Motor Insurance Frauds: Detection and Control

As you are aware, insurance companies are considered custodians of the money of their policyholders. A policyholder pays a premium to the insurance company with the hope that, in case of financial loss, the insurance company will indemnify him/her. An insurance company, through insurance policies, sells a promise to the policyholders that in case of loss due to insured perils, the insurance company will help financially to the insured to the extent of the loss. The premium paid by the insured to the insurance company is treated as consideration, and the insurance policy will be the contract between the insurer and insurance company.

There are some people for whom insurance has become an easy way of making money by staging various types of circumstances, accidents, submitting fraud, fabrication,fabrication and false documents to claim insurance money from insurance companies. The motor and health policies are the most vulnerable for insurance fraud.

Whatever is practiced in the west easily finds its way to India. Motor insurance and health insurance are more susceptible to insurance frauds, followed by life insurance and property insurance. A recent survey has shown that more than 50% of the third party (TP) claims in India are bogus. There are several claims that are based on bogus accidents carried out with the support of legal professionals. Motor Insurance is the largest portfolio in the Indian non-life insurance market, which almost constitutes 40% of the non-life insurance premium.

Insurance fraud is a criminal act, provable beyond a reasonable doubt that violates statutes, making the wilful act of obtaining money or value from an insurer under false pretences or material misrepresentations a crime.

Duffield and Grabosky (2001) posited that fraud means obtaining something of value or avoiding an obligation by means of deception.

According to the International Association of Insurance Supervisors (IAIS), fraud in insurance is defined as "an act or omission intended to gain dishonest advantage for the fraudster or for the purpose of other parties." This embraces many and varied forms of conduct, ranging from false claims against an insurance policy to some corporate frauds that are meticulously planned and intricate in their execution.

Auto insurance in India deals with the insurance of motor vehicles, whether it is used for personal or commercial purposes. The insurance covers for the loss or damage to the automobile or its parts due to man-made or natural calamities.

The Motor Vehicles Act, 1988, came into force on 1 July 1989. It replaced the Motor Vehicles Act, 1939, which earlier replaced the first such enactment, the Motor Vehicles Act, 1914. The act is further amended by the Motor Vehicles Act, 2019.

The Motor Vehicle Act, 1988, has made it compulsory for all motor vehicles, whether they are used for personal or commercial purposes, to have insurance coverage.

The premium in the case of motor insurance will decide on the price of the vehicle.

THE MOTOR VEHICLES ACT, 1988, DEFINES SOME IMPORTANT TERMS USED IN MOTOR INSURANCE

NATURE AND EXTENT OF INSURER'S LIABILITY

THERE ARE DIFFERENT TYPES OF MOTOR INSURANCE

I. THIRD PARTY INSURANCE

Any losses arising due to damages or injury caused by the insured to a third party or third party's property are covered under the third-party vehicle insurance policy. As per the Indian Motor Vehicles Act, third-party liability cover is a must and a basic requirement under a vehicle's insurance policy.

In order to better understand the concept of third-party car insurance, let us look at some terminologies.

For example, in the event of a car accident, the parties involved are as follows:

First party: The insured person or policyholder

Second party: The insurance company

Third party: The person who claims for the damages caused by the first party

In an event where an insured person with a third-party insurance policy is held legally liable for injuries or damage done to a third party, then his/her insurance company indemnifies the insured person.

Any losses arising due to damages or injury caused by the insured to a third party or third party's property are covered under the third-party insurance policy.

In the event of a car accident, an insured person with a third-party insurance policy is required to immediately inform the insurance company of the incident. If you were responsible for the accident (or the other driver believes you were responsible), it's almost certain that a claim will be made against you, which your insurance company will be expected to pay.

So, for the speedy resolution of the claim, it is of utmost importance that the insurance company is informed about the accidental claim at the earliest. This is how third-party motor insurance works.

II. COMPREHENSIVE OR PACKAGE INSURANCE

As mentioned above, comprehensive car insurance is a combination of third-party insurance and own damage insurance. It provides comprehensive coverage against third-party liabilities and loss or damages to the car from accidents, vandalism, fire, falling objects, or floods. We can say that it is such a type of insurance that provides all-round protection to the vehicle from all kinds of risks, whether they relate to your vehicle or a third party.

While third-party insurance only covers you against third-party damages and losses, comprehensive car insurance will cover for your own damages as well.

Without comprehensive coverage, a car insurance claim cannot be made if your vehicle receives damage that is not due to a collision. For highly valued cars, this type of insurance is desirable as an additional protection. Ageing, wear and tear, etc. of the vehicle Electrical or mechanical breakdown Damage to tires and tubes. It is generally suggested that you should have a comprehensive insurance policy for your car.

III. COMMERCIAL VEHICLE INSURANCE

Commercial vehicle insurance is a policy of physical damage and liability coverages for amounts, situations, and usage not covered by a personal auto insurance policy. This type of business insurance covers many types of commercial vehicles—from automobiles used for business purposes, including company cars, to a wide variety of commercial trucks and vehicles.

Commercial vehicle insurance generally covers;

a) Bodily injury liability coverage: pays for bodily injury or death resulting from an accident for which you are at fault and, in most cases, provides you with a legal defence.

b) Property damage liability coverage—provides you with protection if your vehicle accidently damages another person's property and, in most cases, provides you with a legal defence.

c) Combined single limit (CSL): Liability policies typically offer separate limits that apply to bodily injury claims for property damage. A combined single-limits policy has the same dollar amount of coverage per covered occurrence, whether bodily injury or property damage, for one person or several.

d) Medical payments, no-fault or personal injury coverage—usually pays for the medical expenses of the driver and passengers in your vehicle incurred as a result of a covered accident, regardless of fault.

e) Uninsured motorist coverage: pays for your injuries and, in some circumstances, certain property damage caused by an uninsured or a hit-and-run driver. In some cases, underinsured motorist coverage is also included. This is for cases in which the at-fault driver has insufficient insurance.

f) Comprehensive physical damage coverage: pays for damage to your vehicle from theft, vandalism, flood, fire, and other covered perils.

g) Collision coverage: pays for damage to your vehicle when it hits or is hit by another object.

NOTE: Auto insurance does not include;

1. Consequential loss, depreciation, and mechanical and electrical breakdowns when a vehicle is used outside the geographical area.

2. War or nuclear perils and drunken driving.

Let's discuss fraud in motor insurance.

Fraud occurs when someone knowingly lies to obtain a benefit or advantage to which they are not otherwise entitled or someone knowingly denies a benefit that is due and to which someone is entitled.

According to the law, the crime of insurance fraud can be prosecuted when:

i) The suspect had the intent to defraud. Insurance fraud is a "specific" intent crime. This means a prosecutor must prove that the person involved knowingly committed an act to defraud.

ii) An act is completed. Simply making a misrepresentation (written or oral) to an insurer with knowledge that is untrue is sufficient.

iii) The act and intent must come together. One without the other is not a crime.

iv) Actual loss is not needed as long as the suspect has committed an act and had the intent to commit the crime. No money necessarily has to be lost by a victim.

Whenever there is theft of any vehicle, its direct impact comes on the insurance company that bears the most of the cost. So, it is important to limit the cases of theft and related insurance fraud.

Types of Motor Insurance Fraud

1) INTERNAL AND EXTERNAL FRAUD

Fraud against the insurer by an employee, a manager, or a board member on his/her own or in collusion with others who are either internal or external to the insurer. External fraud is fraud against insurers by outsiders of the insurance company, such as applicants, policyholders, and claimants, sometimes perpetrated in collusion with insiders such as agents, brokers, or third-party service providers. This type of fraud is common, and these include providing false statements and submitting bogus claims.

2) UNDERWRITING AND CLAIM FRAUD

Underwriting fraud, which includes fraudulent acts perpetrated at renewal of the insurance contract, covers, for example, dissimulation of information during application (application fraud) to obtain coverage or a lower premium (premium fraud), the deliberate concealment of existing insurance contracts, and underwriting coverage for fictitious risks. Since the principle of utmost good faith obliges the policyholder to report any new information that comes to his attention during the course of the contract and is likely to affect the insured risk. Claim fraud is the most prevalent fraud in India, which refers to deliberately inflated, false, or fictitious claims.

3) SOFT AND HARD FRAUD

The soft fraud refers to claimants seizing an opportunity to inflate the damages of an otherwise legitimate claim (claim padding or build-up). The hard fraud refers to a carefully premeditated and minutely executed scam to rip off insurance. Soft fraud is opportunistic fraud; however, hard fraud is planned fraud. Examples of hard insurance fraud include filing claims for bogus or staged injuries, accidents, burglaries, and fires; conspiracies involving medical doctors, lawyers, and patients defrauding workers' compensation insurance; dishonest insurance agents intentionally failing to remit premiums to the insurance company; and insurers negotiating contracts or claims in bad faith.

THE EFFECT OF INSURANCE FRAUD

Motor insurance fraud affects both individuals and the insuring companies.

The following are examples of the effects of insurance fraud on individuals: i) The average household pays higher insurance premiums to cover the cost of fraud.

ii) The prices of consumer goods rise as businesses are paying higher premiums due to the increased cost of insurance claims.

iii) The cost of motor insurance rises due to fraudulent accident claims.

iv) Innocent insureds are scrutinised more carefully and may incur longer periods to settle claims while under investigation.

Even though insurance companies typically pass the costs of insurance fraud on to the consumer in order to operate at a profit, insurance companies are directly impacted by insurance fraud.

The following are examples of the costs of fraud to insurance companies

i) Every rupee that is spent on insurance fraud directly impacts the profitability for the company as claim costs rise.

ii) Insurance companies incur increased human resource costs by employing fraud units to investigate claims.

iii) Insurance companies that do not effectively prevent fraud may lose.

iv) Insurance companies also lose investment income when a fraudulent claim is filed, as they need to make reserves for the filed claims.

Approaches to Detect Fraud Claims in Motor Insurance

Despite the problems inherent in dealing with fraud, fraudulent claims can be and indeed are detected. Fraud detection typically occurs through the discovery of anomalies or inconsistencies in the information surrounding the claim (e.g., when the circumstances of the claim do not match the account given by the claimant), identification of patterns of claiming behaviour (e.g., repeated claims for similar losses), or recognition of inappropriate claimant characteristics (e.g., aggressive manner, uncertainty, and hesitance in supplying information). Following are the important approaches that can help in detecting potential fraud:

(a) PREDICTIVE MODELLING TO DETECT FRAUD AND CONTROL CLAIM COST

This is the latest technique to detect fraudulent patterns. This technique uses advances in analytics to detect fraudulent patterns in large volumes of data residing in databases, claims management systems, and third-party data sources. The predictive analytics when applied to insurance can considerably reduce the number and number of claims paid out each year and hence can save millions of rupees.

The advantage of using predictive modelling is that it not only detects claims that have easily identifiable fraud characteristics but also detects previously unidentified fraud variables much earlier in the claim process than is possible in manual processes.

The predictive analytics is currently used in detecting fraud in medical insurance and has shown good results. Therefore, this technique can prove very useful in motor insurance to detect fraud and hence prevent loss.

(b) PRELIMINARY INVESTIGATION BY EXPERIENCED AND EFFICIENT FRONT OFFICE CLAIMS HANDLERS

The process of investigation generally involves seeking further information, either from the claimant or from third-party sources, and building up a clear account of anomalies and inconsistencies in the claim coupled with potential motives of the claimant. The responsibility for detecting fraudulent claims in motor insurance companies rests heavily with staff at the front line of the claims-handling process. Claims handlers are often inexperienced, with typical company lifetimes of less than one year, and they often lack sufficient or appropriate training in fraud detection.

It has been observed that the rate at which fraudulent claims are detected is as low as 10%, suggesting that large numbers of fraudulent cases remain undetected. It is a great responsibility to detect anomalies and inconsistencies while processing claims at the nascent stage. Motor insurance companies have to ensure that the life of experienced front office claim handlers should be increased. The company should arrange special training for front-claim handlers in detecting fraudulent claims.

(c) DYNAMIC LIST OF FRAUD INDICATORS TO DETECT FRAUD

In order to increase the chances of detecting fraudulent claims by inexperienced staff, companies have traditionally provided claim handlers with lists of fraud indicators against which to check incoming claims. Every company has their own set of indicators, though there is considerable overlap across company lists. Commercial confidentiality prevents the publication of an exhaustive list of indicators. More importantly, companies do not want the public to have access to such information because the indicators would lose their predictive power if potential fraudsters became aware of them.

A decision procedure may accompany fraud indicators, whereby claims that trigger a number of fraud indicators higher than a given threshold become targets for further investigation. Moreover, lists of fraud indicators fail to reflect the dynamic nature of fraud. Arguably, the use of static fraud indicators makes it less easy to detect new fraud variants than having no lists of indicators at all, since anomalies associated with new fraud variants will not trigger old indicators.

Therefore, insurance companies have to update their fraud indicators with time and make the list more dynamic than static; also, the interactivity between various indicators is a must. At the same time, it is a challenge for insurance companies to provide high-quality service by reducing the claim handling time.

(d) Sophisticated databases to detect fraud

Insurance companies should further take proactive steps to improve fraud detection during the claims handling process. Industry should develop several databases to assist in the detection of anomalous information at the claim stage. For example, a database should be developed that verifies information provided by claimants. Second, the database should assess if claimants have a history of suspicious or similar claims. Last, it should provide repositories for sharing information about claim histories across companies and with other parties.

These databases could be restricted for the use of specialist investigators. However, this system also suffers from some drawbacks, such as opportunities to introduce noise into record sets, such as misspellings, missing items, duplicate data, and out-dated information. Consequently, searching database systems can lead to problems, both with the failure to find expected records and the generation of false positives through erroneous matches.

(e) USING TECHNOLOGY TO DETECT AND CONTROL FRAUD;

The recent technologies and processes have tried to address some of the problems inherent in inexperienced staff and noise in databases by using advanced intelligent software coupled with a detailed understanding of the nature of fraud and fraudsters. One approach is to capitalise upon existing databases while overcoming problems of noise in the data using data. Data mining techniques can detect anomalies between client-supplied data and existing datasets while remaining sensitive to minor mismatches that are likely to generate false positives and allow the detection of patterns of fraudulent activity (e.g., patterns of repeated claim activity) among complex data sets. Other new technologies draw upon profiling approaches used in criminology and forensic investigations, borrowing techniques, etc. The fraud detection process relies heavily on accurate and comprehensive communication of claim information and suspicions, especially in situations where there is no case ownership. The technological approaches show promise but are largely unproven. One concern is that the current wave of technological and process fixes seems to have been developed without a full understanding of their users, that is, the claims handling and investigation staff within the insurance industry. The systems focus upon detecting anomalies, the corollary being that claims-handling staffs are not themselves good at spotting anomalies in claims data.

FRAUD MANAGEMENT SYSTEM

The fraud management control system comprises three components. The three components are key performance indicators (KPI), activity, and fraud management system (FMS) components. KPIs are used to measure the performance of a certain activity or activities, which is supported by a certain FMS component.

The Fraud Management System supports the businesses affected by these events (such as banks, media, and telco) and provides them with the tools required for the assessment, control, and even prevention of these practices in order to limit and avoid money and image loss and leverage the wealth of information provided.

The functional model for the definition of an anti-fraud solution is based on three different components:

i) Prevention: It includes all the components of the key value, such as the customer identity, the creation and delivery of the service, new IT applications and technologies, new operations and business processes, and adequate SLAs.

ii) Detection and management: It includes decision-making and back-office processes.

iii) Analysis and investigation: It includes KPIs and data analyses.

In general, the first solution adopted is data mining. The analysis to be carried out on company data will for sure be time-intensive and complex and require a serious computational ability in order to identify appropriate statistical models for the definition of the prevention rules based on data analysis. A data mining technology enables to collect, analyse, and prevent different fraudulent practices. Data mining techniques are based on the analysis and investigation of a huge database in order to define models and rules.

A business rule is a rule implementing or changing the behaviour of a business application in accordance with the factors interacting with it. The rule defines the logic that must be applied by all the software components that are part of a business application.

The critical success factor of a company that must react to changes is the immediate, prompt, and flexible use of each new business rule. BRMSs support the business requirements for continuous changes without requiring the re-engineering of IT applications.

A fraud management infrastructure supported by a BRMS (Business Rules Management System) can effectively and efficiently meet fraud management strategies by increasing the flexibility and adaptability of the different types of adopted solutions through:

• an easy definition of new rules;
• a quick removal of the existing rules;
• tool boxes that can be used with simple boolean operators;
• the powerful use of "natural language" for the definition of the rules;
• the use of a powerful deductive method;
• the possibility to immediately assess the performances of new rules without a dual system;
• the opportunity to enter in the rule flow and create new cases based on the rules to "be tested.".

Conclusion and Recommendations

Motor insurance contributes to one third of the premium income for the non-life industry. Also, it has been experiencing losses and has a high ratio of claims payment. But shifting its failures to the shoulders of the policyholders by charging them with an increased premium and restricting them is not the way to boost itself. Insurance companies should work towards enhancing and improving their underwriting standards and research methods rather than putting the burden of their losses on the innocent customer, who already pays high premium rates. Since India is a leading IT and software provider, it is easy for the insurance industry to collaborate with software giants like Infosys and Wipro to create sophisticated software to detect and control fraud.

The Indian insurance regulator should propose the formation of a fraud fighting organisation and the creation of fraud special investigation units to battle the motor insurance fraud. Public perception and attitude towards motor insurance fraud is one of the main obstacles to reducing fraud activities; hence, insurance companies need to change the public perceptions towards motor insurance fraud.

Extensive research has shown that situational factors do indeed influence policyholders' perceptions of whether fraudulent behaviour is ethical.

Motor insurance fraud is currently a very significant problem, and there is no reason whatsoever to suppose that its costs, level, or significance will diminish naturally over time. Hence, all insurers should join hands to create a strong centrally administered mechanism to tackle the problem of fraud. It is important to develop a very strong mechanism so that all vehicles are acquired under insurance, as more than 40% of vehicles in India are not covered, and these uninsured vehicles are mostly the cases of fraud. Therefore, it is required that all the vehicles need to be covered and renewed under compulsory insurance. This will help reduce the possibilities of fraud, and it will help insurance companies enrich their premium pool with the comfort of paying genuine claims. This practice is mostly used by developed nations. India should adopt mechanisms from these countries.

The insurance industry should create a consolidated industry-level database of all the insurers issuing motor policies in order to identify duplicate claims and possible fraudulent claims. Also, there is a need to create and maintain a centralised database of motor claims at the main/head office (categorising the claims into death, grievous injury, minor injury, and property) for monitoring of the claims. Further, to ensure efficiency and profitability, a need arises to develop a system for reviewing the performance of advocates and investigators to ensure that only those rendering satisfactory services are retained, and hence unnecessary costs are saved.

Let us not forget that the business of insurers is to settle claims impartially and quickly, and the key to business reputation and growth lies in the claims management process and philosophy. Therefore, it is important that while detecting and controlling fraudulent claims, the valid claims are not affected, and also empathy with the claimant must not be lost even on claims that are not valid. Industry co-operation for controlling fraud and close watch on claims fraud are key factors towards growth of motor insurance at impressive rates and to reach unexplored market.

DISCLAIMER: The above article is only for information and knowledge of readers. In case of necessity, do consult with insurance consultants for more understanding and clarity on the subject matter.

Foot Notes

References: 1. Motor Insurance Frauds in India: detection and control, doctoral research write-up by Mr. Irfan Bashir, Mr. C. Madhavaiah, and Mr. J. Rama Krishna Nail, all University of Pondicherry, Pondicherry.

2. The Motor Vehicles Act, 1988 (as amended from time to time).

3. https://www.reply.com/Documents/1919_img_SYTR09_fraud_management_eng.pdf