Study 9: Insurance Fraud Management in Canadian Society - Summary (Part 1)

Question 1

Effects of fraud on an insurer’s brand reputation

Answer 1

• Insureds may feel resentful about purchasing auto insurance since they are required to do so by law
• Insurers try to keep premiums low, but increases in fraud claims force insurers to raise rates for all policyholders to compensate for payouts
• Insureds may view insurers negatively since they are seeing yearly increases even though their profile hasn’t changed

Question 2

Automobile insurance rates are based on four main factors

Answer 2

1. Insured’s personal profile
2. Amount of coverage purchased
3. Deductible chosen
4. The chosen insurance company

Question 3

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

Answer 3

• Consumer confidence
• Industry integrity

Question 4

A poor fraud management system affects an insurer’s brand in the following ways

Answer 4

• The public’s positive view of the brand decreases.
• The public loses confidence in the brand.
• External vendors may be hesitant to conduct business with the insurer.
• In extreme cases, lenders may impose more stringent requirements on the insurer.
• Regulators may be forced to intervene and investigate.

Question 5

Importance of brand protection

Answer 5

• Negative media attention of insurers influences public’s perception of the industry
• Reputation is an important business driver to attract and retain clients, vendors, staff, and investors

Question 6

Advantages of a strong brand in the industry

Answer 6

• It leads to increased customer loyalty.
• It increases market confidence.
• It helps the insurer position itself as a market leader.
• It lowers marketing costs.
• It generates greater revenues.

Question 7

Disadvantages of a weak brand for insurers

Answer 7

• It shows a lack of authenticity.
• It diminishes repeat business or policy renewals.
• It limits growth and expansion.

Question 8

Consumer opinion on digital consumer experience of Canadian insurance shoppers

Answer 8

1. Lack of efficient digital offerings - digital self serve tools lack basic features, no integrated communication with mobile, web, social media, and email
2. Consumers open to tech company offerings - 33% of consumers open to acquiring insurance from digital natives like Google or Amazon
3. Consumers’ increasing use of mobile apps - more transactions completed using mobile apps, such as purchasing a policy, paying premiums, managing claims

Question 9

Four principles adopted by insurers to combat fraud

Answer 9

• Privity of contract
• Utmost good faith
• Insurable interest
• Proximate cause

Question 10

Privity of contract

(Principle to combat fraud)

Answer 10

• Individuals not party to a contract cannot enforce a benefit or be liable for an obligation
• In insurance, those not named in the policy cannot benefit from it by seeking claim payments or by suing the insurer
• Helps fight fraud since organized crime syndicates cannot be issued claim settlements or sue insurers

Question 11

Utmost good faith

(Principle to combat fraud)

Answer 11

• All parties to an insurance contract must act honestly and make a full declaration of all material facts
• Applicants for an insurance policy know more about the risk than the insurer, and therefore must disclose all information (positive and negative)
• Policy can be cancelled or voided ab initio if facts are not fully disclosed

Question 12

Insurable interest

(Principle to combat fraud)

Answer 12

• Exists when a person tends to suffer a financial loss in the event of damage to an item, object, or event
• Policies only issued and claims only paid to those with insurable interest
• Hardship can be suffered by entities with no ownership in a property, such as a mortgagee, so insurable interest still exists

Question 13

Proximate cause

(Principle to combat fraud)

Answer 13

• The cause that has the most significant impact in bringing about a loss under a first-party property claim
• Insurers determine coverage by investigating the proximate cause to ensure the loss was not intentional or performed by someone acting on behalf of the insured

Question 14

Implications of automobile fraud on insurers and stakeholders (staged accidents)

Answer 14

• Affects everyone involved in insurance ecosystem (i.e. honest policyholders, insurers, vendors, suppliers, employees)
• Staged collisions pose a threat to public safety, and costs to investigate them continue to increase
• Staged accidents typically organized by recruiters who benefit from participants, who pay a fee to participate

Question 15

Examples of implications from a staged accident

Answer 15

• Police services: additional work for responding officers, wastes tax dollars
• Emergency responders: resources wasted on people not in need of medical care
• Transportation services: stress added to transport systems (road closures for a staged accident)
• Civil and criminal courts: systems clogged with cases and appeals
• Insurance companies: time and resources for legitimate claims wasted on fraudulent claims

Question 16

Implications of fraud in property claims - arson

Answer 16

• Adjusters should check existing insurance coverage and underwriting history (ex. recent increases in coverage)
• Helps guide them on what to investigate at the scene
• A purposefully set fire results in a denied claim

Question 17

Implications of fraud in property claims - theft

Answer 17

• After arson claims, theft claims (including burglary) are the costliest source of insurance fraud
• Theft claims more easily arranged, less risk to perpetrator (objects are simply gone)
• A willfully false statement renders a claim invalid with no payment

Question 18

Impact of fraud on insurance premiums

Answer 18

• Premiums of the many pay the losses of the few - fraud upsets this balance and requires increases in payments
• Rates are determined based on expected losses and insurer profit margins
• Financial deficit from fraud is distrubuted to policyholders

Question 19

Impact of fraud on the insurer’s reputation

Answer 19

• Employees of insurers can also commit fraud, which can negatively impact the insurer if they collude with an external fraudster
• Internal fraud is more impactful than fraud from a policyholder, as it leads to loss of confidence from the public and stakeholders

Question 20

Impact of fraud on the insured’s behaviour

Answer 20

• How an insured behavious is referred to as moral hazard (ex. an insured with a problematic vehicle may drive recklessly, hoping to damage it)
• Insured’s lack of understanding of fraud implications, and insurer’s lack of anti-fraud incentives, can lead to insureds not mitigating risk
• Fraud management tools (i.e. performing inspections before accepting risks) can steer insureds to behaving more ethically, which helps retain clients and leads to fewer claims