Travaux d'étude et de recherches: Insurance fraud

Travaux d’Etude et de Recherches :´

Insurance fraud

DIAKITE Keivan

ANGUI Celestin

ETIENNE Pierre-Alexandre

[pic 1]

2016 - 2017

Abstract

This Paper is devoted to the phenomenon of insurance fraud. We start by surveying the various forms of insurance fraud as well as its extent and cost. We proceed to analyse the optimal contract that prevent the maximum people to intend fraud, and we will Introduce a Computational method to help insurances companies in order to detect External fraud.

Keywords : Fraud, Insurance, Auditing, RIDIT, PRIDIT, Contract, Scoring

Contents

1. Introduction        2
2. Survey on fraud        4

1. Typology of insurance fraud . . . . . . . . . . . . . . . . . . . . .        4

1. Internal vs. external . . . . . . . . . . . . . . . . . . . . .        4
2. Underwriting vs. claim        . . . . . . . . . . . . . . . . . . .        4
3. Soft vs. hard . . . . . . . . . . . . . . . . . . . . . . . . .        5

1. The essence of insurance fraud        . . . . . . . . . . . . . . . . . . .        5
2. Complexities of fraud control . . . . . . . . . . . . . . . . . . . .        6

1. Fraud is not self-revealing . . . . . . . . . . . . . . . . . .        6
2. Proving fraud legally is difficult . . . . . . . . . . . . . . .        7
3. Fraud is a dynamic phenomenon . . . . . . . . . . . . . .        7
4. News on fraud is always bad news        . . . . . . . . . . . . .        7
5. Return on investment is hard to quantify        . . . . . . . . .        7

1. Consequences of fraud on insurance companies        . . . . . . . . . .        7

1. The effects of fraud on insurers . . . . . . . . . . . . . . .        8

1. Optimal claim settlement strategy        12

1. Auditing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        12
2. Moral standards and adverse selection . . . . . . . . . . . . . . .        15
3. Credibility issue . . . . . . . . . . . . . . . . . . . . . . . . . . . .        16
4. Fraud signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        17

1. Computational method        19

1. RIDIT method . . . . . . . . . . . . . . . . . . . . . . . . . . . .        19
2. The PRIDIT method . . . . . . . . . . . . . . . . . . . . . . . . .        22
3. Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        23
4. Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        24

List of Tables        25

List of Figures        26

Bibliography        27

Part 1

Introduction

The insurance industry has positioned itself as a basic pillar of our modern society. It will undoubtedly continue to assume that status in the future, even though, under impulse of technological advancement and trends toward globalization and deregulation of financial and real markets, the nature of the insurance business and its value proposition are likely to undergo considerable changes. Insurance has become an essential ingredient of the risk and complexity management strategies for individuals, social groups and businesses. It has enabled us to cope with increasingly complex and uncertain circumstances . The insurance business ?s core functions of collection, accumulation and management of contractual capital savings have made insurance companies into very important institutional investors and key players on the international financial markets. The insurance industry is one of the largest industries worldwide and the interdependencies with other industries are not to be underestimated. The insurance industry, however, is facing the pressure of intensified competition as banks and other financial players continue to move onto their turf, providing financial alternatives to traditional insurance. The issue of fraud control has gradually been gaining momentum as a way of keeping down insurance costs. Insurance fraud has most certainly been around from the very beginning . Nevertheless, the amounts involved in fraud have certainly increased as insurance made its transition into modern consumer society. The industry has been facing a problem of increasing prevalence and of sizeable proportions. Insurers, who have long passed the cost of fraud onto their policyholders in the form of increased premium rates, as well as other stakeholders such as legislators, prosecutors, judges and consumer interest groups, have started to realize that the fraud problem can no longer be ignored. Insurance fraud and, more generally, abuse of insurance not only put the profitability of the insurer at risk, but also negatively affect its value chain, the insurance industry, and may be extremely detrimental to established social and economic structures. They are believed to materially escalate the cost of certain types of insurance (e.g. automobile, fire and health insurance). Eventually, they form a threat to the very principle of solidarity that keeps the insurance concept alive.

We start this survey with a discussion on the essence, typology and cost of insurance fraud. We proceed to find the optimal contract to avoid people to commit fraud then we will introduce a computational method to help the detection of fraud in Insurance companies.

Part 2

Survey on fraud

2.1        Typology of insurance fraud

Three commonly encountered functional classifications of insurance fraud are:

(1) internal vs. external, (2) underwriting vs. claim, and (3) soft vs. hard.

2.1.1        Internal vs. external

Internal fraud is committed by insiders of the insurance industry such as insurers, agents, brokers, managers and other insurer employees or representatives. This covers, for example, selling insurance without a proper licence, embezzlement of insurance funds and obstruction of regulatory body investigations. External fraud is fraudulent activity on the part of outsiders of the insurance industry such as applicants, policyholders and claimants, sometimes perpetrated in collusion with insiders such as agents or brokers, or third-party service providers. This covers, amongst others, providing false statements and submitting bogus claims. It also includes cases of professional providers of services (to insurers, middlemen, or claimants) billing insurance for non-existent or unnecessary procedures or services; misrepresenting services provided; and charging insurance for the same services more than once.

...