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9/14 W01/March 2017 Award in General Insurance

E Fraud

Fraud poses a serious risk to all financial sectors and in the insurance sector both insurers and
Fraud poses a serious
risk to all financial policyholders bear the costs. Losses caused by fraudulent activities affect insurers’ profits and
sectors potentially their financial soundness and so to compensate they raise premiums, resulting in higher
costs for the policyholders. Fraud can also reduce consumer and shareholder confidence, ultimately
affecting the reputation of the insurance company, the insurance sector and, potentially, economic
stability.

E1 Definition of and types of fraud

Fraud in insurance may be defined as: an act or omission intended to gain dishonest or unlawful
advantage for a party committing the fraud (fraudster) or for other parties. This may, for example, be
achieved by means of:

• misappropriating assets;
• deliberately misrepresenting, concealing, suppressing or not disclosing one or more material facts
relevant to a financial decision, transaction or perception of the insurer’s status; and
• abusing responsibility, a position of trust or a fiduciary relationship.
Fraud comes in all shapes and sizes. It may be a simple act involving one person or it may be complex
Fraud comes in all
shapes and sizes operation involving a large number of people from within an organisation as well as outside.
Fraud may be classified into the following types:
1. Internal fraud: fraud against the insurer by a director of the board, a manager or member of staff on
his/her own or in collusion with others who are either internal or external to the company.
2. Policyholder fraud and claims fraud: fraud against the insurer in the purchase and/or execution of
an insurance product by one person or people in collusion by obtaining wrongful coverage or
payment.
3. Intermediary fraud: fraud by intermediaries against the insurer or policyholders. Reference copy for CII Face to Face Training
There are also other types of fraud that affect insurers, such as:

• fraud committed by contractors or suppliers that do not play a role in the settlement of insurance
claims;
• fraud by misrepresentation of insurance cover to attract investors, obtain favourable loans or
authorisations or other types of favourable decisions from public authorities.

Question 9.4

What is fraud? Give some examples of fraud.

E2 Managing fraud risk by insurers

Fraud risk management should be a component of every insurer’s risk management framework and
responsibility is normally allocated at board of directors and management level.
Insurers should address the risk of fraud when establishing their strategy and business objectives, and
then reflect this in the relevant operational procedures and controls, e.g. for:
9 • developing products;
Chapter • accepting clients;

• hiring and firing of management and staff;
• outsourcing; and
• handling claims.