risk Management: a must for Insurers in Pandemic
Equipped with subject matter expertise, technology, insight, connections, and money, these fraudsters are running mini organized crime empires across the country. With help from insiders, they have mapped the insurers to understand their SOPs, priorities, approach and risk appetite. Indian insurance companies have also learned and devised effective fraud risk mitigation techniques aimed at controlling these leakages. They have invested in technology and embraced analytics in their fight against fraud.
The Covid-19 pandemic is certainly the biggest disruptor that our nation has experienced since independence. Loss of life and livelihood, erosion of wealth at all levels of the society has infused unprecedented levels of uncertainty into our lives, aided no doubt by the dynamic nature of the virus and its ability to spawn multiple variants.
As with any natural calamity, insurance has been a great help for the victims this time as well.
As per the latest IRDAI data, over 19.11 lakh covid health claims and over 55,000 life claims have been reported. Out of these, health claims exceeding Rs. 15,000 crores and life claims of over Rs 3,600 crores have been settled.
Life and health insurance has been consistently gaining traction in the Indian market over the past 30 years as an important element of financial planning, or as a risk management tool.
The economic reforms of 1991 laid the foundation for foreign insurance players to venture into the Indian market. The economic growth of the subsequent decades enabled both public and private insurance providers to spread their reach across the country.
Proliferation of mobile Internet and digital mobility in the last decade has ensured that an Indian has access to insurance as swiftly as she does to her WhatsApp. Today, buying insurance is as easy as a click of a button, and it is possible to insure nearly anything that one feels the need to - a cab or train journey, a holiday, expensive mobile phone, critical ailments or even cybersecurity risks. Similarly, the advent of Aadhar and video KYC has further simplified customer onboarding and verification, bringing millions of new customers onbaoard in the recent months.
Despite these developments, we have barely scratched the surface in insurance adoption. The insurance market penetration still stands at only 3.8% of the total population. Just imagine what will the insurance industry look like once it is at 30% or 60% penetration levels? Precisely the reason why India is considered a growth market for the global insurance industry.
Insurance related frauds remain one of the biggest areas of concern for the industry even as the market grows. The industry has been a favorite hunting ground of fraudsters since its earliest days.
Today, insurance fraud costs firms USD$ 100 billion in the US, USD$ 4 billion in Australia, USD$ 3billion in the UK, USD$ 2-3 billion in other EU countries and around Rs. 45,000 crores in India per year. It is estimated that on an average an insurance company loses close to 10% of its premium earnings to frauds.
Like most criminals, insurance fraudsters have also evolved in the past two decades. What used to be a petty crime conceptualized by an individual facing existential crisis in early 2000s has evolved into a well-oiled machine being run by a nexus of individuals from varied backgrounds including finance, medicine, legal and sometimes even serving government officials.
Equipped with subject matter expertise, technology, insight, connections, and money, these fraudsters are running mini organized crime empires across the country. With help from insiders, they have mapped the insurers to understand their SOPs, priorities, approach and risk appetite.
Indian insurance companies have also learned and devised effective fraud risk mitigation techniques aimed at controlling these leakages. They have invested in technology and embraced analytics in their fight against fraud.
Some have introduced apps for case management and reporting and are actively engaging with the law enforcement to curb this menace. However, when it comes to high-risk matters, insurers still rely on Private Insurance Investigators (PII) for on ground execution.
While the insurance eco system, from insurers to fraudsters, has evolved and progressed in the last two decades, PIIs have not. In spite of exposure to possibly the highest occupational hazard in the insurance eco system, their remuneration is still at the levels of early 2000s.Unfortunate as it is, the pandemic-led disruption might act as an agent provocateur in ushering in the next set of changes for the insurance sector.
The Fraud & Risk Management function can also use this disruption as a strategic time out and use this opportunity to address some key aspects of its functioning, which will serve it well for the imminent times of higher insurance penetration in India. Some of the most pertinent issues that may be considered are:
• Criminalisation of insurance fraud – it is imperative for an economy of India’s size to have strict laws addressing insurance fraud. Western economies have adopted aggressive posture towards insurance fraud with an aim of creating an effective deterrent. In India we are witnessing a rapid evolution of insurance fraud from an individual’s effort to organized crime. The sooner this elephant in the room is acknowledged by the policymakers, the better it is for all stakeholders, including the biggest stakeholder - Government of India.
• Similarly, there should be acknowledgement of private insurance Investigation as a crucial and legitimate function within the insurance landscape by the IRDAI. It is equally important that the ground rules, including training, remuneration and code of conduct for PIIs, are prescribed by the regulator.
• An overwhelming majority of PIIs serving the insurance industry in India are small or micro enterprises. This is an opportune moment for an industry wide review of financial remuneration being paid to PIIs. It is also imperative for the insurers to incentivise and support PIIs by offering them professional fees that are more reflective of realities in 2021 and not 2001.
•Certified Private Insurance Investigator (CPII) - Insurance Institute of India in partnership with International Fraud Training Group and Association of Private Detectives and Investigators (APDI) have developed India’s first industry led certification – Certified Private Insurance Investigator (CPII), which may be adopted as the mandatory certification for PIIs across insurance industry.
India’s story is possibly the strongest and most robust story out there, as demonstrated by our ability to learn and adapt to the ‘new normal’ over several millennia of civilisation.
This pandemic is an ideal moment for the Indian insurance industry to utilize the disruption as a ‘Strategic Timeout’ and prepare for the upcoming years of growth by modernising and reforming its `Fraud & Risk Mitigation' function, in line with the ‘new normal’.