India does not have an effective insurance fraud law despite the fact that frauds burnt a Rs 45,000-crore hole in the Indian insurance industry's pocket in 2019.
Elsewhere, the insurance frauds clocked $100 billion in the US, $4 billion in Australia, $3 billion in the UK and $2billion-$3billion in other EU countries the same year.
In percentage terms, most insurers lose between 10%-15% across all lines of their business, whereas health insurance fraudulent claims can even touch 35%. Further, about 90% of auto insurance frauds are the result of padding claims (which means to add damages, injuries and fictitious passengers to insurance claims).
The other 10% of insurance frauds come from organised accident-staging. In the life insurance segment, most frauds are seen where the sum assured is between Rs 2 lakh to Rs 12 lakh.
Most of the advanced countries where the insurance industry has matured, have put insurance fraud laws in place. Insurance fraud is classified as a crime in all the states of the USA.
Of these, 19 states, require companies to form programmes to combat frauds and in some cases to develop investigation units to detect the frauds. 41 of the states have their own insurance fraud bureaus. In Canada, the Insurance Crime Prevention Bureau was formed in 1973 to fight insurance frauds, collect information on insurance frauds and carry out investigations.
In the UK, the Fraud Act 2006, defines insurance fraud as a crime. The Insurance Fraud Bureau in the UK focuses on detecting and preventing organised and cross-industry insurance frauds.
In Denmark, the Forsikring & Pension (F&P), the Danish pensions and insurance association, organises exercises at the Danish Police Academy on how to combat insurance frauds.
In India, there is no specific provision in the Indian Penal Code for insurance frauds. A few sections that have some relevance are-Section 205-false impersonation for the purpose of act or proceeding in suit or persecution; Section 420-cheating and dishonestly inducing delivery of property; Section 464-making a false document including signs, seals and forgery and Section 405-criminal breach of trust.
However, these provisions are not adequate to prosecute a fraudster legally under the current scenario of organised insurance frauds.
Due to the mounting backlog of pending judicial cases in our courts, taking legal action against insurance frauds is not a common occurrence and frauds of amounts not big enough are let go off as opposed to the heavy investment of time and energy in pursuing the same.
As India's insurance industry matures, fraud risk management is going to be a major concern for insurers and business leaders. Insurers will have to continuously reassess their processes and policies to manage and mitigate the risk of frauds.
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 minimise such issues.
External fraud risk can arise at various stages: registration of clients, underwriting, reinsurance and the claims process. The severity of the frauds can range from a slight exaggeration to deliberately causing loss of insured assets.
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.
Insurance frauds pose a significant problem, and affect the lives of innocent people, both directly through accidental or intentional injury or damage and indirectly as these crimes cause insurance premiums to rise every year.
Honest customers should not have to pay the price for fraudsters through higher premiums. Compared to other crimes, court sentences for insurance frauds are lenient, reducing the risk of severe or extended punishment.
Today, when India's insurance industry is working towards reducing costs, one of its main focus areas to control or reduce costs is by proactively arresting frauds, which can be achieved through an effective fraud risk assessment programme and having special investigating units in each organisation.
"The government should make provisions so that just as banks can determine the creditworthiness of an individual by querying the Credit Information Bureau of India Ltd (CIBIL), insurers in future may be able to get details of an individual's insurance history and his claims record whenever they get a new proposal," says Sandeep Malik, a reputed Insurance & Risk Management Consultant who specialises in insurance fraud.
The sharing of knowledge and data should be a common practice amongst all insurers and the regulator and more so with the victims of fraudulent insurance claims.
This data should include fraud patterns and case studies, fraud customer list and intermediaries, fraudulent providers and investigators.
Importantly, awareness should be brought about the due legal process to be followed before reporting a case. The central and state governments shall also have to seriously think about having specific laws to counter the insurance frauds and setting up insurance fraud bureaus.
This is urgently required as the Indian Insurance Act does not contain a definition for insurance frauds. "Neither do we have any specific laws connected to insurance frauds which are spelled out in the Indian Penal Code, 1860. The Indian Contract Act, 1872 also does not have any specific laws pertaining to insurance frauds. Even though the sections related to forgery or fraudulent acts can be applied in the IPC, it does not succeed in deterring the commission of insurance frauds," says the Head-Fraud Control of a leading life insurance company in India.
Academicians around the world and fraud control practitioners working in the insurance industry feel that India should consider Insurance Frauds Control Act on the lines of acts in different states of the USA as the beginning point for discussion and bringing the bill in the parliament for discussion as soon as possible.
(The author is Founder and Chief Executive Officer of the Insurance Foundation of India and the Founder Director of Ria Insurance Brokers Pvt Ltd.)