Documente Academic
Documente Profesional
Documente Cultură
BY
ISAAC AKOMEA-FRIMPONG
(10246640)
FEBRUARY, 2016
i
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.
ISAAC AKOMEA-FRIMPONG .. .
(10246640)
ii
CERTIFICATION
We hereby certify that this thesis was supervised in accordance with procedures laid down by the
University of Ghana.
......... ...........
(1ST SUPERVISOR)
......... .........
(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.
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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
vi
2.2.4 Deterrence of Insurance Fraud ............................................................................................. 13
2.3 Areas in the insurance markets where insurance fraud are rampant ................................... 15
vii
CHAPTER FOUR ......................................................................................................................... 46
DATA PRESENTATION, ANALYSIS AND DISCUSSION ..................................................... 46
4.1 Introduction ......................................................................................................................... 46
5.3 Conclusion........................................................................................................................... 69
REFERENCES ............................................................................................................................. 72
APPENDIX 1 ................................................................................................................................ xii
QUESTIONNAIRE ...................................................................................................................... xii
APPENDIX 2 ............................................................................................................................. xviii
viii
LIST OF TABLES
ix
LIST OF FIGURES
x
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
Keywords: Ghana, Internal fraud, Intermediary fraud, Policyholder fraud, Return on Assets
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CHAPTER ONE
GENERAL 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 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
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
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
1
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
(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
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).
with the help of security officers to clamp down on this anomaly (Boyer, 2004; Morley et al, 2006
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.
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
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
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
ii. To determine deterrence measures that can fight insurance fraud in Ghana?
ii. What are the effects of insurance fraud on the financial performance of insurance
companies in Ghana?
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
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
6
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
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,
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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;
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
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
(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
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%
There are many definitions or explanations given in literature on insurance fraud. A well-known
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
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.
Insurance fraud can be classified into internal and external fraud or it can be classified as
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).
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
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
Some research studies classify insurance fraud into soft (opportunistic) or hard (organised) 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
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.
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
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
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
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
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.
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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
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).
misrepresenting information that results in health care benefits paid to an individual or a group.
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
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
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
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
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.
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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
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).
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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
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
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.
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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
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
This section expounded the theoretical foundations of this study by looking at the causes, effects
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
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 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
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
Opportunity
Fraud
Triangle
Pressure/Motivation
Rationalization
22
The constituents of the fraud triangle (figure 2.1) are explained below:
illegally against the insurer. Pressure arising from a non-shareable problem is critically important
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
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
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
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
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
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;
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
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
A typical feature of insurance fraud and all white-collar crime is the lack of feelings or the
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
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
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
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).
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
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
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,
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.
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
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.
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
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
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
benefits. This included non-disclosure of pre-existing conditions and billing of services not
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
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
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
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
Yusuf (2010) conducted a study on how insurance brokers control opportunism at the post-
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
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.
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
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
Number of companies
26
19
Life Non-life
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
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
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
From table 3.1, all the variables have coefficients which are more than 0.7. Thus, they fit to be
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).
The cross-sectional multiple regression model used in the analysis of the effects of insurance fraud
= 0 + 1 + 2 + 3 + 4 + 5 +
= 2014
= 2014
41
= 2014
= 2014
= 2014
= 2014
, = 0,1, ,5
() =
PBIT is profit before interest and tax. The total assets is non-current assets and current assets
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.
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,
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,
/
=
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
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
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
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
44
v) Objectivity
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
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
regression.
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.
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
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
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
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
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.
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,
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
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
i) Misappropriation of funds
iii) Directors of the board and/or managers do not comply with laws and regulations and/or
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
viii) Directors of the board and/or managers display a dominant management style that
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
xii) Directors of the board, managers or members of staff appear to exhibit extreme greed
xiii) Employees or managers selling the companys assets at below their true value in
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
Also, the nature and the history of a policyholder can create this fraud. For instance, 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
iii) Insured insists on using certain doctors, repair shops, service providers etc.
v) Policyholder has several policies, with the same insured object and coverage, but
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%
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
v) Premium diversion-intermediary takes the premium from the purchaser and does not pass
it to the insurer
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
For policyholder/consumer fraud measures such as thorough client acceptance processes, well-
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,
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.
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
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
This section analyses statistically the quantum of impact of insurance fraud on the financial
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.
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
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
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
ROA 1
INF -0.297** 1
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.
64
Table 4.4: Results from the regression model (2)
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
Significance
df SS MS F F
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.
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.
66
CHAPTER FIVE
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
i. It was observed from the study that many insurance companies (both life and non-life)
companies whiles 13% were not returned. This can be concluded as representative of the
ii. It was found out that 56% of the respondents are from the non-life insurance business
iii. It was established that insurance fraud occurs more in the Ghanaian non-life insurance
67
iv. This study contacted 51.28% in the claims department of the insurance companies; 48.72%
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
vi. It was revealed that falsified contract documents, claimants behaviour and the type of
vii. Majority of intermediary fraud are caused by a) poor training for the intermediaries and b)
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
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
xi. About 52% of the changes in the annual financial performance of insurance companies are
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
5.4 Recommendations
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
ii. A budget or fund should be allocated by insurers to educate and create awareness about
iii. The management as well as employees of all the insurance companies should be given
69
iv. National Insurance Commission (NIC) should conduct regular training for all players in
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
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
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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APPENDIX 1
QUESTIONNAIRE
A. BACKGROUND INFORMATION
1. The name of your insurance company:
................................................................................................................................................
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:
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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)
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)
xiii
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?
xiv
What other factors can cause intermediary fraud? Mention them
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)
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
xv
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?
xvi
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)
xvii
APPENDIX 2
The following fraud indicators or red flags assisted the researcher in developing variables in
Internal fraud
iii. Key managers or employees having too much control and/or authority without oversight
ix. Managers or employees who consistently work late, who are reluctant to take vacations
xii. Inappropriate relationships exist at work or people act in an unusual manner (for
etc.).
xiii. Directors of the board and/or managers do not comply with laws and regulations and/o
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
xvi. Directors of the board and/or managers display a dominant management style that
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
xx. Directors of the board, managers or members of staff appear to exhibit extreme greed
Policyholder fraud
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
xix
Intermediary fraud
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
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
vii. Broker/agent asks for payment of all commissions at once or for payment of commissions
in advance
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
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.
xx