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PRESENTATION ON FRAUD,DATA ANALYTICS FOR SENIOR MANAGERS

OF SONARWA GENERAL INSURANCE COMPANY LIMITED

Presented by Okurapa samuel Ag. CEO

Tuesday, 6 December, 2016

Presentation Objectives Knowledge sharing with senior managers of the company To embrace data analytics in monitoring & identification of fraud The growth indicators for an insurance sector in an economy Understanding why fraud is always committed Effects of fraud on institutions Why I syndrome isn’t a good practice Key ratios impacted by the fraud Monitoring fraud through data analytics Common fraud practices for an insurance company Compiling fraud crimes, reporting and, how to address fraud practices

INTRODUCTIONThe potential and performance of insurance sector is universally assessed with reference to two parameters; Insurance penetration; UP/GDP Insurance density; UP/TPKey words UP-Underwriting premium GDP-Gross domestic product TP –Total population of the countryFraud affects both the UP & GDP,hence its impact to the economy and the need for constituent institutions to address fraud and SONARWA is not exceptional

Definition for FraudFraud is any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving a gain.” theiia.org

“Any intentional or deliberate act to deprive another of property or money by guile,deception,or another unfair means” ACFE.

Fraud is any crime for gain that uses deception as its principal modulus operandus

Reasons for committing fraudAccording to the institute of internal auditors, frauds can be committed by an employee at any level within an organization, as well as by those outside the organization. There are three common characteristics of most frauds: Pressure or incentive Opportunity Rationalization

Pressure or incentiveRepresents a need that an individual attempts to satisfy by committing fraud. Often, pressure comes from a significant financial need or problem. This may include the need to keep one’s job or earn a bonus. The need to maintain higher standard of living etc

Opportunity Opportunity is the ability to commit fraud and not be detected. Since

fraudsters do not want to be caught in their actions, they must believe ; their activities will not be detected. Opportunity is created by weak internal

controls, poor man-management, lack of board oversight, and/or through the use of one’s position and authority to override controls. Failure to establish adequate procedures to detect fraudulent activity also increases the opportunities for fraud to occur. A process may be designed properly for typical conditions, however, a window of opportunity may arise creating circumstances for the control to fail. Persons in positions of authority may be able to create opportunities to override existing controls because subordinates or weak controls allow them to circumvent the established controls

Rationalization of a fraudRationalization is the ability for a person to justify a fraud, a crucial component in most frauds. Rationalization involves a person reconciling his/her behavior (e.g., stealing) with the commonly accepted notions of decency and trust. For example, the fraudster places himself or herself as the priority (self-centered), rather than the wellbeing of the organization or society as a whole. The person may believe committing fraud is justified in the context of saving a family member or loved one so he/she can pay for high medical bills. Other times, the person simply labels the theft as “borrowing,” and intends to pay the stolen money back at a later time

Effects of fraud on insurance institutionsFraud affects various activities of the institution in that in most aspects it involves cash drain off , image damage which constrains operation of the company to deliver to its expectations.

Fraud leads to institutional failures as a result its ability to subdue processes hence poor ratios and regulatory interventions

Example

1. Services based on non arms length grounds.

2. Lack of professionalism and I syndrome (see next slide)

Fraud triangle (I, syndrome….)

Key ratios impacted negatively by un checked fraud practices1. Shareholders funds: Total assets2. Gross premium income: Total Assets3. Premiums Ceded to Reinsurance: Gross premium4. Expense ratio5. Loss ratios6. Combined ratio7. Commission ratio8. Return on assets9. Return on capital employed10. Return on equity11. Investment income to net income

Use of data analytics to monitor fraudIn developed markets the data analysis of the insurance sector is done by;- insurance regulatory authorities Brokers association Association of the insurersThese results are shared across the industry where the blacklisted institutions profiteering out of fraud practices are exposed.

Use of data analytics to monitor fraud An effective and efficient fraud analytics solution therefore is the

key for SONARWA so as to cut costs, boost margins, increase customer satisfaction, and lower litigation costs.

We should therefore look for ways in which analytics of our data should guide in detection of fraud such as;- Claims history analytics – frequency, type, and overall claim

amounts should be used to determine the genuineness of submitted claims.

First Notification of Loss (FNOL) analytics – utilizing a list of suspicious loss indicators to predict which claims are likely to be fraudulent

Use of data analytics to monitor fraud Claims origination analytics – scanning for possible

sources of mishap triggering a claim, to determine if the mishap caused was accidental, or intentional

Billing analytics – these help in separating genuine claims from “over-inflated” fraudulent claims

Loss padding analytics – analytics used to identify “genuine” and “non- genuine” parts of the claims

Effects of fraud practices on companiesAccording to the Everest Group Research (2014) The total cost of insurance fraud (non-health insurance) in the United States is estimated to be more than US$40 billion per year. Its therefore clear that not timely addressing it leads to multiple effects;- Fraud cuts profits for insurers limits the company ability to offer competitive premiums to

customers. Cuts down the market share of the affected company

hence un wanted liquidity stress.

.

Effects of fraud practices on companies Worsens the loss and combined ratios for an institution . Policyholders suffer due to higher premiums charged by

the institution to leverage the loses due to fraud. Limits the ability of the company to retain & Attract

talent. Loss of employment to employees of failing institutions The company is not attractive to investors and does not

contribute as it should be to the economy.

Common fraud practices in insurance sectors

Contract alteration

• Initiation/commencement dates• Maturity dates• Forged signatures• Terms and conditions• Amounts in contracts/insured risk values• None declaration of contracts• Issue of contracts for materialized risks• Contract padding


Underwriting lapses

• Backdated policies• Elimination of needed clauses• Inclusion of cover clauses• Issue of cover notes for an insured periods• Under and over insurance of risks• Under cutting of premiums• Non declaration of self interest• Espionage of legal documents


Human resourc

es practice

s

• Employee records falsification to gain employment or promotions

• Consideration of nepotism

• Sharing of employee data for self interest

• Non reprimand of errant employees

• Obtaining un declared gifts from employees

• Un merited appraisals by supervisors for a monetary reward

• Demanding for favors from an employee this may be in kind or in form

recommendations

• intentional Deprival of training needs to an employee


Human resourc

es practice

s

• Impersonation for an employee• Unauthorized interviewing of candidates for no vacant positions• Approval and award of positions to non eligible candidates• Falsified candidate credentials or curriculum vitae (certificates of attendance presented as

course trainings.(Ballooned CV) • Ghost employees on the company payroll• Salaries paid for unverified bank accounts• Alteration of employee contract terms for personal gain


Claims handlin

g

• Expert report falsification of details• Alteration of details of the injured ,birth, identity and other records• Under declaration of salvage values• Over declaration of the insured risks at time of accident• Inclusion of third parties• Police report irregularities• Insider dealing on disposal of salvage• Non declaration of subrogation rights• Non issue of debit notes for the exercise of the above• Intentional denial of policy holder rights• Intentional absence at accident scenes for personal gain• Connivance with the opponent expert• Un warranted issue of offer letters etc

Fraud data compilation

Fraud Particulars Frequency

Fraudulent motor accident

Impersonation of the regulatory officers

Theft by employees

Theft by agents/Brokers

Fraudulent motor claims

Complaints against garages

Forgery of company documents

Forged policy certificates

Related terminology in understanding fraud

Fraud is perpetrated by a person knowing that it could result in some unauthorized benefit to him or her, to the organization, or to another person, and can be perpetrated by persons outside or inside the organization. Some common fraud schemes include:

Asset misappropriation involves stealing cash or assets (supplies, inventory, equipment, and information) from the organization. In many cases, the perpetrator tries to conceal the theft, usually by adjusting the records.

Skimming occurs when cash is stolen from an organization before it is recorded on the organization’s books and records. For example, an employee accepts payment from a customer, but does not record the sale.

Disbursement fraud occurs when a person causes the organization to issue a payment for fictitious goods or services, inflated invoices, or invoices for personal purchases. For example, an employee can create a shell company and then bill the employer for nonexistent services. Other examples include fraudulent health care claims (billings for services not performed, unbundled billings instead of bundled billings), unemployment insurance claims by people who are working, or pension or social security claims for people who have died.


Bribery is the offering, giving, receiving, or soliciting of anything of value to influence an outcome. Bribes may be offered to key employees or managers such as purchasing agents who have discretion in awarding business to vendors. In the typical case, a purchasing agent accepts kickbacks to favor an outside vendor in buying goods or services. The flip side of offering or receiving anything of value is demanding it as a condition of awarding business, termed economic extortion. Another example is a corrupt lending officer who demands a kickback in exchange for approving a loan. Those paying bribes tend to be commissioned salespeople or intermediaries for outside vendors.


A conflict of interest occurs where an employee, manager, or executive of an organization has an undisclosed personal economic interest in a transaction that adversely affects the organization or the shareholders’ interests.

A diversion is an act to divert a potentially profit able transaction to an employee or outsider that would normally generate profits for the organization.

Unauthorized Illegal use or theft of confidential or proprietary information to wrongly benefit someone.


Related-party activity, Is a situation where one party receives some benefit not obtainable in a normal arm’s length transaction?

Tax evasions intentional reporting of false information on a tax return to reduce taxes owed

Expense reimbursement fraud, Occurs when an employee is paid for fictitious or inflated expenses. For example, an employee submits a fraudulent expense report claiming reimbursement for personal travel, nonexistent meals, extra mileage, etc.

Information misrepresentation Involves providing false information, usually to those outside the organization. Most often this involves fraudulent financial statements, although falsifying information used as performance measures can also occur.


Corruption Is the misuse of entrusted power for private gain? Corruption includes bribery and other improper uses of power. Corruption is often an off-book fraud, meaning that there is little financial statement evidence available to prove that the crime occurred. Corrupt employees do not have to fraudulently change financial statements to cover up their crimes; they simply receive cash payments under the table. In most cases, these crimes are uncovered through tips or complaints from third parties, often via a fraud hotline. Corruption often involves the purchasing function. Any employee


How to address fraud practices The institution must have in place a whistle blowers policy

that will be in compliance with the national laws of Rwanda Vetting of all new recruits into the company so as to

comply with fit and proper requirements Strict observance of approved policies Regular audits of company processes Allow for free communication across employees Enhanced automation for IT infrastructure Etc. etc. ………

Addressing fraud practices at company levelThe institution must compile its own statistics of various fraud alerts that should be shared with all levels of staff. Underwriters /Marketers/Claim officers to have

regular trainings in best practices & reading industry surveys.

Regular briefings for staff on fraud trends The culture of Zero tolerance to fraud must be

echoed across Sonarwa by enforcing the disciplinary actions against perpetrators.

Be disciplined and work for your institution

Q&A

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