Insurance Fraud in Ghanaian Firms

• The study aimed to measure the effect of insurance fraud on the financial performance of Ghanaian insurance companies
• It also looks at the causes of fraud and potential preventative measures
• Primary and secondary data come from 39 Ghanaian insurers
• Regression model is used to determine the relationship between financial performance and insurance fraud variables

Findings from Modelling

• Statistically, insurance fraud has a significant, negative effect on the annual return on assets in Ghana
• Major causes are weak internal controls, poor employee remuneration, falsified documents
• Further causes include policyholder actions to profit from the insurance contract and inadequate training for brokers
• Effective internal fraud policy, rigorous policy assessment, adequate broker training, and modern IT tools are key to deterring fraud

Research Impact

• Findings will impact techniques insurance companies use to combat insurance fraud
• They will also impact policies developed by governments and regulatory bodies

Paper Value

• Determination of the key variables that constitute insurance fraud
• Determination of their impacts on the annual financial performance of insurance companies across Ghana

Introduction

• Empirical research on insurance fraud, market failures, information asymmetry, and poor regulation is increasing globally
• Insurance fraud results in billions of dollars in losses, affecting insurance firms and financial well-being
• There are no internationally agreed ways or methods to measure the financial impact of insurance fraud
• Measuring insurance fraud leading to subjective judgments from researchers

Global Costs of Insurance Fraud

• $80-100bn globally
• Equivalent to $400-1,000 per insured household in the USA
• Health insurance fraud accounts for a significant part of the cost to US insurers, costing about $40-60bn annually
• The FBI estimated the cost of all insurance fraud at about $40bn in 2013, with 20% attributed to the property-casualty sector
• In Canada, fraudulent general insurance claims paid yearly totaled CAD$1.3bn in 1997
• This increased by 5-10% by 2013
• The cost of fraud cannot be less than €8bn (2%) of the total annual premium income in the European insurance market
• 10% of all insurance premiums paid in Australia are lost to fraud, costing AUS$1.4bn in fraudulent claims each year
• Insurance fraud in South America and the Caribbean costs between 19-35% of annual revenue of the insurance industry
• South Africa lost 100 million rands in 2010 due to consumer fraud
• 40% of insurance claims paid by Kenyan insurers are fraudulent
• 10-30% of insurance claims submitted in Nigeria are fraudulent

Fraud Reduction

• Criminal codes on fraud are enshrined in constitutions of many nations
• Insurance industries are devising pre- and post-contractual measures to clamp down on fraud

Example

• The Health Insurance Portability and Accountability Act of 1996 in the USA criminalizes insurance fraud and punishes culprits

Focus of Existing Research

• Limited research exists on the effects of insurance fraud on financial performance
• Concentrated on fraud prevalence in developed economies, with little focus on Africa
• As of 2015, there were only 4 published papers on Africa, three from Nigeria and one from Kenya
• Qualitative research approaches were also predominantly adopted
• The study focuses on measuring the effects of insurance fraud in Ghana committed by various actors

Research Objectives

• Finding the causes of insurance fraud in Ghana
• Determining deterrence measures to combat insurance fraud

Definitions of Insurance Fraud

• The act or omission intended to gain dishonest advantage for the fraudster or for the purpose of other parties
• This may occur through misappropriation of assets, and/or insider trading
• Includes deliberate misrepresentation, suppression, or non-disclosure of relevant facts
• Also includes abuse of responsibility, a position of trust, or fiduciary relationship
• It is a criminal act involving obtaining financial gain from insurer or insured using misrepresentation of facts or false pretenses
• It occurs when individuals deceive an insurance company, agent or other person to obtain money without entitlement
• Happens when someone puts false information on an insurance application, and false or misleading information

Types of Insurance Fraud

• Internal fraud
• Policyholder fraud
• Intermediary fraud
• Insurers' fraud
• This is then grouped into internal and external fraud
• The basis for this classification stems from whether the insurance fraud is committed within or outside an insurance company

Internal Insurance Fraud

• Fraud committed within the insurance company by workers

External Insurance Fraud

• Fraud from external parties or stakeholders directly related to the insurer
• Includes policyholder/consumer fraud i.e. fraud against the insurer in the purchase of insurance policy
• Includes execution of claims by obtaining wrongful coverage or payment
• Intermediary fraud refers to fraudulent activities perpetrated by individuals or entities acting as intermediaries in the insurance process. This includes actions taken by independent brokers or agents that misrepresent information or manipulate insurance products to deceive either the insurer or the policyholders, ultimately for personal financial gain. Such fraudulent practices can undermine trust within the insurance ecosystem.

Insurance Fraud in Ghana

• • Fraud is an unfortunate and significant part of the behaviors displayed by some of the players within the insurance industry in Ghana, where illicit activities can take various forms, including false claims and misrepresentation of information. This behavior not only undermines the integrity of the industry but also affects legitimate policyholders and contributes to increased costs for consumers.
  • In response to the growing prevalence of fraud, insurance companies in Ghana have recognized the need for collaboration and have come together to develop strategies aimed at reducing fraudulent activities. This collective effort is essential in minimizing the impact of fraud on the insurance market and protecting the interests of all stakeholders involved.
  • To enhance these initiatives, various national and international bodies have been brought into the fold to provide expertise, resources, and frameworks that can help tackle this issue more effectively. The involvement of these organizations underscores the seriousness of the problem and brings in a broader perspective on combating fraud in insurance.
  • A specialized database has been established to systematically record instances of fraud, allowing insurers to share information and track patterns of fraudulent behavior over time. However, it is important to note that this database currently covers only a specific class of insurance, namely motor insurance, which may limit its effectiveness in addressing fraud across other areas of the industry.
  • The general attitude of insurance companies toward fraud has often been characterized by a passive position, where insufficient proactive measures and monitoring have been taken to address underlying problems effectively. This passivity can lead to an environment where fraud is more likely to occur.
  • Unfortunately, there is a complete lack of coordination among insurance companies when it comes to combating fraud. Each company often operates in isolation, making it challenging to create a unified front against fraudulent activities that are increasingly sophisticated and widespread.

Additional contributing factors

• No official institution exists that is dedicated specifically to controlling or managing fraud detection within the Ghanaian insurance industry. This lack of regulatory oversight creates a substantial gap in accountability and transparency, which can lead to the proliferation of dishonest practices.
• Currently, individual insurance companies rely primarily on their internal systems to inspect and verify claims submitted by policyholders. These systems may not be robust enough to effectively combat all forms of fraudulent claims, resulting in potential losses for the companies and ultimately affecting policyholder premiums.
• The insurance market has inadvertently allowed for various forms of fraud to flourish. This includes behaviors such as exaggerating claims or filing false claims, which are often encouraged by the absence of sufficient checks and balances.
• Furthermore, many consumers view the insurance system as a means to exploit insurers, perceiving it as acceptable to deceive them for personal gain. This mindset undermines the integrity of the insurance industry and places an additional burden on law-abiding policyholders.

Consumer Fraud Costs

• Estimated that the costs in the Ghanaian range from 15 to 60% of the annual revenues earned by insurance companies
• Larger firms accept that about 15-20 per cent of the claims contain some form of fraud
• Smaller companies are much more heterogeneous, so that they may reach 60 percent

Insurance Fraud Types and Causes in Ghana

• • Fictitious information or data in insurance policies can create significant liabilities for insurance companies. This may include the intentional use of misleading statements or false representations about coverage, premiums, or policyholder details that can lead to fraudulent claims and financial loss.
  • Multiple contracts refer to situations where policyholders may hold several insurance contracts simultaneously, which can complicate claims processes and create challenges in risk assessment for insurers, particularly if overlapping coverages exist.
  • False claims occur when individuals or entities intentionally submit incorrect or exaggerated information to receive monetary benefits from an insurance policy, undermining the integrity of the insurance system and leading to increased premiums for honest policyholders.
  • Theft and dubious contracts orchestrated by employees or managers within an insurance company can involve collusion or misconduct that results in financial fraud, jeopardizing the company’s reputation and operational integrity.
  • Inexperienced intermediaries, such as agents or brokers, may lack the necessary knowledge or training to effectively communicate policy details or assess client needs, potentially leading to misunderstandings, incorrect advice, and ultimately, dissatisfied customers.

Theoretical Review: Fraud Triangle

• Explains the various underlying factors that drive individuals to engage in fraudulent activities, including psychological, social, and economic influences that create an environment conducive to dishonesty.
• Motivation, incentive, or pressure to commit fraud can stem from diverse sources such as financial distress, a desire for social status, or workplace competition, compelling individuals to take unethical shortcuts to achieve their goals.
• Opportunities to commit fraud typically arise from weak internal controls, Lack of oversight can create significant vulnerabilities within the insurance industry. Without appropriate monitoring and regulatory frameworks, fraudulent activities can proliferate unchecked, leading to increased risks for insurers and consumers alike. This absence of vigilance can result in inefficiencies, where dishonest practices thrive and contribute to rising operational costs. Furthermore, a robust oversight mechanism is essential for enforcing compliance, promoting accountability, and ensuring that companies adhere to ethical standards., or a culture that tolerates unethical behavior. Additionally, individuals may devise elaborate methods to conceal their fraudulent actions and take calculated steps to evade detection, further exacerbating the problem.
• Rationalizations toward fraud often involve cognitive dissonance, where offenders justify their actions through a perceived victim mentality, downplaying the severity of their misconduct and demonstrating a lack of emotional engagement or accountability.

Shortfalls of the Fraud Triangle:

• • Modifications have been called for so that a fraud diamond (Wolfe and Hermanson, 2004) can be created. The fraud diamond framework consists of four key components that explain the motivation behind fraudulent behavior. These components includeopportunity, pressure, rationalization, and capability are fundamental elements that influence the likelihood of fraudulent behavior within individuals and organizations. By critically examining these variables, stakeholders can better comprehend how to mitigate fraud effectively. Each component interacts with the others, creating a complex web of motivations that lead to dishonest actions.. By implementing targeted modifications to these components, organizations can better identify and mitigate risks associated with fraud, ultimately fostering a more secure and transparent environment.
  • The fourth element is capability, which refers to the individual's ability to commit fraud, including their knowledge, skills, and resources they can access. This element plays a crucial role in determining whether an individual can exploit opportunities for fraud.

  Adams' Equity Theory

  Adams' Equity Theory focuses on the principle of fairness in the workplace. It posits that employees evaluate their job satisfaction based on the ratio of their inputs (like effort, skill level, and time) to their outputs (such as salary, recognition, and benefits), as compared to others. If they perceive an imbalance, they may be motivated to alter their work behavior or outcomes accordingly.

• • Fairness, in a social and economic context, involves the perception individuals have regarding equity and justice in their interactions and experiences. It encompasses the awareness individuals possess of their own circumstances in relation to others, prompting them to evaluate and compare their conditions. This comparison often serves as a benchmark for assessing their treatment within various systems, such as health care or insurance.
  • Additionally, research indicates that consumers who have experienced negative feelings, particularly those stemming from perceived injustices and unfair treatment by insurance companies, tend to rationalize dishonest behavior. Such consumers might consider insurance fraud not only as a viable option but also as an understandable response to the unfair practices they have encountered, highlighting a complex relationship between perceived injustice and ethical decision-making in economic behaviors.

  Game Theory

• • The foundational principle of any competitive system or structure is rooted in the notion of pure conflict, which underscores the adversarial nature of interactions among competing entities.
  • At the core of the gaming experience lies the intricate relationship between players' strategies. This interdependence requires participants to constantly adapt their tactical choices based on both their self-interests and the expected moves of others, leading to complex strategic decision-making processes crucial for success.
  • Integrating risk management practices, effective corporate governance, and rigorous supervision is essential for maintaining balance and integrity within any operational framework. These elements work together to mitigate potential issues and foster a more resilient organizational structure.

  Conceptual Framework

• Relationship between financial performance and the effects of insurance fraud

• Includes increased cost of operations, higher insurance premium, reputational risk, ethical problems

Methodology

• Descriptive and exploratory research designs used
• Quantitative research methodologies also used
• The population of the study was captured from all the insurance companies in Ghana
• Respondents from the senior managers of the claims and underwriting departments of insurance companies
• Survey questionnaires used together with secondary data of annual financial statements

Descriptive analysis:

• Responses to survey questionnaires
• Survey results
• Causes of insurance fraud in Ghana

Internal Fraud

• Unexplained wealth of employees and managers because of conditions of services and poor remuneration are strong arsenal that create internal fraud in Ghana
• Economy of Ghana has experienced slow growth in gross domestic product over these years after recession
• Uncontainable salary hardship for workers due to financial pressure from family members and dependents
• Workers resort to unethical and thievery
• Employees/managers conniving with either policyholders or intermediaries to defraud the insurance companies' huge sums of money
• Weak internal controls in the insurance companies
• Ill-crafted or no controls or supervision
• None of the businesses have insurance fraud units
• Because of these weaknesses, employees are free to conceal or present the insurance companies incorrectly

Policyholder Fraud

• The falsification of insurance documents
• This unethicalness comes in the form of falsified or missing and changed documents
• The nature of losses or injuries suffered by insured due to unethical tendencies
• Bad financial history can also create this fraud

Intermediary Fraud

• A lack of standardized approach in conducting the intermediary business worldwide
• Diverse systems of operations and poor supervision from the regulatory bodies allow some intermediaries to manipulate the payment systems to their favor. Again, intermediary fraud proves to be a difficult threat to detect some times
• Intermediaries sit in a position of trust between the purchasers of insurance and insurers

Deterrence of Insurance Fraud:

• Specific deterrence measures to control internal fraud include effective internal control, internal audit and a deliberate fraud policy by individual insurance companies and the insurance industry as a whole
• Effective measures include fraud policy by individuals/ business as a whole and an internal fraud unit
• The internal audit units of insurance companies should design programs on laid down control environment

Policyholder Fraud Deterrence

• Measures such as thorough client acceptance processes, well-scrutinized claim assessment, effective application of information technology (IT) techniques, an anti-fraud policy, central anti-fraud bureaus or units by NIC
• These anti-fraud measures are arranged by their level of importance
• In each case, checking databases and red flag lists normally record high scores compared to other preventive measures
• It is also clear from the responses that the measures that make use of information technology are also highly important in this IT revolution era compared to the traditional control measures on policyholder fraud

Intermediary Fraud Deterrence

• Clear procedures and authorizations are crucial for insurance intermediaries
• These procedures should guarantee a proper premium collection, screening, payment of commissions and auditing of the intermediary
• Routine training should be organized for insurance intermediaries to equip them with current and emerging trends on the insurance fraud
• Need well developed procedures

Findings

• From the analysis above, weak management practices and internal controls, quest for quick financial gains, inflated claims consumers and lack of education on insurance fraud to consumers and intermediaries are the main causes of insurance fraud in Ghana
• Overall, the independent variables can explain the variance in the business
• A strong relationship between study variables is shown the Table results
• Normality of the residuals are identified on a Table

Recommendations

• A special unit or insurance fraud bureau in all the ten regions of Ghana should be set up by the NIC to regulate the issues concerning insurance fraud which will seek the interest of insurers and consumers
• Units or bureaus should be equipped with modern gadgets to function fully with their full functions and responsibilities clearly specified
• A fund should be allocated by insurers and NIC to educate and create awareness about insurance fraud to employees, brokers and consumers
• Insurance companies should create a unit in the company to research, detect and fight insurance fraud
• A research and development unit must be established to research into this area and fish out new techniques of fighting against this menace
• Look at fraud committed by insurers against other players in the insurance industry also

Limitations of the Study

• The major obstacle encountered with the research methodology was lack of quantitative data for the insurance fraud factors (internal fraud, policyholder fraud and intermediary fraud) used in this study.
• A survey questionnaire was dispatched to gather the perspective of insurers on three insurance fraud factors
• The sample size is small, just 39 cases may not truly reflect the views of all insurers in Ghana
• Study relied on only one-year data which is a weak reflection in the cost trends