Study 3: Authority, Provisions, and Enforcement - Summary (Part 1)

Question 1

Four categories for the impacts of insurance fraud

Answer 1

1. Consumer harm
2. Industry reputational harm
3. Consumer burden
4. Public interest

Question 2

Consumer harm

Answer 2

• Consumers are harmed when a fraudulent, coercive, or corrupt act is committed against them during an insurance interaction
• Does not include impact of financial loss - purely harm against the person
• Threshold for harm is reached the moment a consumer feels victimized or in danger
• Also presumed to have been harmed if offered an insurance product or service from someone unlicensed or unaccredited

Question 3

Circumstances which demonstrate consumer harm from insurance fraud

Answer 3

• The consumer did not avoid the harm regardless of whether other consumers in the same situation would
• The consumer could not avoid the harm or feeling of victimization because the consumer was naive, intimidated, distracted, or did not fully understand the insurance business.
• The person responsible for the harm took unreasonable advantage of the consumer’s lack of understanding or the consumer’s inability to protect him- or herself.
• The person responsible for the harm ought to have known that the circumstances were likely to have caused harm.

Question 4

Industry reputational harm

Answer 4

Fraud management can positively or negatively impact two key components of the industry’s reputation:

1. Consumer confidence
2. Industry integrity

Question 5

Consumer confidence

(Industry reputational harm)

Answer 5

• Consumer confidence: the degree to which consumers are optimistic that fraud is being dealt with effectively
• Lack of confidence can affect industry reputation
• Onus is on insurers to instil consumer confidence by dealing with fraud

Question 6

Industry integrity - general approaches when fraud or corrupt practices are discovered within the industry

(Industry reputational harm)

Answer 6

1. A swift, principled, and intolerant reaction—builds trust, respect, and admiration of other stakeholders. Sets expectation that others use the same approach.
2. A minimalized and concealed reaction—viewed as hypocritical since the insurer would expect others to adopt a more swift or intolerant reaction. Has a negative impact.

Question 7

Consumer burden - factors that increase the overall burden on consumers

Answer 7

1. Only a small minority of consumers and industry stakeholders engage in insurance fraud. Honest consumers absorb the cost.
2. The extent of regulatory accountability placed on insurers and insurance distributors to effectively manage fraud in their businesses is very low in Canada, so the burden is passed to consumers.

Question 8

Public interest

Answer 8

• Public interest is a broad term that describes anything of appeal or relevance to the collective functioning and welfare of a society.
• Fraud is in the public interest because fraudulent acts require protections for people, and because they occur in an industry that sells products society requires to function.

Question 9

Order of priority for the impacts of insurance fraud by category

Answer 9

1. Consumer harm: personal safety of consumers take priority, and must be dealt with thoroughly and promptly. Moral duty owed to consumers.
2. Industry reputational harm: critical for industry to demonstrate consumer confidence and integrity. Situations that threaten this should be immediately addressed.
3. Consumer burden: fraud occurrences have significant financial impact on consumers, who end up paying for the financial gain of fraudsters
4. Public interest: impacts of fraud are addressed through reporting to law enforcement and regulators.

Question 10

Deficiencies and imbalances in insurance fraud management models

Answer 10

• Primary focus on public interest: model focuses too much on public-sector enforcement
• Limited focus on consumer harm: consumer experiences required to understand and prioritize fraud impact
• Industry reputational harm through incapability: nature of corruption includes an inherent challenge to expose it
• Industry reputational harm through concealment: concealing corrupt acts through fear of negative attention
• Focus limited to consumer wrongdoing: too much focus on fraudulent claims rather than other categories

Question 11

Successful fraud management models in insurance depend on effective case selection practices to…

Answer 11

• execute targeted prevention, detection, investigation, and deterrence strategies;
• achieve the right balance and order in addressing consumer harm, industry reputational harm, consumer burden, and public interest impacts; and
• set the appropriate analyst-to-investigator resource ratio.

Question 12

Case analysis appetite

Answer 12

The higher the fraud risk assessment, the greater the appetite for cases to be analyzed

Question 13

Case investigation appetite

Answer 13

The appetite includes all potential fraud, coercion, and corruption cases. These cases have been identified to include an expressed possibility of fraud and are worthy of investigation, so they should be investigated.

Question 14

Common operational risks related to a properly defined case appetite include the following:

Answer 14

• There are not enough investigators to investigate potential fraud cases while analysts are analyzing fraud risk alerts
• The appetite threshold is set lower than the case capacity of available analysts.
• Analysts select cases from below the appetite threshold.

Question 15

Priority of insurance fraud, coercion, and corruption cases (image)

Answer 15

Question 16

Potential fraud, coercion, and corruption priority

Answer 16

Potential fraud cases have priority over fraud risk cases. The potential fraud cases should be prioritized in the following order:

• An allegation of a fraudulent, coercive, or corrupt act that is in progress
• An allegation of a fraudulent, coercive, or corrupt act that is being planned or is about to be committed
• An allegation of a fraudulent, coercive, or corrupt act already committed

Question 17

Impact priority

Answer 17

• Consumer harm
• Industry reputational harm
• Consumer burden
• Public interest

Question 18

Detection priority

Answer 18

• Complaint—Complaints of fraud are far more likely to result in potential fraud than cases derived from fraud risk analysis. Strong likelihood that a person making a complaint has knowledge or evidence of the occurrence.
• Human detection—Cases involving human detection almost always default to potential fraud.
• Automated detection—Automated detection cases are almost always fraud risk assessments and only represent a possibility of fraud.

Question 19

Category priority

Answer 19

• Coercion
• Corruption
• Insurer internal fraud
• Intermediary fraud
• Fraud against insurer
• Falsified claim fraud, policy fraud, and supplier fraud

Question 20

No company or market knows how often fraud occurs. Some estimates of financial loss due to insurance fraud were prepared, and usually have three common features

Answer 20

1. The estimates represent financial loss due to falsified claim fraud, not financial loss from all other insurance fraud categories.
2. At best, they are rough estimates.
3. The estimates involve considerable sums of money.

Question 21

Three foundational principles of insurance fraud management set out realistic parameters of fraud prevalence in insurance

Answer 21

• Fraud is an ever-present risk for insurers—No matter how effective the fraud management program is, there will always be fraud
• No insurer can stop all fraud—Insurers cannot stop all fraud even if they have world-leading insurance fraud prevention and detection strategies
• There is zero tolerance for known fraud—Does not apply to all fraud, since fraud is ever present, only to fraud that has been discovered.