Fraud is a major problem in both short-term insurance and life assurance. Although most of the fraud is perpetrated by policyholders, it is not unknown for fraud to be perpetrated against policyholders (see “Unauthorised policies a trap for the unwary”, below).

And fraud also takes place with service providers, particularly in the short-term industry, when claims are processed.

Life assurance fraud has become so attractive that, increasingly, crime syndicates are also involved.

Perpetrating fraud is simply not worthwhile. Both the short-term insurance and life assurance industries are strengthening their forensic departments. The companies also increasingly share information where they suspect all is not well. This means there is an ever greater chance of fraudsters being caught.

And if you are caught committing fraud you will not only lose out on the claim but there is a good chance that criminal charges will be laid against you.

Running a close second to fraud is misrepresentation or material non-disclosure of important information by policyholders. This can be a very silly thing to do because life assurance is there to meet the financial needs of your dependants when you cannot do so because of things such as death, disability or even retrenchment.

Peter Dempsey, the deputy chief executive of industry body the Association for Savings & Investment SA (Asisa), says misrepresentation and material non-disclosure cases do not involve the criminal intent that comes with fraud, and they are therefore classified as dishonest claims that will be repudiated.

For example, the Ombudsman for Long-term Insurance, Judge Brian Galgut, recently issued a determination in favour of a life assurance company where the dependent spouse of a policyholder objected to the repudiation of a claim for R500 000 on a policy taken out by her husband last year – a month before he had died.

He was sold the policy by a telesales assurer, who had asked him if he had been admitted to hospital in the last three years as a consequence of his diabetes (which he had disclosed). He answered: “No.”

He was actually dying in a hospital bed at the time he told the lie.

The big problem with defrauding an insurance or assurance company is that it pushes up the costs, which means higher premiums for everyone, be it on your motor vehicle or in the event of things such as death and disability.

Among the consequences is that many people who struggle to balance their monthly budget don’t take out insurance of any kind or have far too little assurance to cover them when the unexpected happens.

What is astounding is that even when people are caught out and their claims are repudiated by companies they think they can hoodwink the various arbitrators who are there to resolve complaints.

Galgut says his office is surprised that “consumers who have perpetrated a fraud would have the gall to then complain to our office…”

He describes one case in which someone successfully complained to his office about a repudiated claim, and then felt confident enough to submit a further complaint about another life assurance company that had also repudiated a claim on the death of the same policyholder.

Galgut says he told the complainant to take his case to court.

Ian Kirk, the chief executive of South Africa’s largest short-term insurer, Santam, says his company is toughening up on fraud. He says between 30 and 40 percent of short-term insurance claims are fraudulent or have an element of fraud.

He says that were it not for fraud, short-term insurance premiums would be between 10 and 15 percent lower.

The consequence of higher premiums is that many people are not insured or are under-insured.

Kirk says Santam and other companies are going to get a lot tougher on fraud. He concedes that there will probably be more consumer complaints as a result, but the industry has no option.

Simultaneously, “graft and inefficiency” in the supply chain – with many suppliers overstating costs or taking advantage to push up costs – will also be tackled.

In a media release, Asisa says that South African life assurance companies managed to prevent 5 792 cases of claims fraud during 2010. Had these attempts not been foiled, the life industry would have lost over R638 million to fraud (see the table above).

Dempsey says that while there was a slight decrease in the total value of the attempted fraud claims from 2009 to 2010, the number of cases increased substantially by 1 204 from the 4 588 cases recorded in 2009.

He says the rise in the number of claims fraud cases detected can be attributed to the increasingly sophisticated fraud detection mechanisms applied by many of the forensic departments of the life assurance companies.

But he says the rising number of cases also indicates that for many policyholders and beneficiaries who are struggling financially, fraud is seen as an easy way out.

Dempsey warns that in cases where fraudulent intent is evident, criminal charges are laid by life assurers, and perpetrators may face jail time. Dempsey says that this increased attention to fraud will not impact on honest and legitimate claims. Last year, the life industry paid out benefits of more than R190 billion to consumers as a result of death and disability claims, maturity pay-outs and pension, annuity and other payments.

Dempsey adds that while the R638 million represents fraud detected, there are bound to be cases that did not appear on the radar screens of the forensic departments. While it is impossible to estimate the amount, Dempsey says it is a given that millions are lost to fraud and dishonesty each year.

Target zones for fraudsters are:

* Health business and hospital claims, with hospital cash plans paying policyholders a daily cash benefit for each day spent in hospital. What is disturbing is that the industry has evidence of doctors and hospital administrators colluding with dishonest policyholders in making claims they are not entitled to.

* Death and funeral claims. This category continued to account for the highest number of fraudulent and dishonest claims in 2010.

* Misrepresentation and material non-disclosure by policyholders. Dempsey points out that misrepresentation and non-disclosure almost always have serious consequences for policyholders and their beneficiaries.

* Fraudulent documentation. Dempsey says in 412 cases, worth R23.3 million, fraudulent documents, particularly death certificates, were submitted in an attempt to access death or funeral policy benefits.

“More ruthless beneficiaries have been caught presenting unclaimed bodies at mortuaries as the deceased covered by the policy,” Dempsey says.

* Disability policy claims: Dempsey says that during tough economic times some consumers resort to fraud and dishonesty to access their disability cover. In extreme cases, policyholders harm themselves to qualify for a disability payout, he says.

Unauthorised policies a trap for the unwary

Check your bank statements and payslips carefully for any unauthorised deductions, particularly by way of debit orders.

The life assurance ombudsman, Judge Brian Galgut, says the most commonly targeted victims of fictitious polices are government employees, who are paid using the Persal system.

He says false applications are submitted by some dishonest advisers using illegally obtained salary codes and forged signatures.

He says many victims remain unaware of the fraud because they do not receive a payslip timeously or do not check their deductions.

He says the danger is that there can be a knock-on effect, particularly if there are multiple frauds, because it may lead to other debit orders being rejected because of a lack of funds.

Two recent cases Galgut adjudicated were:

* A complainant who discovered she had six funeral policies – three issued in 2009 and another three in 2010, with the premiums varying between R81 and R150 a month.

* A complainant who found she had 15 policies, each with a premium of R100.

Galgut was concerned that the assurance companies did not have any “red flags” that would have set off alarm bells.

One of the problems, to my mind, is that debit orders appear on bank statements with strange alpha-numeric codes. When in doubt, check with your bank – that is after you have checked your bank statement and/or payslip.

Some good news comes from Peter Dempsey, the deputy chief executive of the Association for Savings & Investment SA. He says that since the introduction of the Financial Advisory and Intermediary Services (FAIS) Act and subsequently the FAIS examinations, “we have seen a steady reduction in fraud involving brokers and advisers”.

Table: Fraudulent and dishonest claims 2010/2009