Insurance Fraud: Issues and Challenges

The insurance industry has positioned itself as a basic pillar of our modern society. It will undoubtedly continue to assume that status in the future, even though, under impulse of technological advancement and trends toward globalization and deregulation of financial and real markets, the nature of the insurance business and its value proposition are likely to undergo considerable changes. Insurance has become an essential ingredient of the risk and complexity management strategies for individuals, social groups and businesses. It has enabled us to cope with increasingly complex and uncertain circumstances. The insurance business’s core functions of collection, accumulation and management of contractual capital savings have made insurance companies into very important institutional investors and key players on the international financial markets. The insurance industry is one of the largest industries worldwide and the interdependencies with other industries are not to be underestimated. The insurance industry, however, is facing the pressure of intensified competition as banks and other financial players continue to move onto their turf, providing financial alternatives to traditional insurance. At the same time, large corporations are getting more direct access to the capital markets without the need for intermediation of traditional insurers. Also, the convergence between banking and insurance toward all-encompassing, integrated risk management continues to project onto the insurance function a banking rationale based on the assessment of shareholder value and financial performance gauging. The demand for transparent asset management and the efficient use of excess capital that results, are putting extra pressure on the competitive position of insurers. Serious cost control is now claimed to be of vital importance for the industry’s financial attractiveness and future viability. Many lines of business are facing a decline in earnings, reserve deficiencies, rising loss costs and other insurance expenses, as well as pricing difficulties. The issue of fraud control has gradually been gaining momentum as a means of keeping down insurance costs. Insurance fraud has most certainly been around from the very beginning (see e.g. Dornstein, 1996). Nevertheless, the amounts involved in fraud have certainly increased as insurance made its transition into modern consumer society. The