The way a case of fraud can affect a business can be measured in many different ways. It is usually the amount of losses that makes the headlines, but equally the publicity can severely damage some companies that are expected to be able to look after their internal affairs better. Insurance fraud is a type of fraud that is not usually associated with the business itself as a victim but as the perpetrator committing the crime.
Insurance forms a massive part of the economy being a major part of the financial services sector. There are numerous different types of insurance covering product liability, employee liability, premises, vehicles and many others. When businesses become involved in litigation as they frequently do it is the insurers that stand to lose at the end of the day. Therefore, insurance fraud has an enormous effect, with billions being lost to the fraudster every year.
Often the way in which the insurance industry counters the problem is to raise its premiums providing an extra cost to businesses. However, the other way is to reduce the amount paid out in claims. This can mean that legitimate claims become hard to process and deserving victims find themselves without funds to replace their losses. At best they can wait for long periods before being paid. Insurance business often relies on the accuracy and honesty of the insured, to provide reliable details that allow the risk to be assessed in the first place in order that claims can be accepted at face value. Also, having insurance should not absolve the insured from responsibility for looking after their own assets. Just because you are insured does not mean that you can leave the factory door open for the crooks to steal your equipment.
By their very nature, insurance theft cases are fragmented, with every customer who buys insurance potentially being capable of inflating a claim or omitting some information that would lead to a higher premium. But there is still scope for organised criminal attack, with areas such as benefit fraud and art theft often the focus of the fraudster’s attention.
In order to prevent insurance fraud in business it helps the insurers to be confident in their customers’ internal controls that are designed to protect a business. Thus vehicles are harder to steal, premises are protected against arson and directors are not tempted to defraud the organisation. Protecting a business by strengthening its controls, particularly those designed to prevent financial fraud, would appear to be an efficient method for reducing the risk that the insurance company perceives and therefore is able to offer premiums at more reasonable levels to its customers.
Very often an insurance company will be more confident in the business it insures if the processes, books and records are regularly reviewed for adequacy. In particular, premiums for insurance against directors committing fraud are likely to be reduced if a forensic accounting audit of the anti fraud controls is carried out on a regular basis. Other forms of insurance can be more reasonable if physical controls over assets can be demonstrated. For example, fire insurance premiums are reduced when sprinkler systems are installed, and asset insurance more reasonable when alarms are fitted.
If a business is confident that when it has a problem its insurance will cover its losses fully and expediently, it will be less likely to inflate its claims or submit spurious ones in an attempt to compensate other times when it might have been disadvantaged from the process. A fair and balanced insurance service that can be relied upon will encourage the insured parties to treat the service fairly in return. It is in nobody’s interest for insurance companies and the insured to be constantly at loggerheads, each trying to obtain the most from each other – effectively each trying to make a profit at the other’s expense.
Mark Jenner is a fraud accountant who specialises in fraud risk and insurance fraud. He is a Fellow of the Institute of Chartered Accountants, a Member of the Expert Witness Institute, a Certified Fraud Examiner and has a Masters Degree in Fraud Management. He advises companies on fraud prevention.