Irdai mulls SFIO-like independent agency to probe cases of insurance fraud

Insurance Fraud Investigation Agency proposed via Insurance Act amendment

The Insurance Regulatory and Development Authority of India (Irdai) is considering a recommendation to set up an independent investigation agency to probe cases of insurance fraud. This agency, if formed, shall be similar to the Serious Fraud Investigation Office (SFIO), which probes corporate fraud and comes under the Ministry of Corporate Affairs (MCA).

The proposed agency has been recommended by a working group -- constituted by Irdai and insurance councils -- that had representation from both insurance regulator and industry. Such an agency shall be called Insurance Fraud Investigation Agency; its creation has been recommended by amending the Insurance Act, 1938. The agency has been proposed to come under Irdai.

The insurance regulator is currently looking into the proposal, an official said.

Setting up such an agency in India can help in controlling and preventing fraud in the insurance sector. There are insurance fraud prevention agencies operating in many countries, such as the National Insurance Crime Bureau in the US, Canadian National Insurance Crime Services, and Insurance Fraud Bureau and Insurance Fraud Enforcement Department in the UK.

The proposed agency may help in keeping a check on fraud incidents that have been costing insurers dearly with some estimates pegging losses to insurance companies at over Rs 45,000 crore annually.

Currently, India has special investigation units for probing motor fraud in some states but there is no other independent, uniform law, regulation or agency to investigate insurance fraud across the country.

The working group has suggested that just as SFIO was set up in 2015 on the line of the Serious Fraud Office, the UK, to investigate, prevent and prosecute frauds in corporate affairs, the Insurance Fraud Investigation Agency must be formed to probe, prevent, adjudicate and punish the offenders pulling up insurance frauds. The independent agency is touted to manage a database on insurance fraud, and run the investigation and adjudicative mechanism for offenders through state machinery.  

The working group has also suggested that the insurance regulator may consider defining “insurance fraud” and a regulatory and statutory framework for the detection, investigation, and prosecution of insurance fraud.

Currently, cases of insurance fraud are covered through distinct provisions of the Indian Penal Code; they extend interpretational inference of such wrongdoing. People applying for an insurance policy are expected to disclose all material information in good faith, and any wilful non-disclosure is detrimental to insurance companies.

It has been recommended that provisions must be inserted in the Insurance Act to state instances of wrongdoing, such as fabricating claims, specifying false causes, and inflating the extent of loss and making them punishable offences.

Even as Irdai has put in place a fraud management framework for all insurers to internally identify fraud and prevent the same, the insurance regulator has been suggested to come up with a mechanism similar to that adopted by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi).

The RBI has a master circular for classification and reporting of frauds that underlines early detection, prevention, and timely reporting of fraud and action taken. Similarly, Sebi notified the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, for the prevention and investigation of fraudulent activities. The market regulator has also set up a Corporation Finance Investigation Department to conduct probes into fraud, diversion or siphoning or misappropriation of funds.

The insurance regulator may try to replicate such a framework from two other regulators or adopt practices followed in international jurisdictions, the working group has suggested.

The irdai is also considering to link insurance frauds a parameter for calculating credit scores in an attempt to put a lid on the increase in such activity, Business Standard had reported in June.  

Much-needed cover

• Insurance Fraud Investigation Agency shall be a specialised body to investigate, prevent, adjudicate and punish offenders 
• It will have functions similar to those assigned to the US’ National Insurance Crime Bureau, Canadian National Insurance Crime Services, UK’s Insurance Fraud Bureau and Insurance Fraud Enforcement Department
• Setting up of such a body has been suggested to Irdai by an internal working group 
• Estimates peg losses to insurance companies to the tune of over Rs 45,000 crore annually due to instances of fraud