Fraud risk and insurance solutions
December 2019 | TALKINGPOINT | RISK MANAGEMENT
Financier Worldwide Magazine
December 2019 Issue
FW discusses proactive fraud risk and insurance solutions with Jonathan Pflieger at Tokio Marine HCC.
FW: Could you provide an overview of some of the day-to-day fraud risks that companies typically face? How have areas such as white-collar crime, social engineering and cyber event fraud, for example, evolved in recent years?
Pflieger: In today’s crime landscape, asset misappropriation and fraud via a cyber event are the most commonly reported types of fraud. Most events are perpetrated by people inside organisations. Notably, there have been several well publicised white-collar crime cases affecting multinational corporations, such as Wells Fargo and Petrobras, in recent years. Social engineering is still a hot topic when it comes to external fraud. Now that large corporations have enhanced their controls and procedures to prevent these types of events, fraudsters are targeting small and medium enterprises (SMEs) as well as public institutions. Furthermore, as many value chains begin to digitalise, it is not surprising to see more computer-led fraud events impacting corporations. Fraudsters are clearly evolving, and their methods are becoming more sophisticated.
FW: On the regulatory front, are you seeing a rise in fraud-related enforcement and inspection actions? Is there also a trend toward greater cross-border regulatory cooperation, and what effect is this having on fraud risk?
Pflieger: Regulation dealing with compliance, most notably anti-corruption laws, is being strengthened across the board and standards are converging. Enforcement efforts targeting both the financial and non-financial sectors continue to be rolled out in numerous jurisdictions. In 2018, more penalties were collected from Foreign Corrupt Practices Act (FCPA) enforcements than in any prior year. Cross-border regulatory cooperation is clearly increasing, and we are now seeing coordinated enforcement actions leading to global settlements such as the Petrobras case in 2018. This has significant implications for multinational companies, now forced to have up-to-date global compliance frameworks.
FW: Against this backdrop, how would you characterise the general maturity of companies’ fraud prevention initiatives?
Pflieger: According to PwC’s Global Economic Crime and Fraud Survey of 2018, just over half of the surveyed organisations had carried out a fraud risk assessment over the previous 24 months. Companies that actively invest in fraud prevention tend to involve all their employees in this effort, providing enhanced fraud awareness training, notably on the back of the widespread social engineering cases. However, there is still room for improvement. The same can be said for fraud prevention linked to cyber-related events, as these cases are often hitting the headlines, keeping companies on their toes.
FW: Are you seeing more companies using technology and data analytics to fight and prevent fraud?
Pflieger: An increasing number of companies have embedded technology within their fraud risk management framework including, for some, machine learning or predictive analytics. Companies active in financial services and technology are still at the forefront. As digital fraud is clearly on the rise, we expect to see more take-up in this space soon. Anti-fraud technology allows companies to reduce the cost of fraud prevention by detecting events early on and, therefore, mitigating their exposure.
“An effective whistleblower programme will actively contribute to the timely detection of fraud events and is a building block for a transparent culture across an organisation.”
FW: How important is the human factor – including training staff and building the right culture – when it comes to countering fraud? What benefits can a strong whistleblower programme offer?
Pflieger: The human factor is key when it comes to fighting fraud. Companies should, on one hand, monitor indicators frequently and assess how the probability of internal fraud events has evolved. On the other hand, a robust control framework and anti-fraud technology must be accompanied by a strong culture. Culture has a significant impact on all aspects of fraud risk management, from prevention to response. Building a strong culture not only implies training and investing in resources, but also establishing the proper tools to monitor cultural evolution over time. An effective whistleblower programme will actively contribute to the timely detection of fraud events and is a building block for a transparent culture across an organisation.
FW: Why is it important for companies to consider insurance coverage to manage fraud risk? What insurance options are available?
Pflieger: Crime insurance is an important tool in terms of fraud risk management. Notably, and considering the catastrophic nature of potential losses, the coverage offers balance sheet protection. In certain cases, prevention services, which allow the insured to enhance its fraud risk management framework in specific areas, are also included in the policy. Even though the market has hardened over the last few years due to underwriting performance, there are still solutions available for companies with a mature fraud risk management framework, ready to assume an adequate level of self-insured retention. Certain carriers deliver solutions which cover social engineering fraud, provided the insured can demonstrate that specific internal controls have been implemented.
FW: What advice would you offer to companies on developing and implementing an effective fraud risk management strategy, including a viable insurance solution?
Pflieger: To begin with, we would recommend equipping fraud risk management teams with adequate resources to ensure robust prevention, detection, response and recovery capabilities. Companies should also have a holistic view on risk and, therefore, ensure tight collaboration between compliance, risk and legal departments. It is important to stay away from a tick-the-box risk management approach that does not create value in the long run. Furthermore, it is vital to create a strong corporate culture based on transparency and accountability. One effective way of disseminating culture is through continuous training, but the most critical factor is a consistent top-down approach dealing with fraud risk within the organisation, with management who lead by example. Regarding risk transfer, insurers will want to see organisations that demonstrate risk maturity by transferring most of the risk while retaining some of it through deductibles.
FW: What trends do you expect to unfold across the fraud risk and insurance landscape in the years ahead? Do companies need to do more to identify and mitigate this risk?
Pflieger: As some economic indicators are pointing to a potential new global recession, we may face a period where incentives to commit fraud increase. Companies should monitor developments on this front. Another major trend to follow will be technology. Companies will need to keep investing in solutions which contribute to the mitigation of their exposure and allow them to keep up with the risk environment. To illustrate this point, the use of ‘deepfake’ technology by fraudsters could bring a new spin to social engineering risk. Furthermore, as digitalisation carries on, companies will need to ensure that they involve risk management teams at an early stage when developing new products or services, as incorporating new technologies clearly introduces new risks.
Jonathan Pflieger joined Tokio Marine HCC over 15 years ago as a financial lines underwriter for the French and Benelux markets. Today, he manages the underwriting of the financial institutions portfolio written out of operations in Barcelona and is an authority on this segment for the firm’s international teams. He began his insurance career underwriting directors and officers (D&O) and professional indemnity (PI) at AXA Corporate Solutions in Paris. He can be contacted on +34 93 530 7338 or by email: jpflieger@tmhcc.com.
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