Driving Anti-Fraud Management through Digital Strategy

Abstract Fraud detection is at the center stage for the insurance industry. Regulatory compliances and business disputes leave the door open for a number of frauds to happen. Better management of fraud risk and compliance exposure is critical for the insurance industry to innovate and grow. Better fraud management ensures that there is no opportunity for a conflict to arise. Digital Foresight is one such forward-looking, proactive solution that helps organizations to detect and materially crush fraud. Why Use Real-time, Always-on Systems for Fraud Detection? Real-time solutions safeguard insurer’s capital, markets, and reputation today; solutions that are fluid, flexible, and quickly adaptable to changing transnational strategies. Inform Risk Management: Catastrophe modeling using Digital Foresight helps identify risks with advance disaster preparation and notification—ensuring protection of property and people Determine Proximate Cause: Basis catastrophe modeling, it gets easier for insurance companies to figure out whether wind or rain is the proximate cause of damage to a building. This allows for a sound judgment on accepting or rejecting claims and claims payouts Increased Efficiency: In addition to reducing fraud, variable auto-adjudication makes claims processing more efficient, reducing the cost of processing a claim. Relevant data captured during the claims process can also be exported to showcase omni-channel capabilities to stakeholders on their mobile devices Fraud Reduction by more than 10%: Fraud reduction from the Digital Foresight and variable auto-adjudication solutions is not novel. Savings have exceeded 2% in the first full operational month and can easily rise to 10% per year. Shutting down an organized crime group that was hitting one company on their casualty book demonstrates the true power of this technology Introduction:- Having a reputation for integrity is crucial to safeguarding market confidence and public trust. Unfortunately, fraud and misconduct can seriously undermine such efforts, exposing an organization to legal, regulatory, or reputational damage. That is why experienced business leaders work to ensure that they have an effective approach to mitigating these risks. This is especially important in an environment marked by intense scrutiny and rising enforcement. The area of fraud risk management is increasingly attracting mainstream attention as various stakeholders have begun to comprehend the negative effects of uncontained risk. A strong anti-fraud stance and proactive, comprehensive approach to combating fraud is now gradually becoming a pre-requisite and any organization that fails to protect itself appropriately, faces increased vulnerability to fraud. The risk of fraud is rising at an unprecedented rate. Today’s tough economic climate is driving a surge in first party fraud for many organizations, whilst identify theft, the sophistication of fraudsters and cybercrime are also all on the increase. To make matters worse, preventing fraud is becoming more complex, with the challenges of multichannel customer engagement, increased regulations and cross-border activity. This increased complexity is creating unacceptable losses, escalating costs, eroding margins and making customers unhappy, effectively impacting all areas across the business. Fraud is no longer simply a risk issue, it is an organizational issue. To meet these challenges, organizations need to adopt a planned approach to tackle the risk of fraud. There is little doubt that digitalization is changing almost every business process in every industry. It is already making a huge difference to established leaders in the hospitality, banking, and transportation sectors. It is also helping market entrants with new business models rapidly gain market share. Even traditional sectors such as automotive and utilities, historically protected by heavy asset investments, are beginning to see major disruptions to their business models and their positions in the market. Digitalization enables new products and services to be created in flexible ways, ensuring that offerings are designed around consumer needs - think transportation services instead of car sales - and industry boundaries are blurred. The enterprise of the future will be defined more by how well it serves its customers than by the goods or services it offers. Digitalization creates both opportunities and threats; it remains to be seen who will be the winners or even the survivors. But one thing is certain: change is inevitable. Organizations know this and there’s a clear sense of urgency. Almost every major company we have worked with in the past two years is undertaking some kind of digital transformation initiative and this is receiving management attention at the highest level. Business processes are being rethought and new business models tested. The world of business IT is shifting from being a cost center, ready for outsourcing, to a potentially critical competitive weapon. We have seen internal start-ups, strategic acquisitions, and even companies where procurement processes have been simplified just to allow digital transformation to progress more swiftly.   The life and general insurance industry is constantly innovating to better meet the evolving needs and demands of consumers. Technological developments are significantly changing consumer’s expectations of insurance and the digital environment enables both established companies and new start-ups to bring innovations to market much faster and better meet these emerging needs. Regulators and supervisors have a crucial role to play to ensure that consumers and industry reap the benefits of digitalization. They must find the right balance between safeguarding high standards in consumer protection and fair competition on the one hand, and removing regulatory obstacles and actively encouraging innovation on the other. Literature Review: - Technological innovations are changing our lives faster than ever before. And with those changes comes a massive amount of data generated by everything from your car to your smartphone. Yet this is only the beginning. The speed of digitalization and the accelerating growth in amounts of data is only set to increase. Be it health, travel, car insurance or any other type of policy, digitalization and big data are already bringing benefits. Below you can find out about the benefits in terms of what and how insurance is sold. You can also read how insurers keep their customers’ data secure, as well as how insurers are helping to reduce the effects of cyber risks. Another benefit of better technology and data analysis is better fraud detection. Insurance fraud is not a victimless or insignificant crime. Detected and undetected fraud is estimated to account for up to 10% of claims every year in Europe. This raises the premiums of the vast majority of honest customers. Digitalization and the use of data analytics are making it easier to catch the fraudsters. With more - and more sophisticated - data and data analytics, a world of exciting possibilities opens up, such as insuring new risks, offering more tailored policies and providing additional services. And real-time data means policies that can be adjusted far more quickly to reflect changes in a customer’s behavior or circumstances. That is not all. More and new data can increase insurers’ understanding of risks. They can then offer better loss prevention advice to their customers.   Scope & Objective / Hypothesis: - As mentioned above, an effective fraud and misconduct risk management approach is one that focuses on three objectives: establishing policies, programs and controls designed to reduce the risk of fraud and misconduct from occurring, detecting it when it occurs and to taking appropriate corrective action to remedy the harm caused by integrity breakdowns. An organization’s board of directors plays a critical role in the oversight of programs to mitigate the risk of fraud and misconduct. The board, together with management, is responsible for setting the ‘tone at the top’ and ensuring institutional support for ethical and responsible business practices at the highest levels of the organization. Directors have not only a fiduciary duty to ensure that the organization has programs and controls in place to address the risk of misconduct but also a duty to ensure that such controls are effective. As a practical matter, the board may delegate principal oversight for fraud risk management to a board-level committee (typically the audit committee), which is tasked with:

• reviewing and discussing issues raised during the entity’s fraud and misconduct risk assessment process
• reviewing and discussing with the internal and external auditor’s findings on the effectiveness of the organization’s antifraud programs and controls and
• establishing procedures for the receipt and treatment of questions or concerns regarding questionable accounting or auditing matters.

Organizations typically face a variety of fraud and misconduct risks. Like a more conventional entity-wide risk assessment, a fraud and misconduct risk assessment help management understand the risks that are unique to the organization’s operations, identify gaps or weaknesses in control to mitigate those risks, and develop a practical plan for targeting the right resources and controls to reduce such risks. Management should seek to ensure that the risk assessment is conducted across the entire organization, taking into consideration the entity’s significant business units, processes and accounts. Throughout this process, subject matter professionals and various control owners provide input as to the relevant risks to achieving organizational objectives as well as the resources and action steps management can use to mitigate such risks. Methodology:-

• Guidance on values, principles, and strategies aimed at shaping organizational goals and guiding business decisions and behaviors.
• Simple, concise and positive language that can be readily understood by all employees
• Guidance based on each of the company’s major policies or key risk areas
• Practical guidance on risks based on recognizable scenarios or hypothetical examples
• A visually inviting format that encourages readership, usage and understanding
• Ethical decision-making tools to assist employees in making the right choices
• A designation of reporting channels and viable mechanisms that employees can use to report concerns or seek advice without fear of retaliation.
• A method for employees to periodically certify or acknowledge that they have received the code, agree to abide by the standards contained therein and pledge to disclose any known or suspected code violations.

An important part of an effective fraud and misconduct prevention strategy is exercising due diligence in the hiring, retention and promotion of employees and relevant third parties. Such due diligence may be especially important in hiring employees who reside in higher-risk geographic locations, are identified as having discretionary authority over the financial reporting process or who have authority in discreet compliance areas. The scope and depth of the due diligence process typically varies based upon the organization’s identified risks, the individual’s job function and level of authority and the specific laws of the jurisdiction in which the organization or the employee resides. Expected Outcome: The term, medical insurance or the Insurance industry as a whole has been termed as dull and monotonous. But with the course of time, even the insurance industry has geared up and associated itself with the technology to keep up the pace with ever-growing and ever-changing world. History itself has presented us with the examples of those who did not adapt themselves with the change have perished away with time. Evolution is not just a theory but a fact which we all have come to realize with time and time tells tales. One such example we all witnessed was that of Kodak who failed to foresee the power of technology and digitization and hung on to the concept of using Films. The result was a major setback in the industry and among the competitors. When it comes to Insurance, we have already evolved ourselves from the traditional paperwork and human approach to the laptop lifestyle. We all come to the office and as a part of our daily routine; we open our laptop and start with everyday tasks. Observing today’s scenario insurance is now majorly handled from backend and rest of the information is offered to the customer through a platform which provides him with every detail needed at the moment. Be it Cloud Computing or our CRM’s, digitization has managed to renovate this ordinary industry into an exciting one. However, there is still a gap of 30%-40% where technology can still play a major role in changing the entire aspect of this industry. Every facet of the insurance value chain will be impacted by digitization, from interactions with customers to underwriting and claims management. The key to reducing the cost is moving towards the no-touch claim method also serving in reducing the fraud and allowing risk managers to better engage with customers rather than spending time behind paperwork. Giving Real-time access to the customers is to give real power to them thus nullifying the effect of human error in the entire process. Artificial Intelligence is the future we all behold. We have already seen some significant development in this are with the invention of Chat Bots which has virtually taken over the most basic function of human species which is his ability to communicate. One other such example is of Siri, where almost all our everyday tasks are managed by a virtual identity. Conclusion:-

1. Insurance is one of the most innovative industries in the world, but it will increase its dependence on other industries. As shown in the article, this will have both positive and negative effects: the possibilities of providing insurance services are expanding, but at the same time, the risks associated with the security of personal data in its collection, sharing, processing, correction and prevention of any cyber incidents, breaches or unintended use.
2. The main factors that determine the emergence and adaptation of new technologies in the insurance sector include the asymmetry of information, the increase in competition, the change of generations and their social norms, the growth of technical and computer capabilities, the economic crisis and the decline of insurance premiums.
3. The main instruments in digitalization in the insurance industry are: Digital platforms; Internet of Things; Telematics and Telemetry; Big Data and Data Analytics; Comparators and Robo advisers, algorithm-based product comparison and advice; Machine Learning and Artificial Intelligence.
4. The main processes in the insurance value chain that were being revolutionized by technological innovations are: customer relationship (e.g. client interaction and channels), product development, distribution, pricing (underwriting), claim managements and the activity of the back office. SWOT-analysis has showed us that InsurTech has a great potential and could provide benefits to the insurance industry (for instance, effective risk underwriting, decrease of insurance frauds, higher effectiveness of the claim process), but also can bring threats (dependence on the quality of technicians, lack of a clear state regulation, risks of cyber-attacks). That is why the risks of radical innovations have to be estimated on each level of this process and have to be regulated by the authority of states for the protection of consumer rights.

Bibliography:-

• Frédéric de Courtois Vice-president, Insurance Europe General manager, Generali Group, Italy- bibliography
• Aghion P., Tirole J., 1994, The management of innovation, “Quarterly Journal of Economics”, 109(4), pp. 1185-1209.
• Bickley J., 1967, An Overview of Insurance Marketing, “The Journal of Risk and Insurance”, 34(2), pp. 175-183.
• The Europe Insurance Annual Report (2018-19)

Article Posted by -

Sanjiv Dwivedi

Head – Investigation & Loss Mitigation