There is no doubt that the insurance industry is extremely vulnerable to fraudulent activity, both from within and without. Fraud ranges from the inflation of small claims by individual policyholders to massive scams devised by well organised financial fraudsters. The problem is worldwide on both counts. Often the larger scams cut across national boundaries and involve many different countries. Quantifying the extent of the fraud is difficult, but plainly runs into billions of dollars globally.

Is reinsurance fraud any different?

To the extent that much reinsurance is still of a proportional nature, such reinsurers will be impacted by, for instance, consumer fraud, in much the same way as the direct writers. Aggregation of losses may also well flow through under other, non proportional, arrangements. But more likely when we think of reinsurance fraud, we are contemplating either fraud perpetrated on a reinsurer by an insurer or fraud on the part of a reinsurer which has been deliberately established to abuse the primary market. Such scenarios are unfortunately still occurring. While fraud is still fraud, the necessary counter-activity may involve different methods and agencies.

The problem in more detail

What are the main types of fraud? They encompass three principal areas.

Consumer fraud

Consumer fraud may be perpetrated by the individual policyholder in isolation, but more often than not, involves connivance with others in the claims chain, such as doctors, lawyers and the auto repair industry. In the United Kingdom, it is believed that fraud costs insurers about £645 million, which adds about 4% to premiums. In the United States, insurance fraud is the second most common fraud (after tax); in Texas, claims fraud runs in excess of $6 billion, with the majority in the healthcare sector; in California, it is estimated that fraud costs each individual policyholder $250 per policy issued.

Industry fraud

Unhappily, there is also a substantial degree of fraudulent activity within the industry by agents and brokers and within insurers themselves. The reinsurance market has seen a number of well publicised scams which have resulted in the downfall of both fraudulent and legitimate companies. Whether fraudulent reinsurers fit under this section or the next is a moot point.

Money laundering and other big time criminal activity

Both insurance and reinsurance companies provide excellent vehicles for concealing the money laundering process - succinctly put by someone with extensive knowledge of countering this sort of activity as “hiding in the layers”. Most likely other sectors of the financial industry will be involved and, not surprisingly, the Mafia and, in the East, the Triad gangs are also seen as having a hand.

Tackling fraud

Industry and trade associations, insurance regulators and law enforcement are tackling consumer fraud aggressively. “Sting” operations are becoming more frequent, such as those seen recently in the UK involving motor accident repairs, and in New Hampshire, US, where the authorities deliberately set up a bus accident to catch a large number of bus riders who had been filing injury claims without actually ever taking a ride. In connection with the latter, an increasing number of state insurance departments have established fraud bureaux, often with law enforcement powers.

Industry fraud and money laundering too are tackled, in the first instance at local level. However, because such activity is increasingly international, it has become very apparent that effectively combating it requires not only cooperation within a country, but also the uninhibited exchange of information between national authorities. The last few years have seen a growing awareness of the need to coordinate the activities of the many different national agencies trying to cope with the problem. This has led to the formation of several new international associations, as well as a considerable “beefing up” of some of the more long standing.

International Association of Insurance Fraud Agencies (IAIFA)

IAIFA was the first truly international group to attempt get to grips with the fraud problem. Formed in the US in 1986, it brings together regulators, industry and law enforcement from around the world. Its annual meetings provide a forum for information sharing on fraud related activity. Last year the group met in Europe for the first time and, following the success of that meeting, it will meet alternately in the US and Europe in the future.

The 2000 meeting has just been held in Orlando, Florida. It attracted representatives from 21 countries. Attendees heard from regulators, the Federal Bureau of Investigation (FBI), City of London Fraud Squad, the president of the Financial Action Task Force and a host of other speakers on current issues (including the emerging areas of promissory note and viatical fraud) and developments in fighting insurance fraud. Meetings represent a supreme networking opportunity, and the next will take place in Bucharest, June 2001.

Coalition Against Insurance Fraud (CAIF)

The coalition is a US industry initiative, formed seven years ago by a group of major insurers, with the principal objective of increasing public awareness of the extent of consumer fraud and its cost to individual policyholders. It also takes the initiative in enacting new laws and regulations which may impact insurance fraud, and acts as a clearinghouse of insurance fraud information. Its executives now regularly participate in international conferences to share experiences and exchange information.

Association of British Insurers (ABI)

ABI, recognising that insurance fraud is possibly the fastest growing business in the UK, established a crime and fraud prevention bureau in 1995. The bureau initiated a major campaign early in 1999 to deter the casual or opportunistic fraudster, and to send a message to honest policyholders that the industry is working on their behalf to reduce the element of their premium which is increased by fraud. To assist its members it maintains a number of data bases covering such areas as motor, personal injury and commercial claims. Like CAIF, it regularly participates in international meetings.

International Association of Special Investigation Units

The International Association of Special Investigation Units, another US organisation, was founded in 1984 by a handful of insurance industry fraud investigators to assist in coordination, education, raising standards in the profession and supporting new legislation relative to deterring insurance fraud. It now has 3,600 members, representing more than 600 insurance and self insurance companies around the world . Its annual insurance fraud seminar offers on-going training for investigators at all levels of experience.

International Association of Insurance Supervisors (IAIS) fraud sub committee

IAIS is now seven years old. As its name implies, it provides an umbrella organisation for insurance regulators around the world, and over 100 countries are now represented. It is responsible, among other things, for establishing international standards for insurance supervision. Recognising the challenge which insurance fraud of all sorts brings to the insurance regulator, IAIS has established a fraud sub committee, with Guernsey as its chair.

The sub-committee's agenda currently includes making recommendations to its parent committee on such items as monitoring reinsurers and intermediaries, with intervention powers; publishing lists of reinsurers; providing a database of established insurers, reinsurers and intermediaries; producing standards for enforcement procedures and the fitness of shareholders and directors, and the controlling of insurance web sites. It is also preparing a paper on money laundering relating specifically to insurance business.

Offshore Group of Insurance Supervisors

This group deserves a mention because its membership comprises the majority of the offshore financial centres. Its main objectives are to encourage higher standards of supervision within, and exchange of information between, its membership. This enhanced level of cooperation is becoming more and more effective in countering fraudulent activity around the offshore world.

Other initiatives

Given the magnitude of insurance fraud and the fact that today it often cuts across all the financial sectors - insurance, banking, securities and bonds - it is to be expected that there will be increasing cooperation between all the parties involved. On the broadest front, encouragement is provided by the Financial Action Task Force and the main financial regulatory bodies. Practical demonstrations of coordination are seen in a number of current investigations, both in the UK and the US, which involve task forces from a variety of agencies including the FBI, Scotland Yard, the US Postal Service and various US state insurance department fraud bureaux.

There is still much more to be done, particularly in the areas of dealing with the exchange of sensitive confidential information between different jurisdictions, and the time consuming processes involved in working through mutual legal assistance treaties. However, the growing number of opportunities for networking and opening new channels of communication, such as the conferences mentioned, above give rise to considerable optimism that life is going to become considerably more difficult for those wishing to take criminal advantage of the insurance industry.

In conclusion, readers wishing to become more familiar with the problem and potential answers should be aware of the forthcoming Guernsey Tripartite Conference*. This two day conference, organised by the IAIS fraud sub committee and supported by the ABI, the Association of Chief Police and IAIFA, will be the committee's first attempt to stage a conference of its own. It hopes this will attract parties from many countries who are concerned with the fight against insurance fraud. Panel sessions and workshops, led by international experts, will cover such issues as cooperation between insurance supervisors, law enforcement officers and the insurance industry; case studies of international insurance fraud and the operation of anti-money laundering legislation.

* To be held at the St Pierre Park Hotel, St Peter Port, Guernsey, 21- 22 September 2000. For further details, contact Veronica Gould on 01 481 712801.

  • John Darwood has served as insurance regulator in three of the offshore jurisdictions, worked on the formation of the IAIS whilst at the NAIC, and served as president of IAIFA and on the executive of CAIF. He now offers consulting services on regulatory and captive insurance affairs.