Causes, effects and deterrence of insurance fraud: evidence from Ghana
| Published date | 03 October 2016 |
| DOI | https://doi.org/10.1108/JFC-11-2015-0062 |
| Pages | 678-699 |
| Date | 03 October 2016 |
| Author | Isaac Akomea-Frimpong,Charles Andoh,Eric Dei Ofosu-Hene |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Causes, effects and deterrence
of insurance fraud: evidence
from Ghana
Isaac Akomea-Frimpong, Charles Andoh and Eric Dei Ofosu-Hene
Department of Finance, University of Ghana Business School,
Accra, Ghana
Abstract
Purpose – This paper aims to measure the extent of effects of insurance fraud on the nancial
performance of insurance companies in Ghana. It also examines the causes and stringent measures that
can be used to ght against insurance fraud.
Design/methodology/approach – Primary and secondary data obtained from 39 insurers in Ghana
are used in this paper. A multiple regression model is used to determine the relationship between
nancial performance and insurance fraud variables.
Findings – The results from the model indicate that statistically insurance fraud has a signicant
negative effect on the annual return on assets (nancial performance) of insurers in Ghana. Also, weak
internal controls, poor remuneration of employees, falsied documents, deliberate acts of policyholders
to prot from the insurance contract and inadequate training for independent brokers are found to be
the major causes of insurance fraud in Ghana. To deter insurance fraud, effective internal fraud policy,
rigorous assessment of insurance policies and claims, adequate training for independent brokers on
insurance fraud and modern information technology tools are paramount in ghting this menace in
Ghana.
Research limitations/implications – These ndings are to have substantial impact on the
techniques insurance companies will develop to ght insurance fraud and the policies that will be
developed by governments and national insurance regulatory bodies to ght this menace.
Originality/value – The main value of this paper is the determination of the key variables that
constitute insurance fraud and their impacts on the annual nancial performance of insurance
companies in Ghana.
Keywords Ghana, Return on assets, Internal fraud, Intermediary fraud, Policyholder fraud
Paper type Research paper
1. Introduction
In recent years, the amount of empirical researches on insurance fraud coupled with
studies on market failures, information asymmetry and poor regulatory measures in
nancial sectors of economies across the globe are increasing continuously (Crocker and
Tennyson, 2002;Derrig, 2002;Dionne and Gagne, 2002;Yusuf and Babalola, 2009;
Tseng and 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 rms and nancial well-being of both insured and
uninsured (Dean, 2004;Tseng and Su, 2013;Tseng and Kang, 2015).
On the nancial impact of insurance fraud, there are no internationally agreed
methods or bases upon which insurance fraud are measured leading to subjective
judgments from researchers (Jou and Hebenton, 2007;Okura, 2013). The estimated costs
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JFC
23,4
678
Journalof Financial Crime
Vol.23 No. 4, 2016
pp.678-699
©Emerald Group Publishing Limited
1359-0790
DOI 10.1108/JFC-11-2015-0062
of insurance fraud according to Coalition Against Insurance Fraud (CCAIF) (2015) is
approximately $80-100bn equating them to an out-of-pocket cost per insured household
of between $400 and 1,000 in the USA. Health insurance fraud which forms a greater
part of this menace in US cost insurers about $40-60bn a year (CAIF, 2015). An estimate
by Federal Bureau of Investigation published in 2013 placed the cost of all insurance
fraud at about $40bn, with about 20 per cent of that attributed to the property-casualty
sector (Lesch and Byars, 2008;Lesch and Brinkmann, 2011;Tseng and Su, 2013). The
Canadian Coalition Against Insurance Fraud (CCAIF, 1997) estimates from a study
conducted in 1997 indicates that CAD$1.3bn worth of general insurance claims paid in
Canada every year are fraudulent. In 2013, Canadian Coalition Against Insurance Fraud
estimated that this amount has increased by 5-10 per cent. In its 1996, European
Insurance Anti-Fraud Guide, Insurance Europe, notes that the cost of fraud cannot be
less than €8bn or approximately 2 per cent of the total annual premium income of all
classes of insurance combined in 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$1.4bn (Baldock, 1997). In South
America and Caribbean, insurance fraud is estimated to cost between 19 and 35 per cent
of annual revenue of the insurance industry (Fraud Intelligence, 2015). In South Africa,
100 million rands were lost in 2010 because of policyholder/claim or consumer fraud
(South Africa Insurance Crime Bureau, 2015); in Kenya, Kuria and Moronge (2014)
posited that 40 per cent of the insurance claims paid by insurers are fraudulent, and, in
Nigeria, it was estimated that between 10 and 30 per cent insurance claims submitted are
fraudulent (Yusuf, 2011).
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 and Babalola, 2009). Insurance industries have also devised
or are preparing pre-contractual as well as post-contractual measures with the help of
security ofcers to clamp down on this anomaly (Boyer, 2004;Morley et al., 2006). For
instance, regulatory measure such as Health Insurance Portability and Accountability
Act, 1996 in USA criminalizes insurance fraud and punish culprits to suffer an
imprisonment of 10 years with nancial penalties.
Basically, insurance fraud is a salient economic problem for insurance industries and
national economies (Dionne and Gagne, 2002;Yusuf, 2010;Tseng and Su, 2013). But,
researchers have done little on the quantum of effects of insurance fraud on the nancial
performance of insurance companies. Research papers on this topic have concentrated
on the prevalence of fraud in insurance markets in the advanced economies but little in
Africa (Yusuf, 2010,2011). There are four (4) published papers existing on Africa as at
2015 – three (3) from Nigeria, one (1) from Kenya, but none from Ghana per the
researchers review of literature. Also, a cursory look at literature shows that qualitative
research approaches are normally adopted to look at this issue (Dionne and Gagne, 2002;
Crocker and Tennyson, 2002;Tseng and Kang, 2015), with a few using a quantitative
research approaches to analyze the problem. This study addresses these research gaps
in the insurance industry in the context of Ghana. The main purpose of this study is to
measure the effects of insurance fraud committed by employees or managers,
consumers or policyholders and independent brokers or agents against insurance
companies Ghana. The study is based on the insurers’ perspective on insurance fraud
against their nancial performance. The supporting objectives are:
679
Insurance
fraud
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