IRDAI vide Circular Ref. No. lRDA/SDD/MISC/CIR/009/01/2013 dated January 21, 2013, issued the extant Insurance Fraud Monitoring Framework (“Framework”) to provide regulatory supervision and guidance on the adequacy of measures taken by insurers to address and manage risks emanating from fraud.
The Framework has been reviewed to address the evolving nature of fraud. Stakeholders and the public are invited to submit comments and suggestions on the proposed draft on the Framework (Proposed Draft) to sdd@irdai.gov.in in the following format by 13th November 2024:
The major highlights of the Proposed Draft are as under:
- IRDAI has issued the IRDAI (Insurance Fraud Monitoring Framework) Guidelines, 2024 which shall be applicable to all insurers and distribution channels with the aim to establish a comprehensive framework to identify, assess, and mitigate fraud risks effectively across the insurance industry.
- Classification of Fraud- Internal Fraud shall involve deceit by internal staff, such as employees or management, through actions like misappropriating funds, altering documents, or colluding with fraudulent claimants. Distribution Channel Fraud shall capture the incidents that occurs when distribution channels misrepresent policies, siphon premiums, or create fake documentation to deceive the insurer or policyholders. Policyholder Fraud shall includeincidents where individuals obtaining insurance coverage or payments through misrepresentation, forgery, or falsifying documents during any policy-related process. External Fraud shall be those perpetrated by external parties, including vendors and service providers, involving actions like creating fake reports, inflating costs, or selling counterfeit insurance policies.
- Risk Governance Framework-
It requires robust policies for early detection, swift response, and ongoing monitoring, with oversight by the Chairperson, CMD/CEOs, and relevant board committees to mitigate fraud effectively, as it shall include:
3.1 Anti-Fraud Policy –
Upon implementation of the exposure draft, the Insurers are required to implement a Board-approved Anti-Fraud Policy that outlines procedures to deter, prevent, detect, monitor, investigate, and report fraud, aiming for zero tolerance. This policy shall consider the insurer’s size, risk profile, and complexity, establish essential checks for early fraud identification, and include mechanisms for reporting incidents to law enforcement. It should also outline disciplinary actions for fraud, incorporate fraud detection measures for online platforms, ensure adequate resources for the Fraud Monitoring Unit, prevent individuals involved in fraud from holding sensitive positions, and define responsibilities across functions. The policy shall be reviewed at least annually to adapt to evolving risks and trends.
3.2 Fraud Monitoring Committee –
Upon implementation of the exposure draft, the Insurers shall be required to establish a Fraud Monitoring Committee (FMC) to oversee activities related to fraud deterrence, prevention, detection, and reporting. The FMC, led by a Key Management Person and including senior representatives from relevant departments, is responsible for recommending fraud risk management measures, ensuring prompt responses to fraud suspicions, and implementing the fraud governance framework across the organization. Additionally, the committee shall monitor fraud prevention efforts, conduct awareness and training programs, and submit quarterly reports to the Risk Management Committee detailing fraud cases and their financial impacts, while also reporting annual reviews to the Board of Directors and any internal fraud cases to the Audit Committee.
3.3 Fraud Monitoring Unit –
Upon implementation of the exposure draft, the Insurers shall be required to establish an independent Fraud Monitoring Unit (FMU) to support the FMC in executing its functions related to fraud deterrence, prevention, detection, monitoring, investigation, and reporting. The FMU’s responsibilities include implementing FMC’s recommendations, monitoring claims and transactions for signs of fraud, conducting investigations while managing conflicts of interest, and promptly reporting fraud cases to the FMC. Additionally, the FMU shall maintain detailed records of each fraud case, collaborate with industry peers, law enforcement, and regulatory bodies to share intelligence on fraud schemes and perpetrators.
3.4 Risk Identification and Measurement –
Upon implementation of the exposure draft, the Insurers shall be required to implement measures to identify and assess fraud risks, including conducting an Annual Comprehensive Risk. Establish and regularly review Red Flag Indicators for fraud detection, tailored to their operations, using resources like those from the IAIS for guidance.
3.5 Risk Control and mitigation –
To mitigate identified fraud risks, insurers shall be required to implement measures across four key areas:
- Internal Fraud : This will include prudent HR practices, employee training on fraud awareness, a secure whistleblower mechanism, segregation of duties, and strict access controls for sensitive systems.
- Distribution Channel Fraud: This will include adoption of fit and proper standards for distribution channels, conduct background checks, track customer complaints, and scrutinize unusual policy turnover rates.
- Policyholder or Claims Fraud: This will include the measures to be taken to establish a robust client acceptance policy, safeguards throughout the product lifecycle, educating the public on fraud consequences, and employing advanced technologies to detect fraudulent patterns.
- External Fraud: This will require insurers to conduct periodic due diligence on vendors and regularly audit their performance in fulfilling contractual obligations.
- 4. Risk Monitoring and Review
Insurers shall be required to establish an “Incident Database” to track parties convicted of fraud and monitor trends in business performance from distribution channels. Additionally, they shall conduct periodic fraud-sensitive audits, continuously oversee vendor activities for compliance, and monitor customer complaints to detect and prevent fraud.
5. Cyber or New Age Fraud
Insurers shall be required to establish a robust cybersecurity framework, continuously monitor and strengthen fraud risk systems, and deploy specialized teams with the necessary expertise to manage cyber fraud risks across various insurance lines.
6. Insurance Information Bureau (IIB)
Insurers shall be required to engage with the IIB to utilize its Fraud Monitoring Technological Framework, which leverages data analytics for fraud detection.
7. Framework for Reinsurance
Insurers shall be required to implement guidelines that apply to reinsurers, focusing on understanding fraud risk management systems to reduce exposure to fraudulent claims. Insurers shall seek direct confirmation from reinsurers after placement and premium remittance, and conduct robust controls, verification processes, and periodic audits to mitigate reinsurance fraud risks.
8. Framework for Distribution Channels
8.1 Intermediary and Insurance Intermediary
Measures will be required to recognize fraud risks and implement internal policies to deter, prevent, detect, report, and remedy fraud, including training and reporting structures. Any suspicion of fraud impacting the insurer should be reported, with the Board and Senior Management responsible for ensuring adequate fraud risk management.
8.2 Distribution Channels
Measures will be to comply with the insurer’s anti-fraud policies, and any suspicion of fraud that may affect the insurer shall be promptly reported.
9. Training, Education and Awareness
Insurers shall be required to provide ongoing training for employees, board members, senior management, intermediaries, and agents on fraud risk management, tailored to their specific business roles.
10. Reporting
Insurers shall be required to-
- report fraud incidents to Law Enforcement Agencies and relevant authorities;
- file annual returns using Form FMR-1 within 30 days of the financial year’s end;
- promptly report any fraud committed by distribution channels registered with IRDAI to the authority without delay.
A copy of the Exposure Draft is attached herewith for your ready reference.
Source category: IRDAI
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