By James McAuley and Rebecca Street
Your Business|Managing Your Practice
Know Thy Enemy: Recognizing Fraudsters | Canadian Insurance

Know Thy Enemy: Recognizing Fraudsters

“Insurance fraud” is a term broadly used for illicit activity
related to either buying or selling insurance. It comes in many forms:
fabricated claims (property, life, health, and accident), staged auto
accidents, arson, inaccurate declarations, and inflation of genuine claims,
and can even extend to internal crimes, whether related to sales, underwriting,
or claims. Although the nature of insurance schemes varies, they share
one common element: the fraudster.

The cost generated by these fraudsters is immense in both economic and
non-financial terms: the Insurance Bureau of Canada (IBC) reports that
property and casualty insurance fraud in Canada costs an estimated $1.3
billion per year, and 10% to 15% of insurance premiums for home, car,
and business insurance go to paying for fraudulent claims. This cost compounds
the non-financial losses related to the depletion of emergency resources,
inappropriate use of public servants to assist in making claims, injury
and death to innocent bystanders, and wasted time and resources of insurers
and the court system as they investigate and prosecute of those involved
in fraudulent claims. When fraud in the life and health insurance sector
is added in, the problem increases exponentially.

In insurance it is imperative that risks be identified, understood, and
managed. This is equally true when dealing with fraud.

Insurance fraud is seen as a low-risk, high-reward activity that often
involves organized crime rings. In these unusual economic times, there
will be increased motivation for certain individuals and companies to
take advantage of opportunities they either find or create. Rick Dubin,
vice-president, investigative services, at the IBC, has even suggested
that “the business of staging accidents is so lucrative that some
participants are quitting their day jobs!” This, combined with the
general attitude that 46% of Canadians believe it is easy to submit fraudulent
claims, has rightfully put all insurance companies on high-alert for the
risk of fraud.

KPMG Forensic recently released its most recent survey focused on fraud
in Canada. In this survey, entitled Profile of a Canadian Fraudster,
we addressed one of the most basic and important questions: who commits
fraud? Executives of Canada’s largest companies were asked about
the people who had defrauded their companies.

Our survey confirms that, on the surface, a typical fraudster may not
be all that different than the average person. However, below the surface,
a fraudster is not typical. 

  1. Almost three-quarters of frauds were carried out by men.
  2. Most fraudsters (69 %) were between the ages of 30 and 49.
  3. 69% of frauds were inside jobs, 20% were perpetrated by external fraudsters,
    and 11% involved collusion between insiders and outsiders.
  4. The three main factors reported as leading to fraud were personal
    need (28%), opportunity (19%), and greed (14%).
  5. “Bad habits,” which include alcohol, drug abuse, and
    gambling, were a factor in 11 % of cases reported. 


What can be done?
Understanding the characteristics of the potential fraudster and what
motivates their behaviour are the initial steps. To protect a company
against fraud (whether internal or external), it is important for companies
to implement preventative and detective controls. There are clearly
special considerations and approaches that are particularly relevant
for insurance companies.  While such a discussion is too broad
for this article, the following provides our observations that have
relevance to insurers as they do to all corporate entities trying to
help reduce the risk and impact of fraud on their organizations.

Whistleblower Hotlines
A properly organized and publicized whistleblower hotline can help a company
gather tips on financial irregularities, and bring to light these schemes
in their early stages.  Although a hotline may not prevent fraud,
it can be critical in discouraging and detecting fraud. Often times,
the perpetrator isn’t the only one with knowledge of the crime;
a whistleblower hotline provides an avenue for a concerned person to
anonymously voice his or her concerns. 

Risk Assessments
A thorough fraud and misconduct risk assessment can help management to
understand a company’s business risk, and identify weaknesses
in internal controls. What types of fraudster is the company exposed
to? What are the most common types of frauds the company has encountered
in the past? How did they happen? What controls can be strengthened
to prevent these types of crimes? What controls can be implemented to
detect these frauds on a more timely basis? This risk assessment should
also include a plan for any required remedial action.

Fraud and Misconduct Awareness Training
Providing fraud awareness training is a key element to help ensure that
employees are aware of the nature and risks of fraud within a company,
the risks faced, and how to protect against these risks. The effects
of fraud can impact the entire organization, so it is important to arm
employees with the knowledge to help them contribute to the deterrence
and detection of fraud. 

Proactive Data Analysis Tools
Data analysis is the process of gathering data captured in the normal
course of business and transforming it into useful information. This
can include computer-assisted techniques to cross-match data and identify
non-obvious relationships and patterns. This approach can be used to
identify potential fraud and misconduct, or other irregularities that
may have otherwise been undiscovered. Historical data analysis can help
identify patterns and similarities in known frauds, which can be used
in a strategy to prevent or detect frauds in the future. 

Business Code of Conduct
A properly constructed and communicated business Code of Conduct sets
the ethical tone of a company, and guides the moral framework for behaviour.
To be effective, it is important that senior management embrace the
code and demonstrate its values in their daily actions. The code should
explicitly state that the company is intolerant of fraudulent behaviour,
whether it is in the form of committing the inappropriate behaviour,
or simply not reporting known unacceptable behaviour. Communicating
this code of to customers, along with the whistleblower hotline, sends
the message that your company is intolerant of unethical behaviour. 

Combating fraud can tangibly help a company’s finances. Building
a reputation as an active anti-fraud organization can benefit your business
even more. Understanding fraudsters and your company’s risks are
good first stepstowards achieving these goals.

James McAuley is a partner and Rebecca Street is a manager at KPMG