A conveyer-belt of consumer corruption

The life insurance sector is awash with fraudulent and dishonest claims, making it the latest section of the domestic economy to lament South Africa’s near-endemic levels of corruption. Local life insurers detected and prevented 4287 fraudulent and dishonest claims worth ZAR787.6 million across all lines of risk business last year, being a big jump from the 3186 cases totalling ZAR587.3 million reported in 2020.

It took four volumes to document State Capture

Readers will not be surprised by the state of play shared in the opening paragraph. After all, it took four massive volumes for the Judicial Commission of Inquiry into Allegations of State Capture, Corruption and Fraud in the Public Sector to document the scale of the rot that presently afflicts our society. And individual policyholders are not immune. The insurance industry’s fraudulent and dishonest claims statistics for 2021, shared by the Association for Savings and Investment South Africa (ASISA), show that funeral insurance attracted the highest incidences of fraud and dishonesty, followed by death cover, disability cover, hospital cash plans and retrenchment benefit cover. 

Levels of fraud and dishonesty tend to increase during tough economic times, as individuals succumb to the financial pressures they find themselves under. These figures should therefore be unpacked against the country’s near-record level of unemployment and its ongoing struggle with inequality and poverty, alongside its poor economic growth outlook. We are also fairly certain that the administrative pressure on the industry to process pandemic-related death claims during 2020 and 2021 would have opened the door for chancers and opportunists who were keen to press their luck. Fortunately for the honest policyholders out there, the industry is better positioned than ever to flag and prevent suspicious claims. 

Tech working overtime to crush crime

Megan Govender, convenor of the ASISA Forensics Standing Committee, attributed the surge in exposed fraudulent and dishonest claims to the deployment of sophisticated detection mechanisms by the long-term insurance industry. It is easy to dismiss the value of fraudulent transactions as a ‘drop in the ocean’ compared to the ZAR608 billion in legitimate claims and benefits paid by the industry last year, but Govender warned that if left unchecked, fraud and dishonesty would have a severe impact on honest policyholders. These policyholders end up paying higher premiums to make up for unsustainable claims rates. 

There were some unexpected hiccups in fraud detection and prevention during 2020. “The lengthy COVID-19 lockdown [period] prevented our forensic investigators from physically going out into the field, which plays an important part in uncovering syndicate operations and taking a closer look at other criminal activities such as suspicious unnatural deaths,” said Govender. “However, by 2021 our field investigations were largely back to normal, and the success rate is reflected in these statistics.” It would be interesting to know just how large a rand value of fraudulent and dishonest claims slipped through the proverbial cracks during lockdown, but we will probably never know. 

Funeral leads in frequency, but not severity

Mention fraud and dishonesty in a life claims environment and people immediately jump to the funeral policy space, which traditionally leads the tables in terms of sheer number of incidents. And indeed, through 2021 there were a staggering 3268 claims in this category that were sullied by dishonesty or criminal intent, totalling ZAR128.2 million. 

Govender pointed out that unlike 2020, when fraud was the biggest concern in the funeral insurance space, in 2021 misrepresentation and material non-disclosure cases formed the bulk of the dishonest claims. Misrepresentation and non-disclosure refer to policyholders not disclosing or misrepresenting material information to a life insurer that could materially affect the terms of the policy. Ironically, one of the reasons for abuse in this category is that insurers have, over the years, made it easier to buy policies and claim against them. ASISA noted that funeral insurance policies did not require medical underwriting and were “designed to pay out quickly and without hassle when an insured family member dies”. 

We were, however, surprised to learn that more and more fraud and dishonesty matters are cropping up in the disability space too. One reason is that there is more at stake in terms of claims value. So, while the number of incidents in this area are typically lower, the value of fraudulent and dishonest disability claims thwarted in 2021 exceeded the value of funeral insurance claims by quite some margin, coming in at ZAR195.9 million from only 352 incidents. The following bullet points will give the risk and financial advisers among our readership a ‘heads up’ on trends in this space. According to Govender: 

• Claiming for HIV with someone else’s blood: A disability claim was submitted by a nurse under her severe illness benefit, alleging that she had suffered a needle stick injury at work which resulted in her being exposed to and infected with HIV. She supported the claim with a test result that confirmed her status as HIV positive. Subsequent investigations prevented a ZAR1 million fraudulent claim pay-out and led to the nurse receiving a five-year jail sentence, suspended for five years, and a R10 000 fine or six months imprisonment.

• Taking cover on an already disabled person: An ASISA member received a claim for sudden severe dementia against a disability and severe illness policy only one month after the policy had been taken out. The claim was submitted by the policyholder’s brother who had a power of attorney. A forensic investigation revealed that the policyholder had suffered a severe stroke before the policy was taken out and was unable to communicate; all signatures on the policy had been forged. The claim was declined, preventing a ZAR8.7 million fraud. 

Fraud in death claims rise in line with sales

There were 452 fraudulent or dishonest death claims thwarted, totalling ZAR460.4 million compared to 388 cases and R264.3 million in 2020. Govender said that the COVID-19 pandemic highlighted the importance of death benefits in securing families’ financial futures. Higher fraud activity could, therefore, be connected to both higher sales of such covers, and a spike in valid claims. By way of example, South African life insurers reported a 53% surge in death claims in the six months to 30 September 2021, compared to the same period in 2019. Thwarted fraudulent claims in the hospital cash plan and retrenchment benefits space were insignificant, totalling ZAR2.1 million and less than ZAR1 million respectively. 

Govender says misrepresenting material information or not disclosing important information such as any lifestyle or health related detail that could materially affect the terms of a policy, is incredibly short-sighted. “When claims are declined as a result, this is likely to have devastating financial consequences for those financially dependent on a policyholder,” he said, warning those contemplating fraud or dishonesty to gain access to an insurance pay-out that the chances of being caught are high, with the possibility of a lengthy prison sentence or a hefty fine. 

Last year’s Rosemary Ndlovu case, for example, resulted in a sentence of six life imprisonment terms for the former police officer who had several family members murdered so that she could benefit from the funeral insurance pay-out. And a pastor and his wife in the Western Cape received lengthy prison sentences last year for taking out life insurance policies on church members with the intention of having them murdered by a hitman for the death benefits. 

Writer’s thoughts:
The latest ASISA statistics confirm what many FAnews readers already know: crime is rife in South Africa. We also know, sadly, that crime often pays, as illustrated by the mere handful of prosecutions mentioned in the above piece. Is the threat of a fine or jail time enough to combat fraud and dishonesty in the life insurance claims environment? And what fraud or dishonesty horror stories have you heard recently, specific to the life industry? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.