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

To shed light on the structure of the insurance sector and identify the different categories of frauds taking place within it, Mint spoke to Sanjay Dutta, Partner and Leader of Financial Services, Deloitte India and KV Karthik, Partner, Financial Advisor, Deloitte India . an interview.

Edited excerpts:

What are the frauds prevalent in the insurance sector in recent years?

KV Karthik: When we look at it, we’ll probably categorize it into two areas. One is the traditional fraud, and the other is the new age fraud. Insurance fraud survey by Deloitte 2023 India Findings indicate new fraud trends are emerging, traditional frauds persist. This is a matter of great concern for the industry. For example, if we are talking about data theft, collusion between third parties, and mis-selling of insurance products and logs, these are common in both the areas that we are talking about.

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

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

Sanjay Dutta: The crux of the problem is customer satisfaction and speed. Today, they rely on third-party providers (TPAs). Therefore, the ability to combine time pressure with adequate scrutiny is a fundamental problem. During the pandemic, there was a huge jump in the amount of claims along with the policies. And as a result, fraudsters took advantage of this from the technology aspect, the operating model, and the volume. Cyber ​​fraud is an area that we continue to focus on. But in cyber fraud, one need not look at what has happened historically, but rather think about what could have happened due to regulatory or compliance pressures, market pricing pressures or gaps in the system.

And there are many reasons why cyber risks are on the rise. Many people are responsible for the increasing fraud in this sector. In some cases, there are gaps; In others, it’s a sheer inability to handle the job.

KV Karthik: If we look at fraud, insurance fraud can be divided into one related to fraud against the insurer by the policyholder and other parties involved in the purchase or execution of the insurance product. Intermediaries commit fraud against insurers, but sometimes it can also happen to the policyholder. If this happens to the insurer, the policyholder cannot be held responsible. So, the question here is that depending on the type of fraud, it can be an intermediary or a policyholder. It can also be a mixture of both. And there are certain cases where you can commit internal fraud against the insurer by its employees due to collusion with internal or external third parties.

What are your views on fraud by TPAs? Why are insurance companies not 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 provided, inflation of bills, and collusion between third parties. These data sets have come to the fore, which will probably answer the question of who is the third party involved.

Sanjay Dutta: 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 this, the costs go up because insurers do not make much return on investment or equity because of the long gestation period for this business. We have seen insurers trying to exit due to lack of returns. Given this backdrop, if insurers increase the cost, it will increase the capital requirement and become a very unattractive sector for investors to come in.

How are these TPAs ​​forcing insurance companies to increase policy premiums?

Sanjay Dutta: There is no way to directly control the premium. Insurance companies can ensure only one standardized process for managing and resolving claims within the time frame of processing them. Also, reducing premiums by giving customers a choice of which services they want covered. Also, insurance companies need to work with regulatory bodies to see how these third-party charges can be best managed for the industry as a whole. Trying to do it in isolation didn’t work. We must accept that fraud will happen. We need to see how to reduce these incidents. Another approach is using AI capabilities to determine what risk might happen next and prevent it from happening. To think that we can live without fraud in the insurance sector is a utopian dream.

What is the motive behind exposing insurance fraud?

Sanjay Dutta: The main reason is the insufficiency of data. Data is unclear until one translates it with information and applied science. What has been done is a well-developed database where you can track the positions, and it becomes mandatory for all banks and financial institutions to list defaults. We don’t have this kind of setup from the insurance sector. This is only one reason, but this will give insurance companies more opportunities to say no. And to be honest, it would be a real deterrent for fraudsters when you combine it with very stringent KYC norms etc. This whole thing falls into a much more manageable scope of operation than it does today.

How can insurance fraud be reduced?

Sanjay Dutta: There are a few things to weigh, from an insurance perspective, make fraud a priority item for the board, not just for discussion, but for regular, ongoing policy, what are we doing so that this doesn’t become a CIO/CTO problem. The second is to develop a framework identifying different categories of frauds. The third is to establish best practices, both sharing and setting up a database as we do in banking for individual borrowers. Similarly, a database should be maintained for insurance providers and insured customers. This is for agencies or other parties who perpetrate fraud. So systematically, continue to attack the likelihood of where all the fraud may be occurring. Here are some suggestions on how the sector as a whole can reduce insurance fraud.