Control of insurance fraud in Nigeria: an exploratory study (case study)
| Pages | 418-435 |
| DOI | https://doi.org/10.1108/13590790910993744 |
| Published date | 09 October 2009 |
| Date | 09 October 2009 |
| Author | Tajudeen Olalekan Yusuf,Abdur Rasheed Babalola |
| Subject Matter | Accounting & finance |
Control of insurance fraud in
Nigeria: an exploratory study
(case study)
Tajudeen Olalekan Yusuf
Department of Actuarial Science and Insurance,
Faculty of Business Administration, University of Lagos, Lagos, Nigeria, and
Abdur Rasheed Babalola
Zenith General Insurance Company Limited, Lagos, Nigeria
Abstract
Purpose – Insurance fraud as a global economic problem threatens the financial strength of insurers
and threatens the survival of the insurance institution. The purpose of this paper is to explore the
magnitude of the problem including the industry’s and regulatory authority’s responses in tackling the
menace in Nigeria. The paper is motivated by the recent effort on the part of the Nigerian regulatory
authority to strengthen the sector through consolidation. Such renewed vigour on part of Nigeria is
geared towards fighting all forms of economic crimes in both public and private sectors in
post-military years.
Design/methodology/approach – The paper reviews the literature on the existing fraud control
mechanisms, i.e. insurance contract design and auditing and the perception of fraud by customers in
the insurance market. A survey is conducted by interview method to explore the size of the problem
and the effectiveness of the approach the industry and its regulator are adopting to control it.
Findings – The paper’s findings suggest a lukewarm or no serious attitude on the part of the
regulatory authority and the insurance companies in appreciating the enormity of the problem now
and in the future. This stems from lack of clear-cut sanctions for offenders and mechanism for
enforcement.
Originality/value – The paper reveals the paucity of research of such a topical issue in developing
economies and suggests the need for urgent stakeholders’ summit that will discuss effects of insurance
fraud on the industry with a view to identifying specific roles and responsibilities of each stakeholder
group in tackling the problem. This should also be complimented with the establishment of insurance
fraud bureau that would promote public awareness campaign on the evil effect of fraud on the
economy.
Keywords Fraud, Insurance,Nigeria
Paper type Case study
Introduction
The significant increase in the frequency and size of insurer failures in the latter part of
the 1990s and other recent market problems have raised serious concerns about the
adequacy of the state’s regulatory oversight of the insurance industry (Klein, 1995).
The economic rationale for regulating insurer solvency arises from market failures
created by costly information and agency problems (Munch and Smallwood, 1981).
And because owners of insurance companies have diminished incentives to maintain a
high level of safety to the extent that their personal assets are not at risk for unfunded
obligations to policyholders, the threat of insolvency becomes real.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
JFC
16,4
418
Journal of Financial Crime
Vol. 16 No. 4, 2009
pp. 418-435
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590790910993744
Reform of the Nigerian insurance sector, initiated by the last administration was
meant to strengthen the capacity of the industry. The expectation is that the 103
insurance businesses will consolidate to about 30 with a capitalization of about
$1.6 billion by February 2007. The Ministry of Finance together with the industry
regulator, the National Insurance Commission (NAICOM), has revised upwards the
required minimum paid-up capital for the various categories of insurance businesses.
As an example, life insurance businesses are required to increase capital to about $15
million from only $1.2 million while general insurance businesses must raise their
capital base to $23 million from $1.5 million.
The insurance industry, like others within the financial system, has experienced a
lot of changes in its structure and operations, in response to the dynamics of the
economic environment. These changes have triggered a review of related guidelines in
consonance with existing insurance laws and geared towards strengthening the
operational standards of the insurance industry. It is also intended that the guidelines
will bring about improved transparency and accountability in industrial operations.
But as well-meaning as these guidelines may be, the regulatory authority failed to
consider the magnitude of threat which insurance fraud poses towards the realisation
of the objectives of consolidation.
Insurance fraud has become an important economic problem (Dionne, 2000) and
thus has continued to generate ceaseless concerns by various members of the academic
and professional communities (Niemi, 1995; Baldock, 1997; Lamb, 1999; Derrig, 2002;
Viaene and Dedene, 2004; Dean, 2004). It is estimated that the global financial world
loses several billions of dollars per year to insurance fraud (Dean, 2004). Therefore, it
should not come as a surprise that prevention and detection of fraudulent activities is
an increasingly important goal to researchers and stakeholders (Crocker and Morgan,
1998; Doig et al., 1999; Boyer, 2001; Crocker and Tennyson, 2002; Major and Riedinger,
2002; Morse, 2005; Morley et al., 2006).
According to the International Association of Insurance Supervisors (IAIS), fraud in
insurance is defined as “an act or omission intended to gain dishonest advantage for
the fraudster or for the purpose of other parties”. This may for example be achieved by:
.misappropriation of assets and/or insider trading;
.deliberate misrepresentation, suppression or non-disclosure of one or more
material facts relevant to a financial decision or transaction; and
.abuse of responsibility, a position of trust or a fiduciary relationship.
The following four categories of fraud are defined:
(1) Internal fraud. Fraud against the insurer 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.
(2) 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.
(3) Intermediary fraud. Fraud by intermediaries against the insurer or
policyholders. For the purpose of this thesis, “intermediary” should be
understood to mean “independent broker/agent” (IAIS, 2007).
Control of
insurance fraud
in Nigeria
419
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