Insights & Reports > Kroll Global Fraud Report

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Brendan Hawthorne

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With governments and regulators worldwide handing out ever increasing fines for data security breaches, bribery, corruption, money laundering, and market abuse, insurance companies are finding it increasingly difficult to know on which financial crime risks to focus their limited resources.

In terms of pure monetary loss, they should begin with claims fraud. This problem is estimated to cost general insurance companies up to seven percent of gross written premium. Other estimates put the amount undetected in the United Kingdom at over US$3 billion each year. Flourishing organized gangs orchestrate induced vehicle accidents, as well as bogus arson, disability, and healthcare claims. These groups often include doctors and lawyers who support their frauds.

Policyholder fraud in the life insurance industry, on the other hand, tends to revolve around fraudulent surrenders. The extent is difficult to quantify because of the long-term nature of the business and infrequent contact with policyholders. By the time a real policyholder comes forward to claim funds, the fraudsters are often long gone. Organized gangs target call centers or government offices to elicit personal information to enable them fraudulently to surrender policies. Another common tactic is to get gang members employment in insurance companies in order to determine which policies have shown very little activity in recent years: by targeting these, fraudsters can remainundetected for long periods.

Insurance companies also cannot afford to ignore employee fraud. Although its monetary cost is usually less than that of claims fraud, these cases often attract extensive negative media and regulatory interest. Increasingly, organized crime groups place people in companies with a view to committing large-scale internal frauds. Strong pre-employment vetting is crucial to address this threat. Another common employee fraud among general insurers is the facilitation of fraudulent claims payments, usually by adding unauthorized payments to existing claims or by reopening and paying out on old ones, often within self-authorization limits.

Meanwhile, bribery and corruption are currently receiving extensive law enforcement attention worldwide. The number of Foreign Corrupt Practices Act (FCPA) investigations and the severity of resultant fines and prison sentences are increasing. In addition, the British government has proposed a new Bribery Bill. This increased focus means that insurers need to have properly implemented programs which will let them answer three fundamental questions if any employee is found to be involved in bribery and corruption:

• What did you do to reduce the risk of this happening?
• What did you do when you suspected it had?
• What did you do once you knew for certain?

Where offenses are suspected, companies must ensure that independent investigations occur and, if suspicions prove correct, appropriate action is taken against the guilty and appropriate disclosure is made to the authorities.

Money laundering and sanctions will also continue to attract substantial attention for the foreseeable future. Most insurers have mature controls in these areas, although some general insurers still grapple with sanctions legislation due mainly to various contractual arrangements under which they lack access to payee or customer details. Insurers cannot afford to reduce their focus here, given ongoing governmental interest.

With so many issues to consider, the following risk mitigation strategies should get top priority:

• Robust employee screening;
• Data security from both internal and external threats;
• Transaction monitoring for anomalies which may indicate money laundering, corruption, or other fraud;
• Facilities through which employees can report all suspicions of wrongdoing – anonymously if required – and the capacity to investigate resulting information independently of the business areas involved;
• Appropriate due diligence on customers and suppliers;
• Staff training in all areas of fraud prevention, particularly for senior management who set the tone for the organization.

We will never remove all financial crime from any company, but implementing these strategies can help reduce it.