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How Insurance Companies Can Fight Occupational Fraud

08.07.2018

Businesses and organizations throughout the world are vulnerable to fraud committed by employees. This is known as occupational fraud, and it causes organizations to lose an estimated 5 percent of their annual revenues, according to the Association of Certified Fraud Examiners’ (ACFE) 2018 Report to the Nations.

Although no industry is immune from occupational fraud, the effects do vary. Of the 24 industries studied by the ACFE, insurance has the sixth highest incidence of reported occupational fraud cases. The industry suffers a median loss of $153,000 per case.

The most common fraud schemes insurance companies suffer

There are three primary categories of occupational fraud: asset misappropriation, corruption and financial statement fraud. Asset misappropriation encompasses various ways an employee may steal or misuse the employing organization’s resources, both cash and noncash. Corruption occurs when employees misuse their influence in business transactions, violating their duty to the employer for direct or indirect benefits. Corrupt acts include conflicts of interest, bribery, illegal gratuities and economic extortion. Perhaps the most straightforward, financial statement fraud pertains to an employee intentionally causing a misstatement or omission of information in an organization’s financial reports.

In the insurance industry, 45 percent of occupational fraud cases deal with some type of corruption. The next most common schemes are billing (20 percent) and check and payment tampering (18 percent), both of which are types of fraudulent disbursements under asset misappropriation.

6 common red flags of fraud

Understanding the behavioral red flags fraud perpetrators display can help organizations recognize the risks, detect fraud and mitigate losses. According to the 2018 Report to the Nations, 85 percent of fraudsters display at least one behavioral red flag. The following are the six most common behavioral indicators of occupational fraud:

  1. Living beyond means
  2. Financial difficulties
  3. Unusually close association with a vendor or customer
  4. Excessive control issues or unwillingness to share duties
  5. Recent divorce or family problems
  6. A “wheeler-dealer” attitude involving shrewd or unscrupulous behavior

In addition to these red flags, 45 percent of fraud offenders studied by the ACFE for the 2018 Report to the Nations also engaged in non-fraud-related misconduct, including bullying or intimidation, excessive absenteeism and excessive tardiness.

5 fraud prevention and detection techniques

Preventing fraud from occurring is the most cost-effective way to restrict fraud losses. According to the ACFE, organizations that implemented anti-fraud controls realized lower fraud losses. Consider the following techniques when reviewing your organization’s fraud-prevention checklist:

  • Develop an anti-fraud culture. Employees should know where they can seek advice when faced with uncertain ethical decisions. Everyone should also feel they can speak freely when a questionable situation arises.
  • Create a fraud policy. A policy of zero-tolerance for fraud should be communicated through words and actions to employees.
  • Conduct fraud awareness training. Ensure that employees understand what constitutes fraud. Employees should also understand the costs of fraud to the company and its employees (lost profits, adverse publicity, potential job loss, decreased morale and productivity, etc.).
  • Have a fraud reporting hotline. Institute a reporting channel, such as a third-party hotline, where employees can report suspicious activity anonymously or confidentially without fear of retribution. Set the example that reports of suspicious activity will be promptly and thoroughly evaluated.
  • Assess fraud risks. A fraud risk assessment can proactively identify and mitigate the company’s vulnerabilities to internal and external fraud. At a minimum, an organization should have the following strong anti-fraud controls in place: proper separation of duties, use of authorizations, physical safeguards, job rotations and mandatory vacations.

A formal fraud risk assessment is best directed by a Certified Fraud Examiner (CFE). This individual can conduct a thorough, independent and objective review and identify how fraud could occur within critical processes and who might be able to commit it.

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