Fraud in motor and health insurance global perspective : Indian Approach
Global Perspective of General Insurance Fraud:General insurance fraud is undergoing a sea change in its character. It is no more confined to the domain of white-collar crime but surpassed into a full-fledged scam, world over, posing a serious threat to the global economy. What’s visible is only the tip of the iceberg and a lot more underneath. After-tax evasion, insurance fraud is officially acknowledged as the second biggest financial crime in the US costing Americans about $100 billion each year reports National Insurance Crime Bureau. Did you know Insurance Fraud is akin to an industry in the West? Special classes are held to make people proficient in perpetrating insurance fraud. There are organized gangs that specialize in staging vehicular accidents, arson, and sabotage of property – all to one end – getting a fat insurance claim. Unlike the rest of the world, in India, there is so little information in the public domain about insurance fraud that easily misleads one to believe that the malaise has skipped us. But in reality, we are ahead of others. Though a preliminary estimate puts fraud claims at 6% of the total number in India If insurance fraud levels in India are to be rated in the international range of 10%-15%, the Indian general insurance industry would be losing between Rs.2,500-3,500 crore in a year.
Channels of Frauds Against Insurance Companies :Fraud against the Insurance Companies committed at different stages is phenomenal and alarming which can be from outside known as external sources or from within the industry, known as internal source, but very often caused due to the unholy alliance of both the sources.
Collusion between insurance employees, intermediaries and insured :It would not be an exaggeration to say that in most of the cases the insurer cannot be defrauded except without an unholy nexus between the employee/intermediary in one hand and the insured/beneficiary at the other. Most of the frauds committed by way of a concerted effort of agents, brokers, insurance employees, insured members and the provider of services and other stakeholders of the general insurance system. Not necessarily, the policyholder/beneficiary always bribe surveyors and officials of the insurance company to get false claims passed. Some time insurance employees and or intermediaries or the fraudsters approach the policyholder/beneficiary and suggest ways and means exaggerate the genuine claim by fabricating documents.
Various stages of insurance fraud :Fraud can occur at any stage during the process of applying, buying, using, selling, underwriting insurance or while staking a claim which can be broadly categorized as pre-insurance otherwise known as application fraud and post insurance comprising eligibility and claims fraud.
Pre-insurance stage: Application fraud :This is committed when material misrepresentations are made on an application for insurance with the intent to defraud. Application Fraud differs from claim fraud in that the perpetrator is not seeking to illegitimately obtain a benefit payment-rather the perpetrator is seeking to illegitimately obtain a general insurance coverage only. Planned non-disclosure by clients has always been a major problem faced by the Insurance industry, which sadly is socially acceptable. Hiding relevant and potentially damaging information is almost a norm in India. Even if the customer wants to disclose, his/ her insurance agent advises to the contrary and convinces the customer not to tell as it may attract an extra premium. The agent is after all interested only in his commission and is worried that faced with an extra premium, for which the client may decide not to take the policy. Post insurance stage: Frauds at this stage can be either an election fraud or claims fraud. Eligibility fraud: Eligibility fraud most commonly involves misrepresentations of the status of the beneficiary. In such cases, the benefit is paid to a person not eligible to receive benefits because of various factors… Fraud by way of identity theft where people stole other person’s identity to make a false insurance claim, widely prevailing in the west is another species of the eligibility fraud. Claims fraud: Most common where the losses are concocted, exaggerated, inflated, manipulated, manufactured, stage-managed, to name a few. Magnitude and frequency of any insurance fraud are greater at the claim stage in comparison to the pre-insurance stage.
Types of insurance claims fraudsInsurance fraud is generally of two types – one the ‘opportunity fraud’ – otherwise known as ‘soft fraud’ and the other is a deliberate act to cheat known as ‘hard fraud’. Any misrepresentation of facts or circumstances while making a claim is a fraud. This could include hiding your previous driving record or padding up the claims sheet. But unfortunately, most people like to consider these as little exaggerations rather than fraud. Hard fraud: Premeditated fabrication of claim: Hard fraud is a deliberate attempt either to stage or invent an accident, injury, theft, arson or another type of loss. Hard fraud is committed by faking incidents, accidents, burglaries or illnesses, backdating claims, identity theft claims, etc. Soft fraud: Opportunistic padding up of claim: In these kinds of fraud, the claimant demands more than what he otherwise deserves. Approximately, 90% of the general insurance fraud results from soft fraud. Soft fraud, which is sometimes called opportunity fraud, occurs when a policyholder or claimant exaggerates a legitimate claim i.e. seeking more than the loss.
Immaterial fraud :In some cases, what can described as ‘immaterial’ fraud occurs, where a policyholder acts fraudulently simply to obtain legitimate payment of a genuine insured loss. A classic example is where the policyholder has lost the receipt for a stolen item and, facing pressure from the insurer, produces a forged receipt to substantiate the claim. The loss is genuine but the policyholder has lied in the course of making the claim, thereby breaching the duty to act ‘in utmost good faith’.
Motor insurance frauds :MOTOR: World over auto or motor insurance constitute the single largest portfolio ranging between 40% to 70% of the total general business insurance segment. Motor insurance is the most potential and vulnerable fraud-ridden sector in the industry in comparison to another line of insurance. The Association of British Insurer said motor insurance is now the leading area for fraud, with its member uncovering 24000 fraudulent car insurance claims worth 260 million during 2007- the equivalent of 5 million every week. Motor Own Damage Claim Fraud: Motor own damage claims fraud committed at pre and post insurance stage involving both hard and soft fraud. Hard frauds include total damage to the vehicle deliberately to get rid of the same or to earn more money than its market value. Some of the examples are staging collision, theft of the vehicle, burnt by fire, fall into the river, owner vehicle give-ups, loss under an excluded peril, etc. A real accident may occur, but the dishonest owner may take the opportunity to incorporate a whole range of previous minor damage to the vehicle into the garage bill associated with the real accident. Soft fraud accounts for the majority of the motor insurance frauds. Some of the common soft frauds are filing more than one claim for the single loss, higher costs for repair, damage caused earlier, replacement of old spare parts, etc. With the advent of organized gangs in auto insurance fraud, it becomes more complex and sophisticated., which are much difficult to detect, if detected difficult to prove.
Motor TP :From chasing ambulance to organize accidents, fraud in motor third party insurance come a long way. Fraudulent motor TP claims is a multi-million dollar business today involving highly organized gangs. More than one of every three bodily-injury claims from car crashes involves fraud. Insurance Research Council (1996). More than one-third of people hurt in auto accidents exaggerate their injuries.. (Rand Institute for Civil Justice). Recently in the USA, criminal charges were filed against Quentin Hawkins, also known as “Flint Hawkins,” the leader of a ring and 64 others for their participation in a large-scale insurance fraud ring that either staged or fabricated at least 14 automobile accidents between February 1999 and July 2000 and filed number of bogus bodily injury and medical treatment claims under no-fault insurance policies. Such gangs have their code words for communication among themselves, where an accident is referred to as Movies, vehicles as cans, hospitals as a fruit stand and victims as pineapple. Some of its modus operandi is as under : Exaggerated claims: Many instances have been discovered in which corrupt attorneys and health-care providers (combine to bill insurance companies for nonexistent or minor injuries. Hit and run cases: Conversion of natural death into a hit and run case or converting a hit and run case to an accident is very common in India as well as abroad. Paper accidents: Many times documents created in collusion with various authorities to fake an accident and claim compensation. Staged accident: Where the fraudsters will use a vehicle to stage an accident with the innocent party. Typically, there would be 4 or 5 fraudsters in the vehicle, which makes an unexpected maneuver causing the innocent party to collide with the fraudster’s vehicle. Swoop and Squat: Where one or more drivers in the “swoop” car force an unsuspecting driver into position behind a “squat car. This squat car, which is usually filled with several passengers, then slows abruptly, forcing the driver of the chosen car to collide with the squat car. In India: Whatever is practiced in the west easily finds its way to India. A recent survey has shown that more than 50% of the TP claims in India are bogus. Several claims are based on bogus accidents carried out with the connivance of law enforcement agencies. In India, one public sector insurance company becomes richer by around Rs.184 Crores due to the withdrawal of 427 number of Motor Third Party claim cases, including 40 cases where award have been made, fearing action following an investigation by the CBI in pursuance to the direction of the Madras High Court. Last year it is reported that the Insurance companies were defrauded of around Rs.500 Crores for over five years in seven South Bengal districts. It is apprehended that the figures could be around Rs.1500 Crores over the past ten years. (Times of India Mumbai Edition dated 25-07-2007) Some of the common Modus operandi of TP frauds in India is a conversion of ordinary death / other accidental death cases to Hit and Run cases. Conversion of hit and run cases by implanting another vehicle. Most of the hit and run cases are fixed at a later stage in the collusion of the police. In some cases, it was found that the person making the claim changes but all the other details remain the same as 20 claims made in the same car. It was also found that the same vehicle involved in 18 different accidents, all in the same city and the same years. Death due to own negligence and without the involvement of TP vehicles was converted to cases where an accident is shown to be caused by another vehicle. The accident caused under influence of alcohol converted to cases where an accident caused by another vehicle. On Dec 2, 2000, M. Palanivel was injured in an accident while riding pillion on a two-wheeler. Investigation reveals he was riding the two-wheeler and fell when he lost balance. (Moneycontrol .com) Mr. Shankar died in an accident when his car was hit by an Ambassador car. Investigation revealed that he died in an accident when his car hit a tamarind tree. There was no involvement of any Ambassador car. (Money Control .com) Mr. Periyaswanmy was injured in an accident when his two-wheeler hit by an auto-rickshaw. Investigation revealed that he was allegedly driving under the influence of alcohol and fell off his bike. (Moneycontrol .com) Mr. Mohan died in an accident when a lorry hit him when he was driving a motorcycle. The hospital record shows that he died in an accident when his motorcycle rammed into a bullock cart. (Moneycontrol .com) Mr. Senthilkumar was injured as a pedestrian when he was run down by a tempo. Fire Dept. records show that he was injured when he fell down the village well. (Moneycontrol .com) Father and son succeeded in receiving compensation of Rs. 3,55,000/- and Rs. 1,52,000/- for the alleged injury sustained while proceeding in a motorcycle, which was dashed by a car, actually they are operating their tractor, which jilted into a ditch as a result of which the occupants slipped down and sustained injuries. United India vs. Rajendra Singh: 2000(3) SCC 581. Inclusion of some stock victims names in the list of persons as injured persons even though they are not traveling. Substitution of an uninsured vehicle with an insured vehicle. X claiming compensation for the treatment of an injury sustained by Y in a vehicle accident. Passengers traveling in a truck converted to either owner of goods or coolies carried in the vehicle. Impersonating the victim, claimant, owner, the driver sometimes advocates had been a norm. Fraud on grand scale committed in MACT and labor Courts in the State of Gujarat by invisible Advocates reports Yong Lawyers. CBI books Ambala based Advocate for insurance frauds to the tune of Rs. 200 Crores reports Hindustan Times. Filing cases without the consent of the claimants, and in the name of advocates who do not exist had been widely prevalent. Filing of bogus injury report / medical certificate etc. to inflate compensation considered to be a right. FIR field against a Doctor from Godhra General Hospital for issuance of false certificate to get compensation u/s 161 / 167 / 193 / 196 / 197 / 198 / 199 / 200 / 406 /417 / 420/ 465/ 471/ 472/ 476/ 474/ 475 IPC. The list is endless. Health Insurance : 80 percent of healthcare fraud is by medical providers, 10 percent is by consumers and the balance is by other sources. Health Insurance Association of America (1998) Health insurance fraud is described as an intentional act of deceiving, concealing or misrepresenting information that results in health care benefits being paid to an individual or group. Fraud can be committed by both a member and or a provider. Member fraud consists of ineligible members and/or dependents, alterations on enrollment forms, concealing pre-existing conditions, failure to report other coverage, prescription drug fraud, and failure to disclose claims that were a result of a work-related injury. Provider fraud consists of claims submitted by bogus physicians, billing for services not rendered, billing for a higher level of services, diagnosis or treatments that are outside the scope of practice, alterations on claims submissions, and providing services while under suspension or when the license has been revoked. Independent medical examinations are used to debunk false insurance claims and allow the insurance company or claimant to seek a non-partial medical view for injury-related cases. Global Scenario: Health insurance fraud and abuse are common and very costly to America’s healthcare system. Industry analysts argue that out of every $7 spent on Medicare $1 is lost to fraud and abuse that forced the Congress of the United States, to pass the Health Insurance Portability and Accountability Act of 1996 (HIPAA) declaring health care fraud as a federal criminal offense with a punishment of up to ten years of prison in addition to significant financial penalties. In India: In India, health insurance statistics are alarming. According to a survey conducted by one of the leading TPAs, the estimated number of false claims in the industry is estimated at around 10-15 percent of total claims. The report suggests that the healthcare industry in India is losing approximately Rs 600 crore on false claims every year. Health insurance is a bleeding sector with a very high claims ratio. Various types of Health Insurance Fraud: False claims are the most common type of health insurance fraud. The goal is to obtain undeserved payment for a claim or series of claims. Such schemes include any of the following, when done deliberately for financial gain: Some physicians charge insured patients more than uninsured ones but represent to the insurance companies that the higher fee is the usual one. Charging for a service that was not performed, or excessive charging for a service or providing unnecessary services or ordering unnecessary tests. Billing for inappropriate tests-Both standard and nonstandard-appears to be much more common among health-care providers. management of the patient. Unbundling of claims: Billing separately for procedures that normally are covered by a single fee. Double billing: Charging more than once for the same service. Upcoding: Charging for a more complex service than was performed. Miscoding: Using a code number that does not apply to the procedure. Kickbacks: Receiving payment or other benefits for making a referral. Indirect kickbacks can involve overpayment for something of value. Misuse: Criminals sometimes obtain Medicare numbers for fraudulent billing by conducting such as health surveys or offering a free “health screening” test etc.
Attitude towards general insurance fraudInsurance fraud is a globally accepted white-collared crime, more so in India where till recently defrauding an insurance company meant cheating the Government and, by and large, people took as their right.
Cost of general insurance fraudFraud cost the insurance industry an estimated $96.2 billion in 1999. (Conning & Co.) In the United States insurance fraud is estimated to cost US$875 per person per year. Australian Institute of Criminology says that 10% of the claims paid by Australian insurance companies are fraudulent and they add about $70 to the premium of each Australian policy. (Australian Institute of Criminology) In the UK, about 1.50 billion is paid out on account of bogus and exaggerated claims. This adds almost 5% to the premium of an average insurance policy. The South African Insurance Association (SAIA) estimates that approximately 10% of claims paid out are fraudulent. Closer home, insurance frauds in Malaysia are estimated to be 10%-15% of premiums collected.
ImpactSince the very basis of the general insurance, the system revolves around the principle of “collecting from large to pay a few” ultimately it is the policyholders who bear the brunt of the fraud for no fault of its own. The existing system of fraud management: Anti-fraud program Individual insurance companies do make attempts to combat fraud, but they are more concerned about maintaining profitability and not being out-of-line with peer companies, rather than with reforming the system. In most developed and developing countries, insurance associations and insurers have joined hands with the government to combat fraud and manage to promulgate anti-insurance-fraud legislation. As far as Indian insurers are concerned, companies are in a denial and forfeiture mode and, hence, unable to formulate a strategy to combat fraud. Is there any specialty in financial fraud requiring a separate treatment? Difficulties In Proving Fraud: Evidential Complexity: Insurance fraud is considered an ‘invisible and victimless crime’ and all over the world. An allegation of fraud should not be made lightly. From the law of Evidence, it becomes a challenge to prove fraud. The burden of proof is on the insurer if it suspects that fraud has taken place. Therefore, insurers often end up paying the claims because they find it difficult to prove fraud and reject false claims.
Tools for fraud management:Constitution or formation of the Statutory Fraud Committee. There is a need for the establishment of an exclusive Statutory fraud committee for the insurance industry. Amendment to Indian Penal Code to criminalize financial fraud: Insurance fraud to be defined as an offense with severe punitive punishment with the burden of proof to be shifted on the accused to prove the absence of commission of fraud by the amendment to the IPC, Indian Evidence Act. System reforms in insurance practice: Every insurance company should be required to develop Best Practice Code (BPC) within a time frame and submit the same to the regulator; take effective measures to internalize the BPC in its staff, effectively supervise the fictionalization of the BPC, control and monitor variation from the BPC, enforce BPC in the use of discretionary power and make documentation of the same, periodically review the use of discretionary power, conduct periodical legal system, audit and obtain a compliance certificate. Adherence to International Best Practices against prevention of fraud: In the UK, the Association of British Insurers have set up databases that detect multiple insurances, multiple claims, break in insurance, etc. They have taken the service of experts to do data-sifting to detect potentially fraudulent claims. Frauds have a pattern and data-sifting helps insurers detect those patterns. Law for data sharing: Sharing of data amongst the General Insurance Companies in India could be a very effective tool for identification, detection control and combat the fraud. However, for this, they require legal immunity from sharing information on fraudulent claims among themselves, as well as with other financial institutions, regulators, statutory agencies and departments. At present, there are no guidelines about the sharing of information among insurers on such fraudsters. Specific Tool For insurance fraud management: The National Insurance Academy (NIA) has devised a “scientific method” that would facilitate insurers and tackle these third party motor claims. The NIA method is based on seven processes, four preventive and three retrospective tools.
Preventive tools brought about are:Stress analysis would detect the strain and tension in a claimant’s voice to figure out if he/she is truthful about the accident. Red flagging’ which essentially means reporting bogus claims, thereby creating some sort of a bank. The next time a surveyor deals with a particular accident case, he can dip into the bank to help him identify a pattern. Predictive modeling is a third tool by which an insurer can lay his hands on information on the type of vehicles claiming a certain area. The fourth preventive process is database searching. A record of various places and conditions surrounding that area will be kept. This would help an insurer to be extra cautious while settling claims in that area.”
Retrospective tools that to be implied are:‘Exception report’ would point out an exception in the number of claims in various branches of the insurance company. ‘Online analytic processing’, to maintain a person’s records to keep track of the claims he has made. ‘Link analysis’, where a link would be searched for similar types of accidents in different parts of the country. Last word : We may not eliminate fraud but we can surely reduce it.
Mr. M. K. Das
Law Officer, The New India Assurance Co. Ltd.
Published in The Insurance Times, November 2008
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