Fraud in the short-term industry - Have we got a grip on it?

We are all aware of insurance fraud committed everyday, mainly on claims, but have we given enough attention to the management of risk with regard to our own representatives?

Standard Bank estimated that losses contributable to short-term insurance fraud is a substantial 15% of premium costs, which means an estimated R3 billion is lost to fraud in the industry every year. It is further estimated that 25% to 33% of motor claims have a fraudulent “flavour”. While figures related to “in-house” fraud is not available, it has certainly increased over the past years mainly due to economical reasons.

Managing the risk

In line with the requirements of FAIS and other recent legislation - not forgetting King III – risk management will become part of any entity’s core business strategy, and specifically that of the financial service provider (FSP). As such, we are obliged to our clients to address possible fraud by our own staff.

At the point of sale

Fraud does not only occur at claim stage, it is often already a factor at the point of sale. Commission will always be the reason why representatives commit fraud. Representatives canvassing policies through fraudulent conduct is nothing new. Issues such as the falsifying of client details and signatures are well known to us, but have we done enough to address this?

Quality control

What are the solutions? The answer may not be audits, but rather fully fletched quality control on every policy. Stricter quality and risk management measures need to be implemented within FSPs and the focus should change from volume to quality.

In practice

Although the introduction of voice logging has gone some way to address the requirements of the client, processes such as broker appointments and the transfer of clients to another FSP are still problematic.

It does happen that clients are not even aware that they have a new intermediary until they are contacted. In some instances, clients are not aware of a new broker or insurer until the first premium is deducted.

The same applies to broker appointments “en-masse” from one FSP to another. One example involved a representative who submitted broker appointments with falsified client signatures. The policies were transferred to the “new” intermediary and the representative received commission on the “new” business. The original intermediary only noticed when income started to decline. The representative eventually lost her job and was subsequently debarred, but the reputational damage had been done.

Far-reaching consequences

Fraud by representatives is not only detrimental to the client, but seriously imperils the reputation of the FSP. In today`s tight sales and advertising environment, a bad reputation will certainly be felt on the production and financial side. Although the provisions of FAIS are clear regarding these matters, it does happen and creates an atmosphere of distrust amongst clients, and also amongst intermediaries.

Building relationships

New entrants to the industry have declined over the past few years and policies are, in most cases, merely moved between FSPs. This creates its own set of problems which the industry should address together.

Relationship building by intermediaries remains one sure way of retaining clients and addresses the possibility that clients could be lured away by unethical or unscrupulous FSPs. This, and effective quality control measures, may be the key to prevent, or at least minimise, fraud at the point of sale.