Applying Benford’s Law to Detect Fraud in the Insurance Industry—A Case Study from the Romanian Market

Recently, one of the major Romanian insurers was declared insolvent by the market regulator as it was discovered to have fraudulently reported its financial statements. The impact on the insurance prices on the Romanian market was impressive. Significant funds were made available by the Romanian Government to stabilize the market and prevent linked bankruptcies. Over the years, the company was audited by reputable auditors, and yet nothing transpired about the massive fraud, although visible signs of trouble were not difficult to spot for the insurance company. As distressed businesses have stronger inducements to disguise their financial difficulties, they are more likely to manipulate their financials. After years of doubts, it was finally clear that the company manipulated its provisions and the available reserves. Benford’s Law is an easy tool that signalizes possible manipulation of data, and it was used frequently to detect manipulation in financial reports. As such, we used Benford’s Law to determine if the financial statements reported by the insurance company appeared to have been artificially manipulated. The results obtained from this investigation can be largely extrapolated to research related to other types of fraud in different industries.