Commercial crime: Salient points from the 2020 Global economic crime and fraud survey

By: Ablonia Ramela , iTOO Commercial Crime Underwriter

The 7^th Edition Global Economic Crime and Fraud Survey complied by PwC comprised a total of 5000 individuals, of which 245 were South African respondents.

The highlights of the survey were as follows:

• 73% of South African organisations are aware of fraud, which is higher than its global peers whose awareness is at 63%.
• South Africa is ranked third in the top ten countries reporting the most economic crimes with China and India taking up the first two spots.
• The percentage of South African businesses that have experienced economic crime has reduced notably for the first time since 2011. To date, the number of reported cases of economic crime has declined by 17%, from 77% in 2018 to 60% in 2020. However, the value of losses has risen as a result of the increase of senior management involvement in committing financial crimes. In 2018, 20% of fraud was perpetrated by senior management and increased to 34% this year.
• Asset misappropriation (23%) has always been the most prevalent economic crime experienced but has now been overtaken by Customer fraud (47%), bribery and corruption (42%) and Accounting fraud (34%).  This is mainly attributable to the rise in cyber and accounting related crimes.
• 21% of financial crimes occur through collusion, 41% by internal perpetrators and 36% by external perpetrators. The majority of fraud related crimes are committed by internal staff who are trusted with the responsibility to run and care for the organisation.
• Over the next 24 months, it is forecasted that the most disruptive and significant economic crimes an organisation will experience are Bribery and corruption (19%), Accounting/financial statement fraud (16%), customer fraud (14%), cybercrime (11%), and asset misappropriation (10%).
• In the last 24 months, about 7% of respondents have lost more than $50 million (that is over R14 billion) across all economic crime incidents.  The total costs associated with economic crimes are hard to quantify.
• A fair amount of organisations have adapted fraud detection and prevention programmes, however upon the discovery of a disruptive incident, 42% did not conduct further investigations, 59% of the incidences were not brought to the attention of the board of directors, 66% of the incidents were not reported to regulators or law enforcement and an alarming 72% of the incidents were not disclosed to the auditors. Only about 55% of the South African respondents on average, have put in place formal controls over antifraud programmes. 

From the points highlighted above, we can gather that Commercial Crime is steadily becoming an uninsurable risk in South Africa. We have seen the market harden and insurers pulling out from this class of business due to high loss ratios.

What can insurers do?

• Insurers need to apply strict underwriting and pricing criteria to make sure that commercial crime remains a profitable line of business. This can be achieved by:
  • Updating proposal forms in accordance with the changing market. It may not be feasible to do this on a yearly basis, therefore an alternative would be to add annexures or supplemental questionnaires to better understand a risk.
  • Apply minimum deductibles according to industry type, turnover and geographical location. The norm is for the deductible to be 10% of the sum insured, however this can be adjusted for each risk.
  • Ask for a detailed 5-year claims history, request risk improvement measures put in place in response to previous losses and warrant the policy by way of an endorsement.
  • Economic crime and fraud is evolving rapidly and therefore each risk needs to be assessed on merit.
  • Be open with brokers and clients on the reasoning behind underwriting decisions.

What can brokers do?

• Brokers need to make sure that they are knowledgeable on the product line they are dealing with.
• Know and understand their client’s needs in order to provide appropriate and sound advice on which products are best suited for the client. 
• Explain the state of the market to the client so as to manage their expectations. 

What can clients do?

• Perform risk assessment investigations on an ongoing basis in order to quickly detect and mitigate fraud.
• Supplement technology with other tools such as implementing sustainable governance structures, seeking relevant expertise, as well as quick responses and adaptiveness to attacks for minimum impact. 
• Offer fraud awareness training, introduce anonymous whistle blowing hotlines and encourage a culture of honesty and integrity.
• Conduct criminal and background checks on all employees
• Tighten financial and internal stock controls, segregate duties between employees and make sure these are enforced and adhered to.
• Purchase insurance cover in the form of a commercial crime policy.

It is wise to be proactive instead of reactive to better manage the effects associated with economic crime and fraud.