Advisers, brokers have limited options in war against insurance fraud
Insurance plays a vital role in a stable economy, but South Africa’s high rate of insurance fraud, often linked to violent crime and involving suspected law enforcement complicity, reveals a society grappling with deep-seated issues. Insurance crime is top-of-mind across the insurance value chain with professionals involved in distribution (direct and intermediated), underwriting and paying claims doing whatever they can to stamp it out.
Chilling insurance crime headlinese
Today’s opening line was informed by a flood of coverage of insurance crime and fraud incidents under chilling headlines like ‘Insurance killings: Cop, daughter, sister abandon bail bid’ (News24); ‘Cop arrested for alleged insurance payout killings’ (Newzroom Afrika); and ‘Another cop arrested for insurance-related murders’ (The Sowetan). Each piece relates to one or other of the most gruesome insurance crimes to affect South Africa recently, though the blurring of lines between insurance fraud and capital crime is nothing new.
Murder for money is commonplace, and murder for insurance money falls squarely in that category. In fact, South Africa’s earliest documented ‘serial murder for insurance proceeds’ matter dates back to the early 1900s. According to Wikipedia.org, a nurse named Daisy de Melker “became infamous for poisoning two of her husbands with strychnine, allegedly to claim their life insurance payouts.” These deaths and payouts occurred in 1923 and 1927 respectively. Many people have been killed for financial benefits under insurance policies since.
Rising fraud rates and the financial impact
Winding the clocks forward to 2023, the Association for Savings and Investment South Africa (ASISA) has reported a 46% surge in insurance crime incidents across its investment and life insurer members. The association says its members detected 13074 cases of fraud and dishonesty in 2023 compared to 8931 cases in the prior year. The direct losses arising from these fraud and dishonesty cases surged too, up 128% to R175.9 million in 2023 compared to the prior reporting year. At the end of 2023, ASISA members managed 43.8 million risk and savings policies and collective investment schemes assets totalling R3.5 trillion.
Jean van Niekerk, convenor of the ASISA Forensic Standing Committee, attributed the steep increase in fraud detected in 2023 to a combination of three factors. From an industry perspective, ongoing innovations in the fraud detection methodologies deployed by financial institutions’ forensic departments is bearing fruit, resulting in more cases being identified. At a beneficiary or policyholder level, increasingly desperate consumers are willing to commit what they perceive as victimless crimes for extra money. And finally, criminal syndicates have long viewed life insurers and investment companies as lucrative soft targets.
Why R1.5 billion may be the tip of the iceberg
“A loss of R175.9 million to fraud and dishonesty is significant, and our industry is focused on clamping down on criminal activity through continuous evolution and adaptation,” said van Niekerk. These actual losses are dwarfed by the industry’s estimate of the losses it was able to prevent, totalling around R1.5 billion in 2023 and R1.1 billion in 2022. Your writer could not, however, get the math to make sense. If you sum these numbers, then the total for successful plus thwarted incidences is a mere 0.3% of the total life industry claims paid in a year. The sense is that the official statistics are the tip of an iceberg that could run to billions more each year.
ASISA reports under five fraud categories. First, remuneration fraud, which involves attempts by call centre agents, tied agents or independent financial advisers to benefit from commission and/or fees by making up policy sales. Van Niekerk says more than half of all fraud cases recorded by ASISA members in 2023 were classified as remuneration fraud, showing a steep upward trend from 2022. “A positive development is the small increase in actual losses, combined with a significant increase in prevented losses; this indicates that our industry’s prevention methods are delivering results,” he said.
Misrepresentation and non-disclosure on the wane
Second, fraudulent applications, where the insured seeks life cover benefits or premiums reductions using misrepresentation or non-disclosure or even impersonation or identity theft. The third category features fraudulent and dishonest life insurance claims against life and disability cover. Fraudulent and dishonest life insurance claims were the second-highest contributors to fraud cases in 2023, with losses under this category increasing from R17 million in 2022 to R69.8 million in 2023. Much of this total stemmed from fraudulent death claims.
Category four involves fraudulent withdrawals and disinvestments from linked investment service providers (LISPs), collective investment schemes (CIS) and retirement funds. Van Niekerk reports a decrease in fraudulent withdrawals and investments, but a concerning increase in actual losses recorded, which jumped from R23.7 million in 2022 to R40.5 million in 2023. “While the attack rate was lower, the value of prevented and actual fraud increased substantially in 2023,” he said. Finally, category five (other fraud) encompasses fraudulent attempts to obtain investment policy benefits, bribery, and corruption.
How the industry is fighting back
The fight against insurance-related crime is ongoing. Van Niekerk explains that many life insurers and investment companies have dedicated forensic departments focused on clamping down on fraud and dishonesty by identifying criminal trends as they emerge. Preventative measures include using digital technology such as artificial intelligence (AI), improved industry collaboration and enhanced authentication mechanisms such as biometric customer identification.
From 2024, ASISA has asked its members to report on two additional fraud categories: ‘murder for insurance payouts’ and ‘deceased estate fraud’. It emerged that 14 of the 4130 insurance fraud cases reported for 2023 related to the involvement of a beneficiary in the insured’s death. “Someone with criminal intent will always find a way of cheating the system and hope to get away with it; sadly, their modus operandi often involves family members or vulnerable or desperate members of society,” Van Niekerk said.
Some of these ‘murder for insurance’ cases have received widespread media attention, though the media does little to acknowledge the excellent work being done by the industry to detect and mitigate risks. The likes of Rosemary Ndlovu and, more recently, a police officer in Limpopo, would never have been exposed, investigated, or prosecuted had it not been for extensive cooperation between the insurance industry and law enforcement agencies.
One of the standout initiatives in this space is spearheaded by the South African Insurance Crime Bureau (ICB). “The average citizen has no idea of the scale of murder for insurance domestically; it is not reported on enough; there are so many other physical crimes taking place daily that the insurance-related murders become lost in the bigger picture unless a ‘sensational’ case comes up,” said ICB CEO, Garth de Klerk. Another issue is the time to resolve such matters. According to Van Niekerk, the process of gathering evidence and building a case that will stand up in court is slow, often taking months from when an insurer starts investigating for an arrest to take place.
Challenges of tackling complex insurance crimes
Unfortunately, fraud involving deceased estates is on the rise too, with 20 cases reported by life insurers and 34 by investment companies in 2023. Deceased estate fraud is committed by criminals or crime syndicates impersonating legitimate parties and fabricating letters of executorship and other documents, as well as opening fraudulent bank accounts in the names of beneficiaries by impersonators and false executors.
FAnews asked the ICB CEO if there was anything its readers could do to help combat the insurance crime and fraud scourge. “Advisers are not typically involved in this level of cover as most smaller policies end up being underwritten directly with an insurer or through a group scheme,” he said. “Financial and risk advisers can help by creating awareness around the issue, and educating clients to be astute; when they see something they must speak out, especially where they are operating in impoverished communities.”
We allow Van Niekerk the last word. He said it is vital for the savings and investment industry to ensure that fraud remains in check or risk fraud-related losses spiralling out of control. He reminded consumers that the more insurers lost to fraudulent and dishonest claims, the higher the premiums honest policyholders would end up paying for their cover.