With the growth in the life insurance sector, the prevalence of financial crime within the life insurance sector has increased.
The latest EY report on ‘Strengthening the life insurance industry in India by mitigating financial crime risks’ shows that the commission paid to the agents has emerged as one of the main fraud-prone areas. Bribery, corruption, commission-related issues and conflict of interest with employees are some of the key concerns in this regard.
It also says that increase in the interaction between the employees of the insurance company with third parties can lead to higher incidence of fraud. Hence, the respondents of the study believe the current business environment makes the industry vulnerable to financial fraud.
EY conducted a case study to ascertain the risk of fraud on this parameter.
Some of the key vulnerabilities observed are:
*Vendor empanelment process and vendor creation process not interlinked, resulting in non-empanelled vendors getting on-boarded
*Data de-duplication based on limited parameters, leading to duplicate payments to the vendors or creation of dummy vendors
*Absence of a job rotation process for employees in the payout function, thereby increasing the risk of conflict of interest
*Payout file uploaded could be subjected to manual intervention, leading to a risk of unauthorized manipulation
Over 40% of the respondents believed that collusion with third parties is one of top three areas susceptible to fraud. Over 20% highlighted that vendor management and payouts is another function prone to fraud, thus highlighting the importance of effective background checks or due diligence on third parties.
The other areas that are susceptible to fraud are underwriting, gaps in operational processes, money laundering and associated risks, and the underdeveloped transaction monitoring capabilities.
The study says that insurance companies as insurance companies are under severe pressure to increase revenue, the applications and document details are not properly checked for reliability or precision. Hence, effective underwriting process, due diligence, background checks and reviews become critical.
Another problem area is manual processes or ‘disjoint units, systems and data sets’ which leads to multiple issues, including the inaccurate flow of data, incoherent mapping of information and gaps in the tracking of critical data sets.
The report also said that 25% of the respondents indicated that transactions made through demand draft are more vulnerable from a money laundering perspective.
EY said that life insurance companies need to assess the enhanced use of technology to identify risks emanating from money laundering.