CHAPTER 1-

INTRODUCTION

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 CHAPTER 1 – INTRODUCTION

1.1THE INDIAN INSURANCE SECTOR:

 The Indian Insurance Sector is basically divided into two categories – Life Insurance and Non-life
Insurance. The Non-life Insurance sector is also termed as General Insurance. Both the Life Insurance and
the Non-life Insurance is governed by the IRDAI (Insurance Regulatory and Development Authority of
India).

The role of IRDA is to thoroughly monitor the entire insurance sector in India and also act like a custodian
of all the insurance consumer rights. This is the reason all the insurers have to abide by the rules and
regulations of the IRDAI.

The Insurance sector in India consists of total 57 insurance companies. Out of which 24 companies are the
life insurance providers and the remaining 33 are non-life insurers. Out which there are seven public sector
companies.

Life insurance companies offer coverage to the life of the individuals, whereas the non-life insurance
companies offer coverage with our day-to-day living like travel, health, our car and bikes, and home
insurance. Not only this, but the non-life insurance companies provide coverage for our industrial
equipment’s as well. Crop insurance for our farmers, gadget insurance for mobiles, pet insurance etc. are
some more insurance products being made available by the general insurance companies in India.

The life insurance companies have gained an investment prospectus in the recent times with an idea of
providing insurance along with a growth of your savings. But, the general insurance companies remain
reluctant to offer pure risk cover to the individuals.

Insurance industry in India has seen a major growth in the last decade along with an introduction of a huge
number of advanced products. This has led to a tough competition with a positive and healthy outcome.

Insurance sector in India plays a dynamic role in the wellbeing of its economy. It substantially increases the
opportunities for savings amongst the individuals, safeguards their future and helps the insurance sector form
a massive pool of funds.With the help of these funds, the insurance sector highly contributes to the capital
markets, thereby increasing large infrastructure developments in India.

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1.2History of Insurance in India in brief:

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu ( Manusmrithi ),
Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in terms of pooling of
resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine.
This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the
earliest traces of insurance in the form of marine trade loans and carriers’ contracts. Insurance in India
has evolved over time heavily drawing from other countries, England in particular.
 
  In 1818 saw the advent of life insurance business in India with the establishment of the Oriental Life
Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable
had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of the
British Insurance Act and in the last three decades of the nineteenth century, the Bombay Mutual (1871),
Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however,
was dominated by foreign insurance offices which did good business in India, namely Albert Life
Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for
hard competition from the foreign companies.
 
In 1914, the Government of India started publishing returns of Insurance Companies in India. The
Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In
1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical
information about both life and non-life business transacted in India by Indian and foreign insurers
including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance
public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with
comprehensive provisions for effective control over the activities of insurers.
 
The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large
number of insurance companies and the level of competition was high. There were also allegations of unfair
trade practices. The Government of India, therefore, decided to nationalize insurance business.
 
      An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life
Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian
insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly till
the late 90s when the Insurance sector was reopened to the private sector.
 
    

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 The history of general insurance dates back to the Industrial Revolution in the west and the consequent
growth of sea-faring trade and commerce in the 17 th century. It came to India as a legacy of British
occupation. General Insurance in India has its roots in the establishment of Triton Insurance Company Ltd.,
in the year 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd, was set up. This
was the first company to transact all classes of general insurance business.
1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton of India. The
General Insurance Council framed a code of conduct for ensuring fair conduct and sound business practices.
 
    In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The
Tariff Advisory Committee was also set up then.
 
    In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general insurance
business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped
into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the
Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance
Corporation of India was incorporated as a company in 1971 and it commence business on January 1sst
1973.
 

The Past of Insurance Sector In India

In the history of the Indian insurance sector, a decade back LIC was the only life insurance provider. Other
public sector companies like the National Insurance, United India Insurance, Oriental Insurance and New
India Assurance provided non-life insurance or say general insurance in India.

However, with the introduction of new private sector companies, the insurance sector in India gained a
momentum in the year 2000. Currently, 24 life insurance companies and 30 non-life insurance companies
have been aggressive enough to rule the insurance sector in India.

The Present of Insurance Sector In India

So far as the industry goes, LIC, New India, National Insurance, United insurance and Oriental are the only
government ruled entity that stands high both in the market share as well as their contribution to the
Insurance sector in India. There are two specialized insurers – Agriculture Insurance Company Ltd catering
to Crop Insurance and Export Credit Guarantee of India catering to Credit Insurance. Whereas, others are the

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private insurers (both life and general) who have done a joint venture with foreign insurance companies to
start their insurance businesses in India.

1.3 Meaning and Definition of Insurance Fraud:

What is Insurance Fraud?

Insurance fraud is any act committed to defraud an insurance process. This occurs when a claimant attempts
to obtain some benefit or advantage they are not entitled to, or when an insurer knowingly denies some
benefit that is due. According to the United States Federal Bureau of Investigation, the most common
schemes include: premium diversion, fee churning, asset diversion, and workers compensation fraud.
Perpetrators in these schemes can be insurance company employees or claimants. [1] False insurance claims
are insurance claims filed with the fraudulent intention towards an insurance provider.

Insurance fraud has existed since the beginning of insurance as a commercial enterprise. [2] Fraudulent claims
account for a significant portion of all claims received by insurers, and cost billions of dollars annually.
Types of insurance fraud are diverse, and occur in all areas of insurance. Insurance crimes also range in
severity, from slightly exaggerating claims to deliberately causing accidents or damage. Fraudulent activities
affect the lives of innocent people, both directly through accidental or intentional injury or damage, and
indirectly as these crimes lead to higher insurance premiums. Insurance fraud poses a significant problem,
and governments and other organizations try to deter such activity.

Definition of Fraud in Insurance Sector:

Fraud can be generally defined as an act or omission intended to gain dishonest or unlawful advantage
for a party (the “frauster”)or other parties. This could be achieved, for example, by:

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1. Misappropriating assets;
2. Abusing responsibilities, position of trust or a fiduciary responsibilities;
3. Deliberately misrepresenting ,concealing ,suppressing or not disclosing material facts relevant to a
financial decision ,transaction or perception of an insurer’s status.

Section 17 of The Indian Contract Act, 1872 deals with fraud. It read as:

“Fraud” means and includes any of the following acts committed by a party to a contract, or with his
connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to
enter into the contract:-

1. the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
2. the active concealment of a fact by one having knowledge or belief of the fact;
3. a promise made without any intention of performing it;
4. any other act fitted to deceive;
5. any such act or omission as the law specially declares to be fraudulent.

1.4Classification of Insurance Fraud:

Hard vs. soft fraud:

Insurance fraud can be classified as either hard fraud or soft fraud.

Hard fraud occurs when someone deliberately plans or invents a loss, such as a collision, auto theft, or fire
that is covered by their insurance policy so they can claim payment for damages. Criminal rings are
sometimes involved in hard fraud schemes that can steal millions of dollars.

Soft fraud, which is far more common than hard fraud, is sometimes also referred to as opportunistic
fraud. This type of fraud consists of policyholders exaggerating otherwise-legitimate claims. For example,
when involved in an automotive collision an insured person might claim more damage than actually
occurred. Soft fraud can also occur when, while obtaining a new health insurance policy, an individual
misreports previous or existing conditions to obtain a lower premium on the insurance policy.

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1.5Types of insurance:

Figure no 1.1 Types of insurance.

Source: Researcher’s Data

Life Insurance:

Life insurance is different from other insurance, in that sense, the subject matter of insurance is the life of a
human. The insurer will pay a certain amount of insurance at the time of death or at the end of a fixed term.
At present, life insurance enjoys the maximum scope, because life is the most important asset of a person.

“Life insurance is a contract under which the insurance company – in consideration of a premium paid in lump sum or
periodical installments undertakes to pay a pre-fixed sum of money on the death of the insured or on his attaining a certain
age, whichever is earlier.”

Everyone needs insurance. This insurance provides protection to the family prematurely or provides
adequate amounts in old age when reducing the capacity. Under Personal Insurance, the payment is made in
the accident. Insurance is not only security but it is a type of investment because a certain amount can return
the assured to the end of death or term.

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 Table no 1.1 List of Life Insurance Companies

SL.NO NAME OF THE LIFE INSURANCE COMPANIES

1 BAJAJ ALLIANZ LIFE INSURANCE CO. LTD.
2 BIRLA SUN LIFE INSURANCE CO. LTD
3 HDFC STANDARD LIFE INSURANCE CO. LTD
4 ICICI PRUDENTIAL LIFE INSURANCE CO. LTD
5 EXIDE LIFE INSURANCE CO. LTD.
6 LIFE INSURANCE CORPORATION OF INDIA
7 MAX LIFE INSURANCE CO. LTD
8 PNB METLIFE INDIA INSURANCE CO. LTD.
9 KOTAK MAHINDRA OLD MUTUAL LIFE INSURANCE CO. LTD
10 SBI LIFE INSURANCE CO. LTD
11 TATA AIA LIFE INSURANCE CO. LTD.
12 RELIANCE NIPPON LIFE INSURANCE CO. LTD.
13 AVIVA LIFE INSURANCE COMPANY INDIA LIMITED
14 SAHARA INDIA LIFE INSURANCE CO. LTD.
15 SHRIRAM LIFE INSURANCE CO. LTD.
16 BHARTI AXA LIFE INSURANCE CO. LTD.
17 FUTURE GENERALI INDIA LIFE INSURANCE CO. LTD.
18 IDBI FEDERAL LIFE INSURANCE CO. LTD.
19 ORIENTAL BANK OF COMMERCE LIFE INSURANCE CO. LTD.
20 AEGON  LIFE INSURANCE CO. LTD.

Source : Researcher’s Data

General Insurance:

General insurance includes property insurance, liability insurance, and other forms of insurance. Fire and
marine insurance are strictly called property insurance. Motor, theft, loyalty and machine insurance involve a
certain extent of liability insurance. The strict form of liability insurance is fidelity insurance, from which
the insurer compensates the insured for losses when he is subject to payment liability to the third party.

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 Table no 1.2 List of General Insurance Companies

Sr .No NAME OF THE GENERAL INSURANCE COMPANIES.

1 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD.
2 ICICI LOMBARD GENERAL INSURANCE CO. LTD.
3 IFFCO TOKIO GENERAL INSURANCE CO. LTD.
4 NATIONAL INSURANCE CO. LTD.
5 THE NEW INDIA ASSURANCE CO. LTD.
6 THE ORIENTAL INSURANCE CO. LTD.
7 UNITED INDIA INSURANCE CO. LTD.
8 RELIANCE GENERAL INSURANCE CO. LTD.
9 ROYAL SUNDARAM GENERAL INSURANCE CO. LIMITED
10 TATA AIG GENERAL INSURANCE CO. LTD.
11 CHOLAMANDALAM MS GENERAL INSURANCE CO. LTD.
12 HDFC ERGO GENERAL INSURANCE CO. LTD.
13 EXPORT CREDIT GUARANTEE CORPORATION OF INDIA LTD.
14 AGRICULTURE INSURANCE CO. OF INDIA LTD.
15 STAR HEALTH AND ALLIED INSURANCE COMPANY LIMITED
16 APOLLO MUNICH HEALTH INSURANCE COMPANY LIMITED
17 FUTURE GENERALI INDIA INSURANCE COMPANY LIMITED
18 UNIVERSAL SOMPO GENERAL INSURANCE CO. LTD.
19 SHRIRAM GENERAL INSURANCE COMPANY LIMITED,
20 BHARTI AXA GENERAL INSURANCE COMPANY LIMITED

Property Insurance:

Under the property, the insured property of the person/person is insured against a certain specified risk. Risk
can damage property in fire or marine hazard, property theft or accident. Property of any person and society
is insured against the loss of insurance and marine hazards, the unexpected decline in the crop reduction, the
unexpected death of the animals engaged in the trade, the destruction of the machines and property theft is
insured and goods.

Marine Insurance:

The Marine insurance provides protection against the loss of sea threats. In threats are confronting with a
rock, or ship, enemies, fire, and captured by the pirate etc. There is no reason for ship, goods and freight
traffic and disappearances in these hazards. So, marine insurance ship (plow), goods and freight.

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“A contract of marine insurance is a contract under which the insurance company undertakes to indemnify the insured
against losses which are incidental to the marine adventure.”

Earlier only some minor risks were insured, but now the scope of marine insurance was divided into two
parts; Ocean marine insurance and inland marine insurance. The former only ensures the sea threats, while
later the insured perils are included which can produce by the insured’s well-known delivery of the cargo
(gods) and can increase the cargo by the buyer (importer) Go down

Fire Insurance:

Fire insurance involves the risk of fire. In the absence of fire insurance, fire waste will not only increase the
person but also the society. With the help of fire insurance, damages caused by fire are compensated and
society is not much lost. The person is given prioritization of such loss and his property or business or
industry will remain in the same condition in which it was before the loss. Fire insurance does not only
protect the loss, but it also provides some resulting loss, under this insurance war risk, upheaval, riots etc.
can also insure.

“Fire insurance is a contract, under which the insurance company, in consideration of a premium payable by the insured,
agrees to indemnify the assured for the loss or damage to the property insured against fire, during a specified period of time
and up to an agreed amount.”

Liability insurance:

General insurance also includes liability insurance, from which the insured is liable to pay the loss of
property or to compensate for the loss of personality; Injury or death is seen as insurance fidelity insurance,
automobile insurance, and machine insurance etc.

Social insurance:

Social insurance is to provide security to the weaker sections of the society who are unable to pay the
premium for adequate insurance. Pension schemes, disability benefits, unemployment benefits, sickness
insurance, and industrial insurance are different forms of social insurance. Insurance can classify into four
categories from the risk point.

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Personal Insurance:

Personal insurance includes insurance of human life which can cause damage due to death, accident, and
illness. Therefore, individual insurance is further classifying by life insurance, personal accident insurance,
and health insurance.

Guaranteed Insurance:

Guarantee insurance includes losses caused by dishonesty, disappearance, and employee or other party’s
loyalty. The party must be a party to the contract. Their failure damages the first party. For example, in
export insurance, the insurer will compensate the importer on the failure to pay the amount of loan.

Miscellaneous insurance:

Property, goods, machines, furniture, automobiles, valuable articles etc. maybe insure against damage or
destruction due to accident or disappearance due to theft. There are different forms of insurance for each
type of property, which not only provides property insurance but also liability insurance and personal injury
is also insurers.

Other forms of insurance:

In addition to property and liability insurance, there is other insurance which is including in general
insurance. Examples of such insurance are export-credit insurance, state employee insurance so that the
insurer guarantees to pay a certain amount on certain events.

1.6 Principles of Insurance:

The main objective of every insurance contract is to give financial security and protection to the insured
from any future uncertainties. Insured must never ever try to misuse this safe financial cover .Seeking profit
opportunities by reporting false occurrences violates the terms and conditions of an insurance contract. This
breaks trust, results in breaching of a contract and invites legal penalties. An insurer must always investigate

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any doubtable insurance claims. It is also a duty of the insurer to accept and approve all genuine insurance
claims made, as early as possible without any further delays and annoying hindrances.

1. Principle of Utmost Good Faith

Principle of Uberrimae fidei (a Latin phrase), or in simple english words, the Principle of Utmost Good
Faith, is a very basic and first primary principle of insurance. According to this principle, the insurance
contract must be signed by both parties (i.e insurer and insured) in an absolute good faith or belief or trust.

The person getting insured must willingly disclose and surrender to the insurer his complete true information
regarding the subject matter of insurance. The insurer's liability gets void (i.e legally revoked or cancelled) if
any facts, about the subject matter of insurance are either omitted, hidden, falsified or presented in a wrong
manner by the insured.

2. Principle of Insurable Interest

The principle of insurable interest states that the person getting insured must have insurable interest in the
object of insurance. A person has an insurable interest when the physical existence of the insured object
gives him some gain but its non-existence will give him a loss. In simple words, the insured person must
suffer some financial loss by the damage of the insured object.

For example :- The owner of a taxicab has insurable interest in the taxicab because he is getting income
from it. But, if he sells it, he will not have an insurable interest left in that taxicab.

3. Principle of Indemnity

Indemnity means security, protection and compensation given against damage, loss or injury.

According to the principle of indemnity, an insurance contract is signed only for getting protection against
unpredicted financial losses arising due to future uncertainties. Insurance contract is not made for making
profit else its sole purpose is to give compensation in case of any damage or loss.

In an insurance contract, the amount of compensations paid is in proportion to the incurred losses. The
amount of compensations is limited to the amount assured or the actual losses, whichever is less. The
compensation must not be less or more than the actual damage. Compensation is not paid if the specified

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loss does not happen due to a particular reason during a specific time period. Thus, insurance is only for
giving protection against losses and not for making profit.

However, in case of life insurance, the principle of indemnity does not apply because the value of human
life cannot be measured in terms of money

4. Principle of Contribution

Principle of Contribution is a corollary of the principle of indemnity. It applies to all contracts of indemnity,
if the insured has taken out more than one policy on the same subject matter. According to this principle, the
insured can claim the compensation only to the extent of actual loss either from all insurers or from any one
insurer. If one insurer pays full compensation then that insurer can claim proportionate claim from the other
insurers.

For example :- Mr. John insures his property worth $ 100,000 with two insurers "AIG Ltd." for $ 90,000
and "MetLife Ltd." for $ 60,000. John's actual property destroyed is worth $ 60,000, then Mr. John can claim
the full loss of $ 60,000 either from AIG Ltd. or MetLife Ltd., or he can claim $ 36,000 from AIG Ltd. and $
24,000 from Metlife Ltd.

So, if the insured claims full amount of compensation from one insurer then he cannot claim the same
compensation from other insurer and make a profit. Secondly, if one insurance company pays the full
compensation then it can recover the proportionate contribution from the other insurance company

5. Principle of Subrogation

Subrogation means substituting one creditor for another.

Principle of Subrogation is an extension and another corollary of the principle of indemnity. It also applies to
all contracts of indemnity.

According to the principle of subrogation, when the insured is compensated for the losses due to damage to
his insured property, then the ownership right of such property shifts to the insurer.

This principle is applicable only when the damaged property has any value after the event causing the
damage. The insurer can benefit out of subrogation rights only to the extent of the amount he has paid to the
insured as compensation.

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For example :- Mr. John insures his house for $ 1 million. The house is totally destroyed by the
negligence of his neighbour Mr.Tom. The insurance company shall settle the claim of Mr. John for $ 1
million. At the same time, it can file a law suit against Mr.Tom for $ 1.2 million, the market value of the
house. If insurance company wins the case and collects $ 1.2 million from Mr. Tom, then the insurance
company will retain $ 1 million (which it has already paid to Mr. John) plus other expenses such as court
fees. The balance amount, if any will be given to Mr. John, the insured.

6. Principle of Loss Minimization

According to the Principle of Loss Minimization, insured must always try his level best to minimize the loss
of his insured property, in case of uncertain events like a fire outbreak or blast, etc. The insured must take all
possible measures and necessary steps to control and reduce the losses in such a scenario. The insured must
not neglect and behave irresponsibly during such events just because the property is insured. Hence it is a
responsibility of the insured to protect his insured property and avoid further losses.

For example :- Assume, Mr. John's house is set on fire due to an electric short-circuit. In this tragic
scenario, Mr. John must try his level best to stop fire by all possible means, like first calling nearest fire
department office, asking neighbours for emergency fire extinguishers, etc. He must not remain inactive and
watch his house burning hoping, "Why should I worry? I've insured my house."

7. Principle of Causa Proxima (Nearest Cause)

Principle of Causa Proxima (a Latin phrase), or in simple english words, the Principle of Proximate (i.e
Nearest) Cause, means when a loss is caused by more than one causes, the proximate or the nearest or the
closest cause should be taken into consideration to decide the liability of the insurer.

The principle states that to find out whether the insurer is liable for the loss or not, the proximate (closest)
and not the remote (farest) must be looked into.

For example:- A cargo ship's base was punctured due to rats and so sea water entered and cargo was
damaged. Here there are two causes for the damage of the cargo ship - (i) The cargo ship getting punctured
beacuse of rats, and (ii) The sea water entering ship through puncture. The risk of sea water is insured but
the first cause is not. The nearest cause of damage is sea water which is insured and therefore the insurer
must pay the compensation.

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However, in case of life insurance, the principle of Causa Proxima does not apply. Whatever may be the
reason of death (whether a natural death or an unnatural death) the insurer is liable to pay the amount of
insurance.

1.7 LIFE INSURANCE CORPORATION

Life Insurance Corporation of India (abbreviated as LIC) is an Indian state-owned insurance group

and investment corporation owned by the  Government of India.
The Life insurance Corporation of India was founded on September 1, 1956 when the Parliament of
India passed the Life Insurance of India Act that nationalized the insurance industry in India. Over 245
insurance companies and provident societies were merged to create the state-owned Life Insurance
Corporation of India.[2][1]

As of 2019, Life Insurance Corporation of India had total life fund of ₹28.3 trillion .The total value of sold
policies in the year 2018-19 is ₹21.4 million. Life Insurance Corporation of India settled 26 million claims
in 2018-19. It has 290 million policy holders.

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Nationalization in 1956:

In 1955, parliamentarian Feroz Gandhi raised the matter of insurance fraud by owners of private insurance
agencies. In the ensuing investigations, one of India's wealthiest businessmen, Ramkrishna Dalmia, owner of
the Times of India newspaper, was sent to prison for two years.

The Parliament of India passed the Life Insurance of India Act on 19 June 1956 creating the Life Insurance
Corporation of India, which started operating in September of that year. It consolidated the business of 245
private life insurers and other entities offering life insurance services; this consisted of 154 life insurance
companies, 16 foreign companies and 75 provident companies. The nationalization of the life insurance
business in India was a result of the Industrial Policy Resolution of 1956, which had created a policy
framework for extending state control over at least 17 sectors of the economy, including life insurance.

1.7.1 Types of Life Insurance Policies in India:

Figure no 1.2 Types of life insurance policies

Source: Moneysage.in

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1.7.2 Areas of Frauds in Insurance:

Frauds can occur in any area of insurance sector. Basically, the areas of frauds detected so far are as
follows:

Application: Application is the first stage on the insurance policy where in the insured applies for the
insurance .In the application stage frauds occur when

a. The insured conceals certain important facts

b. Giving partial or wrong information

Premium: Premium is a periodical instalment paid by the insured to the insurer for covering the risk.
Frequently occurring frauds at this stage are:

a. Paying the premium in cash

Surrender: Surrender is voluntarily terminating the insurance policy by the insured before the maturity or
the insured event occurs. Frequently occurring frauds at this stage:

a. Forcing the insured to surrender the policy and take a new policy

b. By not disclosing the facts relating to surrender to the insured at the time of taking the insurance
policy

Claims: An insurance claim is a formal request to an insurance company asking for a payment based on the
terms of the insurance policy. Frequently occurring frauds at this stage:

a. Fraudulent activities done by the insured to get the claim amount

Employee related frauds: The frauds done by the employee through collusion with the insured or
misleading the insured. Frequently occurring frauds at this stage:

a. Helping the insured to exaggerate the level of income earned prior to the incident

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 b. Making false policies

According to the research done by Ernst & Young, the frauds risk exposure faced by insurance companies is
as follows:

Figure no 1.3 Fraud risk exposure faced by insurance companies.

Source : Ernst & Young

Life Insurance Companies related frauds and their measures:

Life insurance: Insurance that pays out a sum of money either on the death of the insured person or after a
set period.

Frauds in life insurance business: According to the research done by us claims is the area where the
maximum frauds occur.

1.8 Types of Frauds in Life Insurance :

Typical fraud categories:

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There are three major parties involve in perpetrating life insurance fraud.
 One is the internal employees or the agents of the company
 Second is the policyholder i.e. the customer and

 Third is not a direct found but an indirect fraud i.e. involvement of doctors.

Figure no 1.4 Types of Frauds in Insurance

Source :Survey 2010-2011 by Ernst &Young

Some types of frauds are explained below

1. Misrepresentation-Misrepresentation of critical information relating to profile (includes incorrect

income, educational qualification, occupation, etc. This leads to early claims.

2. Forgery/ Tampered Documents: Forging the customer’s signature in any document / proposal or any
supporting document or submitting wrong documents.

3. Bogus Business: Proposal Forms submitted for nonexistent customers (bogus business)

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4. Cash Defalcation: Delayed Deposit of Premium

5. Product Misinformation : Selling Practice wherein the complete, detailed and factual information of
products is not given to the Customer: Incomplete / Incorrect representation on: Guaranteed Returns, Rider
Features, Charges, Linked Product vs. Endowment etc., Facility of Top-up vs. Regular premium, Premium
Holiday

6. Pre Signed Forms: Obtaining pre signed blank forms and filling up of the ACR/CCR without actually
physically seeing the client/ satisfying oneself about the client.

7. Nexus: Doctor’s nexus means he getting involved with other perpetrators in committing life insurance
fraud
8. Fake Death: Faking one’s death to cash in on a life-insurance policy is a long, time honoured practice.

Some schemes are amateurish and easily detectable. Others are quite sophisticated and involve
elaborate planning in staging the fake death with accomplices, oftentimes family members. Funeral directors
also have been convicted of aiding such scams.
Another way of doing fraud is to create a policy after the death of a particular person by manipulating the
death certificates and claiming the benefit.

Claim Settlement
Claim settlement is not a straight forward process. The basic premise is to pay all “right” claims and reject
all “wrong” claims. However, deciding on what is right and what is wrong is not an easy task. A company’s
reputation is also based on the claim settlement ratio which is nothing but the number of claims settled for
every 100 claims. In the following paragraphs, the issues the companies face in determining what fair claims
are given below:

1. Understanding of the Product: This is probably the first problematic area. In majority of the cases, the
customer doesn’t know what he has purchased and what the benefits are. Very few people read the actual
policy contract and understand its requirements and implications. If this applies to the literate group in the
Indian Society, the problems are compounded for the poorer sections of the society, which forms a vast
majority of the country.

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2. Proposal Form: If problems in claims settlement were to be given a rating, then probably this parameter
would be rated at 99%. This is the most critical problem. A large number of proposal forms are not filled in
with the spirit required Many Proposal Forms are filled in just for the sake satisfying the insurer’s needs to

issue the policy – due regard and truthfulness is not given to the questions. A Life Insurance Proposal Form
is filled in like a credit card application, where just the basic address etc. is given and then signed off without
even pondering over the other fields in the larger proposal form. Questions are just ticked for the sake of
completeness without an iota of a thought given to the facts required thereunder. At the time of claim, when
the actual facts are revealed, then it is the Proposal Form which indicts the customer at a time when they
don’t want to accept the facts. Moreover, illiteracy causes more problems, whereby policyholders say that
they were not aware of what was supposed to be given.

3. Non-Disclosures & Misrepresentations: This is a continuation of the previous point. It is not that the
customer is always ignorant and has just committed errors unknowingly. Many times the customer does not
want to disclose the facts and problems. Hence he purposely does not disclose information in the proposal
form.

1.8 Life Insurance Fraud Schemes:

 Fraudulent Death Claims

To obtain reimbursement for life insurance, a death certificate is required. However, phony death certificates
are not that difficult to obtain. The person might be very much alive and missing or the person might be
dead, and the death is past posted. With small settlements, death claims aren’t closely scrutinized and are
paid relatively easily.

 Murder for Profit

This scheme involves the killing (or arranging for the killing) of a person in order to collect insurance.

The death might be made to look like it was an accident or a random killing.

 Liability Schemes

In a liability scheme the claimant has claimed an injury that did not occur. The slip and fall scam is the most
common, and involves a person claiming to fall as the result of negligence on behalf of the insured.

21
1.9 RED FLAGES FOR LIFE INSURANCE POLICY:

It is important to remember that the hints listed below are merely possible “red flags” that they may be some
evidence consistent with an insurance fraud schemes. Any one or two of these by themselves may not raise
your suspicion; however when you have several of these hints person or a pattern begins to emerge, you
should investigate further or forward your suspicion to the insurance fraud prevention decision.

 The policy’s effective date is close to the date of death.

 The deceased is not well known by relatives and lived alone.
 Policies tend to be for small coverage which is many times available in mass offerings, i.e. in
magazines, mal- in and television and advertisement.
 The agents “loss ratios” appear unusually skewed, considering the size of the market and types of
people insured.
 Policies requiring physical examinations are almost never used in these schemes.
 Numerous life insurance policies were purchased on the victim.
 Different carries were used in securing coverage for no apparent reason.
 The coverage amount is not commensurate with the social position of the deceased; e.g. a loss
income clerical worker has a life insurance estate of millions.
 An unusually large number of death certificates ewer obtained by the beneficiary.

1.9.1 SOME OF THE COMMON FRAUDULENT ACTIVITIES ARE:-

1. AGE PROOF :-
All insurance policies have an eligible age at which the policy can be taken. To accommodate oneself into
the product or enjoy a minimum premium, age proofs are modified to show a reduced age.
2. ADDRESS PROOF :-
Many issuers accept bank projects have a valid address proof. But these are often victim of manipulation to
show a reduced age.
3. MEDICAL TESTS :-
Some cases require medical tests to issue the policy. However, to substantiate not disclosed or miss
presented medical conditions, a different person may be sent at the time of the tests. While this may help to
get the policy, it would create discrepancy at the time of claims, even leading to reputation

22
 4. FABRICATING DATE OF DEATH :-

The benefit of keeping your policy in force by paying regular premiums cannot be understated. Not doing so,
results in the policy to lapse and becoming illegible to avail the death benefit on the policy. However cases
have been seen where the date of death as on the death certificate has been fraudulently change to a death
before the actual death when the policy was in force, so as to register claim.
5. FORGERY OF DEATH CERTIFICATE :-
To avail the death certificate, a false death benefited, a small death certificate is created on the name of
living person.
6. MANIPULATING REASON OF DEATH :-
If a history of an aliment which has been diagnosed before or at the time of filling the proposal is deducted,
the claim can be repudiated. To safeguard oneself from this situation, the reasons of death are modified so as
to fabricate a genuine claim.
Some of the frauds pertaining to age proofs, address proofs can be detected at the underwriting stage, while
others may be detected during the policy term or at the time processing the claim. If detected at the
underwriting stage, the proposal form is rejected and policy is not issued. If detected midterm, the policy can
be cancelled.There are various factors which trigger suspicion and hence an investigation on fraudulent
claims. The income / occupation details furnished at issuance stage and actual fraud at investigation stage,
pattern of issuance coverage availed i .e. at what age did customer started buying and within what span of
time how much coverage was bought, time of death, medical case sheets, comments on postmortem report
and co-relating the various sources of information often help to smell a wrong doing.
Frauds in life insurance occurs mainly due to:-
 Fabrication of documents to save on premiums.
 Avail covers which are not allowed for a particular age group.
 Obtain the death benefit through the unfair means.
 Some extreme cases have also found to involve murder by kin for monetary benefit.

1.9.2 Areas that need more stringent anti-fraud regulation

Fraud risk arising from claims or surrender being the key concern for most insurance companies calls for
more stringent regulations. If claims-related frauds can be detected in time, it can help insurers save
significantly cost. The survey indicates that almost one out of every two respondents feel that more strict
anti-fraud regulations are needed for effective and transparent claims or surrender management.

23
 Figure no 1.5 Areas of Fraud in Insurance Sector

Source: Researcher’s Data

1.9.3 FRAUD DETECTION PROGRAMME STRATEGY

Instead of relying on reactive measures like whistleblowers, organizations can and should take a more
hands-on approach to fraud detection. A fraud detection and prevention program should include a range of
approaches – from point-in-time to recurring and, ultimately, continually for those areas where the risk of
fraud warrants. Based on key risk indicators, point-in-time testing will help identify transactions to be
investigated. If that testing reveals indicators of fraud, recurring testing or continuous analysis should be
considered.

LIFE INSURANCE
 Determine patterns of overpayment of premiums.
 Review transaction payments comprising more than one type of payment instrument.
 Report multiple accounts to collect funds or payment to beneficiaries.
 Report purchase of multiple products in a short period of time.
 Review beneficiaries with multiple policies.
 Isolate transactions for follow-up where employees that are beneficiaries.
 Determine agents/brokers with statistically high numbers of claim payouts.

24
 Calculate benefit payments paid for lapsed policies.
 Find policy loans that are greater than face value.
 Report unauthorized policy changes.
 Identify missing, duplicate, void or out of sequence check numbers.

1.10Measures to prevent Life Insurance Fraud:

 Confirming from the customer that the policy has been taken without any coercion.

 To confirm that the premium is paid by the policy holder, name of the policy holder should be
mentioned on the cheque given by him/her at the time of paying premium.

 Salary bill and bank statement must be scrutinized at the time of issuing the policy.

 Human life value must be calculated appropriately at the time of giving the policy.

 Not encouraging politically exposed persons for the policy.

 Creating awareness to the general public regarding the insurance.

25
 CHAPTER 2-
RESEARCH
METHODOLOGY

26
 CHAPTER 2 - RESEARCH METHODOLOGY

2.1 Introduction
It involves the collection, organization, and analysis of information to increase our understanding of a topic
or issue .A research project may also be an expansion on past work in the field. Research projects can be
used to develop further knowledge on a topic, or in the example of a school research project, they can be
used to further a student's research prowess to prepare them for future jobs or reports. To test the validity of
instruments, procedures, or experiments, research may replicate elements of prior projects or the project as a
whole.

2.2 Importance of the study

Insurance premiums have increased due to false or exaggerated personal injury fraud claims, covering life,
home, and motor and business accident policies. In some case claimants would suffer a genuine accident, but
then exaggerating the injuries or the time of recovery amounts to an insurance fraud.

2.3 Objectives of the study

 To study about frauds in insurance

 To examine the frauds taking place in insurance sector
 To study the profile of “life insurance corporation of India” and the frauds taking place.

2.4 Scope of the study

Fraud impacts organizations in several areas including financially, operationally and physiologically while
the monitory loss can be staggering. Its loss of reputation on an organization can be staggering. Its loss of
reputation, goodwill and customer relations can be devastating. As fraud can be perpetrated by any employee
within an organization or by those outside it, it is important for companies to have an effective fraud
management program in place to safeguard their assets and reputation.

2.5 Research Methodology

Research methodology is the technique of collecting the data sources for doing the project and also used to
identify, select, process , and analyse information about a project topic, i.e primary data and secondary data.

27
2.6 Data Collection

Here the data/information is collected through secondary method of data collection. Data collection is an
extremely challenging work which needs exhaustive planning, diligent work understanding, determination

and more to have the capacity to complete the assignment effectively. Data collection begins with figuring
out what sort of data is needed, followed by the collection of the sample. You have to utilize a certain tool to
gather the data from the chosen sample.

 Primary Data

As the name suggests, are first-hand information collected by the surveyor. The data so collected are
pure and original and collected for specific purpose. They have never undergone any statistical treatment
before. The collected data may be published as well. The census is an example of primary data.

 Secondary Data      

Secondary data are opposite to primary data. They are collected and published already (by some
organisation, for instance). They can be used as a source of data and used by surveyors to collect data from
and conduct analysis. Secondary data are impure in the sense that they have undergone statistical treatment
at least once.

This study used the secondary data to analysis and interpretation of life Insurance Corporation (LIC).
Data is collected from various sources such as IRDA, Insurance magazines , newspapers ,books reports on
LIC frauds and obtaining information from net surfing.

2.7 Tabulation of the data

Techniques used in research study. Statistical analysis of data is an integral and vital part of research report
the following statistical technique used in the study.

 For the purpose of various analysis editing, coding, tabulation etc. of data is used as a technique.

 Charts and diagram were used for better understanding the data collected.

2.8 Test used for analysis

Here no test is used for data analysis and interpretation but Graphical presentation and Percentage
Analysis is used for data analysis

28
CHAPTER 3- REVIEW
OF LITERATURE

29
 CHAPTER 3- REVIEW OF LITERATURE

Derrig,R.A.(2002)1says that insurance fraud is a major problem in the United States at the beginning of the
21st century. It has no doubt existed wherever insurance policies are written, taking different forms to suit
the economic time and coverage available. The term fraud carries the connotation that the activity is illegal
with prosecution and sanctions as the threatened outcomes. The reality of current discourse is a much more
expanded notion of fraud that covers many unnecessary, unwanted, and opportunistic manipulations of the
system that fall short of criminal behaviour .

Arjan Reurink (2018)2 This paper describes the empirical universe of financial fraud as it has been
documented in the academic literature. Specifically, it describes the different forms of fraudulent behaviour
in the context of financial market activities, the prevalence and consequences of such behaviour as identified
by previous research, and the economic and market structures that scholars believe facilitate it. The findings
of the literature review highlight a number of recent developments that scholars think have facilitated the
occurrence of financial fraud

Salleh ,Fauzilh(2018)3;says that the frauds are the factors influencing the attitudes of consumers towards
insurance claim fraud. In this research, data review was conducted on 60 articles associated with this study’s
objectives according to experts’ views and researchers’ experience. It was shown in this research’s primary
finding that economic issues, moral hazard, and perceived fairness are the elements which will result in
insurance claim fraud. This has validated the influence posed by consumer behaviour on insurance claim
fraud.

Jou.S.&Hebenton.B.(2017)4 says that the nature and prevalence of insurance fraud has been studied only to
a limited extent, even in the USA and Europe. Nevertheless, national authorities have pressed ahead with
various approaches to control such fraud. This paper briefly outlines the nature and difficulties around
measurement of insurance fraud and reviews key international trends in the regulation of fraud. It analyses
these findings in the context of actual practices of insurance companies which give evidence to the idea that
‘moral hazard’ is embedded in the institutional arrangements, social relationships, and moral economies of
private insurance.

Derrig.Richard.A.&Valerie,Zicko(2000)5says that there is widespread agreement that insurance fraud is a

major problem in the United States. There is little agreement, however, in what constitutes insurance fraud in
the many articles and research papers published on the subject during the past ten years. The term ‘‘fraud’’
carries the connotation that the activity is illegal and, hence, that prosecution and conviction are potential

30
outcomes of a specific fraud. We compile conviction rates, sentencing outcomes, and recidivism rates in
detail to illuminate the law enforcement process and to gauge the deterrent effect of prosecuting insurance
fraud in the criminal courts.

Chudgar,Dhara&Anjani Kumar Asthana(2016)6 says that life insurance fraud is posing a big challenge for
the entire industry because the number of life insurance frauds are increasing. These increasing frauds are
driving up the costs and premium for the companies. In order to curtail fraudulent activities in life insurance
fraud it is very much important to identify the drivers that contribute to this activity. Both qualitative and
quantitative research was used to identify various drivers, reasons which compel people to commit life
insurance fraud and finally understand the significant effect of external drivers i.e poor control and economic
recession on internal drivers that is fraudsters attitude

Sullivan Carol& Heather Hull(2000)7,indicated that healthcare fraud, waste, and abuse losses are estimated
to be as much as $700 billion per year. These losses contribute to rapidly increasing healthcare costs for all
Americans and have led Americans to approach healthcare from a money motivation standpoint. This money
motivation can lead to a lack of healthcare or the malpractice of healthcare which can actually result in
death.. With a better understanding of the type of frauds that can take place, auditors can help prevent these
frauds with better internal controls and protect society from both skyrocketing healthcare costs and
unnecessary medical problems.

Crocker, Keith&Sharon Tennyson(2000)8,says that claims auditing is not a possible deterrent to fraud, and
the settlement strategy consists of an indemnification profile that relates the insurance payment to the
claimed amount of loss. The optimal indemnification profile is shown to involve systematic underpayment
of claims at the margin as a means to deter loss exaggeration, with the extent of underpayment limited by
expected litigation costs and potential bad‐faith claims. This suggests that liability insurers optimally choose
claims payment strategies to lessen a claimant's incentive to exaggerate losses.

Picard Pierre (2000)9,says that he survey recent developments in the economic analysis of insurance fraud.
The paper first sets out the two main approaches to insurance fraud that have been developed in the
literature, namely the costly state verification and the costly state falsification. Under costly state
verification, the insurer can verify claims at some cost. Claims’ verification may be deterministic or
random. Under costly state falsification, the policyholder expends resources for the building-up of his or
her claim not to be detected.

Picard Pierre(1996)10,says that this paper characterizes the equilibrium of an insurance market where
opportunist policyholders may file fraudulent claims. We assume that insurance policies are traded in a
competitive market where insurers cannot distinguish honest policyholders from opportunists. The insurer-

31
policyholder relationship is modelled as an incomplete information game, in which the insurer decides to
audit or not.

Sparrow ,(2008)11 says that existing literature on fraud analytics in insurance sector is very thinly
documented. Fraud is considered as a second category of white-collar crime in United States declared by
The U.S department of Justice, second only to violent cases (Sparrow, 2008). Fraud is relatively an invisible
crime and difficult to quantify and detect is argued by Sparrow . He also remarked that it is one of the most
serious and important area to be explored for future research. Insurance fraud is costly to individuals and the
insuring companies. Insurance companies also lose investment income when a fraudulent claim is filed.

Palasinski ;Wilson,(2009)12 remarked that insurance fraud presents financial, societal and humanitarian
costs. Out of all types of insurance fraud, the maximum cases are of automobile fraud. It is observed and
estimated that 10% to 20% of the automobile insurance claims are fraudulent. It is also observed that the
current approaches of preventing fraud are broad and ineffective. The automobile premiums in the United
States total $110 billion, this would correlate to an approximate insurance fraud issue of $11 billion
annually.

Furlan et al.,( 2011)13says that the way it is shown that approximately 49% believe that they would not be
caught if they filed a fraudulent claim, 24% of the population believes that it is acceptable to exaggerate the
value of an insurance claim, and 11% believe that it is acceptable to submit a claim for damages not actually
lost and 30% agree that fraudulent activity will increase during downward economic growth.

Jay (2013)14research that the insurance fraud is difficult to predict and quantify. Though the insurance
frauds are subjective in nature and are of different types, the methods and process adopted by different
insurers to study and measure fraud is also not alike (Jay, 2012).

Button et al (2013)15 profiled the household insurance fraudster from close to 40,000 insurance claimants
retained on a database (specifically that of VFM Services). They found the household insurance fraudster to
be almost as likely male as female (54:46), aged 30-50 years with a mean age of 44, and from a variety of
occupations.8 While they suggest caution at generalising too much from their data, the findings lead the
authors to suggest that some types of fraud, at least, were determined by opportunity.

Gill et al’s (1994)16 work on home insurance fraudsters found that those under 30 years of age were
disproportionately more likely to make a fraudulent claim, and 60.8 per cent of those under 45 years of age
knew of someone who had committed insurance fraud, with little difference between genders. The vast
majority of the small number of people who admitted an insurance fraud also reported knowing someone
else who had committed the same offence.

32
Levi (2008)17 has noted of fraud generally, but it is equally applicable to insurance fraud, that some types
require specialist skills (and to this may be added access to networks of suitably qualified co–offenders),
while other types of fraud, involving low levels of skill, may be committed by ordinary people, for example
by adding items to others legitimately taken in a burglary.

Gill (2005)18, In his study of occupational fraudsters, reports on the case of Robert who worked for an
insurer in the claims department. Because he had working knowledge of the insurer’s weak internal
processes for checking claims and was aware of auditors’ practices (specifically the types of files and cases
they did not check), Robert was able to make false payments so they looked like they were being paid to a
third party but in fact were paid to him (or someone working with him). He fraudulently obtained money
over a two-year period before he was caught.

McGuire et al (2012)19 indicated that considerations to be put in place by insurers before pricing include the
age of the plan members, size of the group to be covered and the past claims experience if available. He
supported his arguments by indicating that on the basis of age, more premiums are charged on the older
members to take care of the chronic diseases and their low immunity. From this the insurer will be able to
pre-determine how the claims utilization of the members will look like and this will assist them when pricing
and in turn be able to pay for any claims that occur and at the same time be able to make profits.

Baradhiway .C. (2011)20 enumerated different frauds. Some are clients related and involves falsifying
documents at different stages, giving false information on ones health, money laundering over exaggeration
of claims or even fake claims .Also highlighted various types of insurance fraud and their manifestation as
well as measures of detecting, mitigating and finally for prevention of fraud.

Sunita Mall(2018)21:says that frauds in insurance are typically where a fraudster tries to gain undue benefit
from the insurance contract by ignorance or wilful manipulation.

Nicola J.Morley, Linden J Ball&Thomas C.Ormerod Lancaster University,uk(2011)22:argues that insurance

fraud is a serious and growing problem ,and there is widespread recognition that traditional approach to
tackling fraud are inadequate .An alternative approach is to be done to understand and then to optimize
existing practices in the detection of fraud.

H.Lookman Sithic, T Balasubramanian (2013)23:says that with an increase in financial accounting fraud in
the current economic scenario experienced , financial fraud is a deliberate act that is contrary to law ,rule or
policy with intent to obtain unauthorized financial benefit. Data mining techniques are providing great aid in
financial fraud i e. bank fraud ,insurance fraud and security fraud is nothing but wrongful and criminal trick
planned to result in financial or personal gains.

33
Faseela,V.S,&D.P.Thangam(2015)24:argues that health care frauds to substantial losses of money each year
in every country. Effective fraud detection is very important for reducing the cost of health care system. so
to make health insurance feasible there is need to focus on eliminating fraudulent claims.

Dhara Shah & Anjani Kumar Ashtana (2013)25:says that insurance fraud is one of the most serious problem
threatening viability of insurance companies .Insurance companies have witnessed increase in the number of
fraud cases since couple of years .insurance frauds are driving up the overall cost of insurers and premiums
for policyholders .it encompasses a wide range of illicit practises and illegal acts.

34
CHAPTER 4- DATA
ANALYSIS AND
INTERPRETATION

35
 CHAPTER 4- DATA ANALYSIS AND INTERPRETATION

4.1 MEANING

Data analysis is defined as a process of cleaning, transformation and modelling data to discover useful
information for business decision making. The purpose of data analysis is exact useful information from data
and taking the decision based upon the data analysis.

 4.2 TOOLS OF DATA ANALYSIS 

Data analysis tools make it easier for user to process and manipulate data, analyse the relationships and
correlation between data sets and it also helps to identify patterns and trends for interpretation, here is a
complete list of tools.

 EDITING:

The editing of data is a process of examining the raw data to detect errors and omission and to correct
the, if possible, so as to ensure legibility, completeness consistency and accuracy. 

 CODING:

Coding is the process of assigning some symbols (either) alphabetical or numerals or (both0 to the
answers so that the responses can be recorded into a limited number of classes or categories. The
classes should be appropriate to the research problem being

 CLASSIFICATION:

In most research studies, voluminous raw data collected through a survey need to be reduced into
homogenous groups for any meaningful analysis. This necessitates classification of data, which in
simple terms is the process of arranging data in groups or classes on the basis of some characteristics.

 TABULATION :
The tabulation is used for summarization and condensation of data. it aids in analysis of
relationships, trends and other summarization of the given data. The tabulation may be simple or
complex. Simple tabulation results in one way tables, which can be used to answer the questions
related to one characteristic of the data. The complex tabulation usually results in two way tables,
which give information about two interrelated characteristics of the data.

36
  GRAPH :

Graph representation is another way of analysing numerical data. A graph is a sort of chart through
which statistical data are represented in the form of lines or curves drawn across the coordinated
points plotted on its surface. Graphs enable us in studying the cause and effect relationship between
two variables.

 DIAGRAM:

A diagram is a symbolic representation of information using visualization techniques.

Diagrams have been used since ancient times, but became more prevalent during the Enlightenment.
Sometimes, the technique uses a three-dimensional visualization which is then projected onto a two-
dimensional surface. The word graph is sometimes used as synonym for diagram.

4.3 TEST OF DATA ANALYSIS

A test can be considered an observation or experiment that determines one or more characteristics of a given
sample, product, process, or service. The purpose of testing involves a prior determination expected
observation and a comparison of that expectation to what one actually observes.

a) T-TEST:

Test for a student’s distribution-i.e. in a normal distributed population where standard deviation in unknown
and sample size is comparatively small. Paired t-test compares two samples.

b) Z-TEST

A z-test is a statistical test to determine whether two population means are different when the variances are
known and the sample size is large. It can be used to test hypotheses in which the z-test follows a normal
distribution

a) CHI-SQUARE TEST:
Test for an association of significance between two categorical in a population sample. Typically used with
random sampling.

b) ANALYSIS OF VARIANCE (ANNOVA)

Test for and analysis differences between the means in several groups. Often used similarly to a t-test, but
for more groups.

37
 c) TREND ANALYSIS

Trend analysis is the widespread practice of collecting information and attempting to spot a pattern. In some
fields of study, the term "trend analysis" has more formally defined. In project management, trend analysis is
a mathematical technique that uses historical results to predict future outcome. This is achieved by tracking
variances in cost and schedule performance. In this context, it is a project management quality control tool.

4.4 QUANTITATIVE RESEARCH METHOD

Mean, mode and median are popular quantitative research methods used in business, as well as, engineering
and computer sciences. In business studies these methods can be used in data comparisons such as
comparing performances of two different businesses within the same period of time or comparing
performance of the same business during different time periods

a. Mean:

Mean implies average and it is the sum of a set of data divided by the number of data. Mean can prove to
be an effective tool when comparing different sets of data; however this method might be disadvantaged
by the impact of extreme values.

b. Mode:

Mode is the value that appears the most. A given set of data can contain more than one mode, or it can
contain no mode at all. Extreme values have no impact on mode in data comparisons, however, the
effectiveness of mode in data comparisons are compromised in the presence of more than one mode.

c. Median:

Median is the middle value when the data is arranged in numerical order. It is another effective tool to
compare different sets of data, however, the negative impact of extreme values is lesser on median
compared to mean.

4.5 CASE STUDY

Fraudsters learn trick of Section 45 in life insurance, file death claims after three year lock-in

It is estimated that insurers lost almost Rs 250 crore in the last calendar year due to frauds.

38
A week after a 55 year-old policyholder paid the third premium, a mid-sized life insurer received a death
claim on his policy. The insurance company paid his family the Rs 7 lakh death claim.

Problem arose when a month later, another insurance company got a proposal form to buy insurance policy
from the same 'dead' man. A sales executive was quick to spot the anomaly since the proposal form had the
exact details.

"The policy term was five years and the sum assured was Rs 7 lakh. And similar to the past case, the family
took the policy in the name of the insured. We realised that this person was dead years ago and that we
would receive a claim after three years," said the sales executive.

The policy proposal was declined, and the kin were caught red-handed.

The fraudsters had caught on to this key clause - all death claims filed three years after buying an insurance
policy are payable by an insurer. Whether individual policyholders are aware of this or not, the conmen seem
to have caught on this opportunity.

When the Insurance Laws (Amendment) Act 2015 was passed, Section 45 of the Act was partially amended
to say that no claim can be rejected after three years. This means that once a policy has completed a three-
year period, any claim arising out of it will have to be passed.

But given the rising number of fraud claims, life insurers are in active discussions with the Insurance
Regulatory and Development Authority of India (IRDAI) to bring out possible solutions. Since it is part of
the Insurance Act, any changes to the law will have to be cleared by both the houses of the Parliament.

Insurance sources told Moneycontrol that while there was a drop in fraudulent activity in 2016 and 2017,
there was an increase in 2018. It is estimated that insurers lost almost Rs 250 crore in the last calendar year
due to frauds.
The rise in frauds is also proportional to the change in the law. While the three-year clause was there in the
earlier form of the law too,  it allowed insurance companies to investigate/reject fraudulent claims. Not
anymore.

While the insurance companies have tried to alert the police, the organised gangs are deft and quickly move
to a different city, or a state. Further, a majority of these gangs operate in collusion with doctors, agents as
well a few law enforcement officials. This makes it an almost impossible task to nab the culprits.
For genuine customers, it is no good news either. A rise in frauds means that insurers will either tighten
underwriting making insurance-purchase a time-consuming process or 'blacklist' certain pincodes.
39
If a prospective policyholder belongs to that pincode, their policy proposal would be subject to deeper
scrutiny and in case of any doubt, the policy would not be issued.

From a cost perspective, premiums could also increase if the cases of frauds increase. This would mean that
the good customers would compensate or pay for the misdeeds of the bad customers.

Companies had also sought inclusion of 'insurance fraud' as a category in the Code of Criminal Procedure.
However, no such move has been made on that front.

Life insurance:

 Claims is the major area where most of the frauds occur.

 Only 10% of the frauds are being detected.
 It is difficult for the insurance company to maintain the claim settlement ratio and detect frauds at the
same time.

40
  Proper scrutinizing at the beginning and proper investigation at the time of claims can reduce the
frauds.
 Impact on the financial statements in figures or % cannot be determined due to confidential area.

4.6 DATA INTERPRETATION

Graph no 1.1 Growth of Life Insurance

Source : IRDA

Growth Check 2019

According to insurance regulator IRDAI, the life insurance industry registered growth of 10.75% with
premium collections of Rs. 508132.03 crore in FY 2018-19 as against Rs. 448809.44 crore in the previous
financial year.
G. Murlidhar, MD & CEO, Kotak Life Insurance said, The New Business Premium (NBP) by the industry
recorded a 37% year-on-year growth to Rs. 1.7 trillion year-to-date in November 2019. Further, Individual
Adjusted Premium Equivalent (APE) grew by 17% this year so far and is expected to end around the same
level in 2019.

41
 Figure no 1.6 Growth of Life Insurance Companies Market Shares

Source: IRDA FY2019

Life Insurance Corporation of India (LIC), which is the only public sector life insurer in the country,
continues to be the market leader with 52.78% share new business market share in FY19.
In the private sector, HDFC Standard Life Insurance is leading with a share of 14.25% in new business
premium, followed by SBI Life Insurance at 9.15% and ICICI Prudential Life Insurance at 6.35%.
How Fraud Analytics Add Value at Each Stage of the Policy Life Cycle?
Fraud can be detected across the four stages of the policy life cycle as mentioned below. Fraud analytics, if
deployed at various stages of the policy life cycle, enable insurers to have a comprehensive view of each
policyholder, which paves the way to discover organized frauds.

Point of Sale (POS)/Renewal Stage

Since a sizable part of claims fraud is initiated at the application stage, it is very important for insurance
companies to put a check on the underwriting fraud to decrease premium leakage and avoid exposure to
known fraud at the claims stage.

Apart from the traditional Red Flag indicator method, many insurers are using a combination of

business rules and analytics to tackle underwriting fraud. According to the WNS DecisionPoin™ survey, all

respondents deployed predictive modeling techniques at the underwriting stage to enhance understanding of

current and future insured risks, as seen in Exhibit 8. As a result, insurers were able to develop premiums
that accurately reflected the relative risk characteristics of the pool of underlying policyholders.

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 Graph no 1.2 Fraud Analytics at Underwriting Stage

Source: WNS Decision Point

After implementing analytics at the point of sale stage, most of the carriers were able to promptly detect
fraudulent policies and exercise better control over business rules indicators. This section of insurers also
experienced lower claims volumes and additional benefits as shown below.

Graph no 1.3 Fraud Analytics at Claim Handling Stage

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Claims Stage

At the FNOL stage, the role of claims handler is very important as they are responsible for processing and
investigating insurance claims relating to customers’ policies. Thus, the inability of claims handlers to
accurately notice doubtful patterns results in fake claims getting paid. The chart below illustrates important
role of analytics in the fraud detection process at the claims stage, investigation stage, and post- claims stage.

Graph no 1.4 Investigation of Fraudulent Claims

Source: WNS Decision Point

Investigation Stage

Within the claims life cycle, analytics is largely used at the investigation stage. At this stage, investigators
scrutinize each claim referred to by claims handlers. They compare claims’ data against various data sources
(such as policy information, claim history, medical reports, NICB, ISO, among others) to check the veracity
of the information provided by claimant. Analytics play an important role in collecting, consolidating and
integrating scattered data from various data sources. Techniques such as social network analytics enable
investigators to quickly uncover linkage of claimants with fraudulent activities, thereby, decreasing the
amount of time taken to expose hidden relationships among entities and potential fraud. However, owing to
lack of in-house expertise, extensible and scalable information foundation and technology systems, adoption
of analytics by the U.S. based P&C insurers is low and they usually rely on automated red flags and business
rules to determine fake claims. Further, only predictive analytics is being deployed at investigation stage to
improve fraud detection and speed up claims processing, indicating underuse of other solutions, as shown in
the chart below.

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Post-Claims Stage

Application of fraud analytics at the post-claims stage is in a nascent phase and is mostly deployed by
players with P&C revenues over $5 billion. Few insurers employ a special team within their SIU, who
specially look into claims after their settlement. This team analyzes enormous volumes of claims data to
determine patterns of fraud, which surface gradually and are difficult to trace in individual claims
investigations. This is more common in the No-fault States, where insurers are required to make faster
settlements and do not have enough time to scrutinize claims thoroughly.

At this stage, the SIU analysts compare large volumes of claims data using multiple techniques and tools
(such as combinations of business rules, automated red flags, predictive modeling, and text mining, among
others) to uncover unrevealed inter-relationships between claims and other entities 8 involved in such
activities. These insights enable insurers to discover organized fraud, and also to continuously improve the
rules and models operating at the POS, FNOL, and Investigation stages.

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Graph no 1.5 Fraud Detection by Insurers

46
 Source: WNS Decision Point

In the current environment, where fraud rings adopt sophisticated techniques, real-time data availability is

crucial to increase accuracy. Analysis of internal and external unstructured data provides a great opportunity

to uncover complex fraudulent activities, which are difficult to trace through analysis of the structured data.

For instance:
 Scanning through social media interactions of a claimant may reveal his visit to a bar before his car
accident
 Applying analytics on claimant's social network data may reveal his connection with entities who
are/were involved in fraudulent activities
 Log notes and web interactions can confirm claimant's urgency for claim settlement, adjustor's notes
may point out inflated vehicle repairs

Such a multi-pronged, coordinated approach to fraud can be used for comprehensive risk shrinkage by

altering fraud detection policies/rules at underwriting stage and also save on promotional costs by avoiding

marketing to such 'potential high-risk' prospective customers. Apart from disclosing hidden fraudulent

activities, unstructured data analysis also enables insurers realize many benefits in terms of efficient

processes and reduced costs.

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 CHAPTER 5
SUGGESTION &
CONCLUTION

48
 CHAPTER 5- CONCLUSION AND SUGGESTION

CONCLUSION

Insurance fraud is an attempt to obtain money from insurance companies by arranging a loss or accident or
falsifying information on applications for insurance claims. Fraud can range from large, organized
operations involving hundreds of thousands of dollars to an otherwise honest individual who overstates a
legitimate claim. When caught, prosecuted and found guilty, most fraud perpetrators are required to make
restitution and jail time is also commonly imposed.

One knows that every coin has two sides. Similarly, insurance also has two faces. One of
which is investments and getting regular returns from finan cial institutions for oneself and
for loved ones. The other, awfully, is of which people deceive insuranc e companies for their
undue advantage and cause intimidation to many others. Though, there have been many laws and
agencies all over the world to impede such criminal activity, it is not a full proof solution to all
insurance frauds.

One cannot diminish frauds, schemes, swindles, scams but can positively be alert of them so as not be a
victim of it themselves . One must be sensitive and offer their helping as much as they can .Or put down
their foot down and make an attempt to change immoral to the right. The wrong will see the bright light of
truth and right with the revolution of knowledge, awareness, and an attitude for change amongst the
humanity.

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 SUGGESTIONS

Insurance fraud will disappear only when criminals realize fraud is a fast highway to jail, not an easy road to
riches. Everyone pays for a insurance fraud, and so everyone must join in stamping out these swindles.
Consumers, lawmakers, insurance, companies, doctors, lawyers and many more must be part of the answer.

PROTECT YOURSELF: STAY ALERT

 Never sign blank insurance claim forms

 Demand detailed bills for repair and medical services. Check closely for accuracy.
 Make sure “free services” aren’t actually hidden in insurance bill.
 Be wary of buying insurance from door-to-door or telephone sales people.
 Be suspicious if the price of insurance seems too low to be true.
 Contact your state insurance department to make sure the agent and company are licensed.
 Keep your insurance identification number secret; insurance crooks can steal it and involve you inn
scams.
 Contacts you’re STATE INSURANCE DEPARTMENT and the NATIONAL INSURANCE CRIME
BUREAU if you think you’re being scammed or someone asks you it take part in a fraud.

THE FUTURE- STILL DANGEROUS

 Young people raised on the internet will be the vanguard of this crime wave.
 The large population bulge on aging boomers needing more medical attention will keep health fraud
near the forefront of the largest and costliest fraud crimes.
 The elderly will remain one of the largest targets of insurance swindles. Investment schemes are
among the newest approaches: thousands of seniors are investing in bogus verticals – life insurance

50
policies that don’t exist or were obtained illegally. Many seniors also are investing in fake
promissory notes sold by insurance agents and guaranteed by non- existent insurance companies.

CHAPTER 6
BIBLIOGRAPHY

51
 CHAPTER 6- BIBLIOGRAPHY

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