Fraud: is the industry winning the battle?

Fraud is continuously growing in the South African insurance industry with syndicates getting more sophisticated and smarter to filter through companies’ fraud detector mechanisms. This has been a perennial challenge in the industry and one which insurers have dedicated significant capital towards overcoming.

The multi-million Rand question is: are insurers keeping up with fraud trends to safeguard honest policyholders’ premiums against the costs of fraud or does everyone ultimately pay the price for bad apple policyholders?

The industry killer

The Association of Savings and Investment South Africa (ASISA) reported that although the number of fraudulent and dishonest claims in the life insurance industry has declined, the value of these claims increased substantially from around R700 million in 2012 to almost R800 million in 2013.

The short-term insurance industry estimated in 2013 that fraud costs the industry a whopping R4 billion per year. Statistics have also shown a rising trend in the number of commercial crimes reported. Motor insurers expect anywhere from 25% to 33% of all motor insurance claims to be suspicious and potentially have an element of fraud in them.

The unsettling notion is that some experts have indicated that insurers are only discovering a small fraction of crimes whilst many claims, through perfect fraudulent documentation, are going undetected and are being paid out. If companies’ claims assessors detect the slightest red flag, they should actively seek to validate the claim.

Do not allow the white lie

Insurers also cannot simply overlook the less serious cases involving non-disclosure and misrepresentation, even if the claim amount is minimal. This will effectively result in every policyholder being allowed to tell a white lie which would consequently cost insurers millions of Rands.

Due to many companies having suffered the massive financial implications of sophisticated syndicates and dishonest claimants, it is comforting to know that insurance companies have adopted a zero-tolerance policy against all type of fraudulent cases.

The silent perpetrator

Intermediary involvement has also emerged in many fraudulent cases. ASISA reported an increase in death and funeral cases involving advisors and brokers from eight cases in 2012 to 21 cases in 2013 (R8.1 million in claim value).

Most cases of this type of fraud involve the intermediary falsifying documents and nominating a third party as the beneficiary, accompanied by an almost blatant lack of insurable interest. The broker will often strike a deal with the third party by promising a share of the claim amount to them.

Other cases include one where a broker took an HIV test for an HIV positive client. Another case involved a broker forging life policy documentation on her ex-husband’s life without his knowledge. Fraud involving intermediaries makes investigating fraudulent cases tougher as it adds an additional, and often complicated, factor to consider.

Whilst there are some intermediaries involved in criminal activities, this by no means discredits all intermediaries in the industry. Their role is extremely important as they work closely with clients and can deter potential fraudsters. Given their years of experience, intermediaries should work more closely with insurers to prevent fraud by probing further when carrying out the initial needs assessment, checking the validity of documentation and strongly advising clients against fraud and the consequences thereof.

Fraud will always be prevalent in the insurance industry and if not kept up with, will result in insurers experiencing significant unnecessary losses. Whilst companies have invested millions in fraud-detecting technology to keep claims ratios low, they will ultimately recover these losses from policyholders through increased premiums. It is already estimated that some companies factor in fraud costs of up to 15% in premiums.

It is crucial that insurers, intermediaries and policyholders all work together to detect and expose fraudsters. This will support companies’ targets to keep their claims ratios low and avoid the unfortunate consequence of high premiums in the long term due to the dishonesty of a minority.