Fidelity insurance: protecting your business from internal and external fraud

It’s no secret that fraud is a risk for businesses – nearly half of the organizations operating today have experienced some kind of economic crime in the past couple of years. ¹

While the perception is often that fraud is committed by external, anonymous scammers, internal fraud is just as prevalent. In fact, it accounts for over 50% of the claims that we investigate in Allianz Trade’s Fidelity division. Protection against both is essential.

Fidelity insurance  covers direct financial losses a company sustains due to willful illegal acts by employees or specific forms of fraud by third parties. In very simple terms, it insures against fraudulent behavior from either inside or outside an organization.

This is not a new product; it was established over 40 years ago to address the risk of fraud in the workplace. Fundamentally, the core risk that we’re looking at hasn’t changed in that time. But the way it’s exploited? That’s always evolving.

External fraud threats are becoming increasingly sophisticated. Take CEO fraud, for example. In the past, fraudsters’ methods were fairly basic: they would simply contact an accounting employee and pretend to be the CEO of their company, requesting the transfer of a sum of money. Today, these operations can involve duplicated email addresses, fake voices generated by artificial intelligence, and multiple players acting as other internal departments, such as legal or IT.

When it comes to internal fraud, which includes embezzlement, fraudulent payments, and data violations, the misuse of technology plays a major role. As does the progressively globalized business environment, as well as company growth and structural complexity. All of this makes it harder to keep control of an organization.

Companies that fall victim to fraudsters stand to sustain losses topping €50 million. The kind of sums that we have seen in recent years could put a business through a huge stress test and even lead to insolvency. Not only that, but if the fraud is made public, the company risks major reputational damage.

Certain businesses may believe that they are too small to be targeted or, indeed, that their employees would never hurt the company. But it pays to be careful – fraud can affect companies in every industry, and of every size. There are a number of steps organizations can take to reduce their risk of being defrauded:

-       Training, awareness and culture

First, this means educating employees on how to identify and prepare for potential external fraud. To ensure that employees feel comfortable putting that training into practice, companies should encourage a culture of openness where critical questions are supported. This is one of the best things an organization can do to protect itself. In the case of CEO fraud, for example, if an employee felt it was appropriate to contact the CEO to verify a transaction request – well, that could avoid a costly scam.

-       Control landscape

Senior members of an organization must ensure internal processes are in check. In an era of remote work, this is particularly important. Managers, too, should be accountable for their teams. They are best placed to recognize abnormal behavior or “red flags”, such as an employee who refuses to take time off work (which may be out of fear that traces of their crime may be discovered by their replacement).

-       Insurance

In the event that a business does encounter fraud, having coverage is essential. If you look at internal fraud, experience shows that the perpetrators are often quick to spend the embezzled money – sometimes within hours of the crime. Without insurance, the chances of recovering the losses are slim. Companies should also consider cyber insurance (beyond the scope of Fidelity) to ensure their risk management strategies are well rounded.

At Allianz Trade, our goal is not to provide the broadest service, but rather a specific, excellent service on a topic that we know inside out. Our dedicated Fidelity insurance division is active across the entire lifecycle, from product development to claims management. As such, we are well positioned to advise on trends and meet our clients’ changing needs.

[1] https://www.weforum.org/agenda/2022/07/fraud-cybercrime-financial-business