Study 1: Introduction to Fraud - Summary (Part 1) Flashcards
Two contexts of “fraud” in the insurance business
- Fraud in its broadest sense, ex. “Fraud contributes to the increasing cost of insurance”
- Responsibility for a specific act or circumstance, ex. “The burglary claim made to the insurer was fraud.”
6 key elements of fraud
- Person or entity
- Deceit or falsehood
- Misrepresentation
- Material information or material facts
- Profit or gaining an unfair advantage
- Post-investigation conclusion
Person or entity
(Key element of fraud)
While a person or entity (for example, an organization or corporation) can be responsible for a fraud occurrence, only a person or group of people can be engaged in or commit fraud.
Deceit or falsehood
(Key element of fraud)
- Saying or presenting something that is not true
- Causing or misleading someone to accept something as true or valid when it is false or invalid
- Causing a person or entity to part with something of value
- Pretending to be someone else
- Concealing details that should be disclosed
Misrepresentation
(Key element of fraud)
Committing fraud includes elements of knowledge and intent
- Knowledge: Person or entity must know, or ought to know, they are misrepresenting information or facts
- Intent: Person or entity misrepresents the information with the intent that it will be acted on (a simple mistake is misrepresentation but not fraud)
Material Information or Facts
(Key element of fraud)
- Facts are material when they specifically affect or prompt a person to act on the intention of the dishonest party
- False statements are only fraud if they are material
Profit or Gaining an Unfair Advantage
(Key element of fraud)
Typically, the intended gain is financial, but the loss can also involve prejudice to the economic interest of the victim (ex. a victim of fraud may suffer reputational damage which can lead to a loss of business)
Post-investigation Conclusion
(Key element of fraud)
The conclusion of fraud is only made after an investigation has been conducted.
Three areas of fraud in insurance
- Criminal fraud
- Civil fraud
- Fraudulent Act
Criminal Fraud
- An act that breaches an offence committed against society
- Offence exists so that the responsible person can be punished
- Proceedings require sufficient evidence that prove guilt beyond a reasonable doubt
- Conviction results in fines, imprisonment, or other programs
Civil Fraud
- Legal responsibility or liability for damages suffered by a person or entity due to a fraudulent act
- Exists so that a person can recover damages from the party responsible for the fraudulent act through a lawsuit
- Responsibility must be proven on a balance of probabilities
- Typically ends with repayment of monetary damages, but there is an opportunity to seek punitive damages
Fraudulent Act
A fraudulent act refers to responsibility for fraud that breaches insurance policy conditions, legislative regulations, or statutes regardless of it resulting in a crime or causing a civil loss with recoverable damage. Includes, but is not limited to, criminal fraud or civil fraud.
5 key differences in fraud areas of law
- All criminal fraud and civil fraud involve a fraudulent act.
- Not all fraudulent acts are criminal fraud or civil fraud.
- Because of differences in standards of proof (beyond a reasonable doubt versus balance of probabilities), a person may be found liable for fraud in civil court but found not guilty of the same fraud in criminal court.
- The higher purpose for criminal fraud is a mechanism to punish the person responsible.
- The higher purpose for civil fraud is a mechanism to recover damages from the person responsible.
Key elements of fraud risk
- Possibility of fraud
- Characteristics associated with known similar fraud
- Degree of possibility
Possibility of Fraud
Fraud risk represents a chance that fraud exists. Without analysis or examination, fraud risk should never be construed as being fraud.
Characteristics Associated with Known Similar Fraud
Characteristics associated with known or similar fraud are believed to be most closely associated with proven frauds that are similar in nature and have occurred in the past.
Example: most fraudulent auto accidents occur between 12am and 3am.
Degree of Possibility
- Determined manually or through automation
- Manually: expressed as a general rating (ex. low, medium, high)
- Automation: expressed as a numerical value (ex. 0 to 100)
- Purpose is to direct resources to circumstances most likely to involve fraud to detect and respond
Key elements of potential fraud
- Expressed possibility
- Information or a gathered set of facts
- Material support
- Worthiness of investigation
Expressed possiblity
(Key element of potential fraud)
- A belief held by a person or group that fraud is distinctly possible
- Beyond mere chance
- Facts and information, as well as intuition and experience, can contribute to this belief
Information or a gathered set of facts
(Key element of potential fraud)
Considered by the person who determines whether there is potential fraud.
Material support
(Key element of potential fraud)
Reasons behind belief or suspicion must be supported and linked directly to the information or gathered set of facts
Worthiness of investigation
(Key element of potential fraud)
A determination of potential fraud should be accompanied by:
- Desire to dig deeper into the matter - if no urgency to look into it, it’s likely not potential fraud
- A change to the approach or process typically used to manage the circumstance - ex. getting information through a personal meeting rather than over the phone
The three stages of fraud (in ascending degree of maturity)
- Fraud risk (a chance that fraud exists)
- Potential fraud (a suspicion or belief that something is wrong)
- Fraud (proven intentional misrepresentation for gain or advantage)
Presumed fraud
A conclusion that evidence, or proof collected during an investigation, supports a strong likelihood of the occurrence of fraud.
Actions by an applicant that supports a conclusion of presumed fraud
- The applicant refuses to be interviewed, or agrees but never shows up
- The applicant does not respond to repeated email requests and telephone messages
- The applicant refuses to identify another involved party
- The applicant refuses to provide contact information for an involved party
8 impacts on insurance industry of leaving fraud unmanaged
- Spread of fraudulent activity
- Increased frequency of fraudulent acts
- Increased severity
- More participants involved in fraudulent acts, including a greater proportion of participants with criminal history
- Greater collusion in fraudulent acts and corruption across participants and stakeholders, including insurer employees
- Increased degree of manipulation and deception of insurance consumers
- Increased incidents of corruption and coercion
- Higher incidence of fraudulent acts that are accompanied by intimidation and violence
