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Insurance fraud & corruption risk: Leveraging global expertise to reduce the risk in Christchurch

Author: Jason Weir and Ian Tuke

The earthquakes in Canterbury have created a disaster on scale not previously seen in New Zealand during our lifetime. The vast sums of money involved in the rebuild and recovery creates an unprecedented opportunity for fraud and corruption and we are now seeing large scale frauds being uncovered.

As part of the Deloitte Forensic programme to assist both private and public sectors manage this risk, we along with the Serious Fraud Office arranged for Peter Dent, a global expert in Post Disaster Fraud and Corruption, to share his experience with New Zealand public and private sector leaders charged with rebuilding Christchurch.

Peter’s experience covers 30 global natural and man-made disasters including the response to the Boxing Day Tsunami, Hurricane Katrina, the BP oil spill and Japan’s earthquake/tsunami/nuclear contamination event. Sadly, the common theme Peter finds across first and third world disasters is the significant increase in fraud and corruption as vast sums of money are injected into initial relief and the subsequent rebuild. Public and private sector insurers face the brunt of the risk.

International experience shows that, regardless of the country in which it occurs, fraud and corruption activity increases significantly following natural disasters. While cultural norms and statutory frameworks impact on the scale of financial crime, experience shows that early and effective incorporation of fraud prevention and detection measures as part of the recovery process are also critical to minimising losses from financial crime. A decision was made in the immediate aftermath of Hurricane Katrina to form a Fraud Taskforce which was able to detect US$6 billion in fraud. A key strategy was sharing information and the application of data analytics across this information to detect fraud and identify control weakness. This quantifiable number represented between 10% and 17% of fraud across the total value of claims made. The same approach was then applied by BP and the Japanese government to consistently capture, analyse and prevent significant losses.

There is a growing realisation in both the public and private sectors in New Zealand of the size of the challenge and the potential savings available in Christchurch - even a conservative estimate of 5% fraud amounts to a loss of $1.5 billion assuming a total spend of $30 billion. Peter was interviewed by general TV, radio and print media during his visit, underlining the level of interest in ensuring that no money is wasted in lining the pockets of fraudsters.

So how can this significant fraud risk be managed?

One of Peter’s key messages is that to find fraud you have to actively look for it. His experience suggests we can expect to see:

  • Fraudulent/inflated claims
  • Collusion between parties involved in the rebuild
  • Corruption of public officials

Three of the more powerful tools for preventing, detecting and deterring fraud are:

  • Fraud risk assessment – The best starting point for preventing fraud is by conducting a Christchurch focussed fraud risk assessment. Our approach to the insurance fraud risk in Christchurch involves gaining a thorough understanding of every step of the claims process, from lodgement of claim through to payment of parties involved in the rebuild, and then by ‘attacking’ those stages from a fraudster’s perspective, the control weaknesses are highlighted. This enables remedial action to be taken to tighten the processes. The best result requires a collaborative approach between insurers, counter-fraud professionals and third parties to ensure that processes and systems can be tested given the known schemes already operating in Christchurch as well as those expected in future based on overseas experience;
  • Data – each insurer and public sector agency involved in Christchurch holds vast volumes of data, which presents a fantastic opportunity to identify fraud that would otherwise remain hidden. As an example, many organisations are now comparing customer, employee and supplier databases, looking for links and relationships between these groups. The power of data is amplified when insurers and public sector agencies are able to share information. The barriers to this occurring should be carefully examined to determine if they are warranted;
  • Public – the Insurance Council is launching a fraud hotline for members of the public to report insurance fraud related concerns. Overseas experience shows that the reporting rate significantly increases following the publication of “offensive” examples of insurance fraud. The publication of these examples can also provide a powerful deterrence to many people.

Please contact Ian Tuke or Jason Weir if you would like to learn more about managing fraud risk.

Forward Focus November 2012 contents

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