Impact of Insurance Fraud on Financial Management

Insurance fraud is a one of the serious crimes that organizations are currently facing.  Notably, the crime is considered a felony that attracts a punishment of more than seven years in States such as Pennsylvania (Dionne 65). Critical to underscore is that insurance fraud affects different types of insurance only. In most cases, the victims are given wrong information when applying for the insurance policy. Companies usually look to reduce any pay increases or bonuses and also delay promotions.  Studies show that when it comes to insurance fraud, it may range from a third party or a policyholder. According to a study conducted by Dionne,  this form of fraud is done by  violating the basic principles of insurance through either faking a loss or giving the wrong information on the cause of financial losses incurred in given instances. There has been cases of people even trying to fake their deaths to be compensated therefore benefiting from early payment when the real loss has not actually taken place (Dionne 55). The effect of insurance fraud to financial management and other related aspects of a business or organization cannot be underestimated.   The following paper seeks to analyze impacts of insurance to financial management. The paper starts by highlighting some of the major types of insurance frauds before discussing their effect on financial management.  

            Insurance fraud can either be internal or external (Dionne 85). Internal fraud takes place when an insurance company misinterprets information concerning the insured with the aim of ensuring that the financial gains are directed to the company’s earnings. On the other hand, internal fraud can as well take place by manipulating company financial records, which can benefit an employee or group of employees within an organization. External insurance fraud occurs when the insurance holder or the holder of the policy gives a claim without giving the correct information or by staging a loss.

            Identity theft is another type of insurance fraud. Connectedly, identity theft refers to the stealing of one’s personal information, which is used to commit crime (Dionne 67). The personal identities are used to access financial information of an organization or an individual or authorization of a financial transaction. Statistics show that crimes related to identity theft are common occurrence in the insurance industry (Dionne 45).  Studies have shown that the increased rate of this form of insurance fraud is contributed by the advancement and development of technology (Dionne 65). The use of internet and ATM’s has led to easier access of other people’s information. As is the case with many financial institutions, insurance companies use available technologies such as use of online and mobile-enabled platforms in the provision of services. However, the continued integration of technology in service delivery has increased the risks associated with instance fraud. Fraudsters use any vulnerability gap to take personal information such as credit card password in order to obtain goods or money.

On the other hand, car insurance fraud is another crime that is greatly increasing with time. The fraud takes place when people fake an accident or exaggerate the extent of the accident or even staging theft of their own cars (Dionne 48). Important to underscore is that in many instances, this form of crime is also is classified as felony. Car insurance frauds consist of claim exaggerations on their reports although there are those who take a greater risk of even endangering the lives of other people (Dionne 98). The rise in car fraud has led to insurance companies being keener and investigation is done before compensating the claiming party.

Impact Of Fraud On Financial Management

            Financial management is a key element in the success of any company. On this premise, the effects of insurance fraud on how financial institutions manage their performance cannot be underestimated. According to Dionne, insurance frauds have led to many negative effects on financial management, especially those in the insurance industry (Dionne 89). The customers suffer a great deal when the premiums get increased. Notably, in cases where money is repeatedly taken, the financial loss may become incredible. Consequently, there are reports on instance where companies end up raising the rates of premiums, which affects the interest rates and profit margins. 

            Understandably, most of insurance frauds go undetected making the insurance industries suffer greatly because they at times suffer losses without knowing the real cause of the loss. If a fraud goes undetected, the policyholder gets to benefit leaving the industry at a financial crisis (Dionne 87). In this case, insurance industries are as well losing many customers since many are withdrawing from their insurance covers due to the long time taken in the compensation claims.

On the other hand, the loss of customers due to insurance fraud also affects the financial management in a big way (Dionne 55).  Due to this form of fraud, most customers end up losing trust in insurance industries, which is contributed by the increase in undetected malpractices. Dionne notes that unless insurance industry finds a permanent way to deal with insurance frauds, many companies will continue losing since existing and potential clients develop fear on buying insurance policies. In order to make profits, insurance companies are forced to reduce the premiums, thus losing more customers. The result of this scenario is that insurance firms are not able to make profits, which is wrongly interpreted as poor financial management.

Dionne observes that insurance companies also find themselves delaying the process of paying premiums. Notably, the delay is caused by the long time taken to do investigation whether the claim should be approved or not. In the process of conducting the investigations, insurance companies end up going through a lot of expenses. The loss is further increased if the investigation proves that claims should be approved.   In the event of a fraud, the expenses incurred are supposed to be paid back by the insured. In this case, the fraud victim gets a problem when it comes to acquiring any other insurance or financial service. Connectedly, many insurance companies avoid dealing with clients who may have committed fraud before. Additionally, such cases not only affect the insurance industry because in case where a loss is genuine, the insured gets a delay, which might affect business operations.

Insurance frauds are always going to be there and every day they come up with new methods to cheat and it is due to this that the insurers are supposed to make detection of frauds a priority for them. Insurance industries should also ensure that honest customers do not suffer on behalf of the fraud, through either delay or payment of higher premiums.

            Some countries have taken the initiative of meeting occasionally to discuss the trends and challenges they are facing when it comes to insurance fraud. Most of the challenges faced in one country also faced by other countries. In some countries, they have trained specialists who specialize in investigating insurance fraud and although it cost the industries a lot of money, it is fruitful. The specialists are trained on how to detect insurance fraud easily, including how to handle such frauds, when to involve the police, and steps to take for easier investigation process. In cases, where the insurance staff gets training, their awareness increases and even though frauds come up with new methods to commit a fraud, they are able to detect the crime easily. In the United Kingdom for instance, they Fraud Bureau is tasked with detecting insurance related crimes as well as to prevent any kind of cross-industry insurance fraud. 

            Additionally, study has shown that most of the insurance industries these days have also increased their cooperation with the law enforcement in most countries (Dionne 99). Technology is getting better as years go by, which is an added advantage to the insurance industries. Although technology is used to commit insurance fraud, the same technology is utilized to uncover these fraud cases. At the same time, the public is encouraged to report cases where they experience insurance fraud issues. Admittedly, there are now electronic devices used to identify the authenticity of a document submitted by a policy claimer to the insurance industry.

Evidently, huge losses are incurred insurance organizations as they feel the effect of economic downtown, coupled with instance fraud (Dionne 58).   The increased rates of fraud in the business world make financial managers to come up with varied methods of minimizing losses, which affect the general financial performance.   Further, measures taken to minimize losses also end up affected long term business sustainability, including losing trust and reputation from shareholders, stakeholders, and the public as a whole. In this way, a financial institution is criticized for poor management, which is due to increased fraud cases.

The increased economic difficulties makes employees in the insurance companies feel the effects of recession (Dionne 69). In this way, some employees decide to engage in insurance fraud in the respective employment positions. Studies have indicated that sixty percent of the insurance fraud is done by employees, thus increasing the risk of being affected. Notably, employees’ engagement involves manipulation of financial records, which immensely affects the business performance. However, insurance companies should ensure that they work hand in hand with the authorities to reduce cases of insurance fraud.

Conclusion

As noted above, insurance fraud is a one of the serious crimes that companies are currently experiencing.  insurance fraud is considered a felony that attracts a punishment in many jurisdictions. Additionally, there are different types of insurance fraud such as identity fraud, car insurance fraud, among others as provided. One of the areas affected by insurance fraud is financial management. The main concern is that most of insurance frauds go undetected making insurance industries suffer greatly. notably, if an insurance fraud goes undetected, the policyholder gets to benefit leaving the industry at a financial crisis. However, technology is seen to contribute to the increased rate of fraud in the insurance industry. The main from of fraud is identity theft, which involves stealing personal information with the aim of accessing organizations’ or individuals’ financial records.

                                                                Works Cited

Dionne, Georges. Handbook of Insurance [recurso Electrónico]. , n.d.. Internet resource.