The real cost of insurance fraud: how it happens, how it’s detected and why honesty is – quite literally – the best policy

Luke Nel

The long-term insurance industry plays a critical role in the financial services ecosystem, providing people with the peace of the mind and assurances that their financial futures are protected against life’s uncertainties. However, the integrity of this vital sector is increasingly under threat due to fraud. This can jeopardise the ability of insurers to provide essential solutions, as crimes of this nature can also have a negative impact on policyholders, their families and communities at large.

Health insurance fraud hazards

Insurance fraud takes many different forms. One big issue in health insurance is when policyholders fail to disclose pre-existing medical conditions. But the truth usually surfaces through claims investigations, which leads to a claim being rejected, or a policy cancelled for non-disclosure.

To tackle this, health insurance policies usually have a general waiting period as well as temporary waiting periods for pre-existing conditions. If someone makes a claim during this time for something they didn’t disclose, it’s a red flag. Claims are verified and investigated before being paid. This helps insurers to check that claims are legit and based on honest information.

Common fraud tactics in life insurance

In life insurance, fraud often shows up as misrepresentation and non-disclosure, when someone knowingly gives false information like lying about their income, education, or health, or leaving out these important details. People might use these tactics if they know that their real health status, or a certain medical condition may result in them being denied coverage or having to pay higher premiums.

These tactics are highly ineffective as policyholders get a false sense of security that they are covered, while in fact they do not qualify for the product or are paying the incorrect premium. Their claim may not be paid or only partially paid when the insured event occurs.

Some people take out a life insurance policy for someone they know is sick and in whom they don’t necessarily have an insurable interest such as family members or someone they depend on financially. Without a genuine stake, taking out a policy is purely for financial gain and voids the objective of insurance.

Policyholders should check their documents to ensure that their disclosures reflect accurately so that their policy is valid.

Funeral fraud isn’t worth the risk

There have been extreme cases where people take out funeral policies for people who have already passed away. Those who are caught committing this level of fraud can face serious consequences, including criminal prosecution, jail time and significant fines.

Legally, cover on funeral policies cannot exceed R100 000 per insured life, however, there is no limit on the number of funeral policies one can have with multiple insurers. Ultimately, one funeral policy and a higher level of life cover, which can be cheaper, could be more viable to meet real needs.

Fraud combat strategies

Proactively, data is verified by insurers during the enrolment process to cross-check applicants' disclosures with historical data. This helps identify discrepancies in health declarations, confirms income and employment and that coverage is appropriate and justified.

Reactive claims verification includes checking health and lifestyle disclosures, relationship legitimacy, and other crucial details again.

Insurance fraud hurts us all

Fraudulent claims have a significant impact on the entire insurance industry, incurring longer processing times and making insurance less accessible and more expensive for everyone in a market where financial inclusivity is a key objective.

By providing truthful information, clients can ensure that they are protected, and have peace of mind that their claims will be processed smoothly and efficiently. Together, we need to work towards a system that benefits everyone and leaves no room for fraudulent claims.