Life industry stops R1.3-billion fraudulent claims over 5 years

10 July 2008 Life Offices? Association (LOA)

The life insurance industry managed to detect and prevent some 21 000 fraudulent insurance claims over the past five years. Had these claims not been identified as fraudulent and prevented, losses would have amounted to more than R1.3-billion.

Gerhard Joubert (pictured), CEO of the Life Offices’ Association (LOA), says this is the first time that the industry has been able to present a five year view of claims fraud statistics.

“The LOA started collating fraud statistics in 2003 with the aim of helping member life companies reduce fraudulent claims through the sharing of information about fraud trends and patterns.”

Joubert points out that if life companies did not try and prevent claims fraud, the claims experience of life companies would increase substantially and ultimately force companies to push up premiums.

He says last year alone life companies stopped 1 512 fraudulent claims worth R279-million. At the same time, however, life companies settled valid claims from policyholders and beneficiaries to the value of R90.7-billion – a 13% increase from the R80-billion paid during 2006.

Joubert notes that fraudulent claims in 2007 had reduced by 47% from the 2 844 cases recorded in 2006. He says although the actual number of fraudulent claims decreased, there was a slight increase in the amounts involved, from R242-million in 2006 to R279-million last year.

Fraud prevention

Joubert says the significant decline in claims fraud numbers over the past two years indicates that the industry’s new approach to fraud prevention is beginning to pay off.

He says the forensic departments of the big life insurers have started changing their approaches from reactive investigation of suspected fraud to pro-active fraud prevention through early detection.

“The core of this method is electronic data mining, whereby all client and intermediary data is scanned to such an extent that discrepancies pointing towards fraud are noticed immediately.”

Joubert says life companies also openly share fraud statistics and information with each other with the aim of detecting new trends and syndicate activity as early as possible.

Forged documents and syndicate activity

Fraudulent claims as a result of the submission of forged claims documents amounted to 385 in 2007 with a value of R74.8-million. Although this is much lower than the 459 cases reported in 2006, the value more than tripled from the R21.1-million recorded in 2006.

Syndicate driven fraudulent claims decreased to 48 last years from 65 the year before. In addition the amounts involved more than halved, from just over R4-million in 2006 to a little more than R2-million last year.

Joubert says syndicates operate mainly in the low income market and as a result the majority of syndicate related claims fraud cases have been uncovered in Kwa Zulu Natal and the Eastern Cape.

“Not only is it much more difficult for life companies to verify and investigate claims in these areas, but in addition funeral and entry level policy sales volumes are also the highest in these provinces.”

How do syndicates commit claims fraud? Joubert says all that is required is a real person’s name and identity number. Either a client has an existing policy with an insurer and the syndicate submits a fraudulent death claim without the client’s knowledge or the syndicate takes out a life or funeral policy on this person’s life and pays the required premiums for the waiting period of the policy.

Once the waiting period is over, the syndicate will produce a body with a fraudulent death certificate and claim the death or funeral benefit. Usually these syndicates receive tip offs from state mortuary staff or private funeral parlours who are on their payroll when an unknown body is not identified by next of kin in a reasonable time or when a badly mutilated body arrives (shack fires or floods are often the cause). A fraudulent death certificate is then issued and a claim is made.

Claims fraud by individuals

Joubert says claims fraud is not always committed by syndicates. A social worker in the Eastern Cape, for example, identified people in her community who were suffering from Aids. She managed to take out 75 funeral policies on the lives of these people. The life company involved found out after she had already claimed successfully against 34 of these policies.

Intermediary involvement

While all categories of claims fraud showed as decline in cases for 2007, the most significant decrease was reported in fraud involving intermediaries.

Joubert says this decrease may be as a result of tougher legislation that regulates intermediaries and the advice they offer clients, combined with increased consumer vigilance and early detection methods applied by the industry.

Fraud involving intermediaries peaked at 809 cases in 2004 and dropped to 38 cases last year.

Non-disclosure and misrepresentation

These two categories also showed significant decreases in the number of cases reported although the total value of the claims only decreased marginally.

Joubert says these two categories still account for the highest number of fraud cases.

Material non-disclosure refers to the failure of policyholders to disclose important information about a medical or lifestyle condition. Joubert explains that policyholders are legally obliged to honestly disclose all information likely to influence the judgment of the insurer when determining appropriate policy terms and premiums. Information generally regarded as material by a life insurer includes medical history, state of health, family medical history, life style, and financial status.

Life companies came across 833 cases of material non-disclosure last year to a value of R126.9-million.

Mis-representation occurs when policyholders do not fully disclose the seriousness of a medical or lifestyle condition on application, because they know that if the underwriter was made aware of the full risk they would in all likelihood be required to pay a higher premium. There were 208 cases of misrepresentation to a value of R68.9-million last year.

Joubert points out to consumers that life companies usually detect material non-disclosure and misrepresentation.

“It is therefore in the policyholder’s interest to rather be honest and pay the appropriate premium than to run the risk of having claims against their policies declined when they die or become disabled.”

Geographic spread

The highest number of fraudulent cases in 2007 were submitted in Kwa-Zulu Natal (40%), followed by Gauteng (25%) and then the Eastern Cape (14%). The number of fraudulent cases reported from Kwa-Zulu Natal has increased from 27% in 2006. This is as a result of syndicates operating in the region.

Five year overview of claims fraud statistics

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