Have you ever been asked by someone to pick for them medicine using your medical cover? Or has a doctor ever asked you to do tests, but you didn’t do them, yet they were billed? The two scenarios sound like a simple issue, but they are insurance fraud, a crime that is punishable by law.

According to the Insurance (Amendment) Act, 2019, insurance fraud refers to a deliberate deception to secure unfair or unlawful gain or to deprive a victim of a legal right in an insurance transaction. It can occur during the process of buying, using, and underwriting insurance covers, which according to industry players, is motivated by greed or financial distress.

According to the Insurance Regulatory Authority (IRA), approximately 40 per cent of all insurance claims are fraudulent, that is two in every five insurance claims. The fraudsters range from police, doctors, lawyers, motor garages, employees of insurers, and policyholders among others.

Some insurance fraud cases involve individuals who have taken loans to buy cars and fake accidents to get funds to pay the loans, to those who take private covers for public service vehicles. In motor accidents, it is suspected that medical practitioners, advocates, police, and ambulance chasers are the key perpetrators of fraud.

According to the Association of Kenya Insurers (AKI), insurance fraud is widespread and diverse across all insurance fields. AKI notes that a significant proportion of insurance claims are fraudulent, resulting in elevated premiums for honest customers and contributing to the tarnishing of insurers’ image and reputation.

Insurance fraud types

Insurance fraud can be categorised into two broad forms:

Opportunistic Fraud – which is exaggerating a genuine claim or providing untruthful or incomplete information in an insurance application to obtain a lower premium on the insurance policy.

Hard Fraud – which involves planning or inventing an insured loss intentionally to receive payments for the damages, such as vehicle theft, collision, or fire. It sometimes involves an organized crime syndicate involving criminal gangs that steal vast amounts of money.

Insurance fraud can occur at any stage of the insurance cycle by various insurance players:

• Internal Fraud: Fraud against the insurer by its employees (underwriters, adjusters, and dishonest agents) or in collusion with internal or external parties. This might entail an insurer collecting premiums and then not paying valid claims, fraudulent financial reporting, and stealing money from customers’ accounts by forging signatures.
• Intermediary Fraud: Fraud against the insurer and or policyholders by an intermediary.
• Customer Fraud: Fraud against the insurer by policyholders and or other parties in the purchase or execution of an insurance contract.

The overall challenge is that insurance fraud is hard to identify, and it is estimated that the number of detected fraud cases represents only a small percentage of the actual cases.

Insurance fraud is a big concern and various insurance stakeholders including insurers, regulators and insurance associations are making a concerted effort to prevent fraud.

The insurance industry has been facing several challenges in dealing with fraud, including difficulty in detecting and quantifying fraud, difficulty in communicating information about it, lack of data-sharing mechanisms among insurers, lack of data analytics, skewed attitudes, and a lack of public awareness on the issue.

However, in 2011, the Directorate of Criminal Investigations (DCI) established the Insurance Fraud Investigation Unit (IFIU), a partnership between the IRA and the police, which has helped detect insurance fraud.

In 2020, IRA noted that the IFIU discovered 127 fraud cases worth Sh327.7 million during the Covid-19 period led by motor, medical cases and theft by agents followed by insider fraud.

The most frequent cases in 2020 were fraudulent motor insurance claims at 39 (30.7 percent) and theft by insurance agents at 23 (18.1 per cent) cases respectively.

Systems implemented to fight fraud

Prevention of insurance fraud is a priority for insurers worldwide and requires greater awareness across the entire organisation. Fraud prevention helps insurers reduce financial losses and maintain their reputation and customer trust.

Over the years, fraud investigation has evolved, initially, it was a labour-intensive, costly, and time-consuming process involving manual verifications and physical visits to examine cases. Since it is not feasible to review every claim, insurers have been taking significant strides to leverage artificial intelligence and advanced data analytics for effective fraud detection and timely prevention.

Insurance-related fraud is currently more sophisticated and would need a high degree of analysis. Insurers have been urged to be proactive rather than reactive in tackling fraud by building predictive models to detect and stop fraud before it happens.

Predictive models are built on data based on historical claims, industry red flags and fraud investigation experience to identify future fraud trends. Relationships and variations of these factors are key to identifying doubtful claims. The model then gives a score to a claim and if it does not reach the set threshold, it is flagged off for further investigations.

Link Analysis is then used to evaluate relationships (connections) between unrelated data to useful information for further investigations by competent investigators. Through various software applications, data is mined and harmonised from the company’s different systems and many other different sources into meaningful information that reveals patterns, trends and relationships.

Some insurers are also using artificial intelligence to validate claims. An example is China Pacific Insurance Company (CPIC) which uses voice analytics technology and emotion detection solutions to identify fraudulent claims by detecting and measuring uncontrolled psychophysiological changes to a person’s voice during open conversations and to identify claims that require further investigations.

Locally, in 2021, AKI launched a mobile platform for filing accident claims in the latest push to cut back on motor fraud, reducing instances of fraud where motorists would collude with the police to alter the circumstances of an accident.

The application with geolocation features allows users to upload videos and photos from the scene of the accident together with police abstracts, ID cards and driving licences.

Insurance fraud is a global problem and costs insurers lots of money. Despite the rise in fraudulent activities, insurers should strive to enhance customer experience by paying all valid claims efficiently by ensuring a high-level precision when investigating potential frauds.

The insurers could also take up some collaborative initiatives such as exchanging relevant information in compliance with data protection requirements, collaborating with law enforcement agencies in finding and prosecuting fraudsters, and having training for insurance staff, among others to be able to win this fight against insurance fraud.