Fraud cases in the insurance industry are on the increase, a situation that has been blamed on the high costs of premiums.

According to a survey by consultancy firm KPMG, fraud cases rose by 18 per cent which significantly contributed to high cost of premiums across East Africa.

This contributed to almost 5 per cent increase in premiums in Rwanda, according to the report released last week.

It indicated a growing trend of fraud by customers who either stage-manage accidents or undeclare or exaggerate costs, leaving insurance companies in loses, according to James Norman, the KPMG associate director and head of risk consulting.

Norman said most insurance firms rarely verify customer claims or vet staff before hiring their employees.

This, coupled with weak regulatory framework and policies, exposes the firms to a high rate of fraud compared to other sectors.

The report comes at a time when government and stakeholders are struggling to improve the rate of insurance penetration that is currently under 2 per cent in Rwanda.

According to the study, Rwanda respondents said fraud risk accounts for 5 per cent of the cost of any premium. This compares to Kenya, Uganda and Tanzania, where responds said fraud accounts for 25, 10 and 31 per cent, respectively to cost of insurance cover.

However, experts called for strong laws, arguing that fraud is increasing in both policy and claims. They say that 0.7 per cent of policies and 5.1 per cent of claims made in Rwanda are fraudulent.

Motor vehicle insurance was singled out in the report as the hotbed of fraudulent claims, with car owners accused of committing the most fraud in Rwanda through staged accidents.

The National Bank of Rwanda, which regulates and supervises non-bank financial institutions, including insurance and pension sectors, has been trying to devise strong measures to help the sector grow.

However, the regulator and other stakeholders must now work harder to stem fraudulent activities as they could erode the gains the insurance sector has made thus far.

Norman believes that if insurers embraced ‘front-end’ fraud controls and also trained staff they would counter the vice and guard against fraudsters.

"They must also encourage information and intelligence sharing among sector players to protect the industry from crooks,” Norman told Business Times.

Compared to the banking and telecommunications sector, the extent to which insurance fraud is viewed as a major threat by stakeholders was mixed, with 40 per cent saying it was worse than that in the telecommunications industry.

Over 40 per cent of the respondents in Rwanda said insurance fraud was a significant risk to the overall sustainability of the sector. Despite this, the survey revealed that some firms do not take into account fraud risk when pricing their products, which is seen as a big risk to the sector in the long-term.

Challenges

According to experts lack of information sharing and corruption are some of the other big challenges the industry faces.

Vincent Kadaala, an auditor in Kigali, said insurers must conduct sustained data review and analysis to stay on top of the game and protect the sector from fraudsters.

"They must also be able to use the same data to innovate and forecast market trends.”

Dr. Blaise Uhagaze, the secretary general of the Association of Rwanda Insurers, wants sector policies to be reviewed and tightened to deter corruption and fraud.

"Weak policies are some of the biggest challenges the sector is facing presently. However, we are trying to see how we can engage policy-makers to improve them so as to make the industry more profitable and a big contributor to the country’s GDP,” Uhagaze said. 

BNR promises to act

Besides promising to institute strong measures to deter fraud, the central bank authorities said they will bring on board insurers to join the national platform against fraud.

However, Jonathan Gatera, the National Bank of Rwanda director general for financial stability, urged insurers to form independent units to fight fraud.

"They must also put in place consumer protection mechanisms to ensure trust and confidence among the public.”

He added that the regulator is working with counterparts in the region to fast-track harmonisation of regional regulatory framework.

This, according Gatera, will help insulate the sector against fraudsters.

The country’s insurance sector still has a low uptake of policies; private insurers received Rwf34.9 billion in premiums during the third quarter of last year, a slight increase from the Rwf32.4 billion recorded in the same period in 2013

However, paid claims increased from Rwf13.6 billion in the third quarter of 2013 to Rwf14.9 billion in the same period in 2014.