Insurance Sector Hit Hardest By Economic Crime

NEW YORK–Among industry sectors, the insurance business is the biggest victim of economic crime, a global study by a major consulting group has found.

Total average cost of economic crime losses for insurance businesses over two years is $5.5 million, while average direct losses were $4.47 million, according to the annual “Global Economic Crime Survey” by PricewaterhouseCoopers.

The loss figures for insurers was almost double the global average for businesses and slightly above that of the industrial manufacturing sector, which PwC said had an average fraud cost of about $5 million.

Steven L. Skalak, leader of PwC investigative practice, said yesterday at a New York press briefing that the survey found overall the level of economic crime has been consistent. “We're not having a wave of economic crime, but it is continuing unabated,” he said.

The company defines economic crime as asset misappropriation which can involve stealing physical or cash assets or, in the case of insurers, false claims.

“Insurance is attacked by outsiders. Most businesses are attacked by their own employees,” Mr. Skalak remarked.

According to the report, insurance companies reported the most asset misappropriation–46 percent reported they had been the victims of corruption, while 19 percent cited bribery.

Altogether, 57 percent of insurance companies reported being the victims of some kind of fraud–tied for first place with retail and consumer companies.

Mr. Skalak noted the report's finding of significant collateral damage from economic crime, including distracted management and injury to the brand.

Of the 43 percent of companies reporting a significant economic crime, the report said 76 percent reported that a party external to the firm played a role in the fraud. Of the firms hit by a significant crime, 34 percent reported that in at least one of the cases the external party was located in a foreign country.

When it comes to discovering crime, the survey found that in 2007, the primary means of detection by companies was internal tipoffs (21 percent), followed by internal audits (19 percent) and external tipoffs (14 percent).

In rating crime-fighting methods, Mr. Skalak said most companies gave whistleblower arrangements pretty high marks, as “86 percent in North America think it is effective.”

Among companies with up to five controls in place to fight crime, 28 percent said they had insurance to cover losses and costs from fraud, while among companies with more than five controls in place, 47 percent had insurance.

Neil Keenan, a director in the PwC Advisory Services practice, said that among U.S companies that had insurance policies for fidelity and fraud, 84 percent reported making a zero recovery on their policies.

Mr. Keenan said the low figure might be because the coverage is only obtained for misdeeds by senior management, while lower-level employees may not be covered.

The study was based on the views of 1,500 executives, with 500 of the respondents from U.S. companies. Preference was given to the 1,000 largest companies within a country, and firms in 40 different countries were contacted.

The study was carried out by TNS-Emnid in Germany.