Insurance Fraud Prevention and Detection through KYC and AML

Insurance fraud is one of the rapidly-growing threats. According to Friss, instance agents suspected almost 20% of claims that were fraudulent in 2022. This figure is expected to rise which may cost the insurers a loss of billions of dollars. Since financial criminals have become smarter and more creative in laundering money via fake identities.

Yet, insurance companies like other financial organisations are highly concerned about some particular matters such as money laundering, financial terrorism, tax evasion, and other frauds. Therefore, in order to execute insurance fraud prevention, these institutions incorporate KYC regulations into the industry to stay compliant and prevent it from financial crimes.

Thus, in this blog, KYC AML Guide will take you through KYC regulations that are integrated to bring insurance fraud awareness and prevent it further financial crimes.

Types of Frauds in the Insurance Industry

When it comes to the insurance fraud prevention act, it is crucial to understand different types of fraud in order to prevent them. So, insurance frauds are of several types:

   i. Insurance Fraud

This type of fraud refers to any illegal activity that may create threats and challenges for insurance agents and have an impact on their financial performance. For instance, some financial criminals or fake clients may try to claim payments from insurance companies by showing counterfeit evidence or faking their identities.

   ii. Counterfeit Claims

The counterfeit claim is the most common type of insurance fraud, which is a claim for fake insurance policies. These claims can be made by using fake policy forms which are being sold everywhere over the internet globally. Thus, the rise in health case expenses and digitalisation has also led to an abrupt increase in the number of counterfeit insurance claims.

   iii. Cybercrime

You must have heard of cybercrime, which is a broad term referring to any activity that involves digital crimes, attacks, and online scams. Cybercrimes can be used to rob user data and banking information to use it further for financial disruption and spread viruses.

   v. Identity Theft

Identity theft or identity fraud is yet another common financial and insurance fraud in the industry. Identities within the insurance network may be stolen by financial criminals and access their financial system. However, this is the most sensitive information which these criminals may use for illicit activities. Financial terrorists who have stolen organisations or individuals’ information can access their personal, social, and financial data and use it against their reputation.

   v. Conspiracy or Heist

Conspiracy or heist to commit robbery involves a group of people planning to steal sensitive information of the insurance company or its clients, and further use it for fake claims.

   vi. Ponzi Scheme

A Ponzi scheme is another type of fraudulent crime that involves participants who are promised to provide high returns on their investments. And ultimately, they end up losing all of their invested money, getting nothing in return.

4 KYC Compliance Regulations for Insurance Fraud Prevention

Staying compliant with KYC in the insurance sector is a continuous process that is carried out with numerous regulatory industries all across the globe. Yet, insurance firms must consider these regulations within their sector.

Insurance companies must adhere to regulations in both the insurance industry and the local and national laws in their operating area. Compliance is crucial to ensure the company can provide the proper coverage. Unfortunately, non-compliance can result in fines and legal problems, and in severe cases, the company may be shut down.

Below is a list of KYC and AML compliance standards that many financial, banking, and insurance organisations follow to remain compliant with the regulations.

   i. CCPA

CCPA stands for California Consumer Privacy Act, which was designed throughout California state. Its purpose is to improve the privacy rights of the customers who are acquiring banking services. This KYC regulation in the insurance fraud prevention act provides extra security and protection for California residents.

It means people who live in the United States must be compliant with the CCPA regulation. On the other hand, people living in European or other countries are not eligible to comply with this regulation.

   ii. AMLD5

Another common KYC compliance to bring insurance fraud prevention awareness is AMLD5, which refers to the 5th Anti Money Laundering Directives. This type of regulation must be compliant by financial institutions since it is an upgraded version of the AML regulation.

This AML compliance came into effect in 2018 and was offered to be introduced into domestic laws such as those with AML insurance firms. This KYC and AML compliance was adhered to by those running financial businesses despite how they fulfil the standards. However, companies that fail to remain compliant with AMLD5 may face huge fines.

   iii. GDPR

GDPR is one of the most renowned and significant KYC regulations to protect the personal data of consumers living in the European Union territories. It is a compliance tool that is used to protect users’ privacy and sensitive data. Moreover, it is used to transfer or utilise information inside or outside the EU or EEA regions that organisations are operating in.

   iv. PSD2

PSD2 stands for Payment Service Directive 2, which is the second version of the original payment service directive. However, this version provides better payment regulations for business owners and consumers via contemporary technologies and other payment methods.

Furthermore, it provides more security and measures to these insurance companies or agents who execute digital transactions regularly. It not only includes customers’ personal and financial information but other data which is required by the company as well.

Wrapping Up

Insurance fraud is a growing concern in the business world, especially in the banking and finance industries. It not only involves money laundering or asset theft but also erodes customer trust. Thus to conduct insurance fraud prevention measures, it's crucial to invest in fraud detection tools and resources. This will help protect your business and maintain customer confidence.