One of the most important principles of insurance is “uberrima fides” which means Utmost Good Faith.
All insurance contracts are based on this principle.
Insurance companies are in the business of paying claims but only genuine and legitimate claims and not fraudulent claims.
Unfortunately there are some unscrupulous traders in every market who tend to make money out of insurance through fraudulent claims than they are able to make from the business itself.
Types of fraudulent claims
Fraudulent claims may include:
1. Fabricated claims and
2. Inflated claims
Purpose of insurance
Insurance is meant to protect insured by way of paying compensation arising from unforeseen or fortuitous losses.
Moral hazard appears to to play a big part in making a fraudulent claim or inflated claim.
Deliberate setting of fire to property by the insured or his/her agent is termed as “arson” – a specific exclusion from fire policies.
It may be difficult to establish or prove a case of arson.or fraudulent claim.
It continues unabated and is a matter of serious concern for insurers everywhere.
Early signs of moral hazard
Moral hazard may be apparent at the time of pre-inspection of risk before entering into an insurance contract. Some of the factors include:
1. Poor maintenance of property
2. Poor housekeeping
3. Poor bookkeeping
4. Reluctance to agree to risk improvement recommendations etc.
Manifestation of moral hazard after the loss
There may be manifestations of moral hazard after a loss has occurred which includes:
1. Non-cooperation with surveyors with regard to inspection of damage.
2. Reluctance to allow access to books of account
3. Reluctance to supply with supporting claims documentation etc.
Probable factors responsible for fraudulent claim (in bold)
Reasons which may be attributed to fraudulent claims namely:
1. Business is in bad shape
2. Business unable to repay large bank loans
3. Expiry of large stock of goods especially food items and medicines
4. Products especially dress material becoming out of vogue or fashion etc.
How insurers should respond to fraudulent claims (in bold)
Making fraudulent claims is a criminal offence. As such it should be dealt with strictly. The perpetrators of this crime should be brought to books.
Insurers in the West invest a huge amount of money every year in combating this menace.
They have a system of monitoring fraudulent claims through market intelligence and their own source and mechanism. It includes maintaining a “database” and sharing information regularly with other insurers in the market. They use their own resources to investigate a fraudulent claim.
It is a huge problem or headache for the insurance industry worldwide eating into their profits.
Insurers around the world are reportedly losing billions worth of dollars every year in paying fraudulent claims. It is nothing but a complete waste of money for the insurance industry.
Insurers should be watchful of traders making claims year after year. Dishonest traders take advantage of weak or poor monitoring systems, lack of cooperation between insurers etc.
Insurance sector in the developing world should come together and join hands in order to protect their interests. They should be prepared to spend money and use resources available at their disposal to contain or curb this social malady or menace.
If necessary, they should seek assistance from various government crime control and intelligence agencies in order to combat this crime.
Mr. Haque was brought up and educated in Dhaka. He obtained his master’s degree with honours in Biochemistry from University of Dhaka (DU). He spent nearly four decades in Dubai (UAE) working for several multinational insurance companies in various capacities. He obtained his Fellowship (FCII) from The Chartered Insurance Institute (CII), London, Associateship (AIRM) from The Institute of Risk Management (IRM), London, Associateship (ACIArb) from The Chartered Institute of Arbitrators (CIArb), London. He has authored several books on insurance which have been acclaimed both at home and abroad. He contributes regularly on insurance matters in various online insurance news portals and is a founder General Secretary of Bangladesh Insurance Professionals Society (BIPS). Presently Mr. Haque is serving as the Director of Sadharan Bima Corporation, Dhaka.