Study 1: Introduction to Fraud - Summary (Part 2) Flashcards
Successful fraud management requires four effective strategies
- Prevention
- Detection
- Investigation
- Deterrence
The principles of fraud management must include the following
- Fraud model must incorporate all four strategies (prevention, detection, investigation, and deterrence)
- Strategies must be balanced
- Strategies must be appropriately resourced
- Resources must be capable
- Strategies must be measured and monitored for effectiveness
- Strategies must address all insurance fraud categories
- Strategies must be pertinent to property and casualty (P&C) insurance
Fraud Prevention
- Fraud prevention involves removing the opportunity for fraud to occur in the first place.
- When implemented effectively, it is the most cost-efficient of fraud management strategies (no resulting loss or disadvantage and because the cost of investigation is greatly reduced)
7 fraud prevention strategies
- Identification verification
- Negative thinking
- Intelligence
- Avoidance and severence
- Supplier prohibition
- Fraud history record
- Education
Strategy 1: Identification Verification
(Fraud prevention)
Scrutinize people and businesses against internal and external data to verify
- names or other key identifiers of people;
- locations or addresses of property; or
- serial numbers or other key identifiers of vehicles or property
Strategy 2: Negative Thinking
(Fraud prevention)
Use of subtle communication to demotivate people who are contemplating or tempted by fraud. This can be done by
- reducing confidence in a person’s ability to successfully defraud;
- humanizing experiences to reduce a person’s desire to defraud; or
- appealing to a person’s sense of honesty.
Negative thinking is most effective…
for fraudulent acts considered to be smaller in severity and committed by people who
- rarely behave fraudulently;
- are self-conscious of a tarnished image; or
- can morally counterbalance isolated fraudulent behaviour with their personal history of good deeds.
Attractive to insurers because it allows them to retain customers without alienating them
Strategy 3: Intelligence
(Fraud prevention)
- Refers to information directly associated with fraud that has been created internally (within the business) or externally (from other organizations)
- Degree of intelligence varies. Intelligence derived from fraud risk is less effective than that derived from proven fraud
Strategy 4: Avoidance and Severance
(Fraud prevention)
- Based on principle that a person known for fraud becomes a candidate for future fraud
- Important to sever business relationships with such people
- Prevents known fraudsters from entering the book of business
Strategy 5: Supplier Prohibition
(Fraud prevention)
Can take the following actions when suppliers are known to be fraudulent
- Insurer supplier prohibition: deny invoices and notify customers that invoices will no longer be accepted
- Regulatory supplier prohibition: pursue cease-and-decist orders against suppliers guilty of multiple offences
- Civil court supplier prohibition: create a business ban on suppliers
Strategy 6: Fraud History Record
(Fraud prevention)
Purpose of these records is:
- They provide confirmation of a person or entity’s involvement in fraudulent behaviour.
- They create shame on the part of the person or entity that committed the fraud.
Examples include convictions, lawsuits, and published regulatory findings
Strategy 7: Education
(Fraud prevention)
Educating the public; campaigns typically include
- Awareness of the cost of insurance fraud
- Build awareness and support lobbying efforts for regulatory action
- Promotion of fraud management capabilities to encourage all insurance stakeholders to report fraud
Fraud dection strategies
Necessary on the basis that not all insurance fraud can be prevented. Should try to detect fraud as early as possible for two reasons:
- Increased likelihood that the financial loss or disadvantage can be mitigated
- Increased likelihood to prove responsibility for the fraudulent act
Potential fraud is detected in three ways
- Human detection
- Data detection
- Human complaint
Human Detection
(Potential fraud)
- Discovery of potential fraud by a person acting on judgement or uncertainty about the validity of facts or information
- In most cases, human detection defaults to potential fraud
Data Detection
(Potential fraud)
Two methods of using data detection
- Automated data detection—Using technology to process data using statistical models or artificial intelligence, or both
- Manual data detection—Manually processing or mining data for detection
Human Complaint
(Potential fraud)
A report or expression by a person detailing knowledge of a fraudulent act. Typically considered potential fraud because:
- there is a witness account or first-hand knowledge of the fraudulent act; or
- an investigation by another party or agency has revealed evidence or has been completed.
Two distinct factors for insurance fraud investigation
- Analysis—Conducted by analysts who assess fraud risk alerts to identify potential fraud
- Investigation—Conducted by investigators who investigate potential fraud to determine whether it is fraud or not
Important for every fraud management function to determine investigative capacity by…
- determining its exposure to each category of fraud and the financial and reputational harm that would result if the fraud were not investigated and proven; and
- setting out the priority for which cases will be investigated.
Qualified investigative resources to conduct fraud investigations are essential. A balance of the following resources is needed:
- Stationary analyst—Analyzes fraud risk and gathers information
- Stationary investigator—Investigates potential fraud, conducts telephone and videoconference interviews, and gathers stationary evidence
- Field investigator—Conducts personal interviews, examines scenes, and gathers field evidence
Decision Governance
Every P&C organization should have a strategy governing key investigation decisions, including the following:
- Concluding fraud or presumed fraud following an investigation
- Concluding coercion or corruption following a fraud outcome investigation
- Taking action when fraud is uncovered following an investigation
Purpose behind decision governance is twofold
- A review of evidence and the conclusion should be independent from the investigator.
- There is a desire to mitigate legal and reputational risks to the organization.
Controls assuring integrity in investigations should include
- Contemporaneous notetaking
- Proceeding with an investigation on the basis that the entire investigation is subject to disclosure without relying on legal protection
- Securing second opinions in situations where key decisions are based on expert opinions with diminished certainty
- Voluntary adoption of a higher standard of proof than balance of probabilities
5 fraud deterrence strategies
- Enforcement
- Reporting fraudulent acts to enforcement agencies
- Publicizing fraud management activities
- Pursuing recovery of loss due to fraud
- Cognitive deterrence
Enforcement
(Fraud deterrence)
- Means of imposing compliance with statutes, regulations, and obligations, which exist to address fraud
- Usually involve a penalty or consequence
- Triggered by a report or complaint to a public authority, regulatory, or governing body
Reporting Fraudulent Acts to Enforcement Agencies
(Fraud deterrence)
- Reporting fraudulent acts so that they will be recorded, even if the report is not acted upon.
- Subject of the allegation becomes aware of the record, which acts as a deterrent to future acts
- Any subsequent allegation against the same party will increase the agency’s prioritization of future complaints
Publicity
(Fraud deterrence)
Holds the greatest strategic value and exponentially increases the deterrent value of an enforcement consequence. Examples include the following:
- Law enforcement arrest or warrant execution activity
- Charges and convictions in criminal courts
- Civil litigation proceedings, judgments, and orders
- Disciplinary findings by most professional governing bodies
- Published investigation and prosecution outcomes by an insurance regulator
Recovery pursuit
(Fraud deterrence)
Principle-based strategy. Reputation for aggressive pursuit of recovery of proceeds of fraud acts as a deterrant to recurring acts or similar acts in the future. Recovery circumstances include:
- paid claims before realization of fraud;
- costs of investigation associated with determining fraud; or
- legal costs incurred to pursue recovery or defend fraud conclusions.
Cognitive Deterrence
(Fraud deterrence)
Demonstrate knowledge of and insight into a person’s intention to commit fraud, and convey targeted messages to address trends or issues. Best managed using a deterrence strategy including:
- automated email to the applicant
- Targeted marketing attachment to the policy
- Telephone calls
