FRAUD AND ITS EFFECT IN THE INSURANCE INDUSTRY: A STUDY OF SOME SELECTED INSURANCE COMPANY IN ENUGU
Abstract
The research work investigated the fraud and its effect in insurance industries in Nigeria; a study of some selected insurance companies in Enugu.  The broad objective of the study is to access fraud and its effect in the growth of insurance in Nigeria. The method of data collected were primary and secondary data sources. Secondary data sources include past financial memorandum audit report, review existing auditing and textbooks, Journals etc and primary source is a structured questionnaires used in data analysis. The population of the study was 70, 60 respondents cooperated. The chi-square distribution formulation was used to determine the sample size.  Findings and conclusions, reveals that fraud has actually had effect on insurance industry. It was recommended that insurance practitioners should be able to control fraud and enforce the provision of law guiding them.
TABLE OF CONTENTS
CHAPTER ONE
1.0    INTRODUCTION
1.1    Background  to the Study                        
1.2    Statement of the Problem                    
1.3    Objectives of the Study                    
1.4    Research Questions                        
1.5    Statement of Hypotheses                    
1.6    Significance of the Study                   
1.7    Scope of the Study                        
1.8    Limitations of the Study                        
References
CHAPTER TWO
2.0    REVIEW OF RELATED LITERATURE
2.1    Meaning of Insurance                           
2.2      The Concept of Insurance Fraud                
2.3    Types of Fraud                          
2.4  Typology of insurance fraud                    
2.4    Insurance Fraud Schemes                     
2.5    Red Flags of Insurance Fraud                  
2.6    Insurance Company Fraud Detection Process      
2.7     Ways of Detecting and Checking Claims Fraud     
2.8    Fraud Challenges for Insurers              
2.9    Fraud and Its Effect in the Insurance Industry          
Reference
CHAPTER THREE
3.0    METHODOLOGY
3.1    Research Design                         
3.2    Sources of Data                             
3.3.     Area of the study                        
3.4    Population of the Study                      
3.5    Sample Size Determination                  
3.6    Instrument for Data Collection          
3.7    Validity of the Instrument              
3.8    Reliability of the Instrument                 
3.9    Methods of Data Presentation and Analysis           
References
CHAPTER FOUR
4.0    DATA ANALYSIS, PRESENTATION AND INTERPRETATION
4.1    Data Presentation                        
4.2    Data Analysis                            
4.3.0    Results of Testing for Hypothesis           
CHAPTER FIVE
5.0    SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSIONS
5.1    Summary of Findings                        
5.2     Conclusion                          
5.3    Recommendations                          
References
Appendix
Sample of Questionnaire
CHAPTER ONE
INTRODUCTION
1.3    Background  to the Study
Insurance is defined as a contract in which the insured transfers risk of potential loss to the insurer who promises to compensate the former upon suffering loss (Kariuki, 2013). The insured then pays an agreed fee called a premium in consideration for this promise. The promisor is called the Insurer and the promise is called the Insured, Lowe (2009). Insurance premium is the monetary consideration paid by the Insured to the Insurer for the cover granted by the Insurance policy. The Insurer takes on a number of clients (Insured) who pay small premiums that form an aggregate fund called the premium fund, Insurance theory Concepts (2010). The likelihood of an event or loss may be mathematically calculated or it may be based on the statistical results of past experience in order to determine the amount of premiums that would be required to accumulate a common fund or pool, to meet the losses upon their arising Grose (2009). Insurance is based on the operation of large numbers or averages, where risks are pooled together through paying small premiums which are a small portion of the insured values and aggregated to form a premium fund out of which those who suffer loss are compensated Young (1994).
The insurance sector plays a key role in economic development since it is an infrastructure pillar of the financial services sector and the economy as a whole (Olima, 2010). The economic importance of the insurance sector has been increasing in most developing countries. Insurance companies form a growing part of the domestic financial sector. They have also become significant players in the international capital markets. Gordon (2013) adds that insurance reduces the economic waste occasioned by destruction of property by works such as fire, floods, storms and other natural calamities. Insurance is a mobilizer of savings for the financial and investment sectors of the economy
Many consumers may not be aware of the prevalence of insurance fraud nor the trickle down negative impact it causes. Insurance fraud is the second most costly white collar crime and also one of the most often carried out crimes in the country. Consumers should know that in addition to being wide-spread, insurance fraud also affects everyone.
Furthermore, insurance fraud is any act committed with the intent to obtained fraudulent outcome from an insurance process. This may occur when a claumant attempt to obtain some benefits or advantage to which they are not otherwise entitled, or when an insurer knowingly denies some benefit that is due.
According to the United states Federal Bureau of investigation.  The most common scheme include premium diversion, fee churning, and asset diversion and workers compensation fraud.  The perpetrators in these scheme can be both insurance company employees and demands.  False insurance claims are insurance claims field with the intent a defraud an insurance provider.
This is to say that insurance fraud has existed exercise the beginning of insurance as a commercial enterprises.  Fraudulent claims accounts for a significant portion of all claims received by insurers and cost billions of dollars annually-types of insurance trades are very diverse and occurs in all areas of insurance. Insurance crime also range severity, form slightly exaggerating claims to deliberately causing accident or damage.  Fraudulent activities as affect to the lives of innocent people birth directly through accidental or intentional injury or damage and indirectly as those crimes cause insurance premiums to be higher insurance fraud posses a significant problem and governments and other organization make effort to deter such activities.
1.4    Statement of the Problem
Despite the uptake of insurance products having registered reasonable growth over the years, the penetration levels as represented by the ratio of Gross Direct Premiums to Gross Domestic Product (GDP) stood at 3.16% as at end of 2012 (Insurance Industry Annual Report, 2012) .This may look comparatively reasonable viewed against similar numbers for Sub-Saharan economies which stand at rates below 1%. However, bench-marked against peer states in the Southern African Region, Kenya is way below.
The low penetration rate was attributable directly to a number of factors including unhealthy competition, apathy by consumers due to poor image, pervasive fraud and low levels of consumer awareness (T.Gichuhi, Executive Chairman, Association of Kenyan Insurers, 2012) All the reasons given above may be attributable to undesirable behavior by intermediaries. This in turn translated to inadequate profit levels for the insurance sector in Kenya. Kenyan insurance companies generally reported high loss ratios. Between 2010 and 2013, the loss ratios for the industry as a whole ranged between 56% and 60%. Insurers have traditionally relied on investment income to act as a cushion for their underwriting results. (2006-2013, PwC) It was also a problem to the intermediaries themselves as distrust by the market led to lower sales, lower commissions and lower uptake of insurance sales as a career of choice. A population that is not receptive to insurance in turn suffered the following problems; Inadequate cover against exposure to hazards; insufficient investments/savings for future; Social imbalance occasioned upon the inevitable demise of breadwinners.
The pervasiveness of insurance fraud derived up costs for all consumers and cost the insurance industry millions of shillings each year (Forbes 2010). Detecting insurance fraud was found out to be difficult because of the clandestine nature by which the criminal perpetrates the fraud. The research focused on the general industry as a case in point to come up with ways of solving the problem. Insurance fraud imposed personal costs such as disrupted lives and families, humiliation and depression, lost jobs and bankruptcy.
Dishonest insurance agents pocketed client insurance premium meant to service the clients’ policies, leaving the clients dangerously uncovered. The agents also increased a policyholder’s premiums by secretly adding unwanted coverage to clients’ policies in order to benefit financially (Fraud practices mitigation report 2011). This led to serious integrity issues and reduced the public confidence in insurance companies once a victim found out about the fraud activities
1.3    Objectives of the Study
The broad objective of the study is to investigate fraud and its effect in the Insurance Industry in Nigeria with special reference to some selected insurance companies in Enugu metropolis). The specific objectives are to:
1.    Find out how misrepresentation of product affect the growth of insurance companies in Nigeria.
2.    Determine how misappropriation of premium affected the growth of insurance companies in Nigeria.
3.    Examine the activities of agent and broker in fraud investigation in insurance industry in Nigeria.
4.    Identify the factors that lead to the occurrence of fraud in insurance industry.
1.4    Research Questions
For effective and efficient research, the researcher designed some question to help find solution to the problem.
1.    How does misrepresentation of product affect the growth of insurance companies in Nigeria?
2.    How misappropriation of premium does affected the growth of insurance companies in Nigeria?
3.    What are the activities of agent and broker in fraud investigation in insurance industry?
4.    What are the factors that lead to the occurrence of fraud in insurance industry?
1.5    Statement of Hypotheses
The following hypotheses were drafted from the research questions above:
Hypothesis One
H0:    Misrepresentation of product affect the growth of insurance industries.
H1:    Misrepresentation of product did not affect the growth of insurance industries.
Hypothesis Two
H0:    Misappropriation of premium affect the growth of insurance industries.
H2:    Misappropriation of premium did not affect the growth of insurance industries.
Hypothesis Three
H0:    The activities of agent and brokers affect the growth of insurance industries in the fraud investigation.
H3:    The activities of agent and brokers did not affect the growth of insurance industries in the fraud investigation.
Hypothesis Four
H0:    Some factors intimately affect the occurrence of fraud in insurance industries.
H3:    Some factors did not intimately affect the occurrence of fraud in insurance industries.
1.6    Significance of the Study
This work will be of great important to the management of insurance companies broker the researcher, the universities and the general public.
    The management of insurance companies this research wok is beneficial to the management of insurance companies because they will be enlighten on the need to tack he or eliminate or minimize insurance fraud also insurance brother will be a enlightened on need to fraud takes not insurance cover from someone claiming to be an insurance broker.
    The research work will be beneficial to the staff on the effect of fraudulence practices or their companies so that they will know how to limit the fraud.
The researcher will benefit as the research work is a pre-requisite for my graduation further reference, the research work will serve as a spring board for further research.
1.7    Scope of the Study
This study was conducted in the insurance firms namely: Niger insurance leadway and mansard insurance company. The researcher covered human resource department, risk and compliance department and administrative department as well as internal security organs.
    All respondent in each of the mentioned areas were of great help in successfully carrying the exercise as the insurance industries has a high literacy level with the majority of the employees holding degrees.
1.9    Limitations of the Study
However the researcher encountered some limitation which are state below:
1.    Time: The researcher has a lot of academic work to do and also more importantly, this research has not been given any specific time in the researcher class time table. As a result of this, the researcher has been constrained to limit her area of coverage so as to cover up with the little available time.
2.    Finance: Taking into cognizance of the unhealthy economic situation of Nigeria, one could not expect the research work with its attendant huge financial outlay. This lack of funds also affected the researcher movement to and from the research area as the distance is far and was not traceable.
3.    Insufficient Literature Materials/Data: The most hindrance is material as many as many contributions have not been done in the area of this research study. This in no small measure limited the researcher’s scope of study.
4.    Poor Response: This was another greatest limiting factor to this study. The respondents declined to give direct information and keep the researcher in suspense, as they were not prepared to compromise their job devotion with the researcher’s information requirements. This to a very large extent hindered the researcher access to some essential data of the organization.
REFERENCES
Clarke, M.(1990), "The Control of Insurance Fraud, A Comparative View." The British Journal of Criminology. Pg: 1-23.
Derrig, Richard A(2002), "Insurance Fraud." The Journal of Risk and Insurance. Pg: 271-287.
Manes, A. (1945). "Insurance Crimes." Journal of Criminal Law and Criminology Pg: 34-42
Ministry of Justice. "Fraud Act 2006." 11 August 2006, The Kenya Bureau of Statistics. Staple, Pg: 127-137.
Spencer, P. (2007), Corporate Fraud: A Manager’s Journey. USA: John Wiley & Sons, Inc.
Richard, L. (2007), ‘Modern law Review, Insurance fraud bureau’s data mining initiative net fraudsters Computer weakly