ASISA: Zero tolerance from life insurers to fraud and dishonesty

South African life insurers have reported a significant increase in the value of prevented fraudulent death, disability and funeral cover claims in 2011.

Claims fraud statistics released by the Association for Savings and Investment South Africa (ASISA) this week show that the value of death, disability and funeral claims involving fraudulent documentation and syndicate activity has jumped from R26.2-million in 2010 to a whopping R131.7-million in 2011. The actual number of these claims increased from 452 in 2010 to 545 in 2011.

Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (ASISA), says while a small portion of these claims were paid before fraud was detected, most of the fraudulent claims in 2011 were uncovered by life insurers before money was lost.

“Life companies are often seen as soft targets by criminals hoping to access benefits through fraudulent means. Life companies have, however, put sophisticated fraud detection mechanisms in place to allow for early detection.”

Drop in dishonest claims

Dempsey says while fraudulent claims have shown a marked increase, claims involving dishonesty rather than criminal intent have shown an impressive R142-million decrease from R605.6-million in 2010 to R463.6-million in 2011. He explains that this is mainly due to a substantial drop in misrepresentation and material non-disclosure across all types of cover.

Misrepresentation and material non-disclosure do not involve the criminal intent that comes with fraud and are therefore classified as dishonest claims.

Misrepresentation occurs when a policyholder deliberately provides misleading information to a life insurer, for example adding someone else’s child to a funeral policy, pretending that it is your own child.

Material non-disclosure refers to the deliberate failure of policyholders to disclose information about a medical or lifestyle condition, which is material to the assessment of the risk to be insured. An example of material non-disclosure is when an applicant for life cover omits to mention that he or she participates in dangerous sports. Another example would be not disclosing a serious back injury when applying for disability cover.

Policyholders resort to misrepresentation and material non-disclosure when hoping to secure lower premiums or to obtain cover without exclusions.

Dempsey says greater awareness among consumers that misrepresentation and non-disclosure almost always have serious consequences for policyholders and their beneficiaries is likely to have conributed to the lower number of claims.

“Consumers increasingly realise that life insurers are entitled to declare a policy void if at claims stage it is discovered that critical information was not disclosed,” he says.

Misrepresentation and material non-disclosure cases continued to make up the bulk of claims declined for dishonesty and fraud.

Honesty pays

In 2011, a total of R599.7-million dishonest and fraudulent claims were detected, compared to R638.3-million in 2010 – a R38.6-million decrease.

Dempsey says the number of claims declined due to dishonesty and fraud seems almost insignificant when compared to the total honest claims paid in 2011.

“Last year the life industry paid out more than R216.7-billion in benefits to policyholders, beneficiaries, and pension fund members as a result of death and disability claims, maturity pay-outs and pension, annuity and other payments.”

Dempsey explains that it is nevertheless important for the life industry to prevent dishonest and fraudulent claims, no matter how small. “If left to grow these claims will eventually increase the claims experience of life companies to such an extent that these losses will have to be recovered from customers through higher premiums.”

Zero tolerance

He warns that insurers are increasingly taking a zero tolerance approach to claims involving any kind of fraud, which may result in a criminal investigation and even prison.

Dempsey cites the example of three sisters and a Durban doctor who were recently arrested by the Kwa-Zulu Natal Commercial Crimes Unit after allegedly attempting to defraud one of the big life insurers. It is alleged that at least two of the sisters took out life cover on a woman who was not even aware of this. After paying the premiums for several months, the sisters had the poor woman declared dead, provided a false death certificate and tried to claim the death benefit. The sisters were arrested when one of them arrived at the life insurers’ forensic department in person, demanding that the claim be paid. By then the life company had already suspected fraud and was investigating the claim.

Dempsey says the abuse of hospital cash plans remains a concern for the life industry. In 2011, the life industry detected 549 cases worth almost R4-million.

Hospital cash plans pay policyholders a daily cash benefit for each day spent in hospital. This amount is paid irrespective of medical aid payments or sick leave available to the person hospitalised. Unfortunately, he says, this often tempts policyholders into dishonesty.

He refers to the case of two Department of Health employees who sat opposite each other at the clinic at which they worked. The claims assessor for one of the life companies became suspicious when he received a hospital plan claim from one of the employees who was admitted to hospital after a wardrobe had apparently fallen on her. Two days later he received a claim for another incident involving a wardrobe from a person with a different name and home address, but the same work address as the first claimant. Both had been admitted to the same hospital, which was very far from where they lived and worked, and the same doctor had treated both.

With the help of the forensic investigator at the Department of Health the case was investigated and the “friends” arrested.

Dempsey says in 2011 the highest number of fraudulent and dishonest claims was submitted in Kwa-Zulu Natal and the Western Cape (both 22%). Gauteng was in close second position with 19%, followed by the Eastern Cape with 16%. Dempsey notes that in 2010 the Western Cape featured in the top three for the first time and last year it moved into joint first position with Kwa-Zulu Natal.

Fraudulent and dishonest policy claims statistics for 2011, compared to 2010

Figures have been rounded up.