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The war on insurance fraud

30 July 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

The word on the street is insurance fraud increases during times of economic hardship. It’s difficult to find statistics to back this claim, though the latest insurance numbers certainly point to increased activity in this area. According to the Associati

These fraudulent claims eat into life industry profits. Peter Dempsey, deputy CEO of ASISA, notes the claims could have cost the industry R745.4 million. South Africa’s life insurance companies share their insurance fraud statistics in an attempt to identify and crush criminal syndicates as early as possible. ASISA compiles and distributes this information to industry stakeholders on an annual basis and says 2009 is the worst year on record since the report was first produced in 2003!

‘Improved reporting’ theory trumps recession

“We know that during times of economic hardship more people try and access policy benefits through dishonest means,” says Dempsey. But the increase in the number of fraudulent claims could also stem from improved fraud detection measures and reporting mechanisms implemented over time. ASISA says the 2009 fraud reports are amongst the most detailed yet received – and life companies also submitted data for their health businesses, hospital claims and retrenchment claims. “For these reasons,” he says, “there is little value in comparing last year’s fraudulent and dishonest claims statistics to previous years.”

Before you tear your hair out and lament a society where ethics and morality no longer hold – you must consider the fraud against the backdrop of the life insurance industry as a whole. The life industry paid out benefits of more than R175.6 billion in 2009 to consumers as a result of death and disability claims, maturity pay-outs and pension, annuity and other payments. Fraudulent claims represent a mere 0.2% of total paid benefits.

Unpacking the fraud statistics

KwaZulu-Natal wins the unwanted accolade as the country’s most fraudulent province by number of fraudulent and dishonest claims submitted. They racked up 40% of the total, followed by Gauteng (22%) and the Eastern Cape (15%). But it’s more interesting to assess the fraudulent claims space by insurance product. ASISA was kind enough to provide a breakdown under some common policies and fraud categories, which we list and comment on below:

Death and funeral policy claims: This are of insurance remains the largest contributor to insurance fraud with a whopping 3 266 cases flagged in 2009. Life companies say the value of fraudulent and dishonest claims in this category topped R364.9 million – or R111 726 per claim. What goes wrong in these instances? Dempsey says the majority of cases in this category were due to misrepresentation and material non-disclosure, as well as the submission of fraudulent documentation. There were even cases where syndicate and beneficiary involvement resulted in the death of policyholders! “Adviser and broker involvement also contributed to the statistics, but to a much lesser extent,” says Dempsey.

Misrepresentation and material non-disclosure: ASISA provided an interesting breakdown of fraudulent activities within the death and funeral policy space. Misrepresentation and material non-disclosure were responsible for 1 648 of these claims (more than half of the 3 266 cases) and R352 million (or 96%) of total claims.

If you’re not familiar with insurance fraud investigations the ‘misrepresentation’ and ‘material non-disclosure’ mentioned above apparently fall into the realm of dishonest claims.

Understanding ‘dishonest’ claims terminology

We borrow the following directly from the ASISA press release:

Misrepresentation occurs when policyholders deliberately provide misleading information to a life insurer, because they know that if the insurer was made aware of the full risk, they would in all likelihood be required to pay a higher premium. A pilot, for example, would be guilty of misrepresentation if he declares that he flies only 100 hours a year, when he really spends more than 400 hours a year in the air. A pilot who flies less hours represents a lower risk to the life company and therefore qualifies for lower rates.

Material non-disclosure refers to the deliberate failure of policyholders to disclose information about a medical or lifestyle condition, which is material to the assessment of the risk to be insured. An example of material non-disclosure is when an applicant for life cover omits to mention that she recently enrolled as a student helicopter pilot.

South Africa’s documentation nightmare

South Africa hasn’t had a great run when it comes to managing important documents. The United Kingdom implemented a new travel Visa requirement on all South African citizens after it became apparent our passport was susceptible to criminal use. Home Affairs has long been in a state and you can still ‘buy’ a South African identity document with limited resources. And even Cipro has been in the news of late for registering companies with similar names to respected institutions for as little as R500.

With the country’s morgues in an absolute mess – and autopsies often taking more than five years to complete it’s no wonder fraudulent document have become part of the insurance fraud landscape. Dempsey says companies reported a high incidence of fraudulent documentation being submitted in an attempt to gain access to death or funeral policy benefits last year, totalling 1 238 cases to the value of R74 million. “A number of these cases involved falsified death certificates,” he says. It’s amazing how ‘clever’ criminals become when they want to steal money! Insurers came across cases where death certificates were altered to change the ‘time of death’ to suit policies and unclaimed bodies falsely identified as being covered by a policy.” There were 813 cases of misrepresentation and material non-disclosure detected in the disability claims category to a value of R360.8 million.

Editor’s thoughts: It seems insurance fraud is alive and well in South Africa. Although the successful halting of fraudulent payouts is encouraging, we wonder whether enough is being done to take the perpetrators to task. Are you aware of any fraudulent practices involving insurance benefits – and would you be prepared to blow the whistle? Add your comments below, or send them to gareth@fanews.co.za

Comments

Added by Pint, 19 Jun 2013
Hi Gareth, I am shocked to find out that I have an unknown beneficiary added to my life insurance and of a totally different race if you look at the surname. How can my insurer not pick up that there is something wrong here. Also how can one know whether your very own insurance broker is not taking out life insurance policies on my life with perverse intentions.
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Added by Lloyd, 29 Dec 2010
Hi Gareth Trust all is well. I head up the Insurance Forensic functionality within the Standard Bank Group Financial Control Unit. We are currently trying to place a percentage on the number of irregular and or fraudulent cliams within the Life and Short-term sectors. From the research over the past few years, together with the ACFE and other insurers, it was estimated that around 35% of companies net profits would be subject to irregular and or fraudulent claims. The funeral space was estimated to be between 40 - 45% of net. It is amazing that most of the insurers are suffering a tremendous loss, but only a handful are willing to share this information with the industry in order for us to focus on high-risk areas, syndicates, etc. and place in proactive measures for prevention and detection. We have formed our own informal networking forum, which meets every 2nd month in KZN and Gauteng. About 20 companies are on the forum, including Banks, Dept. of Health, AFU, SAPS and now the short-term sectors. The amount of 'hits' and Red Flags which have been identified has been truely amazing. The sharing of information has lead to several high profile arrests and millions of rands worth of of savings... Just needed to know whether there are similar challenges out there and whether percentages regarding the above have been obtained. Your assistance will be appreciated. Kind Regards Lloyd
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