The Impact of Insurance Fraud on Consumers and the Industry in India

Insurance fraud is an illicit act by the customer or agent to defraud an insurance contract. For example, a seller may sell policies from non-existent businesses, fail to submit the premiums, and sell policies to earn more commissions. Similarly, a claimant attempts to obtain some benefit or advantage they are not entitled to, or when an insurer knowingly denies some benefit that is due. When someone provides false information to an insurance company to gain something of value that they would not have received legally/truthfully, they’ve committed insurance fraud.

Types of Insurance Fraud:

Insurance fraud can be broadly categorized into two types – hard fraud and soft fraud. Hard fraud is when an individual deliberately stages an accident or invents a claim to receive benefits from an insurance company. Soft fraud is when policyholders exaggerate the extent of their damages or losses to receive more compensation.
  • Health insurance fraud: This type of fraud can occur when policyholders submit false claims for medical treatments or services that were not received, or when healthcare providers bill for services that were not rendered.
  • Auto insurance fraud: This can occur when policyholders stage accidents or make false claims for damages or injuries that did not occur. This can also include insurance providers who falsify claims information or use unethical practices to deny valid claims.
  • Property insurance fraud: This type of fraud can occur when policyholders make false claims for damage or loss of property, or when they exaggerate the value of their claims.
  • Life insurance fraud: This can occur when policyholders provide false information on their life insurance applications, such as hiding a pre-existing medical condition, or when they make false claims for death benefits.
  • Workers’ compensation fraud: This type of fraud can occur when employees make false claims for workplace injuries, or when employers deny valid claims or classify employees as independent contractors to avoid paying benefits.

The International Association of Insurance Supervisors defines fraud as “an act or omission intended to gain dishonest or unlawful advantage for a party committing the fraud or for other related parties.”

Insurance fraud can also be categorized based on the perpetrators as below:
Claims Fraud or Fraud by customer: Claims Fraud or Fraud by a customer, is fraud by the customer against the company. Fraudulent customers can defraud the company during the purchase or execution or the claim process.
Agent/Intermediary Fraud: Defraud of the insurance policy by agents or third-party sellers against the company or the policyholders.
Internal Fraud: Fraud by the company’s staff, manager, or director against the company.
Gangs Are Fake-Killing People in India for Insurance Payouts – Bloomberg

What are the consequences of Insurance Fraud?

Insurance fraud has a significant impact on the insurance industry and policyholders. Insurance companies have to pay for fraudulent claims, which results in an increase in premiums for policyholders. Policyholders who are honest and make genuine claims end up paying more for their insurance policies due to the cost of fraudulent claims.
Insurance fraud also undermines the trust and confidence that policyholders have in the insurance industry. It creates a vicious cycle where policyholders become increasingly skeptical of insurance companies and the industry, which in turn leads to more fraud.
India’s insurance industry hit by frauds; insurers pay higher premiums to compensate – Financial Express.

Preventing Insurance Fraud:

The insurance industry and government agencies are working together to prevent insurance fraud. Insurance companies have implemented various measures to detect and prevent fraud, such as data analytics, advanced technologies, and anti-fraud teams. IRDA mandates every insurance company to set up a Fraud Monitoring Framework. The framework should include measures to detect, protect, prevent, and mitigate the risk of fraud from policyholders/customers, intermediaries, and employees of insurance companies. Policyholders can also help prevent fraud by being vigilant and reporting any suspicious activity to the insurance company.
In conclusion, insurance fraud is a widespread problem in the insurance industry that affects policyholders and insurance companies. By working together and taking proactive measures, the insurance industry can help prevent fraud and ensure that policyholders receive the benefits they deserve.