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Thursday, September 1, 2011

Counterfeits and Fakes - in Insurance also !! - Fake Policies

There is a major conundrum in Insurance Industry – Insurance Companies want more policy holders and less no. of claims – they find that claims could be manipulated, exaggerated, falsified, overstated or their calculations could go eerie – all ending up in pile of losses for the Insurers.  The major problem is their product is not otherwise discernable at the time of selling, it can be experienced only by those who have had claims.

Though most policy holders get influenced by the rates rather by any other scale including the service levels, their look out is whether the Insurance Companies would properly settle the claims at the hour of need.  They always have a mindset that Insurers would be evasive and not honour their claims ducking under some of the policy conditions, which neither try nor can understand.. with the multi interpretations possible.  They are also afraid of the solvency, creditworthiness and credibility of the Insurers.  A big loss will hurt all.. When there is perceived manipulation by the claimant, Insurers generally resort to repudiation of claims but seldom proceed further i.e., generally do not resort to any prosecution.

The market players are many – now there are 24 in all which includes the four Public Sector Insurers + ECGC + Agricultural Insurance. Added there are Insurance Agents and Insurance Brokers – Multinationals and other small and big Companies.   For most Insurers, Motor Insurance provides the largest chunk of the premium followed by Retail business including Health policies and then insurance of factories, warehouses, cargo and more. 

In that scenario, when Indian roads are choking with more of vehicles of all description, with the   no. of motor vehicles always on the increase –  many of them being  high end vehicles also,   Premium income should be flowing unabated  to the coffers of Insurers  … but .. the problem is manifold – the claims ratio is high, the third party settlements are eating into Insurer’s reserves.  Then there are vehicles plying without insurance and there are some instances where with connivance of authorities, Insurers are foisted with liability when uninsured vehicle causes accident. 

Public Sector Institutions are known for their iron-clad procedures and strong fundamentals.  There is a general notion that when too many people get involved the controls go hay-wire !

Internationally, Brokers play a major role – here in India they are regulated by IRDA.  Historically, a  broker is one who finds sources for contracts of insurance on behalf of their customers.  In UK, the Insurance Broker became a regulated term under the Insurance Brokers (Registration) Act 1977 which was designed to thwart the bogus practices of firms holding themselves as brokers but in fact acting as representative of one or more favoured insurance companies.   That Act has been repealed and  general insurance is since regulated by  the  Financial Services Authority since 14 January 2005.  Insurance broking is carried out today by many types of organisations   In India, the role of brokers is much limited in being a bridge between Insuring public and Insurance Companies  – they do not issue policies nor settle claims. In UK again, there are Lloyd’s broker – a firm approved by Lloyd's of London, and having  certain minimum standards, and being in a position to  place business directly with Lloyd's underwriters. 

Getting back, Insurance Policies are stamped documents issued by the Insurers themselves (documents printed by them) duly stamped and signed by their Authorised representatives (again not by any Outside Agency but by Company Officials of standing].  In Motor Insurance, though there is a temporary document known as Covernote which would be issued by Agents, Motor Dealers etc.,  Theoretically, it is a temporary document and should be further replaced by a stamped policy.   There have been a few occasions, when copies of covernote would circulate in market, not properly followed up by policy documents.  There could even have been instances where copies of a single cover note had been sold unscrupulously to many unsuspecting customers.

Who is the loser ?  At first instance, it would appear that it is the unsuspecting customer.  For him, having availed insurance protection,  in the unfortunate event of a claim, there would be no indemnification.  Sad ! – unfortunate that they would not attempt nor have they easy means of checking whether the document at hand is real !  Most times, automobile insurance is done for production as a document at the time of Registration of the vehicle or for showing to Police authorities when stopped in the middle of road, for escaping fines.  Actually, it hurts the Insurer more – they are deprived of their legitimate premium, being taken for a ride !  The law of large numbers and principles of Insurance would be more effective if only the playing field is even and proper. 

In this context, read an article of the prevailing situation in Nigeria where Insurers in collaboration with Security are to clamp down on individuals with fake policies.  The crusade is headed by Lagos Area Committee of the Nigerian Council of Registered Insurance Brokers (NCRIB), which   would entail stop and search of insurance documents of motorists.
Frauds are sophisticated – it is not always associated with economic conditions alone.  It is not as if frauds occur only in third  World or Developing Nations but they are dominant on affluent and advanced countries as well.    The African countries do not enjoy very high reputation in some matters.  Nigeria is a federal  constitutional republic comprising 36 states. The country is located in West Africa and shares land borders with the Republic of Benin in the west, Chad and Cameroon in the east, and Niger in the north.  The river Niger gives the country its name.  It is one of the most populous countries.  It is studied that there are  four distinct systems of law in Nigeria: English law which is derived from its colonial past with Britain;  Common law, a development of its post colonial independence;  Customary law which is derived from indigenous traditional norms and practice, including the dispute resolution meetings  and Sharia law, used only in the predominantly Muslim north of the country.

Interestingly, this exercise is to extend to Marine sector also as it is reported that many certificates possessed by the Operators are fake.  There the problem is compounded by the distrust between Insurers and Brokers.  Lots of certificates reportedly are counterfeited.    It is stated that the way to stop counterfeiting is through mutual respect and collaboration. Respect for brokers by underwriters and respect for underwriters by brokers. The basic problem is not with the people, who are counterfeiting but with the industry.

The Nigeria Lagos Area Committee has proposed to get on to the streets and ports for identifying fake licenses, fake marine certificates and more.  Nigeria reportedly has a law which when invoked would entail jail sentence or fine – there is also talk of a national data base. 

Sure when there are stricter laws, enforcement would be lot easier but primarily the system should be good enough to avoid such malpractices – not much of purpose is served in running after the culprits rather than preventing occurrence of such events.  Whether Nigeria is successful is of interest not only to political watchers, Enforcement authorities – also to Insurers round the Globe.

With regards – S. Sampathkumar

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