Rising risk of insurance industry financial crime 

Insurers uncovered more than 96,000 fraudulent claims worth a total of £1.1bn in 2020, according to the latest report by the Association of British Insurers (ABI), with the average fraudulent insurance claim up 6% on the previous year, says Joel Lange, head of business management at Dow Jones.

Even more worryingly, it is estimated that a similar level of insurance fraud goes undetected each year, highlighting the importance of tackling financial crime in the industry. 

Despite the changing threat landscape, a general perception that the insurance sector is low-risk means that anti-money laundering (AML) and counter-terrorist financing (CTF) compliance programs are often implemented by insurance firms at a basic level. However, certain insurance products are exposed to a heightened money laundering risk and life insurance is chief among these. 

Criminals have also been found to overfund life insurance policies bought with proceeds of crime and launder those proceeds by moving the money in and out via remittances or check flows.

In 2008, an investigation by US authorities revealed that some $80m in proceeds from drug trafficking and dealing activities had been laundered through life insurance policies issued in the Isle of Man and other locations. This could have been detected through a rigorous Know-Your-Customer (KYC) programme. Many firms are left unprepared to face such risks. 
 
What Can Be Done? 

To meet the requirements of regulators and to ensure that they are fully protected from becoming both victims or facilitators of financial crime, firms operating in the insurance sector must develop a stronger understanding of the risks and threats they may be exposed to—and make sure that appropriate anti-financial crime controls are in place to address these vulnerabilities.

There are a number of steps firms can take to bolster their compliance efforts:
 
1. Supercharge KYC processes  

Having the fullest possible picture of your customers at onboarding and throughout the customer lifecycle is imperative to identifying financial crime risks. Money laundering and other forms of financial crime may manifest themselves through diverse red flags.

These could include customers reluctant to provide information to confirm their identity or customers who borrow the largest sum available to them as soon as they contract an insurance policy. Other warning signs include frequently changing beneficiaries, or opting to cash investment-type policies early.

It is imperative that firms establish robust KYC processes to identify these flags as well as uny uncommon patterns or changes in behaviour that may require additional investigation. 
 
2. Enhanced due diligence 

Considering the specific increased risk to which life insurers are exposed, they and their intermediaries should develop and implement mitigating controls such as enhanced due diligence to assess customers with higher risk profiles. The activities of politically exposed persons and individuals operating in sanctioned or high-risk jurisdictions should be carefully monitored to prevent insurance products from being misused. 

To get this right often requires deep industry experience and analysis. Organised crime facilitators have a track record of hiding ill-gotten gains in insurance policies to evade the authorities. Uncovering these activities will need robust due diligence processes and expert knowledge in this field. Businesses must invest in screening and reporting procedures that can allow them to stay one step ahead.
 
3. Build a culture of compliance   

To enhance their prevention and detection efforts, firms should ensure they have a comprehensive understanding of their specific financial crime risks. Appropriate training of staff and senior management is key for the former to be able to detect any instances of illicit practice, and for the latter to promote a strong culture of compliance.

This step is particularly important in smaller companies, which many insurance practitioners believe are lagging behind in terms of compliance and are more likely to see AML frameworks exclusively as a box-ticking exercise, according to Dow Jones research. 
  
What are the regulators' positions moving forward?   

The insurance industry has long been regarded as a lesser priority by regulators due to the low money laundering and terrorist financing (ML/TF) risks it traditionally has been exposed to. However, insurance fraud, corruption and money laundering all negatively impact the industry, and as security technology evolves, so does organised crime.

Regulators recognise that the industry generally lags behind in comparison to other financial services sectors when it comes to compliance.  As a result, we can expect to see increased scrutiny on the insurance industry, and stricter enforcement of those found to be facilitating financial crime. The stakes will only get higher for insurance businesses that fail to prepare for this future.

So, the question remains—if you haven't started preparing, what are you waiting for? 
 
By Joel Lange, Head of Business Management at Dow Jones