Insurance fraud on the rise

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The value of fraudulent cases has increased from R600m in 2011 to R670m in 2012. Of these, R620m was in the material nondisclosure, or false disclosure, category.

Peter Dempsey, deputy CE of the Association for Savings & Investment SA (Asisa), says this is still small compared with the R263bn paid out in claims by the life companies last year.

"But if it was left to escalate, fraud and dishonesty would, over time, substantially increase the claims experience of life companies and force them to recover their losses through increased premiums."

The number of dishonest claims increased from 4675 to 4939. Dempsey says life underwriting can only be effective if policyholders honestly disclose all information likely to influence the insurer when policy terms and premiums are determined.

Douw Lotter, head of group forensics at MMI, says a person who declares he flies an aeroplane might forget to say he also flies a microlight: but as microlights are much more dangerous than fixed-wing aircraft, his next of kin might have a death claim for a microlight crash repudiated.

Discovery's head of forensics, Marius Smit, says one of the most effective ways to identify fraud is to encourage and facilitate whistle-blowing - life offices usually provide a fraud line for customers.

And life offices have developed fraud models which use red flags when the characteristics of previous fraud cases are repeated. Analysis of data can often help spot frauds - for instance, if there is suddenly a spike in claims in one area.

Dempsey argues that dishonesty increases in times of financial hardship. "Policyholders will try to keep their premiums to a minimum by not disclosing all risks and get as much as possible from their cover without having to pay for policy loadings."

But Hennie de Villiers, head of life business at Sanlam, says as science changes, these loadings will change - for example, with HIV/Aids, which is usually excluded altogether, the loading is quite modest if clients stick to an antiretroviral regime.

"At Sanlam we believe in more tests, not fewer, as it is very important to us to get a full picture of the client upfront."

Fraudulent documentation, often organised by overseasbased syndicates, was much less common in 2012 than the previous year - the value of claims fell from R125m to R31m, with fraudulent death claims falling from R113m to R29m.

There have been just a handful of cases of outright fraud on disability claims and retrenchment cover. But there have been alarming tales of a chef shooting his thumb off to claim disability and a gardener putting a hand in the lawn mover to lose two fingers.

One of the more common frauds is to include children on a funeral policy who are neither biological children nor officially adopted. Life companies increasingly ask for proof, but Stefan van der Westhuizen, a product actuary at Old Mutual, says it is unrealistic in SA society to enforce such a rule - households, especially in rural areas, often include children who are not related to the head of the household.

Funeral policies are also subjected to frauds in which a local doctor and funeral parlour collude to issue fictitious death certificates.

Disability is an area in which the definition of fraud can be subjective - are people with bad backs or emotional problems just faking it?

Thiru Pillay, chief risk officer at Liberty, admits that the degree of impairment and how it affects functionality are often difficult to determine. "The decision as to what counts as disability depends on the policy terms, the degree of medical impairment and how it affects functionality and the ability to perform an occupation."

This doesn't stop a number of refused disability claims from ending up in the courts.

Van der Westhuizen says there will be grey areas, as many people are unaware of conditions that they should ideally disclose. In the case of honest mistakes, life offices will often give the client the benefit of the doubt.

"Ultimately, we are looking for reasons to pay, not reasons not to pay," he says.

Source: Financial Mail