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Whatever is practiced in west easily find its way to India. Motor insurance and health insurance are more susceptible to insurance frauds, followed by life insurance and property insurance. A recent survey has shown that more than 50% of the third party (TP) claims in India are bogus. There are several claims that are based on bogus accidents carried out with the support of legal professionals. The Motor Insurance is the largest portfolio in the Indian non-life insurance market, which almost constitutes 40% of the non-life insurance premium.

Insurance fraud is a criminal act, provable beyond a reasonable doubt that violates statutes, making the willful act of obtaining money or value from an insurer under false pretences or material misrepresentations a crime.

Duffield and Grabosky (2001) posited that, fraud means obtaining something of value or avoiding an obligation by means of deception.

According to the International Association of Insurance Supervisors (IAIS); fraud in insurance is defined as “an act or omission intended to gain dishonest advantage for the fraudster or for the purpose of other parties”. This embraces many and varied forms of conduct, ranging from false claims against an insurance policy to some corporate frauds that are meticulously planned and intricate in their execution.

Auto insurance in India deals with the Insurance of Motor Vehicles, whether it is used for personal or commercial purposes. The insurance covers for the loss or damage to the automobile or its parts due to man made or natural calamities.

The Motor Vehicles Act, 1988, the Act came into force from 1 July 1989. It replaced Motor Vehicles Act, 1939 which earlier replaced the first such enactment Motor Vehicles Act, 1914. The act is further amended by The Motor Vehicles act, 2019.

The Motor Vehicle Act, 1988 has made compulsory for all motor vehicles whether they are used for personal or commercial purposes to have insurance cover.

The premium in case of Motor Insurance will decide on the price of the vehicle.


Section 2(15) “gross vehicle weight” means in respect of any vehicle the total weight of the vehicle and load certified and registered by the registering authority as permissible for that vehicle;

Section 2(16) “heavy goods vehicle” means any goods carriage the gross vehicle weight of which, or a tractor or a road-roller the unladen weight of either of which, exceeds 12,000 kilograms;

Section 2(17) “heavy passenger motor vehicle” means any public service vehicle or private service vehicle or educational institution bus or omnibus the gross vehicle weight of any of which, or a motor car the unladen weight of which, exceeds 12,000 kilograms;

Section 2 (21) “light motor vehicle” means a transport vehicle or omnibus the gross vehicle weight of either of which or a motor car or tractor or road-roller the unladen weight of any of which, does not exceed 6[7500] kilograms;

Section 2(22) “maxicab” means any motor vehicle constructed or adapted to carry more than six passengers, but not more than twelve passengers, excluding the driver, for hire or reward;

Section 2(23) “medium goods vehicle” means any goods carriage other than a light motor vehicle or a heavy goods vehicle;

Section 2(24) “medium passenger motor vehicle” means any public service vehicle or private service vehicle, or educational institution bus other than a motor cycle, 8[adapted vehicle], light motor vehicle or heavy passenger motor vehicle;

Section 2(25) “motorcab” means any motor vehicle constructed or adapted to carry not more than six passengers excluding the driver for hire or reward;

Section 2(26) “motor car” means any motor vehicle other than a transport vehicle, omnibus, road-roller, tractor, motor cycle or 8[adapted carriage];

Section 2(27) “motor cycle” means a two-wheeled motor vehicle, inclusive of any detachable side-car having an extra wheel, attached to the motor vehicle;

Section 2(28) “motor vehicle” or “vehicle” means any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is transmitted thereto from an external or internal source and includes a chassis to which a body has not been attached and a trailer; but does not include a vehicle running upon fixed rails or a vehicle of a special type adapted for use only in a factory or in any other enclosed premises or a vehicle having less than four wheels fitted with engine capacity of not exceeding 9[twenty-five cubic centimetres];

Section 2(30) “owner” means a person in whose name a motor vehicle stands registered, and where such person is a minor, the guardian of such minor, and in relation to a motor vehicle which is the subject of a hire-purchase, agreement, or an agreement of lease or an agreement of hypothecation, the person in possession of the vehicle under that agreement;


(1) No person shall drive a motor vehicle in any public place unless he holds an effective driving licence issued to him authorising him to drive the vehicle; and no person shall so drive a transport vehicle [other than 1[a motor cab or motor cycle] hired for his own use or rented under any scheme made under sub-section (2) of section 75] unless his driving licence specifically entitles him so to do.

(2) The conditions subject to which sub-section (1) shall not apply to a person receiving instructions in driving a motor vehicle shall be such as may be prescribed by the Central Government.


SECTION 146. Necessity for insurance against third party risks. –(1) No person shall use, except as a passenger, or cause or allow any other person to use, a motor vehicle in a public place, unless there is in force, in relation to the use of the vehicle by that person or that other person, as the case may be, a policy of insurance complying with the requirements of this Chapter:

Provided that in the case of a vehicle carrying, or meant to carry, dangerous or hazardous goods, there shall also be a policy of insurance under the Public Liability Insurance Act, 1991 (6 of 1991).

Explanation. –For the purposes of this sub-section, a person driving a motor vehicle merely as a paid employee, while there is in relation to the use of the vehicle no such policy in force as is required by this sub-section, shall not be deemed to act in contravention of the sub-section unless he knows or has reason to believe that there is no such policy in force.

(2) The provisions of sub-section (1) shall not apply to any vehicle owned by the Central Government or a State Government and used for purposes not connected with any commercial enterprise.

(3) The appropriate Government may, by order, exempt from the operation of sub-section (1), any vehicle owned by any of the following authorities, namely: —

(a) the Central Government or a State Government, if the vehicle is used for purposes connected with any commercial enterprise;

(b) any local authority;

(c) any State Transport Undertaking:

Provided that no such order shall be made in relation to any such authority unless a fund has been established and is maintained by that authority in such manner as may be prescribed by appropriate Government.

Explanation. –For the purposes of this sub-section, “appropriate Government” means the Central Government or a State Government, as the case may be, and-

(i) in relation to any corporation or company owned by the Central Government or any State Government, means the Central Government or that State Government;

(ii) in relation to any corporation or company owned by the Central Government and one or more State Governments, means the Central Government;

(iii) in relation to any other State Transport Undertaking or any local authority, means that Government which has control over that undertaking or authority.


According to section 147, the policy of insurance, issued by an authorized insurer, is required to cover certain kinds of risk up to a certain extent.

The position is as under: –

i) The insurance is to ensure the person or classes of persons specified in the policy. An insurance contract is a personal contract between the insurer and the owner of the vehicle taking the policy, for indemnifying the insured for damage caused to a third party from an accident.

ii)  If the motor vehicle is transferred, the insurance policy lapses on such transfer, and the insurer cannot be made liable unless the policy of insurance is also transferred with the consent of the insurer.

iii) The liability of the insurer is only to the extent of the limits mentioned in section 147(2) of the act. The insurer is, however, free to undertake greater liability, by so providing in the agreement contained in the policy of insurance.

iv) The insurer’s liability arises under section 147 if the damage is caused by, or arises out of, the use of the motor vehicle in a public place.

v) In (Elliot vs. grey), accident is deemed to arise out of the use of the motor vehicle even though the vehicle has been parked and the battery is taken out, or an oil tanker, which is parked on a footpath near a public road bursts and explodes and causes the death of a passer-by on the road. (Oriental fire and general Ins. Co. v. S.N. Rajguru)

vi) If the vehicle is not insured against third party risks, the liability of the driver and the owner of the vehicle can still be there, although no insurer could be made liable in such a case.

vii) According to section 149, the insurer must satisfy judgments against the person insured in respect of third-party risks. The liability which falls on the insured is to be discharged by the insurer, as if he were the judgment-debtor, in respect of the liability.

viii) According to section 149(2), a notice of the proceedings, through the court, is required to be given to the insurer, and the insurer to whom such a notice has been given is entitled to be made a party to the proceedings and to defend him.



Any losses arising due to damages or injury caused by the insured to a third party or third party’s property, are covered under the third-party vehicle insurance policy. As per the Indian Motor Vehicles Act, a third-party liability cover is a must and a basic requirement under a vehicle’s insurance policy.

In order to better understand the concept of third-party car insurance, let us look at some terminologies.

For example, in the event of a car accident, the parties involved are as follows:

First party: The insured person or policy holder

Second party: The insurance company

Third party: The person who claims for the damages caused by the first party

In an event where an insured person with a third-party insurance policy is held legally liable for injuries or damage done to a third party, then his/her insurance company indemnifies the insured person.

Any losses arising due to damages or injury caused by the insured to a third party or third party’s property, are covered under the third-party insurance policy.

In the event of a car accident, an insured person with a third-party insurance policy is required to immediately inform the insurance company of the incident. If you were responsible for the accident (or the other driver believes you were responsible), it’s almost certain that a claim will be made against you, which your insurance company will be expected to pay.

So, for the speedy resolution of the claim it is of utmost importance that the insurance company is intimated about the accidental claim at the earliest This is how a third-party motor insurance works.


As mentioned above, comprehensive car insurance is a combination of third-party insurance and own damage insurance. It provides comprehensive coverage against third party liabilities and loss or damages of the car from accidents, vandalism, fire, falling objects or floods. We can say that it is such type of insurance which provides all round protection to the vehicle from all kinds of risks, whether it relates to your vehicle or third party.

While a Third-Party insurance only covers you against third-party damages and losses, a comprehensive car insurance will cover for your own damages as well.

Without comprehensive coverage, a car insurance claim cannot be made if your vehicle receives damage that is not due to collision. For high valued cars, this type of insurance is desirable as an additional protection. Aging, wear and tear, etc. of the vehicle Electrical or Mechanical breakdown Damage to tyres and tubes. It is generally suggested that you should have a Comprehensive Insurance Policy for your car.


Commercial vehicle insurance is a policy of physical damage and liability coverages for amounts, situations, and usage not covered by a personal auto insurance policy. This type of business insurance covers many types of commercial vehicles—from automobiles used for business purposes, including company cars, to a wide variety of commercial trucks and vehicles.

Commercial vehicle insurance, generally covers;

a) Bodily injury liability coverage– pays for bodily injury or death resulting from an accident for which you are at fault and in most cases provides you with a legal defence.

b) Property damage liability coverage– provides you with protection if your vehicle accidently damages another person’s property and, in most cases, provides you with a legal defense.

c) Combined single limit (CSL)– Liability policies typically offer separate limits that apply to bodily injury claims for property damage. A combined single limits policy has the same dollar amount of coverage per covered occurrence whether bodily injury or property damage, one person or several.

d) Medical payments, no-fault or personal injury coverage– usually pays for the medical expenses of the driver and passengers in your vehicle incurred as a result of a covered accident regardless of fault.

e) Uninsured motorist coverage– pays for your injuries and, in some circumstances, certain property damage caused by an uninsured or a hit-and-run driver. In some cases, underinsured motorist coverage is also included. This is for cases in which the at-fault driver has insufficient insurance.

f) Comprehensive physical damage coverage– pays for damage to your vehicle from theft, vandalism, flood, fire, and other covered perils.

g) Collision coverage –pays for damage to your vehicle when it hits or is hit by another object.

NOTE: Auto Insurance does not include;

1. Consequential loss, depreciation, mechanical and electrical breakdown, when vehicle is used outside the geographical area;

2. War or nuclear perils and drunken driving.


Fraud occurs when someone knowingly lies to obtain a benefit or advantage to which they are not otherwise entitled or someone knowingly denies a benefit that is due and to which someone is entitled.

According to the law, the crime of insurance fraud can be prosecuted when:

i) The suspect had the intent to defraud. Insurance fraud is a “specific” intent crime. This means a prosecutor must prove that the person involved knowingly committed an act to defraud.

ii) An act is completed. Simply making a misrepresentation (written or oral) to an insurer with knowledge that is untrue is sufficient.

iii) The act and intent must come together. One without the other is not a crime.

iv) Actual loss is not needed as long as the suspect has committed an act and had the intent to commit the crime. No money necessarily has to be lost by a victim.

Whenever there is theft of any vehicle, its direct impact comes on the insurance company that bears the most of the cost. So, it is important to limit the cases of theft and related insurance fraud.



Fraud against the insurer by an employee, a manager or a board member on his/her own or in collusion with others who are either internal or external to the insurer. External fraud is fraud against insurer by outsiders of the insurance company such as applicants, policyholders and claimants, sometimes perpetrated in collusion with insiders such as agents or brokers, or third-party service providers. This type of fraud is common and these include, providing false statements and submitting bogus claims.


Underwriting fraud, which includes fraudulent acts perpetrated at renewal of the insurance contract, covers, for example, dissimulation of information during application (application fraud) to obtain coverage or a lower premium (premium fraud), the deliberate concealment of existing insurance contracts and underwriting coverage for fictitious risks. Since the principle of utmost good faith obliges the policyholder to report any new information that comes to his attention during the course of the contract and is likely to affect the insured risk. Claim fraud is most prevalent fraud in India which refers to deliberately inflated, false or fictitious claims.


The soft fraud refers to claimants seizing an opportunity to inflate the damages of an otherwise legitimate claim (claim padding or build-up). The hard fraud refers to a carefully premeditated and minutely executed scams to rip off insurance. The soft fraud is opportunistic fraud however, hard fraud is planned one. Examples of hard insurance fraud include, filing claims for bogus or staged injuries, accidents, burglaries, fires; conspiracies involving medical doctors, lawyers and patients defrauding workers’ compensation insurance; dishonest insurance agents intentionally failing to remit premiums to the insurance company; and insurers negotiating contracts or claims in bad faith.


Motor insurance fraud affects both individuals and the insuring companies.

The following are examples of the effects of insurance fraud to individuals: i) The average household pays higher insurance premiums to cover the cost of fraud.

ii) The prices of consumer goods rise as businesses are paying higher premiums due to increased cost of insurance claims.

iii)Cost of motor insurance rises due to fraudulent accident claims.

iv) Innocent insured are scrutinized more carefully and may incur longer periods to settle claims while under investigation.

Even though insurance companies typically pass the costs of insurance fraud on to the consumer in order to operate at a profit, insurance companies are directly impacted by insurance fraud.

The following are examples of the costs of fraud to insurance companies:

i) Every rupee that is spent on insurance fraud directly impacts the profitability for the company as claim costs rise.

ii) Insurance companies incur increased human resource costs by employing fraud units to Investigate claims.

iii)Insurance companies that do not effectively prevent fraud may lose.

iv) Insurance companies also lose investment income when a fraudulent claim is filed, as they need to make reserves for the filed claims.


Despite the problems inherent in dealing with fraud, fraudulent claims can be, and indeed are, detected. Fraud detection typically occurs through the discovery of anomalies or inconsistencies in the information surrounding the claim (e.g., when the circumstances of the claim do not match the account given by the claimant), identification of patterns of claiming behaviour (e.g., repeated claims for similar losses), or recognition of inappropriate claimant characteristics (e.g., aggressive manner, uncertainty and hesitance in supplying information). Following are the important approaches which can help in detecting potential fraud:


This is the latest technique to detect fraudulent patterns. This technique uses advances in analytics to detect fraudulent patterns in large volumes of data residing in databases, claims management systems and third-party data sources. The predictive analytics when applied to insurance can considerably reduce the number and number of claims paid out each year and hence can save millions of rupees.

The advantage of using predictive modelling is that it not only detects claims that have easily identifiable fraud characteristics but also detects previously un identifiable fraud variables much earlier in the claim process than is possible in manual processes. The predictive analytics is currently used in detecting fraud in medical insurance and has shown good results. Therefore, this technique can prove very useful in motor insurance to detect fraud and hence prevent to prevent loss.


The process of investigation generally involves seeking further information, either from the claimant or from third party sources, and building up a clear account of anomalies and inconsistencies in the claim coupled with potential motives of the claimant. The responsibility for detecting fraudulent claims in motor insurance companies rests heavily with staff at the front line of the claims-handling process. Claims handlers are often inexperienced, with typical company lifetimes of less than one year, and they often lack sufficient or appropriate training in fraud detection. It has been observed that the rate at which fraudulent claims are detected are as low as 10%, suggesting that large numbers of fraudulent cases remain undetected. A great responsibility to detect anomalies and inconsistencies while processing claims at the nascent stage. Motor insurance companies have to ensure that the life of experienced front office claim handlers should be increased. Company should arrange special training for front claim handler in detecting fraudulent claims.


In order to increase the chances of detecting fraudulent claims by inexperienced staff, companies have traditionally provided claims handlers with lists of fraud indicators against which to check incoming claims. Every company has their own set of indicators, though there is considerable overlap across company lists. Commercial confidentiality prevents publication of an exhaustive list of indicators. More importantly, companies do not want the public to have access to such information because the indicators would lose their predictive power if potential fraudsters became aware of them.

A decision procedure may accompany fraud indicators whereby claims that trigger a number of fraud indicators higher than a given threshold become targets for further investigation. Moreover, lists of fraud indicators fail to reflect the dynamic nature of fraud. Arguably, the use of static fraud indicators makes it less easy to detect new fraud variants than having no lists of indicators at all, since anomalies associated with new fraud variants will not trigger old indicators. Therefore, insurance companies have to update their fraud indicator with time and make the list more dynamic than a static, also the interactivity between various indicators is must. At the same time, it a challenge for insurance companies to provide high quality service, by reducing the claim handling time.


Insurance companies should further take proactive steps to improve fraud detection during the claims handling process. Industry should develop several databases to assist in the detection of anomalous information at the claim stage. For example, a database should be developed which verify information provided by claimants. Second the data base should assess if claimants have a history of suspicious or similar claims. Last, it should provide repositories for sharing information about claim histories across companies and with other parties. These databases could be restricted for use of specialist investigators. However, this system also suffers from some drawbacks such as opportunities to introduce noise into record sets, such as misspellings, missing items, duplicate data, and out-dated information. Consequently, searching database systems can lead to problems, both with the failure to find expected records, and the generation of false positives through erroneous matches.


 The recent technologies and processes have tried to address some of the problems inherent in inexperienced staff and noise in databases by using advanced intelligent software coupled with a detailed understanding of the nature of fraud and fraudsters. One approach is to capitalize upon existing databases while overcoming problems of noise in the data using data. Data mining techniques can detect anomalies between client-supplied data and existing datasets while remaining sensitive to minor mismatches that are likely to generate false positives, and allow the detection of patterns of fraudulent activity (e.g., patterns of repeated claim activity) among complex data sets. Other new technologies draw upon profiling approaches used in criminology and forensic investigations, borrowing techniques, etc. The fraud detection process relies heavily on accurate and comprehensive communication of claims information and suspicions, especially in situations where there is no case ownership. The technological approaches show promise but are largely unproven. One concern is that the current wave of technological and process fixes seems to have been developed without a full understanding of their users, that is, the claims handling and investigation staff within the insurance industry. The systems focus upon detecting anomalies, the corollary being that claims-handling staffs are not themselves good at spotting anomalies in claims data.


The fraud management control system comprises of three components. The three components are key performance indicators (KPI), activity, and fraud management system (FMS) component. KPIs are used to measure performance of a certain activity or activities, which is supported by a certain FMS component.

The Fraud Management System supports the businesses affected by these events (such as Banks, Media and Telco), provides them with the tools required for the assessment, control and even prevention of these practices in order to limit and avoid money and image loss and leveraging the wealth of information provided.

The functional model for the definition of an anti-fraud solution is based on three different components:

i) Prevention: It includes all the components of the key value such as the customer identity, the creation and delivery of the service, new IT applications and technologies, new operations and business processes, adequate SLAs •

ii) Detection and management: It includes decision-making and back-office processes •

iii) Analysis and investigation: It includes KPIs and data analyses.

In general, the first solution adopted is Data Mining. The analysis to be carried out on company data will for sure be time-intensive and complex and require a serious computational ability in order to identify appropriate statistical models for the definition of the prevention rules based on data analysis. A data mining technology enables to collect, analyze and prevent different fraudulent practices. Data mining techniques are based on the analysis and investigation of a huge database in order to define models and rules.

A Business Rule is a rule implementing or changing the behavior of a business application in accordance with the factors interacting with it. The rule defines the logic that must be applied by all the software components which are part of a business application.

The critical success factor of a company which must react to changes is the immediate, prompt and flexible use of each new business rule. BRMSs support the business requirements for continuous changes without requiring the re-engineering of IT applications.

A Fraud Management infrastructure supported by a BRMS (Business Rules Management System) can effectively and efficiently meet Fraud management strategies by increasing the flexibility and the adaptability of the different types of adopted solutions through:

  • an easy definition of new rules;
  • a quick removal of the existing rules;
  • tool boxes which can be used with simple boolean operators;
  • the powerful use of “natural language” for the definition of the rules;
  • the use of a powerful deductive method ;
  • the possibility to immediately assess the performances of new rules without a dual system ;
  • the opportunity to enter in the rule flow new cases based on the rules to “be tested”.


Motor insurance contributes to one third of the premium income for the non-life industry. Also, it has been experiencing losses and has a high ratio of claims payment. But shifting its failures to the shoulders of the policyholders by charging them with an increased premium and restricting them is not the way to boost itself. Insurance companies should work towards enhancing and improving their underwriting standards and research methods rather than putting the burden of their losses on the innocent customer, who already pays high premium rates. Since India is a leading IT and software provider it is easy for insurance industry to collaborate with software giants like Infosys and Wipro to create sophisticated software to detect and control fraud. The Indian insurance regulator should propose formation of fraud fighting organization and creation of fraud special investigation units to battle the motor insurance fraud. Public perception and attitude towards motor insurance fraud is one of the main obstacles to reducing fraud activities, hence insurance companies need to change the public perceptions towards motor insurance fraud. Extensive research has shown that situational factors do indeed influence policyholders’ perceptions of whether a fraudulent behaviour is ethical.

Motor insurance fraud is currently a very significant problem, and there is no reason whatever to suppose that its costs, level or significance will diminish naturally over time. Hence, all insurers should join hands to create strong centrally administered mechanism to tackle the problem of fraud. It is important to develop a very strong mechanism so that all vehicles are acquired under insurance, as more than 40% vehicles in India are not covered, and these uninsured vehicles are mostly the cases of fraud. Therefore, it is required that all the vehicles need to be covered and renewed under compulsory insurance. This will help reduce possibilities of frauds and it will help insurance companies to enrich their premium pool with a comfort of paying genuine claims. This practice is mostly used by developed nations. India should adopt mechanism from these countries.

The insurance industry should create consolidated industry level database of all the insurers issuing motor policies in order to identify duplicate claims and possible fraudulent claims. Also, there is need to create and maintain a centralised database of motor claims at the main/head office, (categorising the claims into death, grievous injury, minor injury and property) for monitoring of the claims. Further to ensure efficiency and profitability, a need arises to develop system for review of the performance of advocates and investigators to ensure that only those rendering satisfactory services, are retained, and hence unnecessary costs are saved.

Let us not forget that the business of insurers is to settle claims, impartially and quickly; and the key to business reputation and growth lies in claims management process and philosophy. Therefore, it is important that while detecting and controlling fraudulent claims, the valid claims are not affected and also empathy with the claimant must not be lost even on claims which are not valid. Industry co-operation for controlling fraud and close watch on claims fraud are key factors towards growth of motor insurance at impressive rates and to reach unexplored market.

References; 1. Motor Insurance Frauds in India -detection and control, doctoral research write up by Mr. Irfan Bashir, Mr. C. Madhavaiah & Mr. J. Rama Krishna Nail all University of Pondicherry, Pondicherry.

2. The Motor Vehicles Act, 1988 (as mended from time to time).


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A Qualified Company Secretary, LLB , AIII , Bsc( Maths) BHU, Certification in Insurance Risk Management ( ICSI-III) have completed Limited Insolvency Examination and having more than 20 years of experience in the field of Secretarial Practice, Project Finance, Direct Taxes ,GST, Accounts & F View Full Profile

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April 2024