Effects of fraud management practices on the profitability in the insurance industry

Abstract

The purpose of this research was to study the effect of fraud management practices on the profitability of insurance companies in Kenya. The category of fraud focused on was the policyholder and claims fraud which is defined as the fraud against the insurer in the purchase and/or execution of an insurance product by obtaining wrongful coverage or payment. The deductive arguments adopted were; the reasons for fraud risk management in insurance companies in Kenya based on the International Association of insurance Supervisors, the fraud management practices carried out by insurance firms in Kenya more specifically aligned with the claims management guidelines stipulated by the IRA under section 8 of the guidelines and finally the relationship between the fraud management practices and profitability of insurance firms in Kenya. Primary data was collected using a structured questionnaire. Secondary data was collected from the industry statistics provided by AKI for the past three years. The financial data extracted was the net profit and the total assets to obtain the ROA, to indicate profitability. The companies chosen were the top fifteen general insurance companies. The findings of the study showed that fraud risk management policies in insurance companies in Kenya are driven by the need to meet ethical standards as well as the need to enforce regulatory/supervisory standards. Moreover, the most common fraud management practice was fraud response in which investigations were the most preferred technique. Finally, the results of the regression analysis revealed a low correlation between fraud management practices and profitability