Study 2: Types of Fraud - Summary (Part 1) Flashcards
1
Q
What is policy fraud
A
- A category of fraudulent acts by a person or an entity, or both, to obtain or change an insurance policy
- Can be carried out by a consumer seeking insurance, an applicant for insurance, an insured, or someone who represents or impersonates an applicant or insured
2
Q
Two different circumstances that constitute policy fraud
A
- An applicant for insurance or an insured knowingly misrepresents, or omits to disclose, information that impacts the rating of a risk.
- An applicant for insurance or an insured knowingly submits a falsely created or altered document, or false information contained therein, to support or confirm false rating information.
3
Q
Policy fraud occurs when false information results in either of these three conditions
A
- Issuance of a policy that would otherwise not be issued
- A reduction in insurance premium that would be charged if the rating information were true
- Addition or removal of a policy condition
4
Q
The materiality test
A
If the rating information impact is such that any of the Three Conditions applies, the impact is deemed to be material to the risk.
5
Q
Altered documents
A
- The submission of a falsely created or altered document to confirm false rating information is presumed to be sufficient proof of policy fraud intent.
- Onus of proof shifts to the person who presented the document to prove they didn’t know it was false
6
Q
Typically two motives for committing policy fraud
A
- Reducing the amount of insurance premium (price) required to purchase an insurance policy (this motive is commonly referred to as rate evasion)
- Accessing insurance where the applicant is a high risk and is having difficulty obtaining insurance, regardless of the price
7
Q
Falsified claim fraud
A
- Determined after thorough investigation into the validity of an insurance claim
- Present greatest legal risk to insurers - legal consequences for insurers who make a premature determination of fraud, as well as negative publicity
8
Q
Two different circumstances constitute falsified claim fraud
A
1. Fraud arising from a fictitious claim
- loss never occurred
- loss occurred at a location other than the reported location
- loss occurred at a different date or time than reported
- loss was deliberately caused to profit or gain advantage
- cause of loss is different than reported
2. Fraud arising from an exaggerated claim
- claimant knows that the extent of damage or injury claimed exceeds the actual extent of damage or injury; or
- one or more insurable benefits are knowingly misrepresented by the claimant.
9
Q
Motives for falsified claim fraud
A
- Pure financial profit (ex. money through a settlement, replacing possessions with newer models)
- Accommodation for deductibles (ex. inflate a claim to justify paying for a deductible)
- Elimination of financial burden or commitment (ex. destroy a car to avoid paying the loan for it)
- Source of income or alternative to employment
- Coverage for a previous uninsured loss
- Rationalization for past or future costs of insurance
- Opportunity to gain possession of property that they would otherwise not purchase
- Therapeutic remedy after feeling victimized
10
Q
Indemnity Management Versus Falsified Claim Fraud
A
- Claims departments must manage indemnity payments: ensure clients receive exactly what they are entitled to
- Anything less is unfair to claimant, anything more impacts insurer’s capacity
- Abnormal or uncommon circumstances related to the loss, or the client’s attitude or actions during pursuit of payment, can contribute to interpretation of a motive to gain financially
- However, these actions are just indicators, and not elements of fraud
11
Q
Examples of insurer suppliers
A
- Law firms
- Health-care clinics
- Language translators
- Accountants
- Collision reporting and repair
- Tow trucks
- Vehicle rental
- Salvage
- Storage
12
Q
The following acts constitute supplier fraud, when a supplier…
A
- alters or causes additional damage to property that is the subject of an insurance claim;
- submits an invoice to, or receives payment from, an insurer for goods or services not provided;
- misrepresents an estimate, quotation, or other document intended to support or rationalize the provision of goods or services;
- submits a false or altered document, record, photograph, or video to support or rationalize the provision of goods or services;
- misrepresents accreditation or licensing, or uses false accreditation or licensing, while providing goods or services;
- counsels a claimant to misrepresent the cause of a loss, or extent of damage or injury, that is the subject of an insurance claim; or
- removes a claimant’s property or is in possession of property taken from a claimant without the claimant’s consent during an insurance claim.
13
Q
Motives for supplier fraud
A
- Costliest of insurance fraud categories (high frequency of occurrences, volume of available funds, absence of historical attention, lack of regulatory strategies)
- Little to no risk for a supplier to test ability to profit from fraud (ex. add the cost of a fictional item, add an extra hour of labour) - worst case is that the legitimate portion of the invoice still gets paid
- In most jurisdictions, insurers can’t void a payment to a supplier who has been caught committing fraud
14
Q
Common characteristics of supplier fraud
A
- Supplier collusion with claimants
- Supplier-initiated corruption (bribes to insurance employees or adjusters)
- Cross-supplier collusion and corruption (one supplier will refer a claimant to another in exchange for a kickback)
- Appeal to criminals
- Regulatory constraint to prohibit suppliers
15
Q
Intermediary fraud
A
A fraudulent act by a person or entity while involved in
- advertising insurance for sale
- offering insurance for sale
- selling insurance
- servicing insurance policies in force
16
Q
The following acts constitute intermediary fraud
A
- Creating or altering an insurance policy to allow coverage for a loss that should not be covered
- Creating or altering an insurance policy without the knowledge or consent of the applicant or the insured
- Distributing client information for profit, gain, or advantage
- Knowingly misrepresenting discounts or rating information during the sale of insurance
- Falsely reporting payment of money received from the insurance applicant or the insured during business and retaining personal possession of the payment
- Counselling the insurance applicant or the insured to misrepresent rating information
- Unauthorized advertising, offering, or selling of insurance
17
Q
Four main distribution channels for insurance
A
- Brokerage
- Direct writer
- Agency
- Aggregator
18
Q
Brokerage
A
- Brokers provide representation on behalf of insurance consumers
- Recommend coverage options, assist with placing business, assist with claims
- Authorized to provide temporary coverage until the insurer issues the policy
19
Q
Direct writer
A
Involves the sale of insurance policies directly from insurers to consumers without a third-party intermediary
20
Q
Agency
A
- Like brokerages, agencies are intermediaries between consumers and insurers. However, agencies are typically aligned with insurers under contract to represent them.
- Agencies can have independent agents (two or more companies) or captive agents (only one company)
21
Q
Aggregator
A
- Organization that owns and purchases insurance brokerages under a common brand (ex. HUB International, Navacord)
- Include independent brokers operating under the aggregator and paying a franchise fee to access markets, operating systems, accounting, advertising, etc.
22
Q
Motives for intermediary fraud: authorized intermediaries
A
- Goes beyond financial gain
- Client relationship driven, or desire to conceal Errors & Omissions issues
- Loyalty to long-term clients can supersede professional responsibility (ex. a broker covers up a drinking and driving conviction for a major client)
23
Q
Net impacts of authorized sellers committing intermediary fraud
A
- Financial loss to the insurer (required premium not collected)
- Financial gain for the intermediary (receiving disentitled bonuses)
- Financial gain for the business owner (cheaper insurance)
24
Q
Motives for Intermediary Fraud: Unauthorized Intermediaries
A
Persons or entities that do not hold the required licenses to advertise or sell insurance. Typically act for consumers who are
- naive to insurance processes and products, or
- considered to be high risk and, accordingly, face high insurance premiums or have difficulty getting insurance
Most often motivated by financial gain
25
Characteristics of unauthorized intermediaries of insurance include the following
* Advertising and conducting business with no mechanism for in-person contact between the intermediary and the consumer
* Word-of-mouth advertising within community groups
* Unauthorized intermediaries posing as insurance applicants on behalf of true applicants and often without their knowledge
* Conducting personal business transactions in public places
* Conducting business using only cash or electronic cash transfers
* Charging arbitrary administrative fees
* Advertising or targeting new immigrants who do not understand Canadian insurance systems or products
26
Common Characteristics of Intermediary Fraud
* Intermediary collusion with clients
* Criminal element among unauthorized intermediaries
* Intermediary influence of control adjuster misrepresentation
27
When intermediaries include clients in fraudulent acts when committing intermediary fraud, it typically involves one of two scenarios
1. The intermediary suggests the client deliberately misrepresent or fail to disclose facts to reduce premium and close the sale. In these situations, the client inherits the intent required for policy fraud responsibility.
2. The client pressures the intermediary to act fraudulently under threat of moving the client’s business to another intermediary. This usually happens in situations where the client is not covered for a loss, particularly with commercial clients where premiums and commissions are higher.
28
Examples of fraud against an insurer
* Creating a false document, intended to be issued by an insurer
* Altering a document issued by an insurer for profit
* Creating a false document, cheque, or instrument redeemable as payment and purported to be issued by an insurer
* Cashing or redeeming a false or altered document, cheque, or instrument redeemable as payment, issued or purported to be issued by an insurer
* Distributing insurer information or data to a person or entity without the insurer’s knowledge or consent
* Ransomware attacks against an insurers system (ex. disabling access to their data until a sum is paid)
29
Insurer internal fraud
* **Most important category of fraudulent acts**
* Any fraudulent act committed by someone employed by an insurer
* Managing fraud within an insurance company is the mark of a principled fraud management program
30
Examples of insurer internal fraud
* Obtaining profit, gain, or advantage by deceit, falsehood, or other false pretence at the employee’s workplace or during business
* Soliciting, offering, or receiving a kickback, bribe, or favour from a person or entity in exchange for business opportunity, activity with potential for revenue, income, or advantage
* Engaging in policy fraud, falsified claim fraud, supplier fraud, intermediary fraud, or fraud against insurer involving the employer
31
Motives for Insurer Internal Fraud
* Personal issues (ex. Family problems and addiction)
* Personal relationship with suppliers (personal relationships can evolve into fraudulent activity when there is mutual desire for profit)
* Resentment (employees are at a higher risk of acting fraudulently if they believe they are not being fairly treated or adequately compensated)
32
Issues relevant to insurer internal fraud
* Regulatory oversight (optional for insurers to manage fraud in all Canadian jurisdictions)
* Inconsistent insurer management of fraud categories (policies limited to referring to HR, investigation by corporate security, consultation with law firm, or terminating the employee)
* Insurance fraud training (reduces likelihood of fraud when taken seriously)
