Mind the ‘Attention Gap’
‘Insurance fraud’ has existed since the commencement of the insurance business in its modern sense. In general, insurance fraud transpires when a beneficiary acquires a benefit to which he or she is not otherwise eligible. The insurance directive issued by the National Bank of Ethiopia (NBE) in 2014 specifically defines fraud as “an act or omission by shareholders, directors, employees, customers, policyholders or insurance auxiliaries committed with the intention of gaining dishonest or unlawful advantage for the party committing fraud or for other parties.”Insurance fraud may take many forms and could arise at any stage, starting from concealment or providing erroneous information to an insurer during underwriting or in exaggerating claims or intentionally staging accidents to collect insurance money. Typically, the fraud could either be an exaggerated or staged case that never occurred but the effect in both cases is roiling the insurance industry.
The insurance business involves the accumulation of liquid cash, which makes it vulnerable to mishandling if it is not protected appropriately. Some people consider insurance fraud less risky and there is less possibility of being caught. The wrongdoers in the cycle are not limited to the insurer and the insured. It may have nets and crime rings with insiders and all stakeholders involved in the insurance process, including proof of loss document issuing authorities.
Insurance fraud is not unique to Ethiopia. To see some regional trends, the East Africa Insurance Fraud Risk Survey conducted by KPMG, one of the largest professional services companies in the world, in 2015 notes that fraud in the region exists both in underwriting and claims. For example, in Uganda the detected claims were valued at USD10,000 and it was considered that the total cost of claims fraud was USD500,000.
According to the survey, the top five challenges in managing fraud risks are lack of awareness of the scale of the problem, corruption in the process, no data sharing across the industry, lack of deterrent and punishment or unwillingness to address the issue, and lack of skill sets and expertise.
The survey reveals that the most common fraud modus operandi regionally is non-disclosure. This is despite the fact that insurance as a principle is based on utmost good faith, which calls upon admission of facts on both parties material to insurance.
Insurance fraud is a growing concern in Ethiopia. Currently, although a separate record does not exist to differentiate fraudulent claims and analyse their real impact, it is known that it affects the lives of innocent people. Specifically, it affects insurance demand, as these claims force insurance premiums to escalate; an extra 18Pct is added on premiums due to fraud in East Africa, according to the KPMG report, which discourages purchasing insurance protection.
A fraudulent act varies by class of insurance. For instance, there is a possibility that in life and health insurance, personal accident or workmen’s compensation insurance or other insurance involving phony death claims or forged medical certificates, escalated disability scale of benefits, or proximate causes of accidents may be forged with the help of professional medical practitioners.
At times, the medical institutions, after mastering the insurance terms and conditions, may evidence some perils as insured, even if they are not actually covered by the policies, in order to respect the interests of their patients or simply due to their fidelity to their patients. Here, the driving factor may be financial gain and there are practical cases in which the medical practitioners identify cosmetic surgeries or teeth beautification as illnesses. At other times, although the cases are few, when borderline issues arise the practitioners may interpret it in favour of the insured and include it as an insured peril.
Escalation of claim costs may be an indicator of claims leakage. For example, the net claims incurred by the Ethiopian insurance industry have risen from ETB1.9 billion in 2013 to ETB2.5 billion in 2015. In motor insurance, which takes up to 70Pct of the claim costs of the industry, there is a possibility that fraudulent claims may be lodged. It may be in the form of faking accidents, exaggerating the claim amounts, cost of spare parts and producing false accident evidence.
A fire in a distant rural area may wreck an automobile with no bystanders; the chauffeur could claim an electrical shortage in the engine slot triggered the fire. A number of instances show that total loss cases are becoming total fraud cases. In property and fire insurance, arson may be reported since the cause, documents and the fire itself can destroy the origin of the fire.
To worsen the matter, there are no bold cases that show concrete measures taken by insurance companies to educate wrongdoers. Insurance companies have also contributed to the lenient control since they focus on competition and getting new customers, without having proper data and information about the fraud history of the customer.
What is mislaid?
There are also missing institutions and professionals such as insurance fraud investigation bureaus and professional detectives in the country. Insurers who attempt to identify fraudulent acts are limited and the experts do not have the necessary capacity and expertise to identify the fraudulent acts. In the absence of such systems and detection mechanisms, how can the Ethiopian insurance industry know the extent and impact of fraudulent claims and determine which is which?
Moreover, there has to be cooperation within and among insurance companies in exchanging information and data on fraud cases (either actual or attempted). Joint anti-fraud efforts need to be launched. The Association of Ethiopian Insurers can facilitate this. The regulator, the NBE, should also level the playing field with sound regulation and follow up the enforcement of risk management systems and fraud detection and combatting devices.
According to the directive of the NBE, insurers and reinsurers operating in Ethiopia shall place well-defined fraud communication, monitoring and control policies approved by the board and establish procedures for fraud detection, mitigation and reporting. It is required to submit the documents to NBE for approval.
Likewise, the directive instructs insurers and reinsurers to maintain fraud registers and report any attempted or actual fraud to the National Bank within 15 working days of the date of the detection of the fraud, although data on the implementation is difficult to obtain. There has to be a clear reporting system, implementation and enforcement of anti-fraud and money laundering proclamations.
Finally, the impact of fraud inflicts actual and potential risks on the insurance industry in particular and the country in general. The damage even goes beyond one nation, as insurance companies themselves purchase insurance policies from other reinsurers, which usually are foreign companies in most African countries, to limit the total loss the original insurer would experience in case of disaster. Therefore, proper attention should be given to the matter to maintain the health and soundness of the financial system. Since insurance fraud has deterred effects on the country’s economy, a concerted effort of all is required to minimize its adverse impact. Insurance companies should invest in technology, gathering and availing fraud related statistics and data to be used as an input for taking measures. Certainly, silence provides a breeding ground for fraud.
4th Year • October 16 – November 15 2015 • No. 32