According to the 2018 consolidated statistics of fraudulent and dishonest claims, published by the Association for Savings and Investment South Africa (ASISA), fraudulent and dishonest insurance claims decreased, but still remain a serious problem. Life insurers specifically reported a huge spike in fraudulent death claims.
In 2018, South African life insurers detected a total of 3 708 fraudulent and dishonest claims to the tune of R1.06 billion. The year before saw 5 026 irregular claims made, across all types of long-term insurance products, but to an almost equivalent value of R1.13 billion.
KwaZulu Natal was once again the most dishonest province, responsible for 35% of all fraudulent and dishonest claims. This was followed by the Eastern Cape (18%), Gauteng (17%) and the Western Cape (9%). The rest of the provinces were responsible for 5% or less.
What makes a claim fraudulent, dishonest or irregular?
Insurance fraud takes place when claimants attempt to gain benefits they are not entitled to. This includes falsifying documents at application and claims stage, and exaggerating losses to get benefits.
Insurance fraud is a global problem. PwC’s biennial Global Economic Crime and Fraud Survey of 2018 highlighted that South African organisations that have experienced economic crime is now at a staggering 77% – the highest levels in the world, with fraud committed by the consumer at a shocking 42%.
Donovan Herman, convenor of the ASISA Claims Standing Committee, says life insurers owe it to honest policyholders to protect the integrity of the long-term insurance model by preventing fraud and dishonesty. “If we allow fraudulent and dishonest claims, honest policyholders will ultimately end up footing the bill through higher premiums driven by untenable claims rates.”
Mispresentation and material non-disclosure
Herman notes that there has been a significant decrease in misrepresentation and non-disclosure across all long-term insurance categories from 2017 to 2018. “This indicates to us that policyholders are becoming more aware of the potentially devastating financial consequences of not honestly disclosing important information that could materially affect the terms of the policy.”
Material non-disclosure was also one of the key themes in the annual report by the Ombudsman for Long-term Insurance. This was prompted by the matter of material non-disclosure that made headlines in South Africa when a widow was denied a life insurance pay- out on the basis that her husband, who died from a gunshot wound, was found to have omitted certain medical information during the policy underwriting process.
Material non-disclosure is therefore when the policyholder fails to disclose important information, such as a medical condition, state of health, family history or a dangerous lifestyle. Misrepresentation, on the other hand, occurs when a policyholder intentionally provides misleading information to the insurance company.
Fraudulent funeral claims
According to Herman, most of the fraudulent activity in 2018 took place in the funeral insurance space. Reports from the forensic departments of life insurers show that the buying and renting of dead bodies for the purpose of obtaining fraudulent death certificates is a popular modus operandi.
Life insurers rejected 1 915 funeral claims worth R176.4 million in 2018, of which 1 127 were found to involve fraudulent documentation, a staggering increase of 895 since 2017. Another 156 fraudulent claims showed syndicate involvement and in seven cases beneficiaries were found to have caused the death of the policyholder. The good news for the industry is that zero instances were reported where there was broker or advisor involvement.
Herman says funeral policies do not require blood tests and medical examinations and are designed to pay out quickly and without hassle when an insured family member dies.
“Unfortunately, this makes it tempting for criminals and dishonest individuals to take out funeral cover for people who do not exist with the intention of later submitting claims using death certificates issued for dead bodies rented or bought for the purpose of committing fraud.”
As with the material non-disclosure case, social media and public uproar in the media have played an increasing role in cases where claims were not paid out by the insurer. Herman however argues that while life insurers are frequently accused by the public of trying to avoid paying claims, the numbers tell a different story. In 2018, life insurers paid 99.3% of claims made against fully underwritten individual life policies alone, to a value of R15.1 billion.
Click here to download the ASISA media release that also provides more in-depth detail of death, disability and retrenchment benefit claims as well as hospital cash plans.