South Africa’s short-term insurers go to great lengths to ensure that their new business satisfies the “good risk” tagline. To do this they rely on insurance intermediaries and underwriting managers (UMAs) to ask the right questions when quoting for perso
In most cases the checks and balances put in place by industry stakeholders result in covers being placed at the correct premium. But mismatches between risk and premium can occur when the insured provides incorrect information. Examples include lying about previous insurance claims, misrepresenting the value of insured goods, or failing to provide accurate details of motor vehicle garaging and use. Insurers employ a number of techniques to prevent misrepresentation at policy inception. They record conversations with the insured and also send a policy document detailing the assets covered, values and policy exclusions for the insured to check. Insurers also insist on physical checks of vehicles (if not new) and premises to verify the condition and existence of the assets on risk and to ensure that the required security features are installed.
Misrepresentation at policy inception versus fraud at claims stage
Matters become complicated when an insured’s misrepresentation comes to light at claims stage. It is not uncommon for insurers to rely on the insured’s omissions at policy inception to refute subsequent claims. An insurer’s decision to reject a claim based on misrepresentation often ends up at the Ombudsman for Short-term Insurance (OSTI), where complaints are resolved using principles of fairness and equity. In extreme cases the insured and insurer may settle the matter by declaring a policy void at inception (void ab initio), in which case the premiums paid by the insured from inception to claim are refunded as if the insurance policy never existed.
A more serious challenge to the insurance industry occurs when one or more parties knowingly misrepresent the items on cover, lie about the events leading up to a loss or stage the loss themselves. South African insurers have to deal with thousands of fraudulent claims each year including false reports of vehicle theft or hijacking, staged house robberies and inflated claims for household contents, to name a few. The good news is that the industry is not powerless against such abuses. Servaas du Plessis, CEO of Censeo Assessment & Verification, shared some of his thoughts on insurance fraud trends and detection in a recent presentation titled: Taking the Risk out of Management.
Censeo deals with 19 of the country’s approximately 100 UMAs, including four of the five largest by gross premium income (based on SAIA 2011 statistics). “On the short-term side we primarily look at high risk claims that fall outside of the risk appetites of the underwriters,” said Du Plessis. He noted that the group’s insurance fraud detection strategies were typically incident specific. So, for example, there is a high probability that alcohol is involved in a “single vehicle” accident reported near the Loftus stadium – on a Saturday night – two hours after a Blue Bulls victory. By using advanced analytic and investigative techniques Censeo finds evidence of fraud in up to 20% of vehicle theft and hijacking cases and up to 30% of burglary and robbery cases referred by its clients.
Some perspective on insurance fraud
It is unlikely the experience at individual insurers is as high. Ian Kirk, chief executive of South Africa’s leading short-term insurer Santam is on record that between 10% and 15% of claims in the personal lines space are “either fraudulent or have a fraudulent element”. He added that the quantum of fraudulent claims fluctuates wildly from one year to the next, and can spike to as much as a third of claims during tough economic times. “Some of the vehicle theft claims we receive are already flagged as high risk by our clients’ internal fraud prevention systems,” said Du Plessis. “So the ratio of fraudulent claims to claims investigated by us is likely to be higher than the industry experience”.
The PwC 2011 Global Insurance Fraud survey confirms that the highest risks in the financial services industry are external (65%) – clients claim against companies, you have brokers and service providers and criminal syndicates – though it cautioned against complacency where internal fraud is concerned. “A lot of people are oblivious to internal risk exposure, from procurement all the way to staff accepting bribes,” noted Du Plessis. He said that fraud trends in the domestic insurance market are very similar to those exhibiting internationally. How can insurers identify claims where fraud has taken place?
Popular techniques for fraud detection include predictive behaviour models, descriptive models and decision models. The first of these models interrogates historical data in an attempt to predict specific future behaviour. A descriptive model quantifies relationships, often by categorising consumers along social or income lines… And decision models describe the relationship between all the factors including results of predictive behaviour models, past decisions and the forecast results. These models are used to develop business rules considering client and/or service provider action in specific circumstances and go a long way to understanding insurance risk...
Claims categories with high insurance fraud risk
It is possible to single out vehicle theft, vehicle hijacking and house robberies as areas where insurance fraud frequently occurs. “Vehicle theft / hijacking incidents tend to be quite cyclical – we see a bit of a drop in the latter part of winter – and then, beginning November the frequency picks up as people engage in more active lifestyles,” said Du Plessis. One of the possible drivers of this type of fraud – where the insured “arranges” the theft – is the high final payment (residual value or “balloon”) on most motor vehicle lease agreements. This exhibits in an increase in the number of fraudulent theft / hijacking claims to coincide with the final “balloon” payments (typically February each year) as well as a higher percentage of fraud on vehicles with low resale values.
Burglary and robbery statistics are worrying too. Insurance fraud in this category stems from a combination of fictitious claims, staged burglaries, inflating claims with items not owned or “upgrading” at claims stage. “We often see evidence of significant enrichment through household contents claims,” said Du Plessis. “The number of cases where some element of fraud is evident has been increasing since November 2011, and now comprises almost 30% of claims being investigated by us”.
Insurance companies are hard at work to rein in insurance fraud. Organisations such as the South African Insurance Crime Bureau (SAICB) are tackling criminal syndicates with help from various member companies, while insurers are using technology to flag (and then further investigate) suspicious claims. New legislation such as the Second Hand Goods Act and the micro-dotting requirements it introduces – along with vehicle telematics devices – should have a major impact on combatting insurance fraud going forward.
Editor’s thoughts: One of the difficulties for insurers and UMAs is the wide discrepancies in valuations of personal effects such as jewellery. A Censeo study of 150 jewellery claims suggests savings of up to R1.5 million to the short-term industry just by obtaining fair replacement quotations for the items stolen. Do you have difficulty in determining appropriate sums insured for personal lines household contents, particularly where watches and jewellery are concerned? Please add your comment below, or send it to gareth@fanews.co.za
Comments
Added by Bozza, 08 May 2017She said I had under quoted as she would be required to pay a R1000 excess and my quotation was way too little. She ended up saying she was not interested in my services. The insurer she said she was claiming from was her employer which is why she knew 'everything'. Report Abuse