“Living without fraud in the insurance sector is a utopian dream”

To shed light on the framework of the insurance sector and identify the various categories of fraud that occur within it, Mint spoke to Sanjoy Datta, Partner and Asia Pacific Chief Transformation Officer, Deloitte, and KV Karthik, Partner, Financial Advisory, Deloitte India in an interview.

Edited excerpts:

What frauds have been prevalent in the insurance sector in recent years?

KV Karthik: When we look at it, we will probably classify these into two areas. One is traditional fraud, and the second is new-age fraud. The Insurance Fraud Survey by Deloitte 2023 India Findings indicate that while new fraud trends are emerging, traditional frauds have continued to prevail. It’s a significant worry for the industry. For example, if we are talking about data theft, collusion between third parties, and mis-selling insurance products and log, these are common among both segments we’re talking about.

But the life insurance industry also clearly indicated that fraudulent claims, forgery, or application fraud are some of the biggest concerns. However, suppose you look at the health insurance industry. In that case, it is more related to frauds like billing for services not rendered or fraud related to hospital-related or other third-party-related products, which are some of the biggest challenges.

Who are behind such frauds? Are customers trying to take advantage of digitalization? With digitalization, insurers process claims within 24 hours. Who is committing the crime?

Sanjoy Datta: The heart of the problem is customer satisfaction and speed. Today, they’re reliant on third-party providers (TPA’s). So, the ability to combine time pressure with adequate checks is a basic problem. During the pandemic, there was a huge surge in volumes of policies, as well as claims. And consequently, fraudsters took advantage of that from the technology aspect, the operating model, and the volume. Cyber fraud is one area where we’re seeing a continuous focus. But in cyber fraud, one does not need to see what has happened historically but to start thinking of what could happen because of regulatory or compliance pressures, market pricing pressures or gaps in the system.

And there are various factors at play as to why the cyber risks are rising. There are a lot of people who are responsible for the rise in fraud in the sector. In some cases, there are gaps; in others, it is the sheer inability to handle the work.

KV Karthik: If we look at fraud, insurance fraud can be divided into one related to fraud against an insurer by the policyholder and other parties involved in the purchase or execution of an insurance product. The intermediaries commit intermediary fraud against the insurers, but even it sometimes can happen with a policyholder. If it happens with the insurer, the policyholder cannot be held responsible. So, the question here is that depending on the fraud type, it could be an intermediate at fault or a policyholder. It could be a mix of both as well. And there are certain cases where you can have internal fraud against the insurer by his employees due to collusion with third parties who may be internal or external.

What are your thoughts on fraud by TPAs? Why aren’t insurers trying to build their own network of TPAs?

KV Karthik: Technically, TPA is nothing but a third-party agent. The health insurance industry has come out and said whether it is over-billing services or services not rendered, inflation of bills, and collusion between third parties. These data sets have come about, which will probably answer the question regarding who the third party is involved.

Sanjoy Datta: An ideal solution would be for insurers to have their own network of TPAs and have an exclusive arrangement with hospitals. Now the issue is that the moment an insurer does that, costs shoot up as insurers do not make a very high return on investment or equity simply because of the long gestation period for this business. We’ve seen that insurers have tried to exit because of the lack of return. Given this background, if insurers increase costs, it will add to the capital requirement and become a very unattractive area for investors to come in.

How are these TPAs forcing insurers to increase policy premiums?

Sanjoy Datta: There is no way one can control premiums directly. Insurance companies can only ensure a standardized procedure to manage and address claims within the time they have to process them. Also, reducing premiums by giving options to clients about what services they want to be covered. At the same time, insurance companies need to work with regulatory bodies to see how these third-party charges can be managed as a whole for the industry. Trying to do it in isolation has not worked. We must accept that fraud will happen. We need to see how to lessen these incidences. Another way is using AI capabilities to determine what risk might lie ahead and stop that from happening. Thinking we can live without fraud in the insurance sector is a utopian dream.

What is the objective behind highlighting insurance fraud?

Sanjoy Datta: The main reason is the inadequacy of the data. Data is gibberish unless one translates it into information and from translated science. What has been done is a well-developed database where you can track conditions, and it becomes mandatory for all banks and financial institutions to list the default. We don’t have a similar kind of setup from the insurance sector. It is the only reason, but having that would give insurance companies more ammunition to say no. And it would be a deterrent de facto for fraudsters, to be honest, when you couple that with very tight KYC norms, etc. The whole thing comes into a much more manageable realm of operations than it is today.

How can insurance fraud be minimised?

Sanjoy Datta: A couple of things to weigh in is, from an insurance perspective, make fraud a priority item for the board, not just for discussion, but for regular, sustained policy, as to what are we doing so that it does not become a CIO /CTO problem. The second is to develop a framework, identifying the various categories of fraud. The third is to set up best practices, sharing both and setting up a database as we do for individual borrowers in banking. Similarly, a database should be maintained for insurance providers and insured clients. This is for agencies or for other parties which keep on committing fraud. So systematically, keep hitting out at the possibility of where all fraud can happen. That is what we have suggested on how the sector can reduce insurance fraud overall.