Moonstone Monitor 24 July 2008: The Ugly Face of Fraud

Recently the Life Offices Association (LOA) released statistics that showed a decline in the number of fraud cases. Two newspaper articles provided scary examples of such fraud; what is particularly alarming is the heartless manner in which it is perpetrated.

The Daily Dispatch revealed that Eastern Cape life insurance investigators have discovered 30 policies on the life of a 12-year-old boy diagnosed with HIV/AIDS. Most of the policies, they found, had been taken out by people with no insurable interest in him, as required by South African law. The fraudulent policy takers, including a local shebeen owner, would have defrauded the insurance company of around R250 000 if they had cashed in their policies on the Port Elizabeth boy, who had been adopted by neighbours when his parents died. Such fraudulent life insurance claims are decreasing nationally, but the Eastern Cape still had the third highest number of cases reported in 2007 after KwaZulu-Natal and Gauteng. In another case, an Eastern Cape social worker identified AIDS sufferers in her community and managed to take out 75 funeral policies on their lives. The life company found out after she had claimed successfully against 34 of the policies. Full Daily Dispatch report

In another insurance scam, police have cracked an insurance fraud syndicate and arrested three suspected serial killers for the murders of 21 people, reports the Independent on Saturday. KwaZulu-Natal police say the death toll may be higher as investigations are continuing. Police are also investigating whether Home Affairs officials and bank employees were involved in assisting with fraudulent IDs or the opening of fake bank accounts. The Durban Organised Crime Unit had found that a man and two women had been taking out funeral and insurance policies for people and then finding homeless people to kill so they could produce a death certificate and make the claims. Sibusiso Buthelezi and Brenda Mdluli were arrested in Durban on 13 February, while the alleged mastermind, Maryanne Tholile Dimba was arrested in Johannesburg on 13 April. The three accused have pleaded not guilty in court. Investigating officer Inspector Danie Reyneke said the syndicate used other people's identity documents to open bank accounts in the names of others. Full Independent on Saturday report

The first question that came to mind when I read this was how policies are issued without proof of insurable interest? What controls are in place when the problem is only detected after 34 claims had been paid out?

One must assume that the checks and balances that have been built into the systems at the higher end of the market do not apply in the low income market. Coupled with excessive lapse ratios it must be a major challenge for these product houses who have traditionally survived on huge volumes who now also have to contend with this threat, the extent of which is unknown.