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The roller coaster world of insurance fraud statistics

14 July 2008 Gareth Stokes

Last week the Life Offices’ Association (LOA) released its annual insurance claims fraud statistics. Instead of focusing on the industry’s 2007 prevention activities the opening paragraphs trumpets a five year rolling sum… And that allows the LOA to advertise R1.3 billion in savings over 21 000 prevented fraudulent claims.

A closer look at the numbers shows an alarming discrepancy in the number of fraudulent claims prevented on a year to year basis. The 2005 figure (8 660 claims) is more than double the 2004 number (3 739 claims)… When we shift our gaze to 2006 the number of prevented claims drops 67% to only 2 844… And in 2007 the number of reported ‘prevented’ claims drops yet again, by 46% to 1 512 incidents.

No trend in average rejected claims value either

Over the last five years the average rand value per ‘prevented’ claim shows absolutely no consistency either. In 2003, 2004 and 2005 average claims were between R40 000 and R50 000 per claim. All of a sudden the average prevented claims value shoots up to R85 183 per incident in 2006 – before more than doubling to R184 383 in the current year. Something is not well in the land of insurance fraud statistics it would seem.

With this gripe out of the way let’s look at the 2007 results and comment on some of the insurance fraud categories. For 2007 the largest category is material non-disclosure. 833 claims totalling R126.901 million were prevented in this category. The LOA media release summarises this practice as: “The failure of policyholders to disclose important information about a medical lifestyle or condition. Information generally regarded as material by a life insurer includes medical history, state of health, family medical history, lifestyle and financial status.” This information is important to the industry in determining appropriate premiums and full disclosure would often result in cover not being granted to the individual in question.

Misrepresentation was the third largest category of prevented insurance fraud by rand value. Some 208 claims worth around R68 million were reported in 2007. “Misrepresentation occurs when policyholders do not fully disclose the seriousness of a medical condition 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 risk premium...”

Praise for intermediaries

One of the categories that shows significant decline over the five years is fraud with intermediary involvement. There were 809 claims in this category in 2004, 321 claims in 2005 and 146 claims in 2006. But in 2007 the number came in at only 38 claims. LOA chief executive Gerhard Joubert believes the decline in number of cases could stem from the tougher regulatory environment.

Unfortunately a closer look at these numbers serves to complicate our analysis. Because the rand value of R6.094 million associated with the latest 38 incidents is almost three times as much as that associated with the 321 incidents in 2005 and a good 30% higher than the R4.157 million in 2006!

It seems the activities of insurance fraud syndicates continue to decline. Only 48 cases were prevented in 2007 totalling around R4 million. Joubert says most syndicates are active in the lower income market, mainly in KwaZulu-Natal and the Eastern Cape. This makes it quite difficult for insurers to trace and identify all activity in this category. “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 the highest in these provinces,” said Joubert.

Individuals also get in on the act

One of the examples sited in the latest media release involves a social worker in the Eastern Cape. This individual identified a number of community members who were suffering from HIV/Aids and proceeded to take funeral policies on their lives. More than 75 policies were taken out… When the insurance companies got wind of the activities the individual had already claimed successfully on 34 of the policies. Makes one think doesn’t it!

At the end of the day honesty is the best policy when it comes to insurance. Joubert notes that “It is in the policyholders’ best 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 ore become disabled.”

Editor’s thoughts:
The insurance industry should pride itself in preventing fraudulent insurance claims. But the LOA’s five year statistics make difficult reading. Why do you think the reported numbers ‘swing’ so wildly from year to year? And why do you think the rand value per incident has shot up from R85 183 to R184 383 in one year? Add your comments below, or send them to [email protected]

Comments

Added by Bill, 11 Jan 2010
Gareth, very interesting article. I own an insurance claim investigations firm in the US, and we focus primarily on death claims,. We conduct such investigations all over the world. I publish a quarterly newsletter, and wrote an article early last year on the topic of life claim fraud as it correlates to an economic downturn . My hypothesis was (intuitively) that claim fraud would increase in difficult economic times. In doing my research, I had a really tough time locating any reliable statistics on death claim fraud. Officials in various insurance organizations here gave various reasons for this lack of good empirical data. One is the disparate nature of life insurance claim fraud reporting in the various 50 states in the US (since insurance fraud is generally treated as a state, vice federal, crime). Another reason relates to competitive/marketing concerns on the part of insurance companies, i.e., companies not wanting to divulge such statistics for PR reasons. In fact, statistics on auto claim fraud are much more readily available and uniform in reporting. If you're aware of any good life insurance fraud data maintained here in the US, I'd appreciate knowing where to find it. Many thanks.
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Added by Johannes, 15 Jul 2008
Claim Officials performance is rated on the amount of claims successfully rejected. And not successfully paid. This figure is probably directly related to the amount of disbutes registered with the ombudsman. That comparison would probably be a fair indication of the validity of the statistics.
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Added by Mighty, 14 Jul 2008
Of course the LOA's figures don't add up - but then again neither do the Ombud's figures.
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Added by CR, 14 Jul 2008
Question: If the amount is so high for misrepresentation - it begs a further question - Are these truly misrepresentation cases or are these merely Insurers trying to get out of there obligations?
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Added by Paul Mincher, 14 Jul 2008
Not a clue!!! The swing in numbers is just too vast. I think that the LOA have just scewed up their figures. Plain and simple.
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