UNIVERSITY OF GHANA

CAUSES, EFFECTS AND DETERRENCE OF INSURANCE FRAUD:

EVIDENCE FROM GHANA

BY

ISAAC AKOMEA-FRIMPONG

(10246640)

THIS THESIS IS SUBMITTED TO THE UNIVERSITY OF GHANA, LEGON IN

PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF MPHIL
RISK MANAGEMENT AND INSURANCE DEGREE

FEBRUARY, 2016

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 DECLARATION
I do hereby declare that this work is the result of my own research and has not been presented by
anyone for academic award in this or any other university. All references used in the work have
been fully acknowledged.

I bear sole responsibility for any shortcomings.

Names Date Signature

ISAAC AKOMEA-FRIMPONG .. .

(10246640)

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 CERTIFICATION

We hereby certify that this thesis was supervised in accordance with procedures laid down by the

University of Ghana.

......... ...........

DR. CHARLES ANDOH DATE

(1ST SUPERVISOR)

......... .........

DR. ERIC DEI OFOSU-HENE DATE

(2ND SUPERVISOR)

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 DEDICATION

This work is dedicated to the LORD GOD Almighty for His divine wisdom and strength given me
to go through this research successfully.

It is also dedicated to my mother-AMA BIO, my siblings and Rev. Ellis Zuzer Cofie for their love,
care and support.

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 ACKNOWLEDGEMENTS
This thesis would not have been possible if it were not for the tireless guidance and support I got
from my supervisors- Dr. Charles Andoh and Dr. Eric Dei Ofosu-Hene; I say thank you.

To all other faculty members of University of Ghana Business School, I owe you my deepest
gratitude for support and assistance; you stood by me during the course work and during the period
of thesis writing.

I thank my colleagues; your presence provided a source of warmth and gave me a source of hope
in challenging and difficult periods through the research.

I would also like to express my sincere gratitude to Dr. Tajudeen Olalekan Yusuf (University of
Lagos, Nigeria) for his assistance; Mr Nurudeen of SIC life, Mrs. Henrietta Breni and Yaw
Sarpong of Metropolitan Insurance, Mrs. Ann-Marian Owusu of Star Assurance, David Avor of
Vanguard Assurance for their unwavering support and encouragement during my data collection
and analysis.

Lastly, it is my pleasure to thank Agnes Asare, Caleb Boadi, Lois Owusu-Sekyere, Augustine
Anokye and Obeng family of University of Ghana Staff Village for their support.

God richly bless you all.

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 TABLE OF CONTENTS

DECLARATION ............................................................................................................................ ii
CERTIFICATION ......................................................................................................................... iii
DEDICATION ............................................................................................................................... iv
ACKNOWLEDGEMENTS ............................................................................................................ v
TABLE OF CONTENTS ............................................................................................................... vi
LIST OF TABLES ......................................................................................................................... ix
LIST OF FIGURES ........................................................................................................................ x
ABSTRACT ................................................................................................................................... xi
CHAPTER ONE ............................................................................................................................. 1
GENERAL INTRODUCTION ....................................................................................................... 1
1.1 Background of the Study ....................................................................................................... 1

1.2 Research Problem .................................................................................................................. 4

1.3 Research Objectives .............................................................................................................. 5

1.4 Research Questions ............................................................................................................... 5

1.5 Research Hypothesis ............................................................................................................. 5

1.6 Significance of the study. ...................................................................................................... 6

1.7 Scope of the Study................................................................................................................. 7

1.8 Chapter Disposition ............................................................................................................... 7

CHAPTER TWO ............................................................................................................................ 9

LITERATURE REVIEW ............................................................................................................... 9
2.1 Introduction ........................................................................................................................... 9

2.2 Extent, definition and types of insurance fraud..................................................................... 9

2.2.1 Extent of insurance fraud ....................................................................................................... 9

2.2.2 Definitions of insurance fraud ............................................................................................. 10

2.2.3 Types of insurance fraud ...................................................................................................... 11

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2.2.4 Deterrence of Insurance Fraud ............................................................................................. 13

2.3 Areas in the insurance markets where insurance fraud are rampant ................................... 15

2.4 Insurance fraud in the Ghanaian Insurance Industry ........................................................... 18

2.4.1. The Ghanaian insurance market: An Overview .................................................................. 18

2.4.2. Fraud in the Ghanaian insurance market ............................................................................ 19

2.5 Theoretical Review ............................................................................................................. 21

2.5.1 Fraud triangle ....................................................................................................................... 21

2.5.2 Adams Equity Theory......................................................................................................... 30

2.5.3 Diffusion of Innovation Theory ........................................................................................... 31

2.5.4 Game Theory ....................................................................................................................... 32

2.5.5 Natural Law Theory ............................................................................................................. 33

2.6 Conceptual framework ........................................................................................................ 34

2.7 Empirical Review ................................................................................................................ 35

CHAPTER THREE ...................................................................................................................... 38

RESEARCH METHODOLOGY.................................................................................................. 38
3.1 Introduction ......................................................................................................................... 38

3.2 Research design ................................................................................................................... 38

3.3 Population and sample size ................................................................................................. 38

3.3.1 Population ............................................................................................................................ 38

3.3.2 Sample and Sampling Techniques ....................................................................................... 39

3.4 Data Gathering instruments and procedure ......................................................................... 40

3.5 Method of Data Analysis .................................................................................................... 41

3.5.1 The Regression Model ......................................................................................................... 41

3.5.2 Assumptions underlying the regression model .................................................................... 44

3.6 Research Ethics ................................................................................................................... 44

3.7 Limitations to the methodology .......................................................................................... 45

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CHAPTER FOUR ......................................................................................................................... 46
DATA PRESENTATION, ANALYSIS AND DISCUSSION ..................................................... 46
4.1 Introduction ......................................................................................................................... 46

4.2 Descriptive Analysis ........................................................................................................... 46

4.2.1 Background Information ...................................................................................................... 46

4.2.2 Causes of Insurance Fraud ................................................................................................... 50

4.3 Statistical Measure of the Effects of Insurance Fraud ......................................................... 61

CHAPTER FIVE .......................................................................................................................... 67

SUMMARY, CONCLUSION AND RECOMMENDATIONS ................................................... 67
5.1 Introduction ......................................................................................................................... 67

5.2 Summary of the findings ..................................................................................................... 67

5.3 Conclusion........................................................................................................................... 69

5.4 Recommendations ............................................................................................................... 69

5.5 Limitations of the Study ...................................................................................................... 70

REFERENCES ............................................................................................................................. 72
APPENDIX 1 ................................................................................................................................ xii
QUESTIONNAIRE ...................................................................................................................... xii
APPENDIX 2 ............................................................................................................................. xviii

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 LIST OF TABLES

3.1 Reliability coefficients.41

3.2 Independent variables..43

4.1 Summary statistics...62

4.2 Correlation coefficients63

4.3 Results from the regression model (1).....64

4.4 Results from the regression model (2).....64

4.5 Results from the regression model (3).....65

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 LIST OF FIGURES

2.1 Fraud Triangle......22

2.2 Conceptual framework.....34

3.1 Insurance companies and their lines of businesses..39

4.1 Responses to the questionnaire47

4.2 Lines of business..48

4.3 Job titles of respondents...49

4.4 The three most ranked causes of internal fraud...51

4.5 Four factors that causes policyholder/claims fraud.....55

4.6 Factors causing intermediary fraud......57

4.7 Top three deterrence measures of internal fraud..58

4.8Top five measures that fight against policyholder/claims fraud...60

4.9 Top three measures that fight intermediary fraud61

4.10 Normality test of the regression model..66

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 ABSTRACT

This study measures the extent of effects of insurance fraud on the financial performance of

insurance companies in Ghana. It also examines the causes, and stringent measures that can be

used to fight against insurance fraud. Primary and secondary data obtained from 39 insurers in

Ghana are employed in this study. A multiple regression model is used to determine the

relationship between financial performance and insurance fraud variables. The results from the

model indicate that statistically insurance fraud has a significant negative effect on the annual

return on assets (financial performance) of insurers in Ghana. Also, responses from the survey

questionnaires indicate that weak internal controls, poor remuneration of employees, falsified

documents, deliberate acts of policyholders to profit from the insurance contract and inadequate

training for independent brokers are the major causes of insurance fraud in Ghana. To deter

insurance fraud: effective internal fraud policy, rigorous assessment of insurance policies and

claims of consumers, adequate training and supervision for independent brokers as well as

application of technological tools and techniques are key methods to fight this menace. These

findings are to have substantial implications on the techniques insurance companies will develop

to fight insurance fraud and the policies that will be developed by governments and national

insurance regulatory bodies to fight this menace.

Keywords: Ghana, Internal fraud, Intermediary fraud, Policyholder fraud, Return on Assets

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 CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of the Study

In recent years, the amount of empirical researches on insurance fraud coupled with studies on

market failures, information asymmetry and poor regulatory measures in financial sectors of

economies across the globe are increasing (Crocker & Tennyson, 2002; Derrig, 2002; Dionne &

Gagne, 2002; Yusuf & Babalola, 2009; Tseng & Su, 2013). This has come as a result of gargantuan

losses attributed to insurance fraud on the global insurance markets which runs into billions of

dollars affecting the growth of insurance firms and financial well-being of both insured and

uninsured (Dean, 2004; Tseng & Su, 2013; Tseng & Kang, 2015).

Insurance fraud occurs when an act is committed with the intent to obtain fraudulently benefits or

advantages from the insurance contract to which the perpetrator is not entitled to, or deny

knowingly some benefits to a party to the insurance contract (Derrig, 2002; Morley et al., 2006;

Swaby, 2010). International Association of Insurance Supervisors (IAIS) in 2007 described fraud

in the insurance market an act or omission intended to gain dishonest advantage for the fraudster

or for the purpose of other parties. Insurance fraud may be caused by mismanagement of resources

controlled by an insurer and/or insider trading, deliberate misrepresentation of facts, suppression

or non-disclosure of one or more material facts relevant to the insurance contract or the financial

transaction, and the abuse of responsibility or a position of trust in relation to fiduciary interests

(IAIS, 2007; Morse, 2005; Hoyt et al., 2006; Yusuf, 2010).

A review of literature shows that researchers have erroneously put light on only one aspect of the

insurance fraud (that is, policyholder or claims fraud) to the neglect of other types that equally

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affect the insurance industry. Four types of insurance fraud can be identified in literature (IAIS,

2007; Yusuf & Babalola, 2009 and Yusuf, 2010): (i) internal fraud-fraud against the insurer by a

worker or a manager or a member of the board of directors by colluding with either internal or

external parties to defraud the insurer. (ii) Policyholder fraud or claims fraud-fraud against the

insurer in the purchase and/or execution of an insurance product by obtaining wrongful coverage

or payment. (iii) Intermediary fraud-fraud by intermediaries against the insurer or policyholders.

(iv) Insurer fraud-fraud perpetrated by insurer against the insured through policy churning or mis-

selling (Todd et al., 2000). This study concentrated on the first three types of frauds which are

perpetrated against the insurer by other players or agents in the insurance market.

On the financial impact of insurance fraud, there are no precise methods or internationally

approved approach used to measure the cost of insurance fraud, thus, effects of insurance fraud in

terms of estimates or associated costs are as varied as the definitions of the phenomenon (Lesch &

Byars, 2008; Tseng & Kuo, 2014; Tseng & Kang, 2015). The estimates of the magnitude of

insurance fraud include those offered by Coalition Against Insurance Fraud, of approximately $80

to $100 billion in 2014, equating them to an out-of pocket cost per insured-household of between

$400 and $1,000 in the United States (Coalition Against Insurance Fraud, 2015). Health insurance

fraud which forms a greater part of this menace in US cost insurers about $40 to $60. An estimate

by Federal Bureau of Investigation (FBI) published in 2013 placed the cost of all insurance fraud

at about $40 billion, with about 20 percent of that attributed to the property-casualty sector (Lesch

& Byars, 2008; Lesch & Brinkmann, 2011 and Tseng & Su, 2013). The Canadian Coalition against

Insurance Fraud (1997) estimates from a study conducted in 1997 that CAN$1.3 billion worth of

general insurance claims paid in Canada every year are fraudulent. In 2013, CCAIF has estimated

that this amount has increased by 5% to 10%. In its 1996 European Insurance Anti-Fraud Guide,

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the CEA noted that the cost of fraud cannot be less than 8 billion, or approximately 2 per cent of

the total annual premium income of all classes combined for the European insurance market. In

Australia, 10 per cent of all insurance premiums paid by the public are lost to fraud with the total

amount paid out for fraudulent claims each year running to AUS$1.4 billion (Baldock, 1997). In

Latin America & Caribbean, insurance fraud is estimated to cost between 19% and 35% of annual

revenue of the insurance industry (Fraud Intelligence, 2015). In South Africa, 100 million rands

were lost in 2010 due to policyholder/claim or consumer fraud (South Africa Insurance Crime

Bureau, 2015); in Kenya, Kuria & Moronge (2014) posited that 40% of the insurance claims paid

are fraudulent and in Nigeria, it is estimated that between 10% and 30% insurance claims submitted

are fraudulent (Yusuf, 2011).

Regulatory measures such as Health Insurance Portability & Accountability Act (HIPAA), 1996

in US criminalize insurance fraud and punish culprits to suffer 10 years imprisonment with

financial penalties. Criminal codes are embedded and continue to be added to many countries

national laws to fight all forms of fraud which insurance fraud is one (Yusuf & Babalola, 2009).

Insurance industries have devised or devising pre-contractual as well post-contractual measures

with the help of security officers to clamp down on this anomaly (Boyer, 2004; Morley et al, 2006

and Harper, 2015).

Insurance fraud is estimated to cost the Ghanaian insurance industry over GH6 million annually

(Abbey, 2014; National Insurance Commission, 2014) and claims in the motor insurance segment

were exaggerated by over 40% (Okyere, 2009). Claims incurred by the general insurance business

were found to have elements of fraud in them by 40% which translates to an estimated amount of

GH9 million (Abbey, 2014 and Okyere, 2009). Despite all these findings, insurance fraud

continues to be a blistering topic in all facets of the insurance industry on the global scale.

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Therefore, it is not surprising that the detection, effects and prevention of this nefarious activity

against insurers are increasingly gaining importance to researchers in academia and stakeholders

in corporate practice.

1.2 Research Problem

Insurance fraud is a salient economic problem for the insurance industries and economies (Dionne

& Gagne., 2002; Yusuf, 2010 and Tseng & Su, 2013). Available statistics from recent global

economic surveys ranked insurance industry as the second most fraud-prone avenue (PWC, 2009;

KPMG, 2011). But these statistics showed a little relationship between the quantum of effects of

insurance fraud and the financial performance of insurance companies.

Also, research papers conducted on this topic have concentrated on the prevalence of fraud in

insurance industries in the advanced economies with very little in developing countries like Ghana

(Yusuf, 2010; 2011). There are four (4) published papers existing on Africa as at 2014 from the

researchers review of existing literature on this topic: three (3) from Nigeria, one (1) from Kenya

but none from Ghana.

Again, a cursory look at literature shows that many studies on this topic used qualitative

approaches to explore this issue (Dionne & Gagne, 2002; Crocker & Tennyson, 2002 and Tseng

& Kang, 2015) with few research papers using quantitative approaches to examine this problem.

This study intends to address all these research gaps raised above in the insurance industry of

Ghana.

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1.3 Research Objectives

The main purpose of this study is to measure the effects of insurance fraud committed by

employees and managers, consumers or policyholders, and independent brokers or agents against

insurance companies in Ghana. The supporting objectives are:

i. To explore the causes of insurance fraud in Ghana.

ii. To determine deterrence measures that can fight insurance fraud in Ghana?

1.4 Research Questions

i. What are the causes of insurance fraud in Ghana?

ii. What are the effects of insurance fraud on the financial performance of insurance

companies in Ghana?

iii. What deterrence measures can fight insurance fraud in Ghana?

1.5 Research Hypothesis

H0: There is no significant relationship between insurance fraud and the financial performance of

insurance companies.

H1: There is a significant relationship between insurance fraud and the financial performance of

insurance companies.

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1.6 Significance of the study.

The study sought to help associations, groups, insurance companies and national regulatory bodies

in Ghana to know the nature, current trends, challenges, emerging trends, effects and control

measures to fight insurance fraud in Ghana. This paper will help National Insurance Commission

(NIC) and other authorized financial agencies in formulating policies that will control or eliminate

financial crimes in Ghana. Insurance fraud is absent in the ninety-nine (99) page document of

Insurance Act, 2006 (Act 724) so this paper is to assist legislators to formulate laws that will stand

against this canker.

This study will provide assistance to insurance companies and insurance experts to design

programs and techniques that will detect punish and combat insurance fraud perpetrators. This will

go a long way to boost the overall firm performance of the insurance companies. Again, insurance

firms in Ghana will also gain insights on the scope of emerging trends, effects, challenges and

ways of fighting insurance fraud in their activities. This means that, this paper will draw practical

measures used by insurance firms in the developed economies and other countries to identify, to

assess and to fight insurance fraud. This study is aimed at being used as a reference document to

support all departments of insurance companies and financial crime institutions in combating

insurance fraud.

The findings will also serve as a reference documents for students and researchers on this topic

and other related topics since there are no published research papers in Ghana on this topic as well

as many developing countries.

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1.7 Scope of the Study

This study covers all the players in the insurance industry of Ghana as the research population.

This includes insurance firms, brokerage firms, claims adjusters, insurance agents, reinsurance

companies and loss adjusters. The insurance companies in Ghana are categorized into life

insurance firms and non-life insurance firms according to Insurance Act, 2006 (Act 724). Insurance

companies are made up of employees, management and insurance agents. Out of the research

population, this study focused on one (1) respondent drawn from all the insurance companies in

Ghana: 19 life insurance companies, 20 non-life insurance companies as 2014. The respondents

who were selected constitute the research sample. The respondents were randomly selected from

the senior managers of claims and underwriting departments of the insurance companies in Ghana.

One respondent was chosen to match the secondary data (financial statements) of the insurance

companies available at 2014 for the data analysis in chapter four.

1.8 Chapter Disposition

The research study is organized into five (5) chapters. In chapter one of this study, the problem

statement, objectives and research questions of the study as well as significance of the study are

looked at. It is followed by chapter two which is the literature review. It entails a thorough review

of existing literature on insurance fraud. The third chapter of this paper is on the research

methodology. This chapter focuses on how to answer the research questions raised in chapter one.

This chapter is made up of the research design, population sample frames, sampling techniques,

data analysis models and limitations of the methodology. The next chapter is chapter four which

focuses on data presentation, analysis and discussion of empirical results. This is done by pictorial

7
representations and tables to present the findings gathered from the primary data. Results from the

research model were presented in summary statistics, correlation and regression tables. Lastly,

chapter five focuses on summary, conclusions and recommendations.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

There are research papers on insurance fraud in the advanced economies. In this chapter, existing

literature which are relevant to this studys objectives were reviewed. The chapter begins with the

concepts, definitions, and types of insurance fraud. It goes further to examine the theoretical,

conceptual and empirical reviews on insurance fraud. Thus, this review is done in five sections:

Nature, definitions, and types of insurance fraud; theoretical review; conceptual review;

conceptual framework and lastly empirical review.

2.2 Extent, definition and types of insurance fraud

2.2.1 Extent of insurance fraud

Insurance fraud has existed for a very long time since the inception of insurance business as early

as 3rd and 2nd Millennia BC (Vaughan, 1997). Insurance fraud accounts for a significant portion

of all insurance businesses transacted by insurers globally, and it costs billions of dollars annually.

Insurance fraud ranges in severity, that is, from slightly exaggerated crime to organise or deliberate

fraud (CAIF, 2015). Insurance fraud affects the lives of innocent people, insurers, brokers,

insurance agents and other players, within and outside insurance industry directly or indirectly

(Dixon, 1997; Lesch & Brinkmann, 2011 and Tseng & Kuo, 2014). It costs players in the insurance

industry huge sums of dollars each years but it is virtually impossible to determine the exact value

stolen through insurance fraud (Yusuf, 2010; CAIF, 2015). The nature of insurance fraud is

9
normally undetectable and it is not a visible crime like robbery or murder. The estimated amount

of losses relating to insurance fraud differ greatly from one market or industry or company to the

other (Derrig, 2002and Pao et al., 2014).

The estimated cost of insurance fraud ranges from $80 to $110 million dollars annually in the

United States (CAIF, 2006; Association of Certified Fraud Examiners, 2009); it accounted for 10

percent losses in revenue of property/casualty insurance industry in United States in 2010

(Insurance Information Institute, 2010). In United Kingdom, insurance fraud amounted to 730

million in 2009 (Association of British Insurers, 2011). In Australia, 10 per cent of all insurance

premiums paid by the policyholders or consumers are lost due to fraud with the total amount of

fraudulent claims each year running to AUS$8.5 billion annually (Australian Institute of

Criminology, 2013); and in Latin America & Caribbean, it costs between 19% and 35% of

insurance industries of their income (Fraud Intelligence, 2015).

In South Africa, 100 million rands were lost in 2010 due to policyholder/claim or consumer fraud

(South Africa Insurance Crime Bureau, 2015); in Kenya, Kuria & Moronge (2014) posited that

40% of the insurance claims paid are fraudulent but in Nigeria, it is estimated that between 10%

and 30% insurance claims submitted are fraudulent (Yusuf, 2011).

2.2.2 Definitions of insurance fraud

There are many definitions or explanations given in literature on insurance fraud. A well-known

meaning of insurance fraud in literature was given by International Association of Insurance

Supervisors (2007) as, an act or omission intended to gain dishonest advantage for the fraudster

or for the purpose of other parties. This may be achieved by i) misappropriation of assets and/ or

insider trading; ii) deliberate misrepresentation, suppression or non-disclosure of one or material

10
facts relevant to a financial decision or transaction; iii) abuse of responsibility, a position of trust

or fiduciary relationship.

Derrig (2002) also defined insurance fraud as a criminal act involving obtaining financial gain

from insurer or insured using misrepresentation of facts or false pretences. Utah Insurance

Department (2015) explains that insurance fraud occurs when individuals deceive an insurance

company, agent or other person to try to obtain money to which they are not entitled. This happens

when someone puts false information on an insurance application, and false or misleading

information is given or omitted in an insurance transaction or claim. There are other definitions

given by studies like Yusuf (2010); Dionne & Gagne (2002); Tseng & Su (2013) but the above

definitions are in line with the objectives of this study, therefore they were chosen.

2.2.3 Types of insurance fraud

Insurance fraud can be classified into internal and external fraud or it can be classified as

opportunistic (soft) and organized (hard) fraud.

Internal and External Insurance fraud

In insurance literature, insurance fraud has been group into four namely: internal fraud,

policyholder fraud, intermediary fraud and insurers fraud (Yusuf, 2011) but in this study,

insurance fraud is grouped into two, namely: internal fraud and external fraud. The basis for this

classification stems from where the insurance fraud is committed within or outside an insurance

company.

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 i) Internal fraud

Within an insurance company, an insurance fraud can be occur. This happens when employees

and managers misrepresent, or conceal facts for selfish interest or in connivance with others either

internal or external against the well-being of the insurer (IAIS, 2007; Yusuf & Babalola, 2009). It

happens when a deceit by insurer against insured or other parties in the insurance contract through

mis-selling or churning of insurance products or policies (Todd et al., 2000; Crocker & Tennyson,

2002).

ii) External fraud

Insurance fraud can emanate from external parties: policyholder and claims fraud (consumer fraud,

fraud against the insurer in the purchase of insurance policy or execution of claims by obtaining

wrongful coverage or payment (Yusuf, 2010; Derrig, 2002; Viaene & Dedene, 2004); and

intermediary fraud, fraud by intermediaries (independent broker or independent insurance agent)

against the insurer or policyholders (IAIS, 2007). In this study, the external fraud are divided

further into policyholder (fraud committed by a consumer) and intermediary fraud (fraud

committed by independent brokers).

Other forms of Insurance Fraud

Some research studies classify insurance fraud into soft (opportunistic) or hard (organised) fraud

depending on the intentions of the perpetrator(s).

i) Opportunistic (soft) fraud

Opportunistic (soft) fraud is usually unplanned, and it arises when the opportunity presents itself

(Dionne & Gagne, 2002; Insurance Information Institute, 2015). It is the significantly more

prevalent form of fraud in the non-life or general insurance business. According to Yusuf &

Babalola (2009), this type of fraud occurs in the retail and commercial non-life insurance market.

12
An example of this type of fraud would be getting a car accident, and claiming for injuries that are

false in reality; getting a bigger settlement than you would get if you were telling the truth about

your injuries; and falsely claiming for an expensive art that was destroyed when your home was

burglarized. These instances would be significantly difficult to detect unless thorough

investigations are undertaken.

ii) Organised (hard) fraud

This fraud takes planning and scheming by organized criminal gang or cartel with or without

someone inside the insurance company to help get money from an insurer (CAIF, 2015). An

example of hard fraud would be getting into an accident on purpose so that you can claim the

insurance money or intentionally inflating claims with the aim of benefiting from the insurance

contract.

2.2.4 Deterrence of Insurance Fraud

For an insurer to deter insurance fraud at the firm level, two steps can be followed (Derrig, 2002;

Yusuf, 2011; Swaby, 2011). First and foremost, detect suspicious polices and claims that may give

rise to fraud. Use manual or computerised statistical analysis or use referrals obtained from

underwriters, claims adjusters or insurance agents. In addition, the general public can assist

insurance companies by giving them tips of suspected insured or criminal gangs who have

intentions to defraud the insurer. Also, law enforcement and regular check on suspected, observed,

or admitted insurance fraudsters can assist in this process (Caldeira et al., 2015).

The second step is to refer these identified fraudulent insurance policies and claims to investigators

for further analysis (Derrig, 2002). Due to the sheer number of insurance policies and claims

submitted each day, it would be far too expensive for insurance companies to have employees

13
check each insurance policy or claim for symptoms of fraud (Bolton & Hand, 2002). Instead of

doing tedious, time-consuming exercise, many insurance companies nowadays use computers and

rigorous statistical analysis to identify suspicious claims for further investigations. There are two

main types of statistical analysis tools used: supervised and unsupervised and in both cases,

suspicious insurance policies and claims are identified by comparing data about the insurance

policy and claims to the expected values. The main difference between the two methods is how

the expected values are derived.

In a supervised method, expected values are obtained by analysing records of both fraudulent and

non-fraudulent claims whilst unsupervised methods of statistical detection, on the other hand,

involve detecting claims that are abnormal. Both claims adjusters and computers can also be

trained to identify red flags, or symptoms that in the past have often been associated with

fraudulent claims. Bu the limitation of this statistical detection methods is that they do not prove

that claims are fraudulent; it merely identifies suspicious claims that need to be investigated

further.

At the industry level, insurers are supervised tightly with the insurance regulators making sure that

insurance companies are doing the right thing in terms of administration of their policies and

claims. Insurance companies that fail to work with the supervisors and regulators against fraud in

the insurance industry are punished with fines (Caldeira, 2015).

Criminal codes on fraud are enshrined in constitutions of many nations, and work on new ones are

on-going with the aim of eliminating all forms of fraud which insurance fraud is one of them

(Yusuf & Babalola, 2009). Insurance industries in nations have also devised or are preparing pre-

contractual as well post-contractual measures with the help of security officers to clamp down on

this anomaly (Boyer, 2004 and Morley et al, 2006). For instance regulatory measure like Health

14
Insurance Portability & Accountability Act (HIPAA), 1996 in US criminalize insurance fraud and

punish culprits to suffer 10 years imprisonment with financial penalties.

2.3 Areas in the insurance markets where insurance fraud are rampant

i) Motor insurance

Motor insurance is the most possible and weak fraud ridden sector in the insurance industry in

comparison to other lines of insurance businesses (Tseng & Kuo, 2014). Motor damage claims

frauds are committed at pre and post insurance stages. Auto mobile insurance data are usually

binary indicators which are grouped into accident, claimant, and driver, and injury, treatment, lost

wages, vehicle, and other categories (Derrig, 2002). There are no publicly available data sets for

studying motor insurance fraud detection except for a relatively small automobile insurance data

set. And obtaining real data from companies for research purposes are extremely hard due to legal

and competitive reasons. To avoid that data availability problems and work on a particular fraud

type, one alternative is to create synthetic data which matches closely to actual data. Insurance

fraud in the motor insurance industry comes in two forms namely:

a) Hard frauds

It includes total damage to the vehicle with the deliberate intent to get rid of the same or to earn

money than its market value (Tseng & Kang, 2015). Some of the examples are theft of the vehicle,

vehicle burnt by fire, vehicle fall into river, loss under an excluded risk etc. A real accident may

occur, but the dishonest owner may take the opportunity to incorporate a whole range of previous

minor damage to the vehicle into the bill associated with the real accident.

15
 b) Soft frauds

It accounts for the majority of the motor insurance frauds and it occurs unintentionally (Yusuf,

2011). For instance, more than one claim for single loss, higher cost for repair, damage caused

earlier, and replacement of old spare parts etc.

ii) Health Insurance

Health insurance systems are either sponsored by governments or managed by the private sector

to share the health care costs in the countries or areas these policies are operated (CAIF, 2015).

Health insurance fraud is described as an intentional act of deceiving, concealing or

misrepresenting information that results in health care benefits paid to an individual or a group.

According to Dsane-Selby (2013), health care fraud is an intentional deception or

misrepresentation made by a person or an entity that could result in some unauthorized benefit to

him or his accomplices in relation to the beneficiaries health issues. The medical insurance fraud

characteristics include: damage level insufficient information, suspected diagnosis of proof,

insured low willingness to cooperate and cause of the accident unreasonable , repeatedly claims

record, in a special area, occur at a specific time and claims for late filing. Inconsistent documents

of application, high claim payments, certificate of poor reliability, non-cooperation and very

familiar with insurance knowledge. Each claim is submitted by an affiliate under the approval of

a medical professional justifying the work incapacity. Data such as age, sex, type of claim,

affiliates name and date of birth, ID number, resting period solicited, type and place of the resting,

identification of the medical professional, identification of the employer, labor activity of the

company where the affiliate works, affiliates profession and income records that the affiliate has

gotten in the last three months are incorporated in each form.

16
A neural classifier that makes a predictive detection of the fraudulent and abusive claims would

be of great help for the medical experts in their reviewing process, acting as a pre-screen filter.

This predictive detection must only consider historic data associated to the affiliate, the medical

professional and the employer, and data available before the medical revision of the arriving

medical claim. If the data are consistent, check by manual comparison whether the hospitals and

doctors issuing the certificates are registered medical institutions and doctors. Then, by

comparison with historical cases and records of the insurant, check whether the case is

questionable. Because the health insurance is nationwide, it takes 45 days minimum to complete

the process. So, the research is to solve manpower and to take right decision making by utilization

of data mining technology.

False claims are the most common type of health insurance fraud. The goal of this fraud is to obtain

unmerited payment for a claim or series of claims. The health industry in Ghana is losing

approximately millions of Ghana cedis each year on false claims (Dsane-Selby, 2013). So to

make health insurance feasible there is a need to focus on eliminating or reducing fraudulent

claims. The types of health insurance frauds are:

a) Hard frauds

A deliberate attempt either to fake an event, injury, death or accident which requires hospitalization

or other type of loss that would be covered under a medical insurance policy.

b) Soft fraud

It may also occur when people purposely provide false information in regard to the pre-existing

illness or other relevant information to influence the underwriting process in the favour of the

applicant.

17
2.4 Insurance fraud in the Ghanaian Insurance Industry

This section summarises the overview of the insurance industry in Ghana and the phenomenon of

fraud in the industrys activities and data set. First and foremost, a description of the insurance

industry in Ghana is presented. Afterwards, the causes, the estimation of the impacts of insurance

fraud as well as the deterrence of this menace are looked at.

2.4.1. The Ghanaian insurance market: An Overview

Insurance industry, one of the components of the financial services sector in Ghana has

experienced an enormous expansion since its inception in the pre-independence era (Adu-Ansah

et al., 2012). The number of insurance companies keeps increasing after the insurance business

was separated into life and non-life in 2006 (Insurance Act, 2006). Again, in the recent years there

has been a significant increase in premiums earned by insurance companies because many people

in Ghana are accepting the essence of insuring their properties and lives (Akotey, 2013). But this

has come with an increased number of claims. All the existing forty-five (45) insurance companies

(both life and non-life) believe that the technical disequilibrium observed in the Ghanaian

insurance market is due to the rise in the total number of fraudulent claims and other fraud-related

issues which have become prevalent in the insurance market (KPMG Ghana, 2013). A comparison

of the expansion of the Ghanaian economy and the insurance industry using key financial

indicators show that the sector is becoming more relevant (PwC Ghana Survey, 2013). Earned

premiums are considered to be a reliable indicator of the expansion of the insurance industry in

Ghana (National Insurance Commission, 2014). This means that the insurance industry is

improving its relative position in the Ghanaian economy with Enterprise Group, Vanguard Group

and SIC Group taking leading roles in the Ghanaian financial sector (KPMG Ghana, 2013).

18
2.4.2. Fraud in the Ghanaian insurance market

Fraudulent activities has become part of the behaviours of some of the players in the insurance

industry in Ghana (Okyere, 2009). Because of this, insurance companies through Ghana Insurers

Association (GIA) have come together with National Insurance Commission (NIC) and GTZ

(Deutsche Gesellschaft fur Internationale Zusammenarbeit, GmbH), a German donor agency to

establish Ghana Insurance Industry Database (GIID) in their effort to reduce fraud in the insurance

industry (Abbey, 2014). So far, the database has covered only a class of the non-life insurance

business, that is, motor insurance (Abbey, 2014).

In Ghana, the attitude towards fraud has been characterized by a passive position of insurance

companies. Even though, companies in the insurance industry continue to offer new and attractive

products, the firms have entered a battle of lowering premiums, and have devoted a lot of effort

towards increasing their market share. This has caused complete lack of coordination among

insurance companies in the decades gone by with little control on adverse selection and other

fraud-related problems (NIC, 2014). There is neither official institution controlling fraud or

devoted to fraud detection in the Ghanaian insurance industry, nor the companies implemented

systems to control fraud, than just inspection of claims which is done by the insurers internal audit

or claims unit. It seems obvious that the behaviour of the Ghanaian market has allowed for the

presence of different kinds of fraud. Products such as the group employee insurance (an agreement

between insurance companies and business organizations) speed-up compensations and deter

screening and control of claims. On the other hand, from an outer perspective, insurance companies

are still perceived by consumers as organizations which make large profits in Ghana at the expense

of their consumers. Therefore, it is appropriate to deceive insurers and profit from the insurance

contract.

19
It is estimated that the costs of consumer fraud in the Ghanaian industry ranges from 15% to 60%

of the annual revenues earned by insurance companies (NIC, 2014). The wide range of this interval

is caused by the differences between large and smaller firms and their estimation criteria. Larger

firms accept that about 1520% of the claims contain some form of fraud, while smaller companies

are much more heterogeneous, so that they may reach 60%. These figures are similar to those

reported by CAIF (2015) for the US market, 15% of fraud in the insurance industry, and by Clarke

(1990) for German insurance market which he peaked at 11% in the automobile industry. The

insurance fraud types and their causes which exist in the Ghanaian insurance industry are

summarized as follows:

i) Fictitious information/data in the insurance policy. Age and other experiences may be

incorrectly recorded. For instance, the quality of the car driven in terms of model and vehicle age

is recorded wrongly.

ii) Multiple contracts. An agreement with several companies on the same insurable item may lead

to several compensations for the same injury or accident.

iii) False claims. Typically pre-existing injuries and damages are included in the claim. Those

injuries and damages were not reported previously in order not to be moved to a worse bonus

mauls category. The insured may also present a claim for falsely orchestrated theft of property or

motor vehicle.

iv) Theft and dubious contracts by employees/managers. The economic hardship in Ghana is

pushing many employees to steal money or engage in dubious contract at expense of the insurers

profit.

v) Inexperienced intermediaries. Many insurers in Ghana prefer to hire secondary school leavers

to serve as their agents because of the money involved in paying professional independent brokers

20
and insurance agents. Because of the inexperience of these secondary school leavers many involve

themselves in acts that go against the financial survival of insurers.

2.5 Theoretical Review

This section expounded the theoretical foundations of this study by looking at the causes, effects

and deterrence of insurance fraud in academic literature.

2.5.1 Fraud triangle

Research in white-collar offences (financially motivated nonviolent crimes like insurance fraud,

corporate fraud, financial statements fraud etc) have been studied predominantly from either a

macro, social structure and strain theories (Durkheim, 1965; Merton, 1968; Piquero et al., 2005;

Rossouw et al., 2000; Weisburd et al., 1995; Zahra, Priem, &Rasheed, 2007) or meso (differential

association theory) perspective (Benson, 1985; Clinard, 1990; Nichols, 2000; Piquero et al., 2005;

Sutherland, 1939) to explain white-collar crime. Weisburd et al. (1995) indeed noted that research

on white-collar offending has generally focused on the corporate rather than the individual

offender. Thus, researches that have the potential to improve the behavioural standards of major

corporations lead to neglect in understanding fraud committed by individual offenders. Current

understanding on why people commit insurance fraud is grounded in the fraud triangle, a

theoretical model embedded in the study of psychology developed from the original work of

Cressey (1971). Cressey (1971) argued that financial fraud is motivated by what he referred to as

a non-shareable problem. A non-sharable problem occurs when an individual is confronted with

a problem or personal crisis and is unable to share their problem with friends or colleagues because

of the shame the offender associates with the behaviour and the consequential effects of legal or

social sanctions when the behaviour is discovered. Financial distress, loss of status, and admission

21
of fault or poor judgment have the potential to create a non-shareable problem begetting an

individual to secretly resolve their problem by stealing to avoid losing face. Cressey (1971)

hypothesis later became known as the fraud triangle (see Figure 2.1) in which researchers added

to motivation (a non-shareable problem) the notions of opportunity and rationalization to explain

the advent of fraud (Albrecht & Zimbelman, 2012; Cressey, 1971). Pressure or motivation

provides the incentive to commit fraud; opportunity grants the means to follow through with the

intention to commit fraud; and rationalization helps the offender to deal with the cognitive

dissonance associated with their behaviour. The fraud triangle (figure 2.1), now adopted in the

insurance industry in Ghana, provides a valuable framework to analyse individual fraudulent

behaviour of players in the industry.

Opportunity

Fraud
Triangle

Pressure/Motivation
Rationalization

Figure 2.1: Fraud triangle (Cressey, 1971)

22
The constituents of the fraud triangle (figure 2.1) are explained below:

i) Motivation/Incentive/Pressure to commit fraud

Pressure or incentive motivates an individual (employee, consumer, and intermediary) to behave

illegally against the insurer. Pressure arising from a non-shareable problem is critically important

in understanding the motivation in fraud. Employees/managers, consumers and intermediaries

justify their actions because of economic hardships, and unfair benefits received from the insurer.

This is because an inability to share ones problems on unfair benefits (salaries and other

emoluments) with others sufficiently motivates an offender to behave illegitimately to resolve their

problem (Cressey, 1971). In contrast, rational judgment, if employed, could have aided in the

solution of the problem without resorting to unlawful behaviours. Pressures that have been

identified as common motivators of fraudulent behaviours are discussed below and have been

categorized accordingly:

Financial pressures, vices, work-related pressures and other pressures such as a desire for material

possessions can affect the players in the insurance industries to commit fraud (Albrecht et al.,

2012). A financial strain, such as a distressed business or failed market investment(s), whether it

arises from recklessness or misfortune is the catalyst that drives many offenders to commit fraud

(Cressey, 1971). In an organisational context, recent literature suggests that monetary incentives

such as executive bonuses combined with pressures to ensure the market receives only good news

so as to retain investor confidence and meet insurers targets can lead employees and managers in

the insurance industry to manipulate of products/policies, claims and published financial reported

(Brenna & McGrath, 2007; Yusuf & Babalola, 2009). Vices such as gambling and drugs represent

the second category of pressures that motivates insurance fraud. The AIC and PwC (2003)

discovered that gambling was a major motivation for fraud, second only to greed. According to

23
KPMG (2002) and Fraud Intelligence (2015), the increasing incidence of fraudulent conduct

reflects a rise in gambling accessibility. Of those offenders whose primary motivation was

gambling, the vast majority plough the proceeds back into gambling creating a never-ending cycle

of pressure (Sakurai & Smith, 2003).

The third category that commonly motivates fraud is represented by non-financial pressures. In

this category, workplace dissatisfaction is a major source of illegal behaviour. Some offenders

commit fraud to take revenge on their employer for perceived inequities. When employees feel

that they are treated unfairly (e.g. missing out on a promotion, changes to remuneration, significant

employee layoffs, unfair treatment, or lack of appreciation) and feel they must continue to work in

the same organization, disgruntlement develops providing an incentive for them to misappropriate

assets (Bartlett, Endo, Tonkin, & Williams, 2004; Ramamoorti, 2008). The dissatisfied or alienated

employees like those who are poorly paid or lack respect from colleagues, have little commitment

to the organization and are more likely to engage in activities such as fraud that serve their own

interests (Baucus, 1994; Cressey, 1971).

The final category that motivates fraud comprises other pressures. The type of pressures faced

by offenders in this category will vary and depend on individual circumstances (Duffield &

Grabosky, 2001). Common examples of other pressures include egocentric motivations and a

desire to possess more than one can afford, colloquially referred to as keeping up with the

Joness. Comparisons with those who are wealthier have their origin in strain theory, where the

offender desires material possessions or a lifestyle that matches their more affluent counterparts.

Egocentric motivations are any pressures that fraudulently enhance personal prestige, often found

in people who display aggressive behaviour and a desire to achieve higher functional authority in

their employing organization (Rezaee, 2005). People who are extremely ambitious and obsessed

24
with power and control are more likely to engage in risky behaviour that could lead to fraud

(Duffield & Grabosky, 2001). Moreover, the complexity of the fraud may reflect the professional

pride of the perpetrator in so far as it may spawn a sense of mastery and excitement in meeting and

overcoming challenges (Duffield & Grabosky, 2001).

ii) Opportunities to commit fraud

An opportunity to commit fraud, conceal it and avoid its associated punishments are the second

critical element in the fraud triangle (Tittle, Ward & Grasmick, 2004). Factors that enhance

opportunity vary from weak internal controls to a failure to discipline perpetrators (Albrecht et al.,

2012). In accounting and finance, opportunity has been examined within the context of weak

internal controls which according to KPMG (KPMG, 2013) is a major factor attributable to fraud.

This is in spite of the fact that the internal audit function is the principal means by which the

greatest number of frauds was detected (AIC & PwC, 2003). In the case of executive fraud,

managers are in a position to override. The biennial KPMG Fraud Surveys and a major

investigative report conducted by the Australian Institute of Criminology and

PricewaterhouseCoopers (AIC & PwC, 2003) provide comprehensive insight into fraud committed

against Australian and New Zealand businesses, consumers and players in the finance and

accounting industry by addressing issues such as the types of fraud, the financial consequences of

fraud, and the conditions that increase the risk of fraud. Internal controls, anonymous tips are the

most-cited detection method of frauds (ACFE, 2010). If we accept that fraud deterrence is

dependent on risk management strategies combined with effective internal control systems, then

deterrence is easily formulated. However, the evidence from survey data collected by KPMG on

the type and extent of fraud in Australia, indicates that red flags were present in over one-third of

frauds but were ignored by management (KPMG, 2013).

25
It is generally assumed that insurance fraud offenders are sensitive to the risk of formal sanctions

and consequences because of the costs and stigmatization associated with sanctions that denigrate

their occupational and social success (Simpson & Koper, 1992) but they still commit it to satisfy

their motives. According to this view, opportunities to commit fraud are mitigated when the

probability of detection and the severity of the penalties are high (Votey & Phillips, 1973).

Therefore, the prosecution of offenders based on legal sanction is a key reactive strategy to deal

with fraud (Sarre & Fiedler, 1999). However, prosecuting capably-concealed white-collar crime is

a difficult task when perpetrators have actively disrupted the audit trail that may leave clues to

their crime (Ramamoorti, 2008). Similarly, the nature of white-collar crime, its complexity and the

influence and resources available to perpetrators to defend their positions, means that only an

unrepresented minority of offences are detected and officially recorded (Benson, 2001;

Braithewiate & Geis, 2001; Piquero & Benson, 2004). Furthermore, according to Holtfreter, Van

Slyke, Bratton, & Gertz (2008), the allocation of resources in the U.S. to criminal justice agencies

for the detection and prevention of white-collar crime remains a low priority compared to violent

crime and threats to national security such as terrorism. A publicly held perception that trivializes

white-collar offending as harmless crimes has also contributed to the dearth of resources allotted

to the detection and prosecution of white-collar crime (Holtfreter et al., 2008; Schoeper,

Carmichael, & Piquero, 2007). The opportunity to commit fraud is, therefore, enhanced when the

prevailing belief is that too few white-collar criminals are caught and convicted and, when they

are, the courts are likely to deal with them in an unacceptably lenient manner (Dellaportas, 2013;

Bartlett et al., 2004; Sarre & Fiedler, 1999; Schoeper et al., 2007; Tinker & Okcabol, 1991;

Tennyson et al. 2006).

26
The perception of leniency is perpetuated when victim organizations (insurance companies) take

no action against perpetrators, preferring to warn or dismiss the perpetrator to avoid the effects of

adverse publicity and the embarrassment at having been deceived, and then tighten security to

avoid a recurrence of the same or similar frauds (Sarre & Fiedler, 1999; Smith, 1999). A potentially

powerful arena of social control is lost when insurance managers/employees (and others) who

commit indiscretions are seen to lose their jobs, followed by a variety of explanations ranging from

redundancy to unsatisfactory performance. The extent of leniency, if any, afforded to insurance

fraud offender is unknown in Ghana, but it is sufficient to note that opportunities are seen to expand

whether leniency is real or apparent. It is noted however that in Ghana, the number of convictions

and custodial sentences relating to insurance fraud and other corporate crime have increased

markedly in recent years (Adu-Ansah et al., 2012; Andoh, 2013) suggesting a reversal in the trend

that treats insurance fraud offenders with leniency.

iii) Rationalizations towards fraud

A typical feature of insurance fraud and all white-collar crime is the lack of feelings or the

indifference expressed by offenders stemming from a series of excuses or rationalizations to rid

themselves of the guilt arising from deviant behaviour (Derrig, 2002; IAIS, 2007; Anand, Blake,

& Joshi, 2004; Benson, 1985; Duffield & Grabosky, 2001; Rossouw et al., 2000). In this part of

the fraud triangle, offenders admit the wrongdoing but deny that it was wrong, allowing them to

maintain a non-deviant self-image whilst continuing to engage in criminal activities (Benson,

1985; Coleman, 1987; Willott, Griffin, & Torrance, 2001). The need to rationalize wrongdoing is

psychologically rooted in the theory of cognitive dissonance, in which people are induced to make

statements in order to perform behaviours that they would normally avoid (Kunda, 1990;

Ramamoorti, 2008). The cognition that one has knowingly engaged in illegal behaviour is

27
inconsistent with a self-image of a decent, intelligent, and trusted professional. Holding two

contradictory cognitions creates an unpleasant state of cognitive dissonance that causes individuals

to alter their attitudes to make them consistent with their behaviour and avoid feelings of

wickedness (Kunda, 1990). Rationalization can take a variety of forms, including appeals to higher

loyalties, sad tales of the recent past, and denial. Anand et al. (2004) claim that several of the

rationalizing tactics used by perpetrators to justify their corrupt practices centre on denial that

includes: denial of responsibility; denial of injury; and denial of victimization. Such

rationalizations allow fraud perpetrators to view themselves as morally responsible individuals

being forced to act unethically (Anand et al., 2004). Denials of this sort shift the moral

responsibility of their act to another person or thing by blaming it on circumstances beyond their

control. This form of rationalization does not seek to minimize the moral blame but, rather, seeks

to escape it by transferring responsibility from the offender to another or often to a vaguely defined

group (Rossouw et al., 2000).

In the insurance industry, consumers justify their wrongdoings on how they have paid insurance

premiums for many years but receive little or none of the benefits. So to get their monies back,

they indulge in such acts (Dean, 2004; Tennyson, 1997; CAIF, 2015).

Shortfalls of the fraud triangle

The literature describing the fraud triangle is based on the assumption that the model is an

equilateral triangle carrying equally weighted elements. Rarely, the strength or influence of the

relationship between the elements tested or examined are hard to come by. The fraud triangle

whilst praised by many and adopted by the professions has many flaws. Donegan & Ganon (2008)

highlighted the limitations of the fraud triangle, questioning the properties that underpin

28
motivation and the explanatory power of the fraud triangle as a theory of financial crime.

Commentators on the fraud triangle have subsequently called for a modification to the fraud

triangle to create either a fraud diamond (Wolfe & Hermanson, 2004) or fraud pentagon (Marks,

2009). Wolfe & Hermanson (2004) argue that capability (fourth element) arising from a persons

position or function within an organization, combined with intellectual and cognitive traits and

abilities, allow potential offenders to recognize a fraud opportunity and turn it into a reality. In

other words, fraud only occurs when there is a person with appropriate capabilities to implement

the fraud. Marks (2009) similarly states that it is an employees competence or power to perform

that creates the conditions for fraud to occur. In addition to competence, Marks (2009) added

arrogance to the model, to produce a fifth element creating a fraud pentagon. Arrogance is

defined as an attitude of superiority and entitlement or greed on the part of a perpetrator who

believes that corporate policies and procedures do not personally apply. Calls to modify the fraud

triangle such as those proposed by Wolfe & Hermanson (2004) and Marks (2009) rely on self-

developed assertions which lack significant empirical testing and support. The notion of an

equilateral triangle and its power to explain crime in the context of the accounting profession is

discussed below following the section on findings. There are also many traits of from the players

in insurance industry that compounds this crime but have been sidelined by this theory. Using TRS

(Tamsik-Rajsik-Sattvik) framework and the LAG (Lust-Anger-Greed) cycle, Raval (2013) has

suggested a more thorough research into the rationalization condition of the fraud triangle. He

intimated that insurance fraud is a human act and proposes a series of propositions in predictive

manner for future research.

29
2.5.2 Adams Equity Theory

According to Adams (1963, 1965), fairness refers to how much people are aware of and compare

themselves with other people's situations. People would attempt to maintain fairness by comparing

the inputs (and outputs) that others bring to (and receive from) the same behaviour. As long as the

ratio between these inputs and outputs is equal, people may perceive the given situation to be fair.

The idea suggests that customers may expect to pay in the same cost when obtaining the same

benefits from the same transactions. If people noticed that others were getting more benefits for

their inputs, they would be dissatisfied, and that could result in an unfair feeling (Brockner et al.,

1986; Ajzen, Rosenthal & Brown, 2000; Lopes & Fletcher, 2004).

In the insurance industry, the perceived fairness of customers is an important issue because it was

found that an unfair treatment by an insurer (e.g., an unfair deductible amount) may enhance

customer insurance frauds. For instance, the study by Miyazaki (2009) showed that deductible

amounts affect policyholders' perceptions of whether claim padding is tolerable. However, the

survey work on insurance frauds has focused mainly on the roles of deductible amounts and ethical

attitudes (Tennyson, 1997, 2002; Dean, 2004; Miyazaki, 2009), while the fairness & fraud

problems should also involve the consideration of insurance premium because a high deductible

amount is usually associated with lower premium. The deductible amount over insurance premium

situation may affect policyholders decision making in insurance frauds, because the policyholders

may compare the deductible-premium ratios with those of other insurers, and the perceived

unfairness of the ratios may further contribute to their acceptance of a certain action (such as

cheating or claim padding).

Furthermore, consumers with more negative feelings toward insurance companies are more likely

to view insurance frauds as an acceptable practice (Tseng & Kuo, 2014). Thus, the negative feeling

30
toward insurance companies could be a reason for customers to accept insurance frauds (Dean,

2004; Brinkmann, 2005; Miyazaki, 2009).

It is always important to consider the extent to which customers perceptions and emotions on

equity can be applied to the insurance industry. To do this, it must be understood that a fair

deductible may not imply fairness for customers, because the deductible amount could only be one

of the contract factors that affects customer decision making (Crocker & Tennyson, 2002 and

Tseng & Kuo, 2014). Deductible, premium or other contract factors (such as coverage and renewal

conditions) may need to be considered in insurance contracts, and comparison for the fairness of

the insurance contract may reduce the customers intention to cheat. Also, a professional

explanation of the insurance contracts could reduce the perceived unfairness of the customers,

since sometimes customers are confused by the complex information in the insurance policies.

2.5.3 Diffusion of Innovation Theory

Diffusion of Innovation (DOI) theory was developed by Roger (1962) and it is one of the oldest

social science theories. The theory was developed so as to explain how, over time, an idea, service

or product gains momentum and diffuses (or spreads) through a specific population or social

system. The end result of this diffusion is that people as part of a social system adopt a new idea,

behaviour, or product. According to Arunga (2012) adoption means that a person does something

differently than what they had previously (i.e., purchase or use a new product, acquire and perform

a new behaviour, etc.). In the insurance industry, new ideas are very critical components in the

growth of the industry. Huge financial claims are involved in the insurance industry and as such

this if not well managed using new ideas and methodologies could affect the survival of an

31
insurance firm. This is because many false claims and fraudulent activities can be perpetrated

against the insurer by policy holders, managers and intermediaries if they are not well managed.

This theory suites this study because without new ideas, use of modern technology that would help

detect false insurance claims, and other fraudulent transactions by managers, brokers and insurance

agents, the insurance firm would grind to a halt.

2.5.4 Game Theory

Game theory was pioneered by Dixit & Nalebuff (1960) and the main emphasis of the theory is

based on pure conflict. According to the proponents of the theory, the essence of a game is the

interdependence of player strategies and strategic decision making. There are two distinct types of

strategic interdependence that are sequential and simultaneous. In the former the players move in

sequence, each aware of the others previous actions. In the latter, the players act at the same time,

each ignorant of the others actions (Montet & Serra, 2003). This study is based on this theory

because game theory is the formal study of decision-making where several players or stakeholders

must make choices that potentially affect the interests of the other players. Robust risk

management system and stringent supervision in the insurance industry in Ghana are critical

components that require well-thought strategies and sound decision making to affect the interest

of numerous stakeholders connected to the insurance industry. This is because the industry has so

many players each outwits the other for self-gain. The aim of the insurance company is to

maximize on profit for growth while the policyholders is to get value for their money and if not

forthcoming they will use some unorthodox means to recover and almost all the other stakeholders

to the same. Employees, brokers and insurance agents on the other hand may find themselves

involved without knowledge to this issue (Derrig, 2002). Dixit & Nalebuff (1960) note the

32
theoretic concept apply whenever the actions of several agents are interdependent. These agents

according to the theory may be individuals, groups, firms, or any combination of this causing

havoc to each in the insurance industry. This theory fits well in this study because for the insurance

companies in Ghana to grow in the midst of all these interested parties, there should be risk

management, good governance and strict supervision to manage their interests. This consonance

with Dixit & Nalebuff (1960) work which states clearly that finite games must always have

equilibrium point, at which all players choose actions which are best for them given their

opponents choices.

2.5.5 Natural Law Theory

Natural law theory has been remarkably influential in the evolution of the human thought on the

conception of justice. Developed by Friedman (2002) the theory postulates the history of natural

law is a tale of the search of mankind for absolute justice. In its modern incarnation, natural law

became 'an evolutionary ideal, and thus as a directive force in the development of positive law. As

a consequence, Geny (1990) observes that modern natural theories could be seen as part of the

never ending search for ideas of justice. Natural law can be said to provide objective moral

principles. Developed by Finnis (2012), the concept of a moral principle can generally be referred

to as a principle that describes the right or wrong nature of behaviour. Robert (2003) observes that

proponents of the existence of natural law and, by extension, natural law theories believe that

natural law provides an objective reference that allows us to determine whether our decisions and

actions are right or wrong and thus moral. Finnis (2012) defines the theory as a set of principles of

practical reasonableness in ordering human life and human community. He further asserts that the

principles of natural law explain the obligatory force of positive laws, even when those laws cannot

be deduced. Therefore, if Finnis (2012) is correct, then the principles of natural law fits this study

33
 perfectly well in terms of educating players in the Ghanaian Industry on the moral consequences

of indulging in insurance fraud.

2.6 Conceptual framework

The conceptualization of this study presumes a causal relationship between the insurance

companies financial performance (represented by Return On Assets (ROA)) and the effects of

insurance fraud, namely: increased cost of operations; higher insurance premium; reputational risk;

ethical problems; strict regulatory/supervisory standards; adverse effect on market share; loss of

lives and property (represented by insurance fraud variables in figure 2.2).

Number of years in operations

Effects of Insurance fraud

Internal fraud
Increased cost of
operations; less revenue
Policyholder fraud
from insurance premium;
reputational risk; high costs ROA
paid on inflated claims; Intermediary fraud
breach of ethical standards;
declining market share.

Percentage of Shareholders fund to

total long-term capital

Independent Variables Dependent Variable

Figure 2.2: Conceptual Framework

34
2.7 Empirical Review

Lesch & Byars (2008) conducted a study on fraud investigative and detective framework in the

non-life insurance industry (Property-casualty insurance market) in United States. The findings

establish a high prevalence of fraudulent property-casualty insurance claims contrasted with poor

management and detection of such claims. That is, while 20-50% of the property-casualty

insurance claims are fraudulent, about 10% use technology to detect the same. Lesch & Byars

(2008) also observed that property-casualty claims to be the highest paid expense in the insurance

industry in the United States followed by other fraud types. Property-casualty insurance fraud

included misrepresenting information, concealing, deceiving behaviour that resulted in healthcare

benefits. This included non-disclosure of pre-existing conditions and billing of services not

rendered by healthcare provider. According to their findings, decentralization of insurance

regulation, competitive factors, and inconsistency in claims processing are reasons why there is no

one definition of insurance fraud. The paper concludes by offering a social marketing campaign

as a tool for reducing the incidence and severity of single-claims fraud in the insurance market.

Ernst & Young (2011) undertook a survey on insurance fraud to determine the insurance fraud

scenario, potential risk exposure, economic impact and industry practices to counter fraud risk.

The survey established that claims or surrender-related fraud is the highest followed by premium

and employee-related frauds. Insurance fraud increases cost of insurance, making insurers lose

business to competitors, and leads to higher premium for the policyholders. In addition, insurance

fraud has implication on (threaten) the viability of insurance business and has a bearing on

insurers profitability. The report revealed that though the negative effects of fraud are profound,

they are often under-reported or discounted. Nevertheless, the prevalence of fraud has been on the

increase be it retail, commercial or third-party insurance claim. In the area of general insurance,

35
the study established that health insurance rated high in the number of claims relating to overstating

of claims or document manipulation of non-existing hospitals. Twenty five percent (25%) of health

insurance claims were fraudulent. Fraud has affected insurance firms operationally, financially and

psychologically. On the part of insurance companies, the survey found insurers to fraudulently

mis-sell products with regard to fraudulent misrepresentation of material information and/or

premeditated fabrication.

Okura (2013) conducted a study on the relationship between moral hazard and insurance fraud in

the Japanese insurance industry. The study investigated how policyholders mental predisposition

to lower accidents change once they are insured and the resultant change should the insurers invest

heavily in fraud detection. The findings revealed that policyholders efforts to lower risk exposure

slightly increased with insurers investment in preventing insurance fraud. Thus, moral hazard and

insurance fraud has inter-linked relationship.

Tseng & Su (2013) examined how customer orientation affects the sales peoples attitudes toward

customer misconducts (planned and opportunistic frauds) with regards to customer insurance

fraud. They used life insurance salespeople in Taiwan to determine how they reacted to customer

misconduct based on their marketing philosophy (customer orientation), perceived fraud size and

perceived social consensus. The study established that high customer orientation may not enhance

salespeoples tolerance of customer claim frauds and unethical decisions are most significantly

influenced by perceived fraud size and social consensus. That is, sales peoples high consumer

orientation is related with lower tolerance to the customer insurance frauds.

Button, Gee & Brooks (2012) sought to measure the cost of fraud using 132 fraud risk

measurement exercises from nine countries. The study established that fraud and error losses in

36
organizations were approximately at least 3%, probably more than 5% and possibly more than 9%.

Thus, fraud and error can be measured and if regularly this incentivizes action to reduce it reaping

financial benefits to the organization. Besides, fraud and error can be cost effectively measured

and reduced significantly.

Yusuf (2010) conducted a study on how insurance brokers control opportunism at the post-

contractual stage of insurance contract in Nigeria. Customers opportunistic tendencies are

controlled by insurance brokers by their involvement from notification of claim, audit of claim, to

actual claim settlement and mediation of disputes. Besides, the zealousness of insurance brokers

in controlling customers opportunism is necessitated by the formers apprehension over reputation

damage and their professionalism in handling clients over-exaggeration and suspicious claiming.

Pao et al (2014) conducted a study in the Taiwan insurance industry, and concluded that after

encountering typhoon hit, the insured who purchased automobile theft insurance but do not

purchase typhoon/flood insurance tend to have a significantly higher probability of filling a total

theft claim than other insured. This supports the opportunistic frauds in the insurance market.

37
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter stated the procedure and tools which were used in collecting data for the thesis. The

methodology is designed to enable the researcher achieve the objective of the study which were

set out in chapter one. It captured the following sub-headings: study design, population, sample

and sampling procedures, instrument (s), data collection and data analysis procedures.

3.2 Research design

This study used descriptive and exploratory research designs. These research designs were used

on to collect and analysed data which helped to establish the relationships between the study

variables. The research design also utilized quantitative research approach to offer the extent of

the effects of insurance fraud on the financial performance of insurance companies.

3.3 Population and sample size

3.3.1 Population

The population of this study was captured from all the insurance companies in Ghana. Insurance

companies are made up of nineteen (19) life insurance firms and twenty-six (26) non-life insurance

firms (National Insurance Commission, 2014). The employees of these firms include claim

adjusters, actuaries, financial directors, accountants, underwriters, sales executives and others. The

insurance companies in Ghana offer two main lines of insurance businesses; namely life insurance

38
and non-life insurance (Insurance Act, 2006). The table below shows the line of business the

insurance companies offer:

Figure 3.1: Insurance Companies and their line of Insurance Businesses

Number of companies

26

19

Life Non-life

Source: National Insurance Commission (2014)

3.3.2 Sample and Sampling Techniques

When conducting research one cannot study everybody everywhere and do everything (Miles &

Huberman, 2002, Malhotra & Birks, 2007). Denscombe (2003) also stated that, it is not possible

for researchers to collect data from all categories being investigated. Therefore, a researcher must

attempt to get evidence from a section of the category through a sampling technique.

39
In this study, respondents were randomly selected from the senior managers of the claims and

underwriting departments of insurance companies in Ghana. One respondent was selected from

each insurance company in Ghana as at 2014.

3.4 Data Gathering instruments and procedure

Survey questionnaires were used to collect primary data directly from the insurance companies

and secondary data of annual financial statements of insurance companies were obtained from

National Insurance Commission as at 2014. Questionnaires were used in this study because it

allowed for greater degree of control over the insurance fraud variables, and it saved time by

summarizing insurance fraud problems that might be difficult to observe and quantify in reality

(Dean, 2004; Miyazaki, 2009; CAIF, 2015). Moreover, using questionnaires helped to standardize

the information that were received by the respondents and, at the same time, is one of the simplest

procedures that allow a large number of questions to be investigated (Dooley, 2001). Using

questionnaires also ensured the anonymity and confidentiality of the respondents when they were

investigated on sensitive issues on insurance fraud. Finally, since different opinions on insurance

fraud are differently manipulated in terms of fraud sizes, questionnaires can capture these

differences better (Dooley, 2001). Based on the above reasons, survey questionnaire was an

appropriate tool for primary data gathering.

To ensure the readability and effectiveness of the questionnaire designed before the formal

investigation, the original questionnaires were checked by the researchers supervisors and

experienced insurance experts before they were distributed. The reliability of the questionnaire

was evaluated through Cronbachs Alpha which measured the internal consistency of the

40
constructs. Cooper & Schindler (2008) has indicated 0.7 or more of the Cronbachs Alpha to be

an acceptable reliability coefficient.

Table 3.1 Reliability coefficients

Scale Cronbach's Alpha

Internal fraud 0.812

Policyholder fraud 0.725

Intermediary fraud 0.825

From table 3.1, all the variables have coefficients which are more than 0.7. Thus, they fit to be

included in the data analysis in chapter four (4).

For the return on assets and long-term capital of the constructs were extracted from the secondary

data (the annual financial statements of the insurance companies in Ghana) as at 2014. These data

served as a secondary data for this papers analysis in chapter four (4).

3.5 Method of Data Analysis

3.5.1 The Regression Model

The cross-sectional multiple regression model used in the analysis of the effects of insurance fraud

on the financial performance of insurance companies in Ghana is given by:

= 0 + 1 + 2 + 3 + 4 + 5 +

= 2014

= 2014

41
 = 2014

= 2014

= 2014

= 2014

, = 0,1, ,5

The dependent variable:

() =

PBIT is profit before interest and tax. The total assets is non-current assets and current assets

The independent variables:

The key independent variables in this study are represented by the types of insurance fraud which

were explained in chapter two. They are represented by effects they pose on the financial

performance of insurance companies. These effects were adopted from fraud indicators in

insurance fraud literature (Dionne et al., 2000; Crocker & Tennyson, 2002; Derrig, 2002; Dionne

& Gagne, 2002; Yusuf & Babalola, 2009; Yusuf, 2010; Yusuf, 2011; Tseng & Su, 2013 and Pao

et al., 2014). These effects (refer to table 3.2) are ranked on the likert scale (Likert, 1932) from 1

to 7 to get the views or perceptions of insurers on the effects of insurance fraud on their financial

performance. They are ranged from strongly disagree (1) to strongly agree (7). The results of the

indicators of the effects of internal fraud, policyholder fraud and intermediary fraud obtained from

each of the respondents are included in the model by finding the arithmetic mean of the responses.

42
Arithmetic mean was used because it is easy to compute and with two variables under each

insurance fraud, it is appropriate to use the arithmetic mean to arrive at the averages.

Table 3.2: Effects of the independent variables

Internal Fraud Policyholder Fraud Intermediary Fraud

Increased costs of operations Huge amounts paid for Reputational risk/damage

inflated claims

Breach of ethical standards Less revenue from insurance Decline market share

premium

To ensure robustness of the regression model used in this study, and to reduce specification bias,

the model included the following variables to control bias:

Long-term Capital (LTC)

It is a percentage of shareholders or owners equity to total long-term capital of the insurance

companies. The total long-term capital of an organization is made of the equity finance provided

by the shareholders of the company and long-term debt finance provided by outsiders (Albanez,

2015). This is shown below as:

/
=

The number of years an insurance company has been in operations.

The number of years in operations can affect the number of clients an insurance company will

have, and the level of insurance fraud that company can experience. Insurance companies with

many years in operations are likely to have large clientele base because of trust and good business

relationship in the insurance market than the new insurance companies (Yusuf, 2011). Therefore,

43
they are likely to experience insurance fraud more than the newly incorporated insurance firms in

the market because they tend to experience inefficiencies in management due to moral hazard of

consumers and poor internal control systems (Yusuf, 2010).

3.5.2 Assumptions underlying the regression model

In order to show the Best (minimum variance) Linear Unbiased Estimates of the above regression

parameters stated above, the following Ordinary Least- Squares (OLS) underlying principles were

tested. The results of these assumptions are presented in chapter four.

i) The independent variables are linearly independent of each other.

If this assumption is not satisfied, multi-collinearity is said to be present

ii) The regression model requires that the conditional distribution of the disturbance-term/

error term must be normal in form. This clearly implies that the dependent variable as

a normal conditional distribution

3.6 Research Ethics

Saunders et al., (2009) suggest that in the context of research, ethics refer to the appropriateness

of your behaviour in relation to the rights of those who become the subject of your work or are

affected by it. In the light of this, considerations are given to:

i) Privacy of clients/employees of consultancy firms

ii) Reputation of the researcher

iii) Confidentiality and anonymity

iv) Cultural influences

44
 v) Objectivity

3.7 Limitations to the methodology

The major obstacle encountered with the research methodology was lack of quantitative data for

the insurance fraud factors (internal fraud, policyholder fraud and intermediary fraud) used in this

study. To lessen the weakness that come with unavailability of quantitative data, a survey

questionnaire was designed and dispatched to gather the perspective of insurers on three insurance

fraud variables. In gathering the primary data, uncooperative attitude of some of the senior

managers at the underwriting and claims department of insurance companies was shown. But with

authorized letters from the Finance Department of University of Ghana Business School, the

respondents agreed to fill the questionnaires. Again, two insurance companies categorically

rejected to fill the questionnaires with the fear that the information acquired from them will be

used to tarnish their image or will be relayed to their competitors. But this did not have any

significant impact on the results of this study because 39 out of 45 insurance companies filled the

questionnaires.

45
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND DISCUSSION

4.1 Introduction

This chapter deals with the presentation, analysis and discussion of the data collected showing the

relationships between the variables and concepts discussed in the previous chapters. This chapter

employed tables and graphs in depicting the findings with their implications are clearly discussed.

The software used for the presentation and analysis of the data collected includes Stata12 and

Microsoft Excel 2007. Data was collected from thirty-nine (39) out of forty-five (45) insurance

companies in Ghana (Both life and non-life insurance companies) as at 2014. This chapter is

structured as follows: descriptive analysis (general questions, causes of insurance fraud, and

deterrence of insurance fraud), and statistical analysis of the effects of insurance fraud on the

financial performance of insurance companies using descriptive statistics, correlation and

regression.

4.2 Descriptive Analysis

The descriptive analysis presents and discusses data obtained from the primary data (survey

questionnaire). This section assists in addressing objective two and three raised in chapter one.

4.2.1 Background Information

i) Responses to the Survey Questionnaires

From table 4.1 it can be observed that 87% of the questionnaires sent out were received and 13%

were not received. This shows that the researcher was able to contact more insurance companies

46
in the insurance industry. This results is in line with Cooper & Schindler (2003) findings that a

response rate between 30% and 80% of a total sample size can be generalized to represent the

opinion of an entire study population.

Table 4.1: Survey Questionnaires that were returned or unreturned

100.00

90.00

80.00
Percentage of respondents

70.00

60.00

50.00
Responses
40.00

30.00

20.00

10.00

-
Filled and returned Unreturned
Returned or Unreturned Survey Questionnaires

ii) Lines of insurance business

Out of the responses from the insurance companies, seventeen (17) of the respondents were

from the life insurance industry and twenty-two (22) from the non-life (general) insurance

industry. According to Insurance Act 2006 (Act 724), the insurance business in Ghana are

supposed to be conducted on two lines: life (funeral, keyman, group life, credit and mortgage

policies, whole life, endowment, and term policies) and non-life (liability, engineering, marine,
47
 fire insurance/property insurance, motor insurance, and miscellaneous insurance policies). As

can be seen from figure 4.2, greater responses were obtained from the non-life insurance

business (56%) than life insurance business (44%). This is because over the years the non-life

insurance business in Ghana has enjoyed greater share of the entire industry compared to the

life insurance business. The reason for this is the large clientele base of the non-life insurance

industry emanating from a compulsory motor vehicles (third party) Insurance Act, 1958 which

makes it obligatory for every vehicle owner to insure his or her car. In view of this, the non-

life insurance companies in Ghana are likely to experience insurance fraud more than those in

the life insurance industry.

Figure 4.2: Respondents insurance companies lines of insurance business

44%
Life Insurance
Non-life Insurance
56%

From the figure above, 56% of the respondents are from the non-life insurance companies

representing 22 out of 39 respondents. 44% of the responses obtained of the data collected were

from the life insurance business.

48
 iii) Departments of Respondents

Job titles and the departments in which respondents work differ based on the responses from the

questionnaires. Job titles or position in the insurance companies determines the actual work

managers or employees are supposed to do in the organization. The aim of the researcher was to

give the research questionnaires to those in the claims and underwriting departments to fill them.

Per the responses received and illustrated in figure 4.3, twenty (20) were from the claims

department of the insurance companies holding positions such claims manager, claims adjuster,

and senior claims officer, fourteen (14) from underwriting department with positions like

underwriter, actuary, and policy analyst, five (5) from other departments like accounting, finance,

and marketing.

Figure 4.3 Job titles/departments of Respondents

20.2
20
19.8
19.6
Frequency

19.4
19.2
Response
19
18.8
18.6
18.4
Claims Underwriting
Departments of Respondents

From figure 4.3, 20 Respondents from claims department, 19 from underwriting departments of

the insurance companies in Ghana responded to the questionnaire. The respondents from claims

49
and underwriting departments filled the survey questionnaires because these two departments are

largely involved in accepting potential insured, and assessment as well as payment of claims.

These findings support the findings on why claims and underwriting departments encounter

insurance fraud more often than other departments in insurance companies (Crocker & Tennyson,

2002 and Yusuf & Babalola, 2009).

4.2.2 Causes of Insurance Fraud

Internal Fraud

The questions on the causes of insurance fraud in the Ghanaian insurance industry were obtained

from two sources per this study: published papers (Dionne et al, 2006; Ernst & Young, 2011;

Okura, 2013; and Yusuf, 2011) and official documents issued by recognised bodies or

organisations (IAIS, 2007; CAIF, 2015; Insurance Bureau Canada, 2004). These causes were

ranked on the likert scale for respondents to express their opinions on them and the top three are

illustrated in the diagram below (figure 4.4). Also, additional factors that cause internal fraud in

Ghana were sought from respondents.

50
Figure 4.4: The three key causes of internal fraud in Ghana

70

60
Percentage of Respondents

50

40

30
Responses
20

10

0
Poor remuneration of Weak internal controls Dubious relationship
employees or between employees or
managers managers and outsiders
Factors causing internal fraud

From the figure 4.4, majority of the respondents agreed that poor remuneration of employees is

the key factor that creates internal fraud. The economy of Ghana has experienced downturn in

GDP over the past few years after the economic recession hit the world (State of Ghana Economy

Report, 2013). This economic situation has led to uncontainable hardships on Ghanaians especially

workers. The salaries of workers stand still whiles other things continue to increase amidst

financial pressure from family and dependents. In other order to meet their financial needs, workers

resort to unethical and thievery means to survive. So employees or managers connive with either

policyholders or intermediaries to defraud the insurance companies huge sums of money (PwC

Ghana, 2013). Weak internal controls in the insurance companies were the next talked about cause

51
of internal fraud. This happens where managers or employees wield too much power or authority

with no or poor supervision and well-crafted internal controls. From the data obtained, none of the

insurance companies in Ghana has insurance fraud unit or department. Also, there are no well-

documented fraud policies to guide employees and managers. The internal audit units of most of

the insurance companies in Ghana are weak, and ineffective because of the load of work they

embark on like auditing financial statements, claims audit and then fraud. Therefore, they get less

time to focus fully on insurance fraud. Because of these weaknesses, employees are able to steal,

conceal and misrepresent some of the insurance contracts and keep the proceeds from the contracts

to themselves. Weak internal controls have been identified in literature as the floodgates of attacks

on the strength of organisations (Altamuro & Beatty, 2010 and Daniela, 2013). The dubious

relationship that may exist between employees either within the insurance companies or with

outsiders (third parties) can harm the financial strength of the insurance company. Some of the

employees or managers use their positions to connive with the consumers to defraud the insurance

company. Also, long-time business relationships between employees and outsiders can influence

employees and managers to cause internal fraud if not checked. These findings confirm what

Morley et al. (2006); Tseng & Su (2013) and Yusuf (2011) said about the attitude of insurance

workers in creating fraud which works against the insurer. Other factors identified to cause internal

fraud in insurance industry include:

i) Misappropriation of funds

ii) Steal cheques

iii) Directors of the board and/or managers do not comply with laws and regulations and/or

display a propensity to take undue risks

52
 iv) Directors of the board, managers or members of staff believe that they are being

treated unfairly (for example, passed over for promotion, refused pay rises or staff

displacement).

v) Forge signatures

vi) Directors of the board and/or managers do not provide satisfactory answers to the

supervisor or auditors questions or do not allow staff to speak to supervisors or auditors.

vii) Falsify documents

viii) Directors of the board and/or managers display a dominant management style that

discourages critical or challenging views from others such as staff.

ix) Transactions are unusual as to time (for example, day of the week, season), frequency

(too many, too few), place (too near, too far out), amount (too high, too low, too

consistent, too different) and parties (related parties, strange relationships)

x) Poor accounting records and/or poor documentation

xi) The organisational structure is changing and/or too complex.

xii) Directors of the board, managers or members of staff appear to exhibit extreme greed

for personal gain.

xiii) Employees or managers selling the companys assets at below their true value in

return for payment.

Policyholder fraud (consumer fraud)

The major cause of policyholder/consumer fraud from the responses is the falsification of

insurance documents (like policy/contract forms, receipts, claim forms, application forms). This

occurs when there is unavailability of original documents, incomplete documents (no name on the

53
documents or filled in later, no signature), different handwritings, new documents concerning old

events/products, strange dates, inconsistencies between the application form and the claim form or

too well documented claims (all receipts available, recent photographs of the items lost). The next

most important factor that causes policyholder fraud is the attitude of the policyholders or

consumers. This unethical, unprofessional and anti-business attitudes of consumers come in the

following forms: the claimant is aggressive when pushing for quick settlement of his/her claims

and willingness to accept low settlement; the policyholder is unwilling to cooperate in terms of

revealing facts about the insurance policy or the incident he/she is claiming for; a policyholder

avoids the use of telephone or mail; in some situations a claimant wants instant cash payment

instead of cheque or credit payment; a policyholder did nothing to prevent or limit the damage

(moral hazard), and a situation where the policyholder is very knowledgeable about the terms or

has contacted the broker/agent or insurer immediately prior to the loss. The third cause of

policyholder fraud comes from the nature of losses or injuries suffered by insured. This come from

losses that may occur shortly after the insurance policy coverage is incepted or increased or just

before it ceases or an inconsistency between the insured amounts.

Also, the nature and the history of a policyholder can create this fraud. For instance, the

policyholder/claimants financial situation is bad, the policyholder is a criminal or a fraudster, the

claimant has a bad claim history or the claimant provides a post office box or hotel as address

instead of his residential address. These four major causes of policyholder fraud are illustrated in

figure 4.5. These findings confirm the findings of Yusuf & Babalola (2009); Hoyt (2006); Tseng

& Kang (2014) and Pao et al. (2014) on the factors that cause policyholder insurance fraud.

54
Figure 4.5: Four key factors that causes policyholder or consumer fraud in Ghana

16

14

12
Number of respondents

10

6 Response

0
Falsified Attitude to Characteristics Nature and
documents defraud insurer of the losses history of
policyholder
Factors that causes policyholder fraud

Other factors that causes policyholder or consumer fraud include:

i) The insured has an attitude of frequently changing insurers.

ii) Exaggerating damages/loss

iii) Insured insists on using certain doctors, repair shops, service providers etc.

iv) Staging the occurrence of fictitious damages/loss

v) Policyholder has several policies, with the same insured object and coverage, but

did not inform the insurer

55
 vi) Fraudulent death claims through fake deaths

Intermediary fraud

Intermediary fraud (from independent brokers and independent insurance agents) is created by

many factors per the findings of this study. The first cause of intermediary fraud is the lack of

standardised approach in conducting the intermediary business worldwide. There are many ways

in which intermediaries operate in different jurisdictions all over the world especially with the

collection and payment of insurance premiums from consumers and payment of insurance claims

from the insurer. Some economies use instant cash system in addition to instant commission

scheme whiles others use the credit payment systems. The two systems operating at the same time

in Ghana coupled with poor supervision from the National Insurance Commission allow some

intermediaries to manipulate the system and profit from it. Secondly, intermediary fraud proves

to be a difficult threat to detect. Intermediaries sit in a position of trust between the purchasers of

insurance and insurers (Yusuf, 2011). This trust forms a basic element of the relationship in the

insurance contract as the intermediary operates far from the insurer or the insured. Getting insight

and information will help the intermediaries to handle this trust with care. Unfortunately, from the

findings it was clear that there is inadequate training given to independent brokers and insurance

agents about this menace and this is shown in the figure 4.6. As a result of this, it may be difficult

for insurance brokers to detect and report illegal dealings by the insured.

56
 Figure 4.6: the major causes of Intermediary fraud in Ghana

Inadequate
training
43% Poor
supervision
57%

Additional factors that cause intermediary fraud are:

i) Non-disclosures or misrepresentation of the risk to reduce premiums

ii) Commission fraud

iii) There is a personal or other close relationship between the client and the intermediary.

iv) The premiums received and commissions paid are above or below the industry norm for

the type of policy.

v) Premium diversion-intermediary takes the premium from the purchaser and does not pass

it to the insurer

vi) There are frequent changes in control or ownership of the intermediary.

vii) Inflates the premium, passing on the correct amount to the insurer and keeping the

difference.

57
4.2.3 Deterrence of Insurance Fraud

Internal fraud

Specific measures to control internal fraud include effective internal control, internal audit and a

deliberate fraud policy by individual insurance companies and the insurance industry as a whole

in Ghana.

Figure 4.7: Top three deterrence measures to fight internal fraud in Ghana

Transparent and
robust internal
fraud policy
25% Effective
internal fraud
unit
43%
Internal audit
32%

From the figure 4.7, it is clear that 43% of all the respondents are of the view that effective internal

audit fraud will deter employees or managers to shy away from fraudulent activities that will go

against the insurer. The internal audit unit will come up with programs such as laid down control

environment, risk assessment, information and communication, control activities and robust

monitoring systems to check activities of employees and managers. Internal audit measures should

be instituted by insurance companies. Insurance companies that has already audit units should be

58
furnished them with modern fraud detection measures on data mining, logistic regression and other

practical measures through training to execute their work effectively. Transparent and robust

internal fraud policies should be well-developed and allowed to work to fight against this

antithesis. Additional measures to fight internal fraud are:

i) Realistic business goals

ii) Proper incentive structure for employees and managers

Policyholder (Consumer) fraud

For policyholder/consumer fraud measures such as thorough client acceptance processes, well-

scrutinised claim assessment, effective application of information technology (IT) techniques, an

anti-fraud policy, central anti-fraud bureaus or units by National Insurance Commission and others

can fight this type of fraud. These anti-fraud measures are arranged by their level of importance:

i) proper claims reporting procedures; ii) product proofing (including designing fraud prevention

characteristics when designing a product) and iii) emphasizing the consequences of fraud to the

policyholders. The key preventative measures shown in figure 4.8: client acceptance and d claim

assessment are assessed equally as important control measures according to respondents. In each

case, checking databases and red flag lists normally record high scores compared to other

preventive measures. It is also clear from the responses that that measures that make use of

information technology are also important than the more traditional measures (peer reviews,

professional judgment and checking red flag lists manually).

59
Figure 4.8: Top five measures to fight against policyholder (consumer) fraud

35%
29% 30%
30%

25%

20% 19%

15% 12%
10%
10%

5%

0%
Client Product Rigorous Application Anti-fraud
acceptance proofing Claim of IT tools bureaus
assessment Assessment
Percentage of respondents
Another key measure proposed by the respondents is information sharing between insurers,

between insurers and law enforcement, and between insurers and other parts of the chain (e.g.

medical service providers, repair shops) are crucial.

Intermediary fraud

To fight against intermediary fraud, clear procedures and authorizations are crucial. These

procedures should guarantee a proper premium collection, screening, payment of commissions and

auditing of the intermediary. The graph below (figure 4.9) presents the top three measures that can

prevent intermediary fraud.

60
Figure 4.9: Top three measures to prevent intermediary fraud

18
16
16
14
14
12
10 9
8
6
4
2
0
Strict procedures and Proper screening of Training
authorisations on intermediaries
premium collection
and claims
disbursement
Respondents

The answers from the open question about intermediary fraud stresses on the following:

a) Auditing

b) Knowledge sharing between independent brokers and insurers agents.

4.3 Statistical Measure of the Effects of Insurance Fraud

This section analyses statistically the quantum of impact of insurance fraud on the financial

performance of insurance companies using cross-sectional regression model. The assumptions

underlying the regression model are tested, and the results are showed below.

61
4.3.1 Descriptive statistics of data for regression models

This section summarised the mean, standard deviations, maximum and minimum results of the

variables obtained from the combination of the primary data and secondary data.

Table 4.1: Summary Statistics

Standard
Observation Mean deviation Minimum Maximum
ROA 39 2.15 7.42 1.12 22.14
INF 39 5.13 3.99 2.11 6.45
PCF 39 5.85 6.19 1.27 6.79
MEF 39 5.49 5.92 1.41 6.88
NY 39 8.18 15.23 2.14 70.34
LTC 39 52.56 82.11 47.21 83.17

From the table 4.1 above, it can be observed that, an average of 2.15 is achieved by insurance

companies in Ghana on their Return on Assets (ROA). This comes with a range of 21.02 emanating

from minimum of 1.12 for the insurance companies on their total assets and maximum of 22.14.

In terms of internal fraud (INT), an average of 5.13 of the companies was affected by internal fraud

based on the views/perceptions of the respondents. A minimum of 2.11 and a maximum of 6.45 of

insurance companies respectively did experience internal fraud. On policyholder or consumer

fraud (PCF), an average of 5.85 of companies did suffer from policyholder/consumers fraud. A

minimum of 1.27 and a maximum of 6.79 insurance companies suffered from policyholder fraud

whiles the rest saw large changes against their annual returns. Intermediary fraud (MEF) posted a

mean of 5.49. The average number of years it took insurance firms to gain a strong financial stance

in the insurance market is 8.18 years with a minimum of 2.14 years and a maximum of 70.34 years.

For the long-term capital ratio, it is observed from the above table that, an average of 52.56 of

62
equity capital to total long-term capital is needed by insurance companies to maintain their

solvency in the Ghanaian insurance market.

4.3.2 Correlation Matrix

The relationship between the study variables was tested using correlation. From the finding (table

4.2) on the correlation analysis there is a negative relationship between Return on Assets (ROA)

and the insurance fraud variables (internal fraud, policyholder fraud and intermediary fraud). There

is positive relationship between ROA and the number of years in operations and long-term capital

of insurance companies. Also, the suitability of the independent variables to fit into the regression

model was also checked. With all the correlation coefficients being less than 0.5 from table 4.2, it

was concluded that the independent variables are not multi-collinear therefore fitted in the

regression model (Farrar et al., 1967).

Table 4.2: Correlation coefficients

ROA INT PCF MEF NY LTC

ROA 1

INF -0.297** 1

PCF -0.463** 0.223 1

MEF -0.340** 0.141** 0.340* 1

NY 0.113 0.039 0.205 0.107 1

LTC 0.371 0.106 0.162 0.381* 0.298 1

Note: *, ** indicates significance level at 10% and 5%

4.3.3 Results of Regression

From the table 4.4, it was revealed that there is a significant negative relationship between internal

fraud, policyholder fraud, intermediary fraud, number of years in business and long-term capital,

63
and return on assets. This is because the p-value of the three insurance fraud variables (internal

fraud, policyholder fraud and intermediary fraud) are less than significance level of 0.05, which

makes the null hypothesis (chapter one, 1.5) to be rejected, and accept the alternative hypothesis

that there is a significant negative relationship between insurance fraud and the financial

performance of insurance companies. This is in line with the findings of the studies conducted by

Kline (2011 and Efron, 2004; Okura, 2013), that a null hypothesis of less 0.05 significance level

should be rejected.

The results in table 4.4 shows that a unit change in internal fraud would lead to a decrease in

financial performance by of 0.66; a unit change in policyholder fraud would lead to a decrease in

ROA by 0.89; a unit change in intermediary fraud would lead to a decrease in ROA by 0.07.

However, long-term capital has a significant positive relationship with return on assets where a

unit change in long-term capital of insurance companies would lead to 0.13 increases in ROA of

insurance companies. Therefore, based on the above analysis, internal fraud, policyholder fraud,

intermediary fraud and long-term capital have significant influence on the financial performance

of insurance companies.

Table 4.3: Results from the regression model (1)

Multiple R R Sq. Adjusted R Standard Error of estimate
Sq.

0.72 0.52 0.45 0.38

64
Table 4.4: Results from the regression model (2)

Variables Coeff. Std. Er t-Stat. P-Value

Intercept 8.94 1.76 5.07 0.00

INF -0.66 0.03 -21.42** 0.00

PCF -0.89 0.03 -26.11** 0.00

MEF -0.07 0.02 -4.83** 0.00

NY 0.06 0.03 1.8 0.08

LTC 0.13 0.02 6.29** 0.00

Note: ** indicates significance level of 5%

From the findings in the table 4.3, overall, the independent variables explain about 45% of the

variation in ROA. Multiple R is the correlation coefficient which shows the relationship between

the study variables. The finding from table 4.3 shows that there is a strong relationship between

study variables as shown by 0.72.

Table 4.5: Results from the regression model (3)

ANOVA

Significance
df SS MS F F

Regression 5.00 1,113.81 222.76 1,424.30 0.00

Residual 33.00 5.16 0.16

Total 38.00 1,118.97

From the ANOVA statistics from the table 4.5, the independent variables provide a good fit at the

significance F value was less than 0.05, an indication that the model was statistically significant.

4.3.4 Normality test of the regression model

To check the normality of the residuals in the regression model we plotted a histogram of the

residuals and observed if the histogram has the shape of the normal distribution. As can been seen

65
from figure 4.10, the residuals are approximately normally distributed. Figure 4.10 also shows the

results of the kurtosis and skewness of the model. Skewness is the measure of the symmetry of a

distribution of a real-valued random variable about its mean. According to Kline (2011), the

normality of a regression model is said to be skewed when the results of the residuals plotted on

histogram graph are between -3.0 and 3.0. From figure 4.10, all the variables fall within the range

with the lowest being -3.00 and 2. From figure 4.10 the residuals is normally distributed.

Figure 4.10: Normality of the residuals of the regression model

66
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

The previous chapters concentrated on the introductory aspects of the study which dealt with the

background of the study, problem statement, objectives and justification of the study, the scope

and limitation of the study. It also reviewed the relevant literature on the study. More so, the

methodology and the profile of the study area were clearly espoused. Finally, the data gathered

through the use of questionnaires were also analysed which brought to bear the possible solutions

to the questions raised at the introductory chapter. This chapter summarises the findings analysed

from the data gathered through the questionnaire and annual financial statements of 39 insurance

companies as at 2014 in chapter four. This chapter also discusses the researchers

recommendations and conclusion to the study.

5.2 Summary of the findings

i. It was observed from the study that many insurance companies (both life and non-life)

responded massively to the questionnaires. 87% responded distributed to the insurance

companies whiles 13% were not returned. This can be concluded as representative of the

views of insurance companies in Ghana on insurance fraud.

ii. It was found out that 56% of the respondents are from the non-life insurance business

whiles 44% were from the life insurance industry.

iii. It was established that insurance fraud occurs more in the Ghanaian non-life insurance

industry than the life insurance industry.

67
 iv. This study contacted 51.28% in the claims department of the insurance companies; 48.72%

from the underwriting.

v. The top rated causes of internal fraud in Ghana are a) weak internal controls, b) employees

long relationship with customers and other external parties, and c) poor conditions of

services which push employees and managers to get quick wealth.

vi. It was revealed that falsified contract documents, claimants behaviour and the type of

losses can cause policyholder (consumer) fraud.

vii. Majority of intermediary fraud are caused by a) poor training for the intermediaries and b)

lack of thorough screening of intermediaries contract policies and claims submitted.

viii. Insurance fraud poses effects on high premium paid by insured; policyholder fraud

increases the costs of operations because fictitious claims are paid; and intermediary fraud

increases the reputational risks of insurance companies.

ix. Strict procedures on policy and premium acceptance, effective internal controls, deliberate

fraud policy; internal fraud team or department; application of IT tools; regular training;

auditing are some of the measures that can fight against the three types of fraud.

x. Empirically, it was established that insurance fraud has a negative impact on the annual

return on assets of insurance companies in Ghana.

xi. About 52% of the changes in the annual financial performance of insurance companies are

influenced by insurance fraud, and the percentage of long-term capital of insurance

companies.

xii. The insurance fraud siphons huge portion of the revenue of insurance companies but they

go undetected.

68
5.3 Conclusion

From the above analysis, weak management practices and internal controls, quest for quick

financial gains, inflated claims consumers, and lack of education on insurance fraud to consumers

and intermediaries are the main causes of insurance fraud in Ghana. The results from the cross-

sectional regression model indicate that statistically insurance fraud has a significant negative

effect on the annual return on assets (financial performance) of insurers in Ghana. In addition,

effective internal controls, deliberate fraud policy by insurance companies, rigorous clients and

claims acceptance procedures, application of modern IT tools, competent and well-equipped

insurance intermediaries can fight against insurance fraud in Ghana.

5.4 Recommendations

The following are recommended to clamp down on fraud against insurers:

i. It is recommended that a special unit or insurance fraud bureau in all the ten (10) regions

of Ghana should be set up to regulate the issues concerning insurance fraud which will seek

the interest of insurers and insurance practitioners and consumers. This unit or bureau

should be equipped with modern gadgets to function fully. Their full functions and

responsibilities should be assigned from the word go.

ii. A budget or fund should be allocated by insurers to educate and create awareness about

insurance fraud to employees, brokers and consumers.

iii. The management as well as employees of all the insurance companies should be given

regular rigorous training on how to combat insurance fraud.

69
 iv. National Insurance Commission (NIC) should conduct regular training for all players in

the Ghanaian Insurance Industry about insurance fraud.

v. Effective supervision should be preached to all managers at the all departments of

insurance companies especially those at the claims and underwriting department.

vi. Motivation, immediate rewards and better conditions of services to managers, employees,

insurance agents and brokers from the insurer will help curb insurance fraud.

vii. Employees at the claims, accounting, finance and underwriting departments of insurance

companies must be selected strictly on deep knowledge, integrity, trends and professional

standards.

viii. A special research and development unit must be established to research into this area and

fish out new techniques of fighting against this menace.

ix. Little or no research paper exists on fraud perpetrated by insurers against other players in

the insurance market (that is, insurers fraud). It is recommended that future researches

should look at it.

5.5 Limitations of the Study

This study concentrated only on the mainstream insurance industry in Ghana with no comparative

studies with insurance companies in other countries especially those in Africa to establish the true

picture the problem at hand. In addition, the sample size used in this study is small, just thirty-nine

(39) responses may not truly reflect the views of all insurers in Ghana. Also, this study relied on

only one year data (single point estimate) which is a weak reflection in the trends of cost of

insurance fraud incurred by the insurance companies over the years. Again, a causality test should

have been conducted to establish a proper relationship between insurance fraud and financial

70
performance of insurance companies but this was not done because of lack of quantitative data on

insurance fraud.

71
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83
84
 APPENDIX 1

QUESTIONNAIRE

I am a postgraduate student (MPHIL Risk Management & Insurance) of UNIVERSITY OF

GHANA BUSINESS SCHOOL conducting a study on the topic CAUSES, EFFECTS AND
DETERRENCE OF INSURANCE FRAUD: EVIDENCE FROM GHANA. I would
appreciate it if you will take some time off your busy schedule to provide responses to the questions
below. Your responses will aid in providing insight into the effects of insurance fraud on the firm
performance of insurance companies in Ghana, the causes and how to control it. Please answer the
questions in your candid opinion and to the very best of your ability. Responses provided are only
meant for academic research purposes and would be kept confidential from external parties.

A. BACKGROUND INFORMATION
1. The name of your insurance company:
................................................................................................................................................

2. Line of business of your insurance company: Life or General (Non-life):

................................................................................................................................................

3. Your position in the insurance company or your job title:

.................................................................................................................................................

For the purposes of this questionnaire, fraud in insurance is defined as a fraudulent activity
which is intended to gain dishonest advantage for the fraudster or for the purposes of other
parties (IAIS, 2007). This may for example be achieved by: 1) misappropriation of assets; and/or
2) insider trading; and/or 3) deliberate misrepresentation; and/or 4) suppression or non-
disclosure of one or more material facts relevant to a financial decision or transaction; and/or 5)
abuse of responsibility, a position of trust or a fiduciary relationship. The following are the three
categories of insurance fraud that affects insurance companies from other parities:

i. Internal fraud Fraud against the insurer (insurance company) by an employee, a

manager or a board member on his/her own or in collusion with others who are either
internal or external to the insurer.
ii. Policyholder fraud and claims fraud Fraud against the insurer in the purchase
and/or execution of an insurance product by obtaining wrongful coverage or payment.
iii. Intermediary fraud Fraud by intermediaries against the insurer or policyholders. For
the purpose of this questionnaire intermediary should be understood to mean
independent broker/insurance agent

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 B. CAUSES OF INSURANCE FRAUD

2). In your opinion, what level of importance do you attach to the following factors causing
internal fraud? (Please circle your choice)

Strongly Disagree...Strongly Agree

Poor remuneration of employees and managers 1 2 3 4 5 6 7
with befitted conditions of services denied to
them
Weak internal controls- Key managers or 1 2 3 4 5 6 7
supervisors having too much limited control
and/or authority, and without oversight or audit
of activities of employees
Manager or employees with external business 1 2 3 4 5 6 7
interests putting pressure on them to satisfy their
external parties
Manager or employees having close or long 1 2 3 4 5 6 7
standing relationships with consumers and other
external parties

What other factors, do you think can cause internal fraud? Mention them

3). In your opinion, do you think the following factors will cause policyholder fraud? (Please
circle your choice)

Strongly DisagreeStrongly Agree

Policyholder or claimant attitude to defraud: 1 2 3 4 5 6 7

aggressive, pushes for quick settlement, is willing
to accept low settlement, is unwillingly to
cooperate, avoids the use of telephone or mail,
wants cash payment, did nothing to prevent or limit
the damage, is very knowledgeable about the
terms, has contacted the broker/agent or insurer
immediately prior to the loss.

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 Falsified and strange documents- no original 1 2 3 4 5 6 7
documents, no name on the documents (or filled in
later), different handwriting, new documents
concerning old events/products, strange dates,
inconsistencies between the application form and
the claim form or too well documented claims (all
receipts available, recent photographs of the items
lost).
Features of the losses or injuries being claimed for: 1 2 3 4 5 6 7
losses occur shortly after the coverage is incepted
or increased or just before it ceases, inconsistency
between the insured amount and the characteristics
of the insured (like life style, age, profession).
History and nature of policyholder: bad claim 1 2 3 4 5 6 7
history, claimant provides a post office box or
hotel as address, does not pay premiums

What other factors in your opinion can cause policyholder and claims fraud? Mention them

4). In your opinion, can the following factors leads to intermediary fraud?

(Please circle your choice)

Strongly Disagree.Strongly Agree

Poor supervision of intermediaries activities: 1 2 3 4 5 6 7

Policyholder/insured lives beyond the region were the
broker/agent operates. Charges high insured amount
by a broker/agent with a small portfolio.
Request for payments and or via the broker/agent 1 2 3 4 5 6 7
correspondence.
Exceptional increase of production and/or increase of 1 2 3 4 5 6 7
production from brokers or agents without apparent
reason
Inadequate training and education on insurance fraud 1 2 3 4 5 6 7
Intermediary often changes address or name 1 2 3 4 5 6 7

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 What other factors can cause intermediary fraud? Mention them

C. EFFECTS OF INSURANCE FRAUD

5). In your opinion, do you think the following consequences from insurance fraud will affect
the financial performance of insurance companies in Ghana? (Please circle your choice)

Strongly Disagree....Strongly Agree

i) INTERNAL FRAUD
Increased costs of operations 1 2 3 4 5 6 7
Breach of ethical standards 1 2 3 4 5 6 7

ii) POLICYHOLDER
FRAUD
Increased costs paid for inflated claims 1 2 3 4 5 6 7
Less revenue from Insurance Premium 1 2 3 4 5 6 7

iii) INTERMEDIARY
FRAUD
Reputational risk 1 2 3 4 5 6 7
Decline in Market share 1 2 3 4 5 6 7

D. DETERRENCE OF INSURANCE FRAUD (ANTI-FRAUD MEASURES)

6). In your opinion, what measures are the most effective in the battle against internal fraud?

Strongly DisagreeStrongly Agree

Fraud policy: Issuing an office manual and 1 2 3 4 5 6 7
internal guidelines on insurance fraud for
management and staff
A central anti-fraud function or unit (e.g. fraud 1 2 3 4 5 6 7
prevention office)
Effective internal controls: establishment of 1 2 3 4 5 6 7
clear responsibilities, elimination of the
management of money flows by a single person,
observance of the four eyes principle (control
by a second person), establishment of clear
reporting lines and communication procedures
Adequate supervision of staff and management 1 2 3 4 5 6 7

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 Establishment of efficient physical and 1 2 3 4 5 6 7
procedural safeguards over the use, handling
and availability of cash, other assets and
transactions as well as of information(systems)
Pre-employment and in-employment screening 1 2 3 4 5 6 7
of management and staff especially those in
claims and underwriting department
Robust internal audit team or function 1 2 3 4 5 6 7

What other measures in your view can be effective in the fight against internal fraud?

7). What measures are in your opinion the most effective in the battle against policyholder
fraud?

Strongly Disagree.Strongly Agree

A clear policy concerning fraud management by 1 2 3 4 5 6 7
National Insurance Commission
Anti-fraud bureaus or offices throughout Ghana 1 2 3 4 5 6 7
Product proofing (including fraud preventing 1 2 3 4 5 6 7
characteristics when designing a product e.g. by
reimbursing only the actual value of property and not
the replacement value)
Emphasizing the consequences of fraud to the 1 2 3 4 5 6 7
policyholder and claimant in the application form and
in the contract
Thorough client acceptance procedures: peer reviews; 1 2 3 4 5 6 7
checking internal databases; checking external
databases; special investigations; risk assessment of
clients and product combinations (customer due
diligence /know your client)
Robust claim assessment processes: professional 1 2 3 4 5 6 7
judgments; checking red flag lists manually; checking
red flag lists automatically.
Application of IT tools and techniques: voice stress 1 2 3 4 5 6 7
analysis; data mining / neural networks; IT tools to
check the authenticity of documents etc.

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 What other measures in your view can be effective in the fight against policyholder fraud?

8). What measures in your opinion are the most effective in the battle against intermediary
fraud? (Please circle your choice)

Strongly DisagreeStrongly Agree

Adequate and routine training for independent brokers 1 2 3 4 5 6 7

Procedures and authorizations concerning premium 1 2 3 4 5 6 7

collection, bank authorization etc
Screening by the insurer that the intermediaries are fit and 1 2 3 4 5 6 7
proper
Disclosure procedures about the intermediaries and their 1 2 3 4 5 6 7
organization
Monitoring the performance of intermediary relationships 1 2 3 4 5 6 7
(quality of business, anticipated and actual levels,
persistency of business)

What other measures or procedures can help to fight intermediary fraud?

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 APPENDIX 2

The following fraud indicators or red flags assisted the researcher in developing variables in

the questionnaire (appendix 1) and data analysis in chapter four:

Internal fraud

i. Unexplained wealth or living beyond apparent means, sudden change of lifestyle.

ii. Customer complaints and/or missing statements, unrecognized transactions.

iii. Key managers or employees having too much control and/or authority without oversight

or audit by another person.

iv. Rising costs with no explanation

v. Manager or employees with close or longstanding relationships with contractors

vi. Manager or employees with external business interests

vii. Marked personality changes of managers or employees

viii. Fast increasing sales or change in product mix

ix. Managers or employees who consistently work late, who are reluctant to take vacations

and who seem to be under permanent stress

x. New managers or employees who resign quickly

xi. Low staff morale without explanation.

xii. Inappropriate relationships exist at work or people act in an unusual manner (for

example, evasive behavior, unexplained curiosity of people over financial controls,

etc.).

xiii. Directors of the board and/or managers do not comply with laws and regulations and/o

display a propensity to take undue risks

xviii
 xiv. Directors of the board, managers or members of staff believe that they are being

treated unfairly (for example, passed over for promotion, refused pay rises or staff

displacement).

xv. Directors of the board and/or managers do not provide satisfactory answers to the

supervisor or auditors questions or do not allow staff to speak to supervisors or auditors.

xvi. Directors of the board and/or managers display a dominant management style that

discourages critical or challenging views from others such as staff

xvii. Transactions are unusual as to time (for example, day of the week, season), frequency (too

many, too few), place (too near, too far out), amount (too high, too low, too

consistent, too different) and parties (related parties, strange relationships)

xviii. Poor accounting and/or poor documentation

xix. The organisational structure is changing and/or too complex.

xx. Directors of the board, managers or members of staff appear to exhibit extreme greed

for personal gain

Policyholder fraud

i. Limited or strange documents (like receipts)

ii. Claimants behaviour

iii. Characteristics of the losses

iv. Characteristics of the claimant

v. Insured frequently changes insurer

vi. Insured insists on using certain doctors, repair shops, service providers etc.

vii. Policyholder has several policies, with the same insured object and coverage, but did

not inform the insurer.

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Intermediary fraud

i. Intermediary often changes address or name.

ii. Exceptional increase of production and/or increase of production without apparent reason.

iii. Portfolio of the broker/agent has (relatively) a lot of insurances with special characteristics

(Where the commission is higher than the first premium /with an arrears of premium

payment / with a payment shortly after inception (life) / with unnatural maturities (after

earning period of commissions).

iv. A lot of policy substitutions with complete commission.

v. Insured and broker/agent are represented by the same person or have the same zip code;

vi. Policyholder/insured lives beyond the region were the broker/agent operates. High insured

amount by a broker/agent with a small portfolio.

vii. Broker/agent asks for payment of all commissions at once or for payment of commissions

in advance

viii. Request for payments to be made via the broker/agent

ix. There is a high amount of claims fraud.

x. There is a personal or other close relationship between the client and the intermediary.

xi. The premiums received and commissions paid are above or below the industry norm for

the type of policy.

xii. There are frequent changes in control or ownership of the intermediary.

xiii. There are a number of complaints or regulatory inquiries on the intermediary.

xiv. The intermediary is in financial distress.

xv. The intermediary insists on using certain loss adjusters and/or contractors for repairs.

xvi. The policyholder/insured lives outside the region where the intermediary operates.

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