Claims are inherent to insurance and fundamental to its value. When losses occur – and they inevitably will at times – policyholders want their insurer to pay out any legitimate claims. However, fraudulent or illegitimate claims require insurers to be vigilant and, as the world continues to grapple with the Covid-19 pandemic, a pattern of fraud in trade transactions has remained. This article peeks into year-end expectations for the claims landscape and how insurers are insulating against fraud.
Experiences from COVID and post-COVID
The beginning of 2021 was essentially a continuation of 2020, as lockdown measures were reintroduced in many countries, border-crossings were once again limited, and businesses were forced to continue operating amongst restrictions and remote working. Trade credit insurers also had to accept that 2021 was an extension of the status quo regarding emerging claims and claims paid.
At 2020’s end, the expectations for claims throughout 2021 were mixed. A significant increase in volume was expected for the first quarter of the year, followed by a projected decrease in the second quarter, anticipating a rebounding global economy. Despite the earlier predictions for a rise in claims, particularly in credit and political risk insurance (CPRI), there has yet to be a notable uptick in the claims reported amongst the members of the Berne Union, the International Association of Credit Investment Insurers[1].
What is notable is that according to the Berne Union, claims so far in 2021 have been at pre-pandemic levels, with insurers’ risk appetite for new business remaining robust. However, insurers are generally cautious about the expectation for claims volumes going forward. Given the potential impact of the pandemic continuing to influence the risk environment unpredictably, some insurers now fear the bulk of bankruptcies will emerge in late 2021 and into 2022, while others are predicting a more gradual flow for claims based on a potential link between the extension of government pandemic response programs and financial support, and the elongated claims cycle. This theory suggests that Covid-19 related claims may gradually emerge over several years going forward.
Many public insurers widened their mandates in 2020 to support businesses, including those industries most severely impacted by Covid-19. Naturally, being more exposed to these industries, SMEs, and more vulnerable risks, in general, maybe the reason why public providers continue to expect increasing claims going forward. However, these updated predictions are still nowhere near the tsunami expected at the start of the year.
While the overall volume of claims has not yet been disrupted in COVID and the CPRI market remains healthy, a pattern of fraudulent claims has emerged, requiring the industry to take a more careful stance to ensure that claims lodged are indeed legitimate. With the potential for claims volumes to rise as governments withdraw support measures, we may witness a corresponding influx in fraudulent claims.
What are Fraudulent Claims?
What does a fraudulent insurance scam look like in the credit insurance market? Fraud can be committed by either the buyer or the seller or when they both collude to swindle the credit insurer.
A common way of committing fraud as a buyer is by purchasing goods or services on an open account with the sole intention of not paying. An example might be when they conduct the first few deliveries against cash to gain the seller’s confidence. Over time, now with a track record, the seller may be willing to ship a larger order or to grant credit by selling on open account terms, for 30 or 60 days, for example, during which time, the buyer could receive the goods, re-sell the goods and then disappear without payment.
In other cases, fraudulent sellers intentionally misstate overdues, establish fraudulent payment schemes, or present audited financial statements based on false information.
Collusion between the buyer and seller can look like each legitimate establishing company in their respective countries. These companies would undertake several smaller transactions over a period to create a payment track record and get a credit risk assessment. With this in hand, the buying company will make a big order, which is insurable given the payment history. The seller creates false documentation showing that goods were supposedly shipped or exports bogus goods via ports that have poor adherence to international standards. When the underwriter becomes suspicious, the fraudulent buyer is long gone.
How to spot fraud as a credit insurer?
Of course, fraud has been around since the beginning of time, usually driven by greed or fear. Both characteristics are in play during a pandemic, and unfortunately, trade credit insurers have not been very successful in countering fraud with traditional instruments. Advancements in technology have made fraud easier for scammers to conduct, so insurers have had to become much more diligent in spotting fraud cases, implementing better fraud prevention policies and guidelines than ever before by focusing on the fundamentals at an early stage.
Fraud detection is most successful when suspicious patterns are discovered early. For example, underwriters need to pay attention to an increase in the number of credit limit applications above a defined threshold or outside an approved period and undertake regular screening of the ownership relations between policyholders and buyers. Where the seller ships 80% of its product to one seller, the risk of fraud might be higher.
When examining financial statements to issue a credit limit, underwriters also need to look for clues in the financial statements. The company’s behaviours and life cycle of its production – from orders at customer service to fill the orders through manufacturing and shipping to invoicing – should be understood to ensure that the process matches the cash cycle and the generated receivables are generated related.
Ultimately, there is no better defense than maintaining thorough Know Your Customer (KYC) or Know Your Transaction (KYT) policies. Nor is there a substitute for an underwriters’ common sense, curiosity, and a good dose of skepticism. At ICIEC, we’re sure to ask the right questions and are confident in our due diligence process before we bind a policy. Insurance is inherently meant to cover the risk of lost payment, and as a leading multilateral ECA, ICIEC ensures that all legitimate claims are honoured and paid. After all, this is why our customers value our insurance.
