Proposed insurance database system will curb fraud

Proposed insurance database system will curb fraud
Insurance. Photo/Courtesy

Jonathan Marucha

Stakeholders in the insurance industry welcomed with open arms the Association of Kenya Insurers’ (AKI) announcement to roll out an Integrated Motor Insurance Database System. The portal, which will be up and running by February, is meant to curb fraud by providing members with a platform they can use to verify the validity of information provided by clients.

From the portal, underwriters will verify the underwriting and claims history of a client as well as receive alerts on various fraud indicators that will be built into the system when it is completed and fully functional.

The development is a significant step as fraud in claims and premium debtors remains a major challenge in the insurance sector. Unlike its counterpart in the financial sector, where banks make customer reference to credit bureaus, the insurance sector still lags behind in developing a framework to monitor insurance premium cons or fraudsters.

Typically, insurance fraud occurs when any act is committed with the intent to fraudulently obtain some benefit to which they are not otherwise entitled or someone knowingly denies some benefit that is due and to which someone is entitled.

According to AKI, an estimated 35 per cent of insurance claims paid out are fraudulent. This has not only contributed to reduced prospects of growth in the sector but has, further led to the subsequent erosion of trust in the insurance business.

A 2016 report by the Insurance Regulatory Authority (IRA) reveals that insurers reported that 75 per cent of premiums collected were channelled towards payment for non-liability claims, while 66 per cent was paid for life insurance claims.

Furthermore, the report revealed that motor and medical insurance category continues to suffer major losses. In the report, of the Sh43 billion collected as motor insurance premiums, Sh25 billion was used to pay claims.

Under medical insurance, Sh38 billion was collected but underwriters paid out Sh17 billion in claims to service providers. Fraud contributes largely to the loss ratio as it enhances the escalating insurance costs thereby threatening its viability, which eventually makes it unaffordable to both existing and prospective customers who end up paying for the dishonest few who perpetuate fraud.

The industry’s success is hinged on improving counter-fraud strategies to focus on deterrence, detection and enforcement of industry regulations. To this end, the industry may borrow a leaf from Britain, which operates a well established Insurance Fraud Register (IFR) that supports fraud screening and detection.

The IFR, whose primary objective is to protect honest customers while at the same time reducing insurance costs, is sponsored by the Association of British Insurers on behalf of its members. It provides the industry with a central database of known insurance fraudsters making it easy to detect and prevent fraud. Moreover, the register serves as a crucial reference point when insurers are approached by people seeking to take out a policy or make a claim.

The IFR has closed loopholes that fraudsters exploit and improved fraud detection when underwriting and claims decisions are made thus creating a greater deterrent to potential fraudsters. Additionally, it has also lowered the cost paid by insurers for accessing this information.

It is high time the Kenyan industry considered a specific reference bureau to provide insurers with necessary data on the credit-worthiness and records of perennial claimants or fraudsters. Lack of a common database has seen fraudsters hop from one insurer to the other unnoticed.

Having a reference bureau will make it difficult for fraudsters to buy new products or renew existing policies. In our context, such a bureau would be set up by AKI and funded on behalf of its members; similar to that of the UK.

Moreover, to effectively manage premium fraudsters, the regulator would collaborate with existing Credit Reference Bureaus to make it more difficult for culprits to obtain other financial services.

The bureau would thus provide insurance players an opportunity to conduct basic, but critical, risk analysis before issuing covers. This will improve decision-making on risk acceptance; thereby providing protection as well as demonstrating a collective and non-competitive approach to the deter fraud. Such data will enable insurers to either reject proposals at the onset or price risks appropriately.

Establishment of such a reference point will instil confidence in the sector thereby improving insurance penetration, which still remains low. It would keep fraudsters at bay and thereby keeping the cost of insurance down for honest customers. The writer is executive director, Laser Insurance Brokers Ltd

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