Fraud and financial crimes perpetrated against insurers are on the rise. Although the banking industry remains the primary route for money laundering, stricter regulations and improved AML controls within that sector have driven criminals to other channels that may be more vulnerable to money laundering activities. Insurance providers, often less attuned to fraud practices and with fewer resources dedicated to prevention, are increasingly under attack.

Insurance Europe estimated that fraud—both detected and undetected—represents up to 10 percent of Europe's overall claims expenditures. In addition, PwC noted in its Global Economic Crime Survey that a whopping 62 percent of global insurers have been exposed to fraud or financial crime during the past 24 months, compared to 37 percent and 35 percent in previous years. Given these developments, insurers need to act quickly and decisively to defend themselves against fraudulent claims and abuse of annuities.

Insurers seem more susceptible to fraud than ever

The insurance ecosystem is particularly vulnerable to money laundering activities because of the wide range of money transfer processes inherent to the trade, from transfer of ownership to withdrawal at maturity, premium overpayment, premium refunds and more.

Life insurance firms are at particular risk because of the massive flows of funds into and out of their businesses: most life insurance firms offer highly flexible policies and investment products that provide room for customers to deposit and subsequently withdraw large amounts of cash with a relatively minor reduction in value.

Moreover, money launderers often utilize several different insurance products in conjunction: for instance, a wire transfer to buy investment-linked insurances can be converted into securities products.

As an insurer it has become increasingly critical to assess business security on the whole, rather than per product. Implementing a thorough and comprehensive customer authentication solution for onboarding and transfer of ownership is essential to fraud prevention in today’s precarious landscape.

European regulators respond to new risks

In accordance with Articles 2, 3 and 11 ff. of the AML4 and AML5 directives, insurance companies are defined as financial institutions, and as such, must have suitable customer due diligence (CDD) measures in place, including customer identity verification. While many European insurers have implemented fraud management to some degree, industry standards and practices have not yet caught up to those of financial institutions when it comes to effective fraud prevention and protection.

With regulations increasing each year to combat the rise in fraudulent activity within the insurance sector, substantial consequences for inadequate fraud prevention are looming. At present, insurers risk severe reputational damage when a problem comes to light. However, with new regulatory requirements on the horizon for insurers, authorities around the world are poised to impose a range of anti-money laundering sanctions that could devastate non-compliers on a larger scale.

KYC: the gatekeeper against insurance fraud

To fight fraud at scale, insurers must assess customer identities right from the beginning of the insurance lifecycle. Implementing an effective KYC process involves rigorous risk assessment for exposure by type of client, insurance policy, geography, and sanctions screening. In cases where customers (policyholders or beneficiaries) lie about their name, provide false addresses, or appear on sanctions lists, insurance firms must take steps to prevent them from opening an account, purchasing a policy, or receiving a payout.

Insurers may be inclined to build these KYC processes in-house, but historically, this lengthens development time, bloats costs, and diminishes efficiency. Given the high stakes and data complexity involved in the KYC process, many insurers are choosing a more streamlined option: KYC automation provided through a technology partner. With artificial intelligence (AI) technology, identity verification, monitoring and screening, the entire process becomes fast, simple, reliable, and secure. Smart KYC onboarding and monitoring reduces human error where possible and, ultimately, helps insurers prevent fraud while avoiding costly non-compliance penalties.

Organizations in the insurance sector should consider taking advantage of the rapid advancement in next-generation capabilities such as automation, AI, and advanced analytics that prevent fraud across industries. Modern KYC practices are the way forward, and the key to safely and cost-efficiently onboarding customers and reducing opportunities for money laundering across the client lifecycle.