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E Fraud

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

Be aware
Cyber crime is any criminal act dealing with computers and networks (hacking). Additionally, it also includes
traditional fraud conducted through the Internet. Cyber security should form a key part an insurer’s risk management
framework.

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,
involve:
• the theft of company assets;
• deliberately misrepresenting, concealing or suppressing 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.
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
9
Chapter 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:
• developing products;
• accepting clients;
• hiring and firing of management and staff;
• outsourcing; and
• handling claims.