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INSURANCE FRAUD

Atty. Dennis B. Funa Deputy Insurance Commissioner for Legal Services

Insurance Commission

1

THE INSURANCE COMMISSION

2

The Insurance Commission

• The Insurance Commission is a

government agency under the

Department of Finance with the

primary responsibility of

supervising and regulating the

operations of life and non-life

companies, mutual benefit

associations, and trusts for

charitable uses.

3


• It is tasked with the issuance of

licenses to insurance agents,

general agents, resident

agents, underwriters, brokers,

adjusters and actuaries.

• It also possesses the authority to

suspend or revoke such

licenses.

4


• More recently, the Insurance

Commission has also been

delegated as the regulatory

body responsible for

supervising and regulating pre-

need companies.

5

THE PHILIPPINE INSURANCE

INDUSTRY

6

The Philippine Insurance Industry

• Based on the Association of Southeast

Asian Nations (ASEAN) Secretariat

Database (2013), the Philippine insurance

industry ranked FOURTH - behind

Singapore, Malaysia and Thailand – in

terms of total assets or resources in the

ASEAN insurance markets of 10-member

economies.

7


• 18.89 percent growth in total assets,

amounting to PHP 738.5 Billion, and by

the end of the year, it will be worth PP 1

Trillion in combined asset of both life

insurance and nonlife insurance.

• Total premium income generated at PHP

171.2 Billion, topping the highest premium

generated in 2012 of PHP 120 Billion.

8


• 7.58 percent increase in total net worth, or

from PHP105 Billion in 2012 to PHP113.5

Billion in 2013

• 7.35 percent increase in total investments,

or from PHP455.9 Billion in 2012 to

PHP489.4 Billion for life insurance last

year.

9


• The total benefits paid from 2013,

amounting to PHP49.8 Billion is 13.9

percent higher than the previous year,

which is PHP43.7 Billion

• 31.63 percent increase in terms of total net

income at PHP13.8 Billion in 2013

compared to PHP10.5 Billion in 2012

10


• Between 2009 and 2013, the country’s

insurance penetration increased by

68.63percent, form 1.02 percent to 1.72

percent of the GDP.

• The country’s insurance density rose from

P845.4 to P2,034.2, which is equivalent to

an increase of 140.62 percent.

11


• Fitch Ratings announced favorable

forecasts for the insurance industry,

expecting significant premium growth over

the next few years.

12

INSURANCE FRAUD

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Defining Insurance Fraud

• Insurance fraud is defined as an illegal act,

committed by either the buyer or the seller,

which attempts to exploit the insurance

contract.

• It can be identified further into two types,

classified according to which party (the

insurer or the insured) committed the

fraudulent act.

14

Types of Insurance Fraud

Buyer Insurance Fraud

a type of insurance fraud committed by the

insured party wherein the buyer bends the

process to obtain more coverage, or claim more

cash, than he or she is rightly entitled to.

15

Categories of Buyer Insurance Fraud

Hard Fraud – deliberate orchestration of

loss in order to receive payment for

damages.

(Examples: organized collisions, auto-theft, arson,

murder for proceeds, suicidal accidents and faking

one’s death)

16

Categories of Buyer Insurance Fraud

Soft Fraud (opportunistic fraud) –

exaggeration of loss by the policyholders of

otherwise legitimate claims.

(Examples: concealment and misrepresentation).

17

Types of Insurance Fraud

Seller Insurance Fraud

the seller of a policy hijacks the usual

process in a way that maximizes his or her

profit.

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Seller Insurance Fraud

It can also be classified further into five

categories:

- premium theft or premium diversion

- inexistent or ghost insurance companies

- unauthorized insurance agents or brokers

- fee churning

- over and under coverage of insurance

policies.

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Categories of Seller Insurance Fraud

Premium Theft or Premium Diversion –

Insurance Representatives accept

premiums but do not remit or submit them

to the Insurance Companies. Sometimes,

the premiums collected are higher than the

premiums remitted to the Insurance

Company.

20


Inexistent Insurance Companies –

Policies are issued and premiums are

accepted from policyholders, but the

insurance company is not authorized/

licensed or does not exist.

21


Unauthorized Insurance Agents/ Brokers

- The Insurance Agents / Brokers

misrepresent themselves as authorized by

Insurance Companies. The Insurance

Companies, if not estopped, may validly

deny any liability arising from the issued

policies.

22


• Fee Churning

An insurance representative advises the

customer to cancel, renew and open new

policies in a way that is beneficial to him or

her instead of making sure it will be beneficial

to the client.

23


• Over or Under Coverage Insurance Policy

Insurance representatives may convince

customers to buy coverage that they don’t

need, or sell a lesser policy while representing

it as a complete policy, thereby making the

insured pay for either an over or under

coverage insurance policy.

24

Claims Settlement (For the year 2013)

Paid – Up

Capital Assets Net-

Worth Premiums Investment

s Benefits/

Losses

Payment

(Claims

Paid)

Net

Income

Life

Insurance

Industry

13.84 738.52 113.58 171.21 489.44 49.85 13.83

Non-Life

Insurance

Industry

23.49 153.28 59.57 27.06 61.42 13.8 0.82

* Data As of February 26, 2014 based on Submitted Reports from Insurance Companies

* All Amounts are in Billion Pesos

* Life Insurance: 25 Companies

* Non - Life Insurance: 69 Companies

* Composite (Life and Non-Life): 4 Companies

25


Paid – Up

Capital Assets Net-


s Benefits/

Losses

Payment

(Claims

Paid)

Net

Income

Life

Insurance

Industry

13.84 738.52 113.58 171.21 489.44 49.85 13.83

Non-Life

Insurance

Industry

23.49 153.28 59.57 27.06 61.42 13.8 0.82






26


Paid – Up

Capital Assets Net-


s Benefits/

Losses

Payment

(Claims

Paid)

Net

Income

Life

Insurance

Industry

13.84 738.52 113.58 171.21 489.44 49.85 13.83

Non-Life

Insurance

Industry

23.49 153.28 59.57 27.06 61.42 13.8 0.82






PHP 63.65 Billion

27

Premium Collection (For the year 2013)

Paid – Up

Capital Assets Net-


s Benefits/

Losses

Payment

(Claims

Paid)

Net

Income

Life

Insurance

Industry

13.84 738.52 113.58 171.21 489.44 49.85 13.83

Non-Life

Insurance

Industry

23.49 153.28 59.57 27.06 61.42 13.8 0.82






PHP 200 Billion

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Effects of Insurance Fraud

ON THE INSURED

• Raises the cost of insurance policies since any loss from insurance

fraud is an excuse to remodel and tweak the costs of the policies paid

for by policyholders.

ON THE INSURER

• Investors favor better-performing companies with a good reputation and

control on its agents over companies that treat their policyholders badly.

• Every instance of insurance fraud puts pressure on the business.

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THE INSURANCE CODE

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Fraud Committed by the Insured

Insurance Code as

amended Fraud Committed Effect

Section 29 Concealment – An Intentional and fraudulent

omission to communicate information Material

to Insurer

The Insurer is entitled to

rescind the contract of

Insurance

Section 64 Fraud or Material misrepresentation The Insurer may cancel the

insurance upon prior notice

Section 76 Breach of Warranty with fraud The Insurer may rescind/

cancel the insurance contract

Section 248 A fraudulent claim in life insurance policy to

obtain proceeds thereof. The Insurer may refuse to pay

the claim

Section 249 A fraudulent claim in non-life insurance policy The Insurer may refuse to pay

the claim.

Section 251 Presenting or causing to be presented any

fraudulent claim or Fraudulently preparing,

making or subscribing any writing with intent to

present or use the same, or allowing it to be

presented in support of any such claim.

The Insured may be held

criminally liable and penalized

by fine or imprisonment.

* Applicable to all of the above: Section 82 par (2) A person insured is not entitled to a return of premium if

the policy is annulled, rescinded or if a claim is denied by reason of fraud.

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Fraud Committed by Insurance Companies, Agents,

Brokers, Adjusters, Mutual Benefit Associations

Insurance Code as

amended Fraud Committed Fraud Committed by Effect

Section 82 Fraud or misrepresentation of

the Insurer or of his agent The Insurer or his

agent The insured is entitled to

the return of premium

Suspension or revocation

of license

Section 314 Fraud in obtaining or attempting

to obtain a license

or

Fraudulent practices

Insurance Agent/

Insurance Broker Suspension or revocation

of license

Section 339 Fraudulent practices Insurance Adjuster Suspension or revocation

of license

Section 419 Fraudulent conduct of business Mutual Benefit

Associations Suspension or revocation

of license

Applicable in all of the above Fraud is Section 442 of the Insurance Code which provides that “Any person,

company or corporation who violates any provision of the Insurance Code shall be deemed guilty of a penal

offense, and upon conviction be punished by a fine not exceeding Two hundred thousand pesos

(P200,000.00) or imprisonment of six (6) months, or both, at the discretion of the court.”

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INSURANCE FRAUD CASES IN THE

PHILIPPINES

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Cases of Insurance Fraud decided by the Supreme Court

Buyer Insurance Fraud (Hard Fraud)

Juan De Carlos vs. Court of Appeals and People, GR No. 103065, August 16, 1999

• Facts: Sy It San, a proprietor, obtained three (3) fire insurance policies from FGU

Insurance Corp. The policies were valued at P150,000.00, P800,000.00 and

P100,000.00. Employees of FGU Insurance and the insured Sy It San conspired with

one another to file a fraudulent claim by reporting a fire incident over the insured

properties.

• Held: All accused were found guilty for the crime of Estafa through falsification of

public documents.

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Buyer Insurance Fraud (Soft Fraud)

United Merchants Corp. vs. Country Bankers Insurance Corp., GR No. 198588, July

11, 2012.

• Facts: UMC Merchants Corp. procured fire insurance over its stock from

Country Bankers Insurance Corp. for the amount of 50 Million pesos. During

the effectivity of the policy, a fire gutted the warehouse. UMC made a false

and fraudulent declaration as to the amount of loss by enlarging the claim.

35


Buyer Insurance Fraud (Soft Fraud)

United Merchants Corp. vs. Country Bankers Insurance Corp., GR No. 198588, July

11, 2012.

• Court denied any amount claimed by UMC due to the false and fraudulent

claim.

• It has long been settled that a false and material statement made with an

intent to deceive or defraud voids an insurance policy.

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Seller Insurance Fraud (Unauthorized Insurance Agents/ Underwriters)

Insular Life vs. Feliciano, GR No. L-47593, December 29, 1943

• When underwriter answers the application himself making false statements in representing that

the insured was healthy when in fact he was suffering from T.B. and the insured died after a short

while, there was concealment. The underwriter is not an agent of the insurer since he only

solicited the business, and his knowledge is not that of the insurer. The insurance company can

refuse payment.

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Cases of Insurance Fraud lodged in Insurance Commission

Seller Insurance Fraud (Unauthorized Insurance Agents/ Underwriters)

Two cases are pending with the Insurance Commission, wherein Insurance

Agents are separately accused of fraud in issuing surety bonds on behalf of a

legitimate Insurance Companies. The Insurance Company alleged that it never

authorized nor issued the surety bonds. The Fake Surety Bonds were used in NLRC,

DTI and HLURB.

Seller Insurance Fraud (Premium Theft and Misrepresentations)

A case is pending with the Insurance Commission where an Insurance Agent

was accused of collecting a premium of 620 pesos but only remitting 100 pesos to

the Insurance Company. There were also complaints that said Insurance Agent

misrepresented the Insurance Coverage stating that the total premiums paid shall be

returned to the Insured/ Assured.

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PREVENTIVE MEASURES AGAINST

INSURANCE FRAUD

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Choosing the right insurance company

Appropriate Authority/License issued by the


The Financial Capacity of the Insurance Companies

Sufficient Capital and Investment Capacity

Certification issued by the Insurance Commission on

pending claims/ complaints against Insurance

Companies.

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Red Flags in Investigating Erring Insurance

Companies.

• Capitalization Requirement/ Impairment –

An insurance company doing business in the Philippines shall at all times maintain

the minimum paid-up capital, and net worth requirements as prescribed by the

Commissioner. (Sec 200 Insurance Code)

New Life and Non-Life Insurance

Companies Minimum is One (1) Billion Pesos at present

Paid-Up Capital Existing Life and Non-Life Insurance

Companies June 30, 2013 – Minimum of 250 Million

Pesos Net Worth

Dec. 31, 2016 – Additional of 300 Million

Pesos Net Worth


Pesos Net Worth


Pesos Net Worth

Net worth consists of Paid-Up Capital,

Retained Earnings, Unimpaired

Surplus, and Revaluation of Assets.

Reinsurance Companies Minimum Capitalization of 3 Billion Pesos

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Companies.

Investment

All Insurance Companies may only invest in real and personal

properties, securities, equities, bonds and instrument of

indebtedness as provided in the Insurance Code and as may be

determined by the Insurance Commissioner.

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Companies.

Margin Solvency

Solvency requirements shall be based on internationally

accepted solvency frameworks and adopted only after due

consultation with the insurance industry associations. The

Margin of Solvency is the excess of the value of admitted assets

over the amount of its liabilities, unearned premium and

reinsurance reserves.

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Companies.

Number of Pending Claims/ Complaints

against the Insurance Companies, Agents,

Brokers or Adjusters

Other relevant information received from

whistle blowers/ informants

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INSURANCE FRAUD



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References

• The Insurance Commission

• The Insurance Code (R.A. 10607)

• The Lawphil Project: Philippine Laws and Jurisprudence

Databank by the Arellano Law Foundation.

• The Federal Bureau of Investigation Website

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INSURANCE FRAUD



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