With increasing interactions with third parties, greater complexities around data privacy controls, technological advancements and increasing use of life insurance products as a lever for money laundering, the propensity for financial crime has enhanced significantly. The vulnerable areas in the sector are not limited to “claims” or on-boarding.
With the Insurance Regulatory and Development Authority of India (Irdai) releasing a guidance on monitoring and regulating fraud within life insurance companies through the Fraud Monitoring Framework circular, insurers have taken action to implement aspects, specifically in the areas of fraud policies and guidelines, response plans, training and awareness.
However, certain areas still continue to ail. According to a survey by EY, some of the more susceptible areas are: payouts and underwriting; silo-like operational processes; insurance as a means to launder money; transaction monitoring; and data leakage and cyber crime. The findings have been derived from responses of over 100 individuals, representing a majority of the public and private life insurance companies.
Payouts and underwriting: Traditionally, the claims process has been more susceptible to fraud risks. But with millions at stake, areas related to commission payouts and underwriting have emerged vulnerable as well. Pressure to increase revenue could lead to lapses if the application and document details are not properly checked for reliability or precision.
A major provision under the Insurance Law (Amendment) Bill allows insurers to repudiate claims on grounds of fraud only if they are received within 3 years of policy issuance. This 3-year cycle is expected to result in insurers incurring additional costs for background checks and enhanced customer due diligence prior to issuance of policies. Additionally, the overall process of “auto-underwriting” would also have to be monitored to incorporate fraud scenarios and vulnerabilities. Third party (non-core) business payout has garnered importance in terms of fraud vulnerabilities in recent times. With the potential for bribery and corruption, commission-related issues and conflict of interest with employees emerging as key concerns, the propensity for financial crime has become high.
Gaps in operational processes: One of the key operational issues faced by life insurers is multiple silo systems. Such situations could lead to multiple issues, including inaccurate flow of data, incoherent mapping of information and gaps in tracking of critical data sets. Nearly half of the respondents believed that “disjoint units, systems and data sets” or “manual processes” contributed most to frauds.
Impact of money laundering: The insurance sector witnessed an increase in people investing in life insurance policies, especially the “one-time” premium category. The risk that emanates with this is the cash received for this premium and the extent to which it is monitored to gauge money laundering risks. 25% respondents indicated that transactions made through demand draft are more vulnerable. It has been noted that individuals with higher incomes are paying an even higher life insurance premium. Of late, this issue has been on the rise in tier 3 cities and villages where it may be difficult to ascertain an individual’s income. Typically, the document submitted may not always be verified or cross-checked.
Transaction monitoring capabilities still at a nascent stage: More than 50% of the respondents stated that the overall reporting and transaction monitoring capabilities are in the very early stages of development at life insurance companies. Life insurers must assess the enhanced use of technology to identify risks. They should also be cognizant that an anti money-laundering transaction monitoring system does not result in the reduction of staff vigilance. It has been often observed that suspicious activities tend to be frequently identified in circumstances that do not lend themselves to standalone automated surveillance.
Data leakage, cybercrime and other concerns: Almost 40% of the respondents stated that data leakage and cybercrime are one of the biggest financial crime risks today. This is followed by fake documentation, believed by 28% of the respondents. About 40% respondents indicated that “unauthorized modifications” to customer data is another concern. A life insurer conducted a fraud risk vulnerability assessment on the customer payout function. Multiple instances of fraud red flags were noted. Some of these were:
• Customer number and address modified 30 days before submission of a surrender request
• Agent (not servicing the policy) taking the proceeds of full or partial surrender into their account by submitting forged documents
• Bank passbook submitted with claim documents having altered name and address
• Surrender requests processed using a fake bank authorization letter, without obtaining canceled cheque or bank statement copy
• Date of death altered for a policy issued after the actual date of death of the customer.livemint