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 SAMITIS

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 SAMITIS

RAMNIRANJAN JHUNJHUNWALA COLLEGE
GHATKOPAR (WEST), MUMBAI-400086.

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

SR NO.
1
2
3
4
5

CHAPTERS
EXECUTIVE SUMMERY
SCOPE OF THE STUDY
INDIAN INSURANCE SECTOR
INSURANCE FRAUD

TYPES OF INSURANCE FRAUD

PAGE NO.
8
12
19
22

6
7

LIFE INSURANCE
FRAUD IN INSURANCE ON RISE

29
34

(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.. REALISE.. REAL LIES
AREAS THAT NEED MORE STRINGENT ANTI-

43
44

13

FRAUD REGULATION
TYPES OF FRAUD AFFECTING INSURANCE

46

COMPANIES

SR NO.
14
15

CHAPTERS
DEDICATED ANTI FRAUD DEPARTMENT
DIFFERENT MEANS EMPLOYED TO DETECT

PAGE NO.
50
52

FRAUD
13

DATA ANALYSIS FOR FRAUD DETECTION

6

57

14

AUTOMATION LEVELS SUPPORTING FRAUD

63

15

DETECTION
EMERGING TRENDS IN FRAUD MANAGEMENT

65

16
17
16

QUESTIONNAIRE
CONCLUSION
REFERANCE

69
70
75

 EXECUTIVE SUMMERY

India, one of the fastest growing economies in the world, has risen in the demand
for insurance products. Over the last 10 years, the insurance industry has grown at
a Capital Annual Compounded Growth rate (CAGR) of around 20%. However,
with the exponential growth in the industry, there has also been an increased
incidence of frauds in the country. Insurance fraud encompasses a wide range of
illicit

practices

and

illegal

acts

involving

intentional

deception

or

misrepresentation.

The industry has witnessed an increase in the number of fraud cases in the last one
year. Organizations are waking up to the fact that frauds are driving up the
overall costs of insurance and premiums for policy holders, which may there
often their viability and also have a bearing on their profitability.

Hence, companies need a more vigorous fraud management framework. Although

this survey focuses on retail insurance, frauds related to commercial insurance
claims and third-party claims are also on the rise. 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. Fraud impacts
organizations

in

several

areas

including

physiologically.

financially,

operationally

and

 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, 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.

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.

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.
Also during an investigation he should not create any circumstances which
may encourage or enforce any persons 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.
It is imperative that he takes help of at least one more investigator when
conducting mobile surveillance.
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.
LIMITATIONS OF THE STUDY
The topic fraud in insurance is a vast topic and confidential one. 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. By utilizing this information I have completed my project.

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 RESERCH METHODOLOGY
Research methodology is the technique of collecting the data sources for doing the
project, i. e. primary data and secondary data.

PRIMARY DATA
Primary data had been adopted by an informal interview to the development officer
of life insurance Corporation of India.

SECONDARY DATA
Secondary data are adopted by collecting the informations from different
management books, websites of insurance sector and especially the LIC websites,
journals and magazines and current news from newspapers, the names of
secondary data has been specified in the Bibliography.

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CHAPTER 1 - INDIAN INSURANCE SECTOR

INTRODUCTION

The Insurance sector in India governed by Insurance Act, 1938, the Life Insurance
Corporation Act, 1956 and General Insurance Business (Nationalisation) Act,
1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and
other related Acts. With such a large population and the untapped market area of
this population Insurance happens to be a very big opportunity in India. Today it
stands as a business growing at the rate of 15-20 per cent annually. Together with
banking services, it adds about 7 per cent to the countrys GDP .In spite of all this
growth the statistics of the penetration of the insurance in the country is very poor.
Nearly 80% of Indian populations are without Life insurance cover and the Health
insurance. This is an indicator that growth potential for the insurance sector is
immense in India. It was due to this immense growth that the regulations were
introduced in the insurance sector.

Since then the insurance industry has gone through many sea changes .The
competition LIC started facing from these companies were threatening to the
existence of LIC .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 entry of the private players and the increased use
of the new distribution are in the limelight today. The use of new distribution
techniques and the IT tools has increased the scope of the industry in the longer
run.

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 SOME AREAS OF FUTURE GROWTH

LIFE INSURANCE
The traditional life insurance business for the LIC has been a little more than a
savings policy. 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, 2001). For the new life insurance
companies, term life policies would be the main line of business.

HEALTH INSURANCE
Health insurance expenditure in India is roughly 6% of GDP, much higher than
most other countries with the same level of economic development. Of that, 4.7%
is private and the rest is public. What is even more striking is that 4.5% are out of
pocket expenditure (Berman, 1996). There has been an almost total failure of the
public health care system in India. This creates an opportunity for the new
insurance companies. Thus, 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.

PENSION
The pension system in India is in its infancy. There are generally three forms of
plans: provident funds, gratuities and pension funds. Most of the pension schemes
are confined to government employees (and some large companies). The vast
majority of workers are in the informal sector. As a result, most workers do not

13

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

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 PRESENT SCENARIO OF INSURANCE INDUSTRY

India with about 200 million middle class household shows a huge untapped
potential for players in the insurance industry. The insurance sector in India
has come to a position of very high potential and competitiveness in the
market. Indians, have always seen life insurance as a tax saving device, are
now suddenly turning to the private sector that are providing them new
products and variety for their choice.

Consumers remain the most important Centre of the insurance sector. 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.
Computerization of operations and updating of technology has become
imperative in the current scenario. 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. The concept is very well established in the country like
India but still the increasing use of other sources is imperative. At present
the distribution channels that are available in the market are listed below.
Direct selling
Corporate agents
Group selling
Brokers and cooperative societies
Bancassurance

15

 Customers have tremendous choice from a large variety of products from

pure term (risk) insurance to unit-linked investment products. Customers are
offered unbundled products with a variety of benefits as riders from which
they can choose. More customers are buying products and services based on
their true needs and not just traditional money back policies, which is not
considered very appropriate for long-term protection and savings. There is
lots of saving and investment plans in the market. However, there are still
some key new products yet to be introduced - e.g. health products.

The rural consumer is now exhibiting an increasing propensity for insurance

products. A research conducted exhibited that the rural consumers are
willing to rule out anything between Rs 3,500 and Rs 2,900 as premium
each year. In the insurance the awareness level for life insurance is the
highest in rural India, but the consumers are also aware about motor,
accidents and cattle insurance. 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 also pointed out the private companies have huge task to play in
creating awareness and credibility among the rural populace. The perceived
benefits of buying a life policy range from security of income bulk return in
future, daughter's marriage, children's education and good return on savings,
in that order, the study adds.

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 REPORT HIGHTLIGHT

Gains of liberalization in Indian insurance sector.

Indian insurance market segmentation by products.
Size of the market and market share of life insurers, in INR (crore).
Market share of non life insurers.
Forecast of life insurance growth up to 2012.
Forecast of non-life insurance growth up to 2012.
Market revenue of both public and private insurers.
Policies and measures taken by IRDA to develop the insurance market.
Research and development activities.
Regulation of insurance and reinsurance companies.
Major challenges that Indian insurance sector is facing.
Profiles of the major players.

CHAPTER 2 - INSURANCE FRAUDS

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

18

 CAUSES
The chief motive in all insurance crimes is financial profit. Insurance contracts
provide both the insured and the insurer with opportunities for exploitation. One
reason that this opportunity arises is in the case of over-insurance, when the
amount insured is greater than the actual value of the property insured. This
condition can be very difficult to avoid, especially since an insurance provider
might sometimes encourage it in order to obtain greater profits. 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.
Insurance companies are also susceptible to fraud because false insurance claims
can be made to appear like ordinary claims. This allows fraudsters to file claims for
damages that never occurred, and so obtain payment with little or no initial cost.
The most common form of insurance fraud is inflating of loss.
TYPES OF INSURANCE FRAUD

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

1) HARD FRAUD
Hard fraud includes someone staging a car accident, injury, arson, loss, break-in, or
someone writing false bills to Medicare to illegally receive money from their
insurance companies. This type of fraud often receives more media attention and
its easier to detect. Hard fraud often involves criminal activity and the intention of
squeezing millions of dollars out of insurance companies. But, the average person
can also be found guilty of hard fraud.
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2) SOFT FRAUD
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. Workers compensation claims is the most frequent
and expensive type of soft fraud. It costs insurance companies millions of dollars a
year. As a result, insurance premiums are rising. Yet, approximately up to one-third
of consumers dont see anything wrong with employees receiving workers
compensation benefits even if they are healthy enough to go back to work.
For example, when involved in a collision an insured person might claim more
damage than was really done to his or her car. Soft fraud can also occur when,
while obtaining a new insurance policy, an individual misreports previous or
existing conditions in order to obtain a lower premium on their insurance policy.
TYPES OF LIFE INSURANCE FRAUD
Whether we are a policyholder or a shareholder in an insurance company,
insurance fraud affects us. The field of insurance is wide and fraud exists in every
area. Therefore, 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.
Insurance fraud comes in two main categories

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

21

maximize commissions and ensure the sale, rather than focusing on meeting the
client's needs.

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

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

23

Life insurance is a long term contract between a policyholder and an insurer, which
assures the policyholders family / dependents a certain amount of money in the
case of the death of the policyholder.
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.
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 policys 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.
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.
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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
25

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.
THE COST OF INSURANCE FRAUD
Just as there are two main types of life insurance fraud, there are also two
consequences. When people engage in buyer fraud, it raises the cost of insurance.
The reason for this is very simple; insurance companies are really good at
modeling, so they tweak their models to account for buyer fraud and then spread
that cost across all their policyholders. In a very real way, every person who tries to
stick it to the insurance company ultimately makes your policy cost more.
In contrast, seller fraud can potentially hurt just the select few that experience it. It
is, in every essence of the word, bad luck. However, on the whole, every time the
insurance company you invest in treats someone badly, it loses business to a
company with a better reputation and controls on the agents. As an investor, you
will be tempted to move your capital to the better performing company, thus
punishing seller fraud in a roundabout way. The internet has also helped reduce
seller fraud, as many shady outfits and practices become exposed sooner in the
game. Insurance is a business that is built on risk analysis and probabilities. Every
26

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

27

CHAPTER 5 - FRAUD IN INSURANCE ON RISE

India is one of the fastest growing economies among BRIC countries, and so is the
case with the countrys insurance sector. LIFE INSURANCE CORPORATION OF
INDIA has conducted the Insurance Fraud Survey to assess the fraud scenario, the
potential risk exposure, the economic impact and the industry practices to counter
fraud risk.

The significant role fraud plays in negatively affecting the insurance sector is often
under-reported or discounted. It is a general consensus in the market that fraud
cases have significantly increased in the last one year. Claims / surrender related
fraud is the biggest concern for insurance companies, and the majority of
respondents feel that more anti-fraud regulations are the need of the hour. Fraud
risk in insurance is a complex matter, which affects both the parties insurers as
well as policyholders. Frauds increase the cost of insurance, resulting in insurers
losing to their competitors, and at the same time, policyholders paying higher
premiums.
There have been increased incidences of fraud over the last one year.
28

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

29

essential components of fraud are the intent to deceive and the desire to induce an
organization to pay more than it otherwise would.
Fraud detection and management should be a proactive process, which
includes identification of suspicious claims that have a high possibility of
being fraudulent, through a computerized statistical analysis. Approximately
8% of life high value policies to monitor and investigate fraud risk, which
mitigates such risks to a large extent. 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. It is also important for
the industry to build a shared or centralized database to share information
related to frauds.
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.
INTERMEDIARY FRAUD: - frauds by intermediaries against insurer
and / or policyholders.
INTERNAL FRAUD: - fraud against insurer by employee on his / her own
volition or in collusion with parties that are internal or external to insurer.
The CBI registered a case against the Divisional Manager of the company
for allegedly collecting money from customers and issuing cover notes to
them, but neither the money nor the cover note was deposited with the
Insurance Company.
A former employee of one of the biggest private life insurance companies
allegedly cheated the companys customers by issuing fake receipts
Insurance companies have five key areas of risk exposure. These are related to
Claims or surrender
Premiums
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 Applications
Employee-related fraud
Vendor-related third party fraud
In the business of general insurance, a large number of frauds occur in health
insurance, and these pertain to overstating of claims or involve the manipulation of
the documents of non-existing hospitals, pharmacies, etc., or to cover up
nondisclosure of facts at the proposal stage. It has been observed that there are a
higher number of fraudulent cases in the case of hospitalization benefits and
personal accident policies. According to an Indian association, Out of the total
outgoings in health insurance, nearly 25% are fraudulent claims.

CHAPTER 9 - REAL EYES...REALIZE...REAL LIES

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Short History of Antifraud Efforts

Fraud in insurance has undoubtedly existed the industrys beginnings in the
seventeenth century, 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. And, given the fine line between investigating suspicious
claims and harassing legitimate claimants, some insurers were afraid that a
concerted effort to eradicate fraud might be perceived as an t i - c o n s u m e r
move.
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, 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, prompted many
insurers to reexamine the issue.
Gradually, 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. These included consumers, who were
paying for fraud through their insurance premiums; the people used by
organized fraud groups to file false claims, often the poor, who
sometimes found themselves on the wrong side of
t h e l a w ; 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.

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CHAPTER 8 - 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 antifraud regulations are needed for effective and transparent claims or surrender
management.

It is estimated that Indias health insurance sector is losing around INR10 billion
on false claims every year. Apart from depleting the financial resources of
insurance companys fraudulent claims or surrender also affect policy holders

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Adversely, since the latter have to pay higher premiums for insurance products.
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 companys profits. To manage
fraud, companies can adopt a hybrid approach to detection, using a Combination of
profiling rules to filter fraudulent transactions with advanced analytics software.

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. Insurance companies have so far taken a lenient approach on this
aspect.

CHAPTER 9 - FRAUD AFFECTING INSURANCE COMPANIES

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

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In its quest to restrict unfair practices, IRDA has formulated the Insurance
Regulatory and Development Authority (Protection of Policyholders Interests)
Regulations, 2002. To counter the increase in the number and complexity of frauds,
IRDA has announced draft regulations for open market consultation, to reduce
unfair practices and the information gap in domestic insurance.
Some of the proposed regulations: An amendment of IRDAs 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.
Standardization of terms and conditions on unit-linked insurance products
IRDAs acquisition of a database for the distribution of insurance products
In its bid to check financial fraud, IRDA has made it mandatory for all insurers to
obtain a recent photograph of new customers.

CHAPTER 10 - DEDICATED ANTI FRAUD DEPARTMENT

Fraud can be perpetrated in many ways. Therefore, an insurer should adopt a
holistic approach to adequately identify, measure, control and monitor fraud risk.
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For an insurance organization, its fraud management strategy should form part of
its business strategy and be consistent with its overall mission and objectives.
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. Additionally, insurance companies can provide
their stakeholders with a fraud reporting mechanism.
Regardless of the mode of implementing step one, the next step should be to
investigate these fraud claims or surrender and conduct further analysis
According to Indias Ministry of Labor and Employments advisory note, which
was sent to insurance companies, 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, manageable and correct? In a data-driven industry such as
insurance, companies will not only need to compete in terms of their product
offerings, but will also be required to leverage business intelligence-enabled
analytics to attain a competitive edge?

CHAPTER 12 - DATA ANALYSIS FOR FRAUD DETECTION

Data analysis technology enables auditors and fraud examiners to analyze an
organizations business data to gain insight into how well internal controls are
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operating and to identify transactions that indicate fraudulent activity or the

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

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The following techniques are effective in detecting fraud. Auditors should ensure
they use these, where appropriate. They include the following:
Calculation of statistical parameters- (e.g., averages, standard deviations,
high/low values) to identify outliers that could indicate fraud.
Classification to find patterns amongst data elements.
Stratification of numbers - to identify unusual (i.e., excessively high or
low) entries.
Digital analysis using Bedfords Law -to identify unexpected occurrences
of digits in naturally occurring data sets.
Joining different diverse sources -to identify matching values (such as
names, addresses, and account numbers) where they shouldnt exist.
Duplicate testing -to identify duplicate transactions such as payments,
claims, or expense report items.
Gap testing-to identifies missing values in sequential data where there
should be none.
Summing of numeric values-to identify control totals that may have been
falsified.
Validating entry dates-to identify suspicious or inappropriate times for
postings or data entry.
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
39

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.

CHAPTER 14- EMERGING TRENDS IN FRAUD MANAGEMENT

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Insurance fraud management has gained significant momentum within the past
twenty years. Growing competition, decreasing margins and increasing innovation
will all put pressure on insurers to strengthen this capability. To date, employees
are seen as the essential success factor for efficient fraud management and the most
important method for identifying potential insurance fraud. Experience and expert
knowledge should be complemented with training and tailored general checklists
to fuel success.

The fraud management processes within these insurance companies are supported
by bespoke software. Use of packaged software tends to be concentrated in the
business divisions focused on motor, property and casualty insurance where IT
helps to support a range of small damage claims. 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, systematic
examination procedures. 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. A more modern and efficient
approach to claims processing has a wide range of potential benefits it opens up the
door to cost savings; it makes faster triage possible and allows employees to
concentrate on carrying out loss or benefit cases or even conducting the enquiry.

FOUR DIMENSIONS OF FRAUD MANAGEMENT

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Bearing Point offers efficient and integrated fraud management solutions, 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.

1. THE ORGANIZATION

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The organization dimension contains the organizational structure and integration of

fraud management within the overall 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. Therefore input from the organization as well as
responsibilities for this process need to be defined.

2. EMPLOYEES
Employees face many challenges regarding fraud. Initially, they need to detect
fraud, 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. The employees 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.

3. 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. 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.
Clearly defined processes create security for your employees and enhance
prospects of success for a new fraud management strategy.

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

CHAPTER 15 QUESTIONNAIRE
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 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

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

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Though, there have been many laws and agencies all over the world to
impede such criminal activity, 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, it is very difficult to scam them. One must know all
the loop-holes of their business to scheme someone. Lack of knowledge
and not knowing ones basic rights on behalf of prey could land them in
scrambled scam bisque.

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 . 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 , 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) ,
etc. through the enduring and conscious endeavor of these
institutions insurance fraud tempo has declined by an enormous
a m o u n t . Several have studied preceding and enduring market conditions
to identify with the diverse frauds that take place and the reasons behind
committing these frauds.

One cannot diminish frauds, schemes, swindles, scams but can positively b e
alert of them so as not be a victim of it themselves.
T u m b l i n g fraudulent situations is a unremitting and collective effort of
countless. One must be sensitive and offer their helping as much as they can. One
can either grumble about how things are all going wide of the mark o r
swallow the consequences. Or put their foot down and
m a k e a n attempt to change the immoral to the right. 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, awareness, and an attitude for change
amongst the humanity.

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 INSURANCE FRAUD : THE CRIME YOU PAY FOR

Watch out- insurance crooks are picking your pocket in order to line theirs. These
thieves are committing insurance fraud, one of Americas largest criminal
industries. Insurance fraud is a crime, and one way or another, honest consumers
and businesses pay the price.
Insurance fraud occurs every day and in every state. People of all races, incomes
and ages are victimized.

THE FUTURE- STILL DANGEROUS

Despite the encouraging progress, insurance fraud will remain a vast and
dangerous criminal enterprise. Here are several fraud trends consumers should
know about:
The internet will hatch new insurance swindles as computer- survey consumers
buy from online insurance companies that may be virtually untraceable. Young
people raised on the internet will be the vanguard of this crime wave.
The global economy is igniting huge insurance money laundering schemes, often
involving fake insurers that bilk people out of millions. Tracking them across
international borders will pose a big problem.
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.
Insurance fraud against immigrants will remain a serious problem as diverse ethnic
continue migrating. Many fraud crimes will be committed by fraud rings or
organized mafias of immigrants themselves.

48

The elderly will remain one of the largest targets of insurance swindles. Investment
schemes are among the newest approaches: thousands of seniors are investing in
bogus verticals life insurance policies that dont exist or were obtained illegally.
Many seniors also are investing in fake promissory notes sold by insurance agents
and guaranteed by non- existent insurance companies.

EVERYONES SOLUTION
Everyone pays for a insurance fraud, and so everyone must join in stamping out
these swindles. Consumers, lawmakers, insurance, companies, doctors, lawyers
and many more must be part of the answer. Insurance fraud will disappear only
when criminals realize fraud is a fast highway to jail, not an easy road to riches.

PROTECT YOURSELF: STAY ALERT

You can protect yourself against insurance scams: stay alert, ask questions, and go
slow or back out if an insurance transaction seems suspicious.
Never sign blank insurance claim forms
Demand detailed bills for repair and medical services. Check closely for
accuracy.
Make sure free services arent actually hidden in insurance bill.
Be wary of buying insurance from door-to-door or telephone sales people.
Be suspicious if the price of insurance seems too low to be true.
Contact your state insurance department to make sure the agent and
company are licensed.
Keep your insurance identification number secret; insurance crooks can steal
it and involve you inn scams.

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 Contacts youre STATE INSURANCE DEPARTMENT and the NATIONAL

INSURANCE CRIME BUREAU if you think youre being scammed or
someone asks you it take part in a fraud.

CHAPTER 17 REFERANCE

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 Primary data had been adopted by an informal interview to agent of life

insurance.
Secondary data are adopted by collecting the informations from
different management books
websites of insurance sector and especially the LIC websites
Journals and magazines and news from newspapers.

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