Can insurance fraud increase your premiums?

Insurance fraud in South Africa is dramatically on the rise. The SA Insurance Crime Bureau (ICB) estimates that in 2019, up to 20% of the R35 billion paid out by short-term insurers was claimed fraudulently*.

How does this statistic affect legitimate claimants or those who didn’t claim at all? We got in touch with insurance experts to find out more.

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What is insurance fraud?

According to Precious Nduli, head of technical marketing at Discovery Insure, when someone buys insurance, they transfer the cost of a potential loss to the insurance company in exchange for a fee, known as the premium.

She explains that policyholders pay this regular fee in return for insurance protection against a future insured event – which we call a claim. Therefore, the main component of the premium is to cover the future claims of the policyholders.

“Fraudulent claims usually emanate from the misrepresentation or non-disclosure at the underwriting or plan inception stage. This means the policyholder is not paying the correct premium for their risk,” says Nduli.

“Alternatively, misrepresentation of information at the claims stage can lead to the insured unduly benefiting, which can increase costs for the insurer,” she adds.

Premiums higher because of fraud

Nduli believes that fraudulent claims lead to higher premiums for all policyholders because the insurer needs to recover these costs in order to meet its obligations to all policyholders in the future.

Christelle Colman, insurance expert at Old Mutual Insure, agrees that the impact insurance fraud has on premiums is immense.

“Claimants who attempt to defraud their insurance company not only put themselves in danger of criminal prosecution, but they also set off a chain reaction that results in increased premiums for others,” says Colman.

She explains that this is caused by the high cost of measures insurers must take to clamp down on fraudsters.

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What is insurance fraud?

According to Precious Nduli, head of technical marketing at Discovery Insure, insurance involves transferring risk in exchange for a fee. Specifically, the cost of a potential loss is transferred by the consumer to the insurance company, in exchange for a monthly premium.

Insurance protection is taken out against a future insured event, this being the claim component, Nduli says. Therefore, the main component of the premium is to cover the future claims of policyholders.

“Fraudulent claims usually arise from misrepresentation, or non-disclosure, at the underwriting or plan-inception stage. This means the policyholder is not paying the correct premium for their risk,” says Nduli.

“Alternatively, misrepresentation of information at the claims stage can lead to the insured unduly benefiting, which can increase costs for the insurer,” she says.

Premiums rise because of fraud

Fraudulent claims lead to higher premiums for all policyholders, Nduli says, because the insurer needs to recover these costs in order to meet its obligations to all policyholders in the future.

Christelle Colman, insurance expert at Old Mutual Insure, notes that the impact is immense. “Claimants who attempt to defraud their insurance company not only put themselves in danger of criminal prosecution, but they also set off a chain reaction that results in increased premiums for others.”

The high cost of measures insurers must take to clamp down on fraudsters, Colman says, forms a large part of this expense.

Who commits insurance fraud?

According to Colman, the risk of fraud increases during times of low domestic economic growth, high unemployment rates, and rising household costs – all of which place additional strain on disposable income.

“This is the situation that many South Africans face at present. Economic distress promotes economic crimes, which disrupts business,” says Colman.

She refers to “The Fraud Triangle”, which is comprised of the following factors. 

• Pressure. The perpetrator commits fraud because they are under pressure - they can’t find a way out of the difficult situation they find themselves in. The result is that they’re tempted to secure money illegally.
• Opportunity. The perpetrator sees an opportunity to solve their financial problems illegally. They may abuse their power or position, and use inside knowledge to make the system work for them.
• Rationalisation. The perpetrator has a “valid” reason or justification for committing fraud. This behaviour is rooted in a sense of entitlement, or a belief that they are committing the crime for a “good cause”. The more pressure the potential perpetrator feels, the more they’ll rationalise that they’re in the right.

What action is being taken?

According to Louis Hay, head of short-term insurance propositions at Standard Insurance Limited, insurance fraud is tightly managed and mitigated by the industry, in order to protect the consumer.

“Reductions in fraud through centralised interventions, such as the Insurance Crime Bureau, assist both the industry and the consumer to save money and attack the syndicates abusing the system,” says Hay.

In one of its annual reports, the ICB noted that one syndicate used false identities to submit false roadworthy certificates for 68 vehicles, creating a false history for them. They then insured the vehicles and shortly thereafter reported that they had been in serious accidents.

When the syndicate was taken down, the authorities found that, in the three years that they had been active, they had acquired approximately R20 million.

Hay points out that the ICB is working tirelessly to get ahead of insurance fraud. Investigations are ongoing, and arrests and convictions have been made.

* Source: https://www.moonstone.co.za/insurance-fraud-is-a-global-phenomenon/.