Navigating the Complex Landscape of Insurance Frauds

“Rising frauds lead to greater operational threat.”

Insurance is one of the tools for risk management that aims at reducing the risk on the day-to-day life of individuals, organisation and society. At the same time, it should also be appreciated that insurance cannot be utilised as a risk free tool for all types of situations. Insurance provides risk management solutions to many situations that fall within the competence of human judgement and managerial skills.

Insurance is very important in today’s world there are number risk which people face in their day-to-day life.

The different types of insurance are life insurance, health insurance, automobile insurance, and property insurance. These are the most common types of insurance. Other types of insurance include terrorism insurance, key man insurance etc.

As there are number of advantages in taking an insurance policy, it is also associated with many risks. There are number of frauds taking place in the insurance sector. People have to be very cautious while taking an insurance policy.

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Insurance is a federal subject in India. It is a subject matter of solicitation. The legislations that deal with insurance business in India are Insurance Act, 1938 and Insurance Regulatory & Development Authority Act (IRDA), 1999.

The hypothesis is that THIS PROJECT SCANS THE RISKY NATURE OF INSURANCE WITH REFERENCE TO VARIOUS TYPES OF TRANSACTIONS AND THEIR VULNERABILITY TO FRAUD.

CONCEPT OF INSURANCE

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known small loss to prevent a large, possibly devastating loss.

An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. There are number of frauds taking place in the insurance industry. Insurance fraud is any act committed with the intent to fraudulently obtain payment from an insurer. Insurance fraud poses a very significant problem, and governments and other organizations are making efforts to deter such activities.

On the one hand, human life is subject to various risks—risk of death or disability due to natural or accidental causes. Humans are also prone to diseases, the treatment of which may involve huge expenditure. On the other hand, property owned by man is exposed to various hazards, natural and man-made. It is important for all to understand the various products that life and general insurance companies offer before they make a choice as to the product they want to buy. As per regulations, insurers have to give the various features of the products at the point of sale. The insured should also go through the various terms and conditions of the products and understand what they have bought and met their insurance needs.

They ought to understand the claim procedures so that they know what to do in the event of a loss. The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums.

HISTORY OF INSURANCE

Insurance sector in India is one of the booming sectors of the economy and is growing at the rate of 15-20 per cent annum. Together with banking services, it contributes to about 7 per cent to the country's GDP. Insurance is a federal subject in India and Insurance industry in India is 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.

The origin of life insurance in India can be traced back to 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. It was conceived as a means to provide for English Widows. In those days a higher premium was charged for Indian lives than the non-Indian lives as Indian lives were considered riskier for coverage. The Bombay Mutual Life Insurance Society that started its business in 1870 was the first company to charge same premium for both Indian and non-Indian lives. In 1912, insurance regulation formally began with the passing of Life Insurance Companies Act and the Provident Fund Act.

By 1938, there were 176 insurance companies in India. But a number of frauds during 1920s and 1930s tainted the image of insurance industry in India. In 1938, the first comprehensive legislation regarding insurance was introduced with the passing of Insurance Act of 1938 that provided strict State Control over insurance business.

Insurance sector in India grew at a faster pace after independence. In 1956, Government of India brought together 245 Indian and foreign insurers and provident societies under one nationalised monopoly corporation and formed Life Insurance Corporation (LIC) by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs.5 crore.

The (non-life) insurance business/general insurance remained with the private sector till 1972. There were 107 private companies involved in the business of general operations and their operations were restricted to organised trade and industry in large cities. The General Insurance Business (Nationalisation) Act, 1972 nationalised the general insurance business in India with effect from January 1, 1973. The 107 private insurance companies were amalgamated and grouped into four companies: National Insurance Company, New India Assurance Company, Oriental Insurance Company and United India Insurance Company.

These were subsidiaries of the General Insurance Company (GIC). The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses. In the United States, regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual state insurance departments.

Whereas insurance markets have become centralized nationally and internationally, state insurance commissioners operate individually, though at times in concert through a national insurance commissioners' organization. In recent years, some have called for a dual state and federal regulatory system (commonly referred to as the Optional federal charter (OFC)) for insurance similar to that which oversees state banks and national banks. In 1993, the first step towards insurance sector reforms was initiated with the formation of Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra. The committee was formed to evaluate the Indian insurance industry and recommend its future direction with the objective of complementing the reforms initiated in the financial sector.

Key Recommendations of Malhotra Committee:
Structure
* Government stake in the insurance Companies to be brought down to 50%. * Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations. * All the insurance companies should be given greater freedom to operate.

Competition
* Private Companies with a minimum paid up capital of Rs.1billion should be allowed to enter the industry. * No Company should deal in both Life and General Insurance through a single Entity. * Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. * Postal Life Insurance should be allowed to operate in the rural market. * Only one State Level Life Insurance Company should be allowed to operate in each state.

Regulatory Body
* The Insurance Act should be changed.
* An Insurance Regulatory body should be set up.
* Controller of Insurance should be made independent.

Investments
* Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%. * GIC and its subsidiaries are not to hold more than 5% in any company.

Customer Service
* LIC should pay interest on delays in payments beyond 30 days * Insurance companies must be encouraged to set up unit linked pension plans. * Computerisation of operations and updating of technology to be carried out in the insurance industry. Malhotra Committee also proposed setting up an independent regulatory body - The Insurance Regulatory and Development Authority (IRDA) to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives.

Insurance sector in India was liberalized in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership. IRDA consists of a Chairman and some permanent as well as part time members. The regulations, however, are enacted under the guidance of a statutory advisory committee Full force and utility of various institutions like Advisory Committee and self-regulatory organizations are not yet realized as the regulator seems to be in a long learning mode.

Due to over delegations, Individual incumbents decide the pace and extent of utilization of prudential and statutory bodies. There is a 26 percent equity cap for foreign partners in an insurance company. There is a proposal to increase this limit to 49 percent. The opening up of the insurance sector has led to rapid growth of the sector. Presently, there are 16 life insurance companies and 15 non-life insurance companies in the market. The potential for growth of insurance industry in India is immense as nearly 80 per cent of Indian population is without life insurance cover while health insurance and non-life insurance continues to be well below international standards.

TYPES OF INSURANCE

Insurance provides compensation to a person for an anticipated loss to his life, business or an asset. Insurance is broadly classified into two parts covering different types of risks: 1. Long-term (Life Insurance)

2. General Insurance (Non-life Insurance)
Long-term Insurance

Long term insurance is so called because it is meant for a long-term period which may stretch to several years or whole life-time of the insured. Long-term insurance covers all life insurance policies. Insurance against risk to one's life is covered under ordinary life assurance. Ordinary life assurance can be further classified into following types:

Types of Ordinary Life Assurance| Meaning|

1. Whole Life Assurance| In whole life assurance, insurance company collects premium from the insured for whole life or till the time of his retirement and pays claim to the family of the insured only after his death.| 2. Endowment Assurance| In case of endowment assurance, the term of policy is defined for a specified period say 15, 20, 25 or 30 years. The insurance company pays the claim to the family of assured in an event of his death within the policy's term or in an event of the assured surviving the policy's term.| 3. Assurances for Children| i).Child's Deferred Assurance: Under this policy, claim by insurance company is paid on the option date which is calculated to coincide with the child's eighteenth or twenty first birthdays. In case the parent survives till option date, policy may either be continued or payment may be claimed on the same date.

However, if the parent dies before the option date, the policy remains continued until the option date without any need for payment of premiums. If the child dies before the option date, the parent receives back all premiums paid to the insurance company.| | ii). School fee policy: School fee policy can be availed by effecting an endowment policy, on the life of the parent with the sum assured, payable in instalments over the schooling period.| 4. Term Assurance| The basic feature of term assurance plans is that they provide death risk-cover. Term assurance policies are only for a limited time, claim for which is paid to the family of the assured only when he dies.

In case the assured survives the term of policy, no claim is paid to the assured.| 5. Annuities| Annuities are just opposite to life insurance. A person entering into an annuity contract agrees to pay a specified sum of capital (lump sum or by instalments) to the insurer. The insurer in return promises to pay the insured a series of payments until insured's death. Generally, life annuity is opted by a person having surplus wealth and wants to use this money after his retirement. There are two types of annuities, namely:

Immediate Annuity: In an immediate annuity, the insured pays a lump sum amount (known as purchase price) and in return the insurer promises to pay him in instalments a specified sum on a monthly/quarterly/half-yearly/yearly basis. Deferred Annuity: A deferred annuity can be purchased by paying a single premium or by way of instalments. The insured starts receiving annuity payment after a lapse of a selected period (also known as Deferment period).| 6. Money Back Policy| Money back policy is a policy opted by people who want periodical payments. A money back policy is generally issued for a particular period, and the sum assured is paid through periodical payments to the insured, spread over this time period. In case of death of the insured within the term of the policy, full sum assured along with bonus accruing on it is payable by the insurance company to the nominee of the deceased.|

General Insurance

Also known as non-life insurance, general insurance is normally meant for a short-term period of twelve months or less. Recently, longer-term insurance agreements have made an entry into the business of general insurance but their term does not exceed five years. General insurance can be classified as follows:

Fire Insurance| Fire insurance provides protection against damage to property caused by accidents due to fire, lightening or explosion, whereby the explosion is caused by boilers not being used for industrial purposes. Fire insurance also includes damage caused due to other perils like storm tempest or flood; burst pipes; earthquake; aircraft; riot, civil commotion; malicious damage; explosion; impact.| Marine Insurance| Marine insurance basically covers three risk areas, namely, hull, cargo and freight. The risks which these areas are exposed to are collectively known as "Perils of the Sea". These perils include theft, fire, collision etc.| | Marine Cargo: Marine cargo policy provides protection to the goods loaded on a ship against all perils between the departure and arrival warehouse.

Therefore, marine cargo covers carriage of goods by sea as well as transportation of goods by land.| | Marine Hull: Marine hull policy provides protection against damage to ship caused due to the perils of the sea. Marine hull policy covers three-fourth of the liability of the hull owner (ship-owner) against loss due to collisions at sea. The remaining 1/4th of the liability is looked after by associations formed by ship-owners for the purpose (P and I clubs).| Miscellaneous| As per the Insurance Act, all types of general insurance other than fire and marine insurance are covered under miscellaneous insurance. Some of the examples of general insurance are motor insurance, theft insurance, health insurance, personal accident insurance, money insurance, engineering insurance etc.| I

MPORTANCE OF STUDYING FRAUD

Definition of fraud

Fraud is defined as “any behaviour by which one person intends to gain a dishonest advantage over another”. In other words, fraud is an act or omission which is intended to cause wrongful gain to one person and wrongful loss to the other, either by way of concealment of facts or otherwise.

Definition of fraud u/s 17 of Indian Contract Act

Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

(i) the suggestion, as a fact of that which is not true or by one who does not believe it to be true; (ii) the active concealment of a fact by one having knowledge or belief of the fact; (iii) A promise made without any intention of promising it; (iv) Any other fact fitted to deceive; and

(v) Any such act or omission as the law specially declares to be fraudulent.

The importance of studying insurance fraud cannot be over-emphasized. Once the types of fraud are determined & detected, & the modus operandi is discovered, insurers can take measures to reduce instances of fraud. These measures include, warning insured about fraud & implementing more stringent security measures for verification of identity. Knowing the various types of frauds as well as an in-depth study of the most frauds that have taken place till now is imperative if we are to reduce the incidence of these crimes to a minimum.

WHAT IS INSURANCE FRAUD?

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. Insurance fraud is perceived as a victimless crime, but the estimated losses from this crime exceed $100 Billion every year. Ten percent of all types of insurance claims property & casualty, health, life, workers’ compensation) are suspected to be fraudulent. According to the Insurance Research Council, 30% of all bodily injury Arizona appears to be fraudulent or contain injury exaggeration.

In Phoenix, that figures goes up to 36%. The losses from fraudulent auto insurance claims in Arizona cost policyholders an estimated average of $167 to $200 in higher annual premiums. Insurance fraud impacts the public by causing us all to pay higher insurance premiums. In addition, businesses may pass along their increased insurance costs to their customers in the form of higher prices. All of this translates to more money out of YOUR pocket!

CAUSES OF INSURANCE FRAUD

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.