Claims and Cover-ups: Deciphering Insurance Fraud with Forensic Accounting

Insurance Frauds are considered as Victimless Crime. But thats not the case, where there are no identified victims, the society is a victim.

Welcome to another #ForensicForesight article!

We have been exploring forensic accounting and financial fraud related topics in our article series. In the last article, we discussed healthcare sector frauds and how forensic accounting helps detect them.

You can find the previous article here!

Today, we understand a new domain prone to fraud - the insurance sector, and how forensic accounting plays its part in detection.

Insurance Sector

We often think of insurance fraud as related to the healthcare sector, which is prone to fraudulent claims. However, insurance fraud is pervasive in many other forms and sectors, such as auto/vehicle insurance fraud, property insurance fraud, etc. When we look at the big picture, one of the largest insurance companies reveals that in 2022, the company identified over 9,250 instances of fraud, saving approximately 12000 crores. A global study suggests that insurance fraud costs the industry billions annually, with some estimates reaching as high as $80 billion annually in the U.S. alone.

Insurance fraud is the act committed to obtain a fraudulent outcome from an insurance process. Exaggerating a legitimate claim, fabricating claims, or even lying on an insurance application to get a lower premium are some ways people perpetrate insurance fraud. The types of insurance fraud can be broadly categorised based on the nature of the schemes, the central themes they follow, and whether they originate internally or externally.

Here, we'll try to understand some of the most prevalent schemes.

Common Insurance Fraud Schemes

1. Fraud by Misrepresentation- Application Fraud: Providing false information on insurance applications.- Policy Misrepresentation: Misleading the insurers about details to receive low premiums.- Falsifying Theft Reports: Reporting fake or exaggerated thefts for claims.
2. Fraudulent Claims- Exaggerating the Claims: Inflating the value of legitimate claims.- Creating Fraudulent Claims: Staging accidents or faking incidents.- Medical Fraud: Fictitious injury or treatment claims by corrupt medical providers.- Arson-for-Profit: Deliberate destruction of property for insurance amount.
3. Property-Related Fraud- Disaster Fraud: Overclaiming damages from natural disasters.- Inflated Inventory/Paper Boats: Claiming losses for non-existent or overvalued property.- Phony Property Losses: Fabricating property damage or loss.
4. Insurance Professional Fraud- Internal Fraud: Unethical activities by insurance professionals, like pocketing premiums or issuing fake policies.- Broker Schemes: Brokers engaging in settlement fraud or by creating fictitious payees.
5. Vehicle and Liability Insurance Fraud- Vehicle Insurance Schemes: Includes 'ditching', repair fraud, and accidents with 'phantom vehicles'.- Liability Schemes: Staged 'slip and fall' incidents or other liability frauds.
6. Life Insurance and Personal Injury Fraud- Life Insurance Schemes: Including fraudulent death claims and vanishing premium schemes.- Personal Injury Schemes: Fabricated or exaggerated injury claims to exploit liability insurance.
7. Opportunistic and Organised Fraud- Opportunistic Fraud: Individuals exaggerating claims occasionally.- Organised Fraud Rings: Groups systematically engaging in insurance fraud (e.g., staged car accidents).

The Case of a Fraudulent Claim

Let us understand the role of forensic professionals and Fraud Examiners in the case of a fraudulent insurance claim. Note that while some investigative steps might be conducted by law enforcement, the expertise of forensic professionals is also equally important in complex financial deceptions.

The case involves a suspected fraudulent insurance claim following a staged vehicle accident. The key objective is to determine if there was a financial incentive behind the fraud.

For that reason, the forensic professional or a fraud examiner:

• Examines the claimant's financial records, focusing on assets, liabilities, income, expenses, and cash flow. This is to identify any financial strains that could have motivated the fraudulent claim.
• Review the specifics of the insurance claim, checking for inconsistencies or exaggerated damages common in fraudulent claims.
• Reviews both business and personal financial histories of the claimant. For instance, if the claimant faces business losses but has substantial undisclosed personal assets, the motive for insurance fraud may be less clear-cut.

Some of the key questions that the Fraud Examiner would ask are:

The forensic professional works in tandem with attorneys and insurance investigators.  They perform a document analysis to provide critical financial documents and records to attorneys for the investigation. They further guide the interrogation process by suggesting specific financial questions to uncover hidden motives or discrepancies.

Challenges in Insurance Frauds: The Need for Forensic Accounting and Fraud Examination Expertise

Detecting insurance fraud is a sophisticated task, filled with challenges that often require the specialised skills of a forensic expert/ Fraud Examiner. The diverse nature of fraud in the insurance industry almost always involves money. This is where a forensic accountant is essential. There are several reasons why financial fraud experts are called for in an investigation of the claims.

•  Advanced Techniques like Technology Manipulation and Identity Theft that Fraudsters Employ
• Overwhelming Data Volume to Detect Patterns of Anomalies
• Legal and Regulatory Complexity
• Diverse Nature of Fraud Types

Modern fraudsters are increasingly sophisticated, employing technology manipulation and identity theft. This requires a deep understanding of finance and technology, making forensic professional invaluable due to their expertise in these areas. Insurance companies handle a massive volume of claims regularly. Sifting through this data to spot fraudulent activities is an overwhelming task. Forensic professionals/ Fraud Examiners are trained to analyse large datasets, identify anomalies, and detect patterns indicative of fraud.

Forensic professionals and fraud examiners are adept at adapting their investigative techniques to suit different types of fraud, including an understanding of the various laws, ensuring that they stay one step ahead of fraudsters.

3 Key Red Flags in an Insurance Fraud: A Forensic Professional’s Perspective

• Irregularity in Financial Statements: Unusual patterns in financial statements, such as sudden spikes in claims or discrepancies in account balances, can signal fraud.
• Discrepancies in Claim Reports: Irregularities such as inflated claims, duplicate filings, or claims for non-existent injuries or damages. Mismatches between the claim details and supporting documentation are a common sign of fraud.
• Unusual Policyholder Behaviour: Patterns that may indicate fraud, such as a high frequency of claims shortly after policy inception or changes in coverage amounts just before a claim is made.

As we come to the end of this article, let us summarise the key factors that necessitate the expertise of a forensic professional or a fraud examiner in insurance fraud cases.

6 Factors That Necessitate Forensic Accounting Expertise in Insurance Fraud Cases

We will examine various fraudulent schemes and highlight the role of forensic accounting in each of them in our forthcoming articles.

Keep checking this space!

The previous articles in our #ForensicForesight series are in the following links!

1. Starting a Forensic Accounting Practice - How to Succeed in the Field
2. Exploring the Emerging Practice: Fraud Risk Assessment in Forensics
3. Extending the Reach: CAs, CMAs, and CSs brought under the ambit of PMLA reporting entities.
4. Building a Robust Fraud Risk Assessment Framework: Best Practices and Tips
5. Uncovering Deception: The Emerging Role of Detective Forensic Accounting
6. Building the blueprint: planning a forensic engagement
7. Forensic Accounting Engagements: Exploring Standards for Comprehensive Planning
8. Piecing the Puzzle: The Art of Evidence Collection in Forensic Accounting
9. From Pieces to Patterns: The Intricacies of Evidence Analysis in Forensic Accounting - I
10. From Pieces to Patterns: The Intricacies of Evidence Analysis in Forensic Accounting - II
11. Unmasking Deception: The Interplay of Human Behaviour and Forensic Accounting
12. Tracing the Trail: The Role of Forensic Accounting in Money Laundering
13. Tracing the Trail: The Role of Forensic Accounting in Money Laundering – II
14. Procurement Pitfalls: How Forensic Accounting Exposes Deceptive Schemes
15. Diagnosing Deception: Forensic Accountant’s Role in Identifying Healthcare Fraud

Dr. (CA) Durgesh Pandey

Durgesh is a highly accomplished forensic accounting and fraud investigation professional. He holds the distinction of being the first PhD in Forensic Accounting from the National Forensic Sciences University (NFSU), Gandhinagar, an Institute of National Importance under the Ministry of Home Affairs, Government of India.

He has trained thousands of professionals and law enforcement officials on financial crime investigation.  He is passionate towards research/teaching and associated with NFSU as professor of practice. He regularly speaks and publishes internationally.