Global economic crime rates remain high as customer fraud continues to rise

What is corporate risk modeling?

Risk modeling is a mathematical approach to developing deep, quantitative analysis. Thousands of inputs across multiple dimensions are analyzed with consideration of both known and potential risks specific to your company. An actuarial team’s deep modeling capabilities guide and harness data analytics that produce key metrics needed to enhance the strategic management of your risks.

The resulting metrics and insights — complete with visualizations and the “what ifs” that can impact profitability and dramatically influence strategies — can:

• facilitate growth
• reduce risk
• support strong governance and oversight
• help your business thrive in an uncertain environment

Regardless of industry, this guidance can provide leadership with the insights needed to optimize its risk management framework through leveraging modernized risk modeling capabilities. And it can help companies navigate difficult markets and times of uncertainty, when flexibility is essential. 

Here are the key questions to consider.

1. Is your company growing or is your risk profile changing?

Fluctuating pricing and adverse reserve development can quickly compound into a troublesome financial position for a growing or evolving company. Corporate entities often struggle with a lack of flexibility in a changing environment. With claims costs tightly related to socioeconomic trends, failure to react to changing market or economic conditions can limit the company’s ability to be proactive. They can also result in stale results driving business decisions.

For financial planning and analysis (FP&A), corporate risk modeling presents a path forward by proposing answers to crucial questions. What strategies can be implemented to drive improved performance? How will leadership prepare the company for short- and long-term changes? What are the priorities for growing the business? 

Operationalizing targets by incorporating deeper modeling capabilities helps strategically balance costs with risk tolerance. And lets businesses know where they stand.

2. Are you managing your risk retention — risk transfer threshold optimally?

Finding the right balance between risk retention and risk transfer is critical. Companies that are more flexible in their ability to retain risk — and transfer risk to the commercial market — are better able to weather changing market and economic conditions. Finding the right balance between risk retention and risk transfer can help companies reduce costs and optimize the total cost of risk.

Evaluating alternative scenarios through deep, quantitative analysis can provide insights on the optimal risk retention / risk transfer structure for your company at any given point in time. By taking a strategic, rather than reactive, approach to risk management, companies can increase their competitive advantage.

3. Have you experienced changing insurance market conditions?

An increasingly hardening insurance market creates challenges for corporations trying to purchase or renew insurance policies in the commercial sphere. COVID-19, social and general inflation, cyber breaches and climate disruption events have only made conditions worse. Navigating a fast-changing market requires careful consideration of potential impact on current strategies and performance goals.

Leading-edge risk modeling technology combined with actuarial professionals who understand your long term goals and turn them into quantifiable outcomes can help companies in every industry. By viewing your business through a quantitative lens — a lens that captures the impact of changing conditions — leaders gain deeper insights that can be harnessed for proactive and strategic decision making.

4. Are you able to effectively communicate risk insights to your leadership?

Good analysis and modeling are key components of proactive risk management. According to results from PwC’s 2022 Global Risk Survey, just under 40% of business executives today make better decisions and achieve sustained outcomes by consulting with risk professionals early on. However, manual data processes often prevent or delay getting the information necessary for strategic planning and communicating risk insights to leadership.

Streamlining data collection processes can help reduce administrative burden and delays, while providing “one source of the truth” for many stakeholders. Users can then quickly utilize and interrogate data. Harnessing enhanced analytics, redesigned reporting uses risk modeling to deliver key risk indicators, providing early-warning signals to leaders that they may need to reevaluate strategies and mitigation activities. 

And provides real-time risk insights and analysis to support risk-informed decision making. 

5. Can you articulate your risk appetite and how it impacts your risk strategy?

In today’s complex and dynamic environment, companies need to constantly reevaluate their risk strategy to make sure it aligns with their risk appetite. While a changing risk profile may be necessary for innovation and growth, the right balance needs to be struck. 

Corporate risk modeling gives leaders an overview of current risk, as well as a roadmap that calculates potential future risk — taking into account the "what ifs" that may cross a risk tolerance curve.

• 47% of companies report experiencing fraud in the last two years - the second highest reported level in 20 years
• Customer fraud sees the biggest increase in the last two years, up from 29% to 35%
• Customers, hackers and vendors/suppliers are responsible for 39% of all incidents in the last two years

Fraud and economic crime rates remain at record highs, impacting companies in more ways than ever. PwC’s bi-annual survey of business crime reports that fraud committed by customers tops the list of all crimes experienced (at 35%), up from 29% in 2018. Businesses report that customer fraud and cybercrime are the most disruptive of all the crimes.

Although fraud committed by customers is on the rise, it is also one of the types where dedicated resources, robust processes and technology have proven most effective for prevention.

Globally, all regions experienced customer fraud in the last two years, with the Middle East (47% up from 27%) and North America (41% up from 32%) seeing the biggest increases.

The Global Economic Crime and Fraud Survey examines over 5000 responses from 99 countries. It reports on the overall insights from companies who have experienced on average six incidents over the last two years. The report provides insights into the threat, cost of fraud and what companies need to do to develop stronger proactive responses.

The report highlights the importance of prevention and how investing in the right skillset and technology can create an advantage. Nearly half of organisations responded to crime by implementing and enhancing controls, with 60% saying their organisations were better for it.

However nearly half of respondents did not conduct an investigation at all. Barely one third reported the crime to their board, but of the organisations who did, 53% ended up in a better place.

“Fraud and economic crime is a never- ending battle. Getting to the root of the problem is key to preventing and dealing with future fraud. Whether it's through technology, new processes, skills and training, or a combination - the result is strengthening business as a whole against crime, which is ultimately good for the consumer too.” comments Kristin Rivera, PwC Global Forensics Leader.

The perpetrators: Who’s committing the fraud

Fraud hits companies from all angles - the perpetrator could be internal, external or in many instances there is collusion.

• In the last two years, 39% of respondents said external perpetrators were the main source of their economic crime incidents.
• One in five respondents cited vendors/suppliers as the source of their most disruptive external fraud.
• 13% of respondents who experienced fraud in the last two years reported losing more than US$50 million.
• Antitrust, insider trading, tax fraud, money laundering, and bribery and corruption are reported as being the top five costliest frauds in terms of direct losses - sometimes compounded by the significant cost of remediation.

Taking action and being prepared

While technology is just part of the answer in fighting fraud, the report finds that more than 60% of organisations are beginning to employ advanced technologies such as artificial intelligence and machine learning to combat fraud, corruption or other economic crime. However, concerns about deploying technology are linked to cost, insufficient expertise and limited resources. 28% say it’s because they struggle to see its value.

The benefit in using technology to fight fraud is undeniable but organisations must recognise that using tools or technology alone does not amount to an anti-fraud programme.

“Collecting the right data is just the first step. How the data is analysed is where companies will have an advantage when fighting fraud. Companies often fail to see the value in technology when they don’t invest in the right skills and expertise to manage it” comments Kristin Rivera, PwC Global Forensics Leader.


^Notes:

1. ^{Download the report at www.pwc.com/fraudsurvey.}
2. ^{Customer fraud is defined as fraud against a company through illegitimate use of, or deceptive practices associated with, its products or services by customers or others (e.g. mortgage fraud, credit card fraud).}
3. ^{Cybercrime features in the top three most disruptive crimes experienced in almost all industries reported in the survey - Financial Services (15%), Industrial Manufacturing and Automotive (15%), Technology, Media and Telecommunications (20%), Consumer Markets (16%), Government and public sector (17%), Health Industries (16%).}
4. ^{Globally, all regions report experiencing customer fraud in the last two years: Middle East (47%), Africa (42%), Asia Pacific (31%), Europe (33%), Latin America (33%), North America (41%).}
5. ^{PwC highlighted the global issue of upskilling in its 23rd CEO survey and identified that whilst retraining/upskilling was seen as the best way to close the skills gap, only 18% of CEOs have made 'significant progress' in establishing an upskilling programme. In order to take advantage of what technology can do for your organization, hiring the right people to work alongside new technologies is important. This is apparent even when hiring staff to support advanced technologies such as artificial intelligence and machine learning to uncover fraud.}

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