Travaux d'étude et de recherches: Insurance fraud

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In the remainder of this paper, we will consider the external causes of fraud

2.1.2 Underwriting vs. claim

Fraud can be committed both at underwriting as well as at claim time. Underwriting fraud, which also includes fraudulent acts perpetrated at renewal of the insurance contract, covers, for example, the dissimulation of information during application (application fraud) to obtain coverage or a lower premium (premium fraud), the deliberate concealment of existing insurance contracts covering the same property and casualty (P&C) risk, and underwriting coverage for fictitious risks. Note that the policyholder is obliged to report any new information that comes to his attention during the course of the contract and is likely to affect the insured risk. Nonetheless, the concept of insurance fraud is most often associated with, and sometimes reduced to, the case of deliberately inflated, false or fictitious claims (claim fraud).

2.1.3 Soft vs. hard

When using a broad definition of insurance fraud, one typically distinguishes between soft and hard fraud. The label ”soft” tends to be broadly associated with unwanted opportunistic behaviour of normally honest people. What behaviour exactly falls under this category is not always made explicit and depends on the stakeholder using the vocabulary, but it generally includes claimants seizing an opportunity to inflate the damages of an otherwise legitimate claim (claim padding or build-up). The adjectives ”soft” and ”opportunistic” have been used interchangeably. The label ”hard” tends to be associated with carefully premeditated and minutely executed scams to rip off insurance. The adjectives ”hard” and ”planned” have been used interchangeably. The terminology ”hard fraud” is often reserved for criminal offences. While some crooks work alone, others are part of well-organized fraud rings. Examples of hard insurance fraud are filing claims for bogus or staged injuries, accidents, burglaries, fires; conspiracies involving medical doctors, lawyers and patients defrauding workers. Compensation insurance; dishonest insurance agents intentionally failing to remit premiums to the insurance company; and insurers negotiating contracts or claims in bad faith.

2.2 The essence of insurance fraud

Insurance is a contractual relationship in which an insurer party agrees with an insurance taker party or policyholder, against payment of a premium, to make monetary provision on behalf of an insured party to cover, after a formal claim has been filed by a (first- or third-party) claimant party, the loss of an insurable interest due to one or more future, well-defined, but uncertain events. At any time, all parties transacting in the context of this contract are legally required to act with the utmost good faith toward one another, which obliges them to reciprocally disclose all material information known to them.

The duty of the utmost good faith applies throughout the life of the insurance contract and binds all parties equally. Material information to be disclosed to the insurer is information that would influence the decision of a prudent underwriter on whether to accept a risk for insurance and, if accepted, on what terms and at what cost, or would allow the insurer to assess the real extent of the loss. In the absence of bad faith on behalf of its counterpart, the insurer is legally obliged to honour the obligations of coverage stipulated in the clauses of the contract. In addition to clearly stating what is and, especially, what is not covered by the insurance contract at the time of underwriting, the insurer then primarily demonstrates its good faith by co-operating with the claimant and promptly and generously settling compensation under the terms of the policy. Moreover, at all times, the insurer is expected to act professionally and organize accordingly, i.e. in accordance with professionally accepted standards and ethics.

A lack of good faith does not, however, as such, imply fraud. In legal terms, though its exact specification may vary across legal systems, fraudulent activity on behalf of any of the transacting parties generally requires the presence of (at least) the following elements: (1) material misrepresentation (in the form of concealment, falsification or lie), (2) intent to deceive, and (3) aim of gaining an unauthorized benefit. The absence of one or more of these key elements makes an undesirable activity at most qualify as so-called abuse of insurance, where the latter is typically defined as any practice that uses insurance in a way that is contrary to its intended purpose or the law. Although fraud has a particular meaning in legislation, the concept of insurance fraud is often used broadly in practice to encompass abuse of insurance, and is often used without implying direct legal consequences.

Information asymmetries underlie the very existence of fraud. At important transaction moments in the life of an insurance contract, access to certain relevant information is typically confined to one (or a subset) of the transacting parties. The party with the information advantage often has a clear incentive to commit fraud. In particular, a lot of information about the nature of the risk put up for insurance is private information known only to the party seeking insurance. This clearly provides the latter with the opportunity to intentionally omit or misrepresent material facts or circumstances to obtain a better bargain. In the same way, the claimant is put in a natural position to fraudulently misrepresent the circumstances and nature of the loss. The insurer typically is the one with an information advantage as far as the clauses of the contract and the quality of the cover sought or paid for are concerned.

2.3 Complexities of fraud control

Granted, fraud control is a complex issue, more complex and difficult than is usually appreciated. The following impediments stand in the insurers way to effective fraud control.

2.3.1 Fraud is not self-revealing

The ambition of fraud is to be processed as normal. This means that fraud has to be looked for to be discovered. One only sees what is unveiled; and that is never the problem, Sparrow regularly claims. Moreover, unless fraud is detected promptly, it is likely to go unnoticed. Fraud control is subject to the constraints of speedy detection and minimal investigative lead time. This is one of the profound implications of automation and the increasing use of powerful information and communication technologies. Pay and chase is neither effective, nor