Life insurers form repository to fight fraud

The new rules in the life insurance industry have made it impossible for an insurer to reject a claim after three years. For you, this is good as your insurer can’t deny your beneficiary insurance money if a claim is made after three years of buying a policy. Within three years, the insurer can investigate the claim and repudiate on grounds of fraud or misrepresentation. The rules state that life insurance companies must compulsorily pay all claims made three years after the date of commencement of a policy. No exceptions. So, if there is fraud, mis-statement or non-disclosure by the policyholder, the insurer has three years to discover and act on it. After that, the policy cannot be called into question.

This has insurers worried, especially in an environment where fraud is on the rise and policies are bought with an intention to commit fraud. “In the last couple of years, fraud by both distributors and customers has gained volume, size and complexity. Policies are bought on fake names and on behalf of deceased persons; we have experienced increased fraud in certain geographies like Uttar Pradesh, Gujarat and Andhra Pradesh,” said Khushru Sidhwa, executive vice-president, audit and risk management, HDFC Standard Life Insurance Co. Ltd. In fact, according to some estimates, insurers lose about 6% of revenue annually due to fraud.

To battle fraud, life insurance companies with the help of the Life Insurance Council, industry body representing life insurers in India, have signed up with Experian India, which provides business data and analytical tools, to build a data repository to create a fraud monitoring framework.

“Experian was selected from three applicants. A small group of three insurers was then constituted to draft the terms of agreement and finalise data fields. The agreement was then rolled out by the Life Insurance Council for life insurance companies on a voluntary basis. Insurers are free to sign up with the repository. For now, we have a contract of three years with Experian,” said Sidhwa.

Currently, 15 out of a total of 24 insurers have tied up with Experian, including ICICI Prudential Life Insurance Co. Ltd, Kotak Mahindra Old Mutual Life Insurance Ltd, Birla Sun Life Insurance Co. Ltd, and Reliance Life Insurance Co. Ltd.

More companies are joining. “We are hoping to complete the process of tying up with the remaining insurers within the next couple of months,”said Mohan Jayaraman, country manager, Experian India.

How does it work?

Experian has been running a fraud repository for the banking sector for over four years and has tie-ups with 43 banks. It screens customer applications to pick out discrepancies and possible fraud with the help of the Hunter system, a patented solution by Experian for fraud detection and management. At present, it has a database of about 50 million records. “It is designed to ensure privacy of data. Hunter is operated by a body regulated by the Reserve Bank of India. In case an application is potentially fraudulent, only its relevant details are shared; individual entity information is stored separately and is not available across entities,” added Jayaraman.

It will use the same system to screen customer applications and claims in the life insurance industry as well. Insurers who have tied up with Experian will do a handshake between the Hunter system and their own databases. “To start with, we will share a negative list. This list comprises customers, employees and agents who have committed fraud or customers who are financially or medically unfit. Subsequently, we will share all the applications on an on-going basis,” said Vijaya Nene, director, operation and services, PNB Metlife India Insurance Co. Ltd.

When you buy a life insurance policy, you fill up the proposal form with all relevant details. Chosen data fields will be fed into the fraud repository, which will check the details against its database. “In our experience, frauds are often committed through identity theft, so we don’t run a check against the negative list alone. Fraudsters are able to duplicate 80-90% of customers’ details, but err on some information, which gets caught as a discrepancy. We tag that form, which can be accessed by the insurer for further investigation. In most cases, the nature of a discrepancy itself indicates if it’s fraud. In some cases, there is need to investigate further,” said Jayaraman. “Companies can choose to integrate on Hunter in a batch or online mode. In the online mode, the information would flow to Hunter instantly and would immediately be actioned and get flagged,” he added.

At present, the system is live for ICICI Prudential and the repository is in the process of completing tie-ups with the others. “Even in the case of ICICI Prudential, we don’t really have to wait for the insurer to share their database. As we get customer applications, we can screen them against the existing database from the banking sector,” added Jayaraman.

Finally, it’s up to the insurer to deny or cancel the policy if already issued.

“The tie-up with Experian will help us screen these applications and validate against the database from the banking sector and also with the negative list shared by the insurance industry. If there are discrepancies, the system will show us the nature of the discrepancy and finally it’s up to us to take a call,” added Nene.

Reining in fraud

For insurers it is important to fight fraud as it affects underwriting policies and finally reflects in the premiums that customers have to pay. “We are in the business of paying claims and that exposes us to a lot of fraud. So fraud intelligence is needed. But in India it’s difficult to track fraud due to a lack of a single identity number,” said Nene. “In the developed world, for instance, there is a single number that gets tagged when you make a financial transaction or get medical help. Verifying a person’s track record is important as it helps us underwrite policies better, which ultimately reduces claims and rejections,” she added.

But that’s not the only kind of fraud. There are frauds against policyholders as well. “We see high attrition among the junior sales staff, which sometimes leads to data theft and subsequent mis-selling of policies through spurious calls. Then there are some persons who are responsible for misselling policies and manipulating documents. We plan to share a negative list of all such people with Experian, so that there is an industry level negative list or repository,” added Sidhwa.

The industry is also working on a repository that will capture trends and profiles of customers and the sales force to check misselling. “The mandate for the fraud repository is to screen applications for discrepancies leading to a possible fraud. But it doesn’t profile customers. For instance, how many policies a customer owns? Is an agent making its policyholders surrender policies to buy new ones? So, what the industry also needs is a risk repository that can profile customers, employees and distributors to capture trends and check misselling,” said Sandeep Ghosh, chief executive officer and managing director, Bharti AXA Life Insurance Co. Ltd. According to him, a number of life insurers are in talks with LexisNexis, a data analytics firm that provides risk solutions.

The industry is serious about combating fraud. Even as the first step starts with battling fraud by customers and subsequently against customers, it’s good news for you. A fraud and risk monitoring framework is important for a mature market.