Insurance Need to improve fraud detection standards

By DALJIT DHESI
daljit@thestar.com.my

Insurers must adopt international best practices and share data, information

KUALA LUMPUR: Insurance fraud will continue to be a threat unless fraud-detection standards are improved and the public are made more aware of this menace.

Deputy Home Minister Datuk Lee Chee Leong said insurers must continue to improve their standards in fraud detection by adopting international best practices and share data and information relating to fraud activities among insurers.

“The regulators and law enforcers have to continuously assess the effectiveness of the law as to whether they are adequate and can at least discourage people from committing insurance fraud.

“Strong cooperation has to be extended to other jurisdictions, too, especially Asean, as organised crime operates in multiple countries and locations. With concerted effort by all parties, I am confident that this activity can be successfully minimised,” he said in his speech at the International Insurance Fraud Conference 2010 yesterday.

Datuk Lee Chee Leong ... 

‘Insurance fraud pushes up the cost of everything one buys.’

 

Lee urged all agencies, from the private and government sectors, including the public, to play their roles effectively in combating insurance fraud.

He said the relevant associations and the Malaysian Insurance Institute (MII) could take the lead by educating society on the consequences of promoting insurance fraud and how they could help to combat it.

Lee said some authorities estimated the cost of insurance fraud ran as high as 10% of the total claims cost. An estimate done in the Unites States by the Coalition Against Insurance Fraud showed that the cost of insurance fraud was about US$80bil a year and this trend would keep escalating.

Insurance fraud, he said, pushed up the cost of everything one bought and used as every company that produced goods or services paid for insurance as a cost of doing business.

Phillip K.F. Fong, who is Crawford Group director for global markets-Asia Pacific and managing director for Malaysia, said based on global figures, it was estimated that about 3% to 5% of total gross premiums worldwide had an element of fraud.

He said during difficult times, as in the case of an economic downturn, the tendency for insurance fraud would be on the rise, for example, in property, household and motor-related claims.

Fong said insurers needed to upgrade their skills and improve their fraud-detection capabilities.

Phillip K.F. Fong ... ‘The insurance industry needs to be vigilant at all times.’

 

“Loss adjusters like us are the eyes and ears for insurers. If we detect glaring cases, we will notify them immediately. We also need forensic scientists and those with strong expertise to handle fraud cases as fraudsters are becoming more innovative. The insurance industry needs to be vigilant at all times,” he told StarBiz.

Fong categorised fraudsters into three different types – opportunistic, repeat and organised ones. He said to have an effective fraud strategy, three golden rules should be upheld – detection (identification of high risk/suspicious claims), investigation (management and customer-focused investigation of claims once labelled “high risk”) and articulation (production of accurate management information).

Apart from making people more conscious of fradulent claims, insurers must not be publicity-shy as those who fear adverse publicity are invariably the subject of a greater proportion of dishonest claims. MII CEO Khadijah Abdullah said a more structured way of capturing information on insurance fraud was needed via cooperation from Bank Negara, insurers and other relevant parties.

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Insurance fraud in M'sia estimated at RM1.74bil last year

KUALA LUMPUR: Insurance fraud, estimated at RM1.74 billion in Malaysia last year, is clearly a "big business" and more alarming is, the public apathy surrounding it.

"This apathy at times, unfortunately, even finds its way into our criminal justice system," Deputy Minister of Home Affairs, Datuk Lee Chee Leong said on Monday.

Research on the public perception of insurance fraud concluded that on average, 30 per cent of the public respondents believed, it is acceptable to pad an insurance claim, he added.

"(Hence), there seems to be a great willingness among normally law abiding people to tolerate low levels of insurance fraud.

"However, the burden of combating such crime should not merely rest with the public sector alone, but also the private sector, particularly, the insurers themselves," Lee said in his opening remarks at the International Insurance Fraud Conference 2010, here, on Monday.

He also said that the Association of Malaysian Loss Adjusters (AMLA) and the Malaysian Insurance Institute (MII) should perhaps take the lead to educate society on the consequences of promoting insurance fraud and how they can help combat the issue.

According to the National Insurance Crime Bureau of the Unites States, fraud inflates the cost of each consumer's insurance premiums by US$200 to US$300 annually.

"Insurance fraud pushes up the cost of everything you buy and use because every company that produces goods or services, pays for insurance as a cost of doing business.

"Going forward, the insurers must also continue to improve their standards of fraud detection by adopting the international best practices and share data and information relating to fraud activities among themselves," Lee said.

Meanwhile, the MII's Chief Executive Officer, Khadijah Abdullah suggested that there should be a unified statutory body to oversee fraud in the industry and compile appropriate data.
"Currently, associations and Bank Negara Malaysia, have their own supervision over the issue but there is no single body that can help compile the information," she said. - BERNAMA

U.S.’s Startup Myth; China’s ‘Ford Moment’: Commentary Review

Job-Creation Faith Is Misplaced

Recently an acquaintance at the next table in a Palo Alto, California, restaurant introduced me to his companions: three young venture capitalists from China. They explained, with visible excitement, that they were touring promising companies in Silicon Valley. I’ve lived in the Valley a long time, and usually when I see how the region has become such a draw for global investments, I feel a little proud.

Not this time. I left the restaurant unsettled. Something didn’t add up. Bay Area unemployment is even higher than the 9.7 percent national average. Clearly, the great Silicon Valley innovation machine hasn’t been creating many jobs of late -- unless you are counting Asia, where American technology companies have been adding jobs like mad for years.

The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups. (July 2)

Andy Grove

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So Far, Capitalism Rules

If these factory strikes continue, China may have to go Communist.

It’s tempting to wonder which way China will go. Will it side with demands for higher pay and let strikes broaden? Might it clamp down on this budding Solidarity-style movement to protect the all-important export machine? Or will workers demand a true Communism -- not just one that abhors Google?

So far, China has taken the first path, going more the way of capitalism than Communism. It raises the specter of a “Henry Ford moment” in the most populous nation, with both good and bad implications for the global economy.

First, the good news. China’s leaders are taking a page from the industrialist who built Ford Motor Co. In 1914, Ford doubled the average automaker’s wage to $5 a day. It made his Model T more affordable to them and provided a model for a stable workforce that formed the core of the U.S. middle class.

It’s a dynamic China needs more of, and signs are that it’s spreading before our eyes. The positive domino effect it unleashes would create a growing domestic market for products factory workers produce. It would accelerate China’s shift from exports to a consumer-led economy. (June 28)

William Pesek

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Banking Bill Invites Meltdown

The financial overhaul bill set for passage sometime next week is supposed to “bring accountability to Wall Street.” In announcing an agreement between the House and Senate last week, Senator Christopher Dodd noted that “the American people have called on us to set clear rules of the road for the financial industry to prevent a repeat of the financial collapse that cost so many so dearly.”

The final bill, though, does little to prevent a systemically important bank from failing, and makes it far more difficult for regulators to assist one seeking to avoid failure. This all but insures that the system-wide calamity the bill should be trying to prevent will, in fact, occur again.

Most of the systemic risk in the U.S. is now carried in the six largest bank-holding companies (Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley). The bill lets them off easy: none is to be broken up and the effort to lower the risk they take on was diluted. (June 28)

Roy C. Smith

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EU Mulls Sovereign Default

The notion that default might be the only sensible exit strategy for an indebted euro nation is finally gaining traction with the authorities. With global financial markets still in a state of disrepair, investors would be wise to tread softly amid the potential nightmares.

A draft European Union document, dated June 25 and scheduled for discussion July 12-13, was obtained this week by Bloomberg reporter Meera Louis. The draft suggests the forthcoming stress tests planned for the region’s banks should assess the dangers posed by “exposures to sovereign risk.”

That’s a euphemism for asking whether banks would blow up if a government couldn’t pay its debts. Including that scenario in the analysis is an admission that the prospect of restructuring has, in the minds of the euro’s apparatchiks, moved up the scale to “possible” from “out of the question.”

On June 28, the Bank for International Settlements weighed in with its annual report. Cheery reading it is not. (July 1)

Mark Gilbert

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--Editors: John Lear

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The Chinese economy’s secret recipe

Comment by FAN GANG

CHINA’S GDP growth this year may approach 10%. While some countries are still dealing with economic crisis or its aftermath, China’s challenge is – once again – how to manage a boom.

Thanks to decisive policy moves to pre-empt a housing bubble, the real estate market has stabilised, and further corrections are expected soon.

This is good news for China’s economy, but disappointing, perhaps, to those who assumed that the government would allow the bubble to grow bigger and bigger, eventually precipitating a crash.

Whether or not the housing correction will hit overall growth depends on how one defines “hit.” Lower asset prices may slow total investment growth and GDP, but if the slowdown is (supposedly) from 11% to 9%, China will avoid economic over-heating yet still enjoy sustainable high growth. Indeed, for China, the current annualised growth rate of 37% in housing investment is very negative. Ideally, it would slow to, say, 27% this year!

China has sustained rapid economic growth for 30 years without significant fluctuations or interruption – so far. Excluding the 1989-1990 slowdown that followed the Tiananmen crisis, average annual growth over this period was 9.45%, with a peak of 14.2% in 1994 and 2007, and a nadir of 7.6% in 1999.

While most major economies in their early stages of growth suffered crises, China’s story seems abnormal (or accidental), and has elicited periodic predictions of an “upcoming crash.” All such predictions have proved wrong, but the longer the story lasts, the more people forecast a bad end.

For me, there is nothing more abnormal about China’s unbroken pattern of growth than effective macroeconomic intervention in boom times.

To be sure, both economic development and institutional reforms may cause instability. Indeed, the type of central government inherited from the old planned economy, with its overstretched growth plans, causes fluctuations, and contributed significantly to instability in the early 1980s.

But the central government must be responsible for inflation in times of overheating, lest a bursting bubble fuel unemployment. Local governments and state-owned enterprises do not necessarily have those concerns. They want high GDP growth, without worrying much about the macroeconomic consequences.

They want to borrow as much as possible to finance ambitious investment projects, without worrying much about either repayment or inflation.

Indeed, the main cause of overheating in the early 1990s was over-borrowing by local governments. Inflation soared to 21% in 1994 – its highest level over the past 30 years – and a great deal of local debt ended up as non-performing loans, which amounted to 40% of total credits in the state banking sector in the mid-1990s.

This source of vulnerability has become less important, owing to tight restrictions imposed since the 1990s on local governments’ borrowing capacity.

Now, however, the so-called “animal spirits” of China’s first generation of entrepreneurs have become another source of overheating risk. The economy has been booming, income has been rising, and markets have been expanding: all this creates high potential for enterprises to grow; all want to seize new opportunities, and every investor wants to get rich fast.

They have been successful and, so far, have not experienced bad times. So they invest and speculate fiercely without much consideration of risk.

The relatively high inflation of the early 1990s was a warning to central government policymakers about the macroeconomic risks posed by fast growth. The bubble bursts in Japan’s economy in the early 1990s, and the South East Asian economies later in the decade, provided a neighbourly lesson to stop believing that bubbles never burst.

Since then, the central government’s policy stance has been to put brakes on the economy whenever there is a tendency toward overheating. Stringent measures were implemented in the early 1990s to reduce the money supply and stop over-investment, thereby heading off hyperinflation.

In the recent cycle, the authorities began cooling down the economy as early as 2004, when China had just emerged from the downturn caused by the SARS scare in 2003. In late-2007, when GDP growth hit 13%, the government adopted more restrictive anti-bubble policies in industries (steel, for example) and asset markets (real estate), which set the stage for an early correction.

Economic theory holds that all crises are caused by bubbles or over-heating, so if you can manage to prevent bubbles, you can prevent crises. The most important thing for “ironing out cycles” is not the stimulus policy implemented after a crash has already occurred, but to be proactive in boom times and stop bubbles in their early stages.

I am not quite sure whether all Chinese policymakers are good students of modern economics. But it seems that what they have been doing in practice happened to be better than what their counterparts in some other countries were doing – a lot on “de-regulation,” but too little on cooling things down when the economy was booming and bubbles were forming.

The problem for the world economy is that everybody remembered Keynes’ lesson about the need for countercyclical policies only when the crisis erupted, after demanding to be left alone – with no symmetric policy intervention – during the preceding boom. But managing the boom is more important, because it addresses what causes crises in the first place.

In a sense, what China has been doing seems to me to be the creation of a true “Keynesian world” – more private business and freer price competition at the micro level, and active countercyclical policy intervention at the macro level.

There may be other factors that could slow down or interrupt China’s growth. I only hope that policymakers’ vigilance will prevail (and be improved upon), enabling China’s high-growth story to continue for another 10, 20 or 30 years. – © Project Syndicate

Fan Gang is Professor of Economics at
Beijing University and the Chinese Academy of Social Sciences, director of China’s National Economic Research Institute, Secretary-General of the China Reform Foundation, and a member of the Monetary Policy Committee of the People’s Bank of China.