Effects of fraud risk management practices on net incurred medical claims in Kenyan insurance industry

Abstract

The purpose of this research was to establish the effects of fraud risk management practices on insurance fraud levels which are manifested in the insurance claims that are fraudulent. The study employed standard framework of fraud risk management which encompasses corporate governance, fraud prevention practices, fraud detection practices and fraud response & monitoring practices. The study focused on collecting primary data on the fraud risk management practices from medical insurance providers. Further, secondary data on net incurred claims ratios, as well industry benchmarks was sought from Insurance Regulatory Authority (IRA). The data collected aided in the determination of possible correlation between independent variables (Corporate governance, fraud preventive practices, fraud detective practices, fraud response & monitoring and market share) and dependent variable net incurred claim ratio through the Pearson correlation test and regression analysis. The study found that most medical insurance providers engage in various proactive and reactive fraud risk management practices which were perceived to have varying levels of effectiveness. Correlation tests indicated that corporate governance, fraud preventive practices, fraud detective practices and fraud response & monitoring practices were significant in predicting the dependent variable of the study, (Net incurred claim ratio). However, the market share was not a significant determinant of the net incurred claim ratio. Corporate governance and fraud detective practices were found to be moderately negatively correlated to net incurred claim ratio. Fraud preventive practices and fraud monitoring practices were found to have a strong negative correlation with net incurred claim ratio. Results of regression analysis revealed that the fraudulent risk management practices significantly predicted the level of net incurred claim ratio. The implication of these findings is that if organizations employ strong fraud risk management practices, they are likely to reduce the level of fraudulent insurance claims. On the other hand, organisations with weaker fraud risk management practices were likely to have a higher level of net incurred claim ratio which factors the fraudulent claims. Organizations can use this inverse relationship to fix strong controls which will impact positively on reducing the level of fraud.