Submitting a false claim or exaggerating a genuine claim is seen as a “drop in the ocean” in the finances of insurance companies, but the reality is very different.

“Many people think insurance fraud is a “victimless crime” where the only ones who lose are the insurance companies and their executives with deep pockets. However, this could not be further from the truth,” according to Insurance Business.

A report by New Zealand’s Insurance Fraud Bureau (IFB), estimates fraud at around 10% of the entire country’s gross written premium. In 2020, this meant that fraud cost policyholders and insurers around $739 million, or roughly $398 per household, per year. Things are even worse in the United States, as the FBI estimates that the total cost of insurance fraud (excluding health insurance) is more than $40 billion per year. Insurance fraud costs the average US family between $400 and $700 per year.

Why does insurance fraud cost policyholders?

In the report by New Zealand’s Insurance Fraud Bureau, several ways in which insurance fraud costs policyholders are listed:

• Insurers have to invest in complex systems and processes to identify fraud.
• Potential fraud leads to additional staff training as insurers need to make sure their application and claims teams are regularly trained to spot fraudulent activity.
• Slower claims processing – Whenever a new insurance fraud scam comes to light, the processing of claims becomes slower due to additional verification processes, which can affect genuine claims.
• Manpower cost increases as insurers may need to hire additional employees to combat the threat of fraud.
• Certain fraud scams, such as staged car crashes or arson, pose a danger to human lives, affecting the insurance industry and even potential fraudsters.

SA’s own Crime Watchdog

In South Africa the Insurance Crime Bureau was formed in 2008 to address the rise of organised fraudsters who use both life and non-life insurance, as a way of making money, by detecting and preventing such crimes from occurring as well as acting as the mediator for all insurance companies to work together in dealing with the problem.

According to Hugo van Zyl, COO at the ICB, the organisation is involved in the detection and prevention of physical crimes such as robberies, carjacking and vehicle theft, which poses significant risks to the non-life insurance sector. “Although the impact of the arrests and other successes cannot be measured in the short term, we are of the opinion that this has a huge impact in making South Africa a safer place and minimising risk for the industry.”

The SA Insurance Crime Bureau estimated that in 2019 up to 20% of the R35 billion paid out on short-term insurance claims could have been fraudulent. If correct, this means that in 2019 alone the South African short-term insurance industry lost almost R7 billion to fraud.

The 2020 Annual Report of the Insurance Crime Bureau highlights that Covid-19 has led to economic desperation and resulted in an increase in opportunistic crimes like fast track claims on cell phones, tablets & laptops, fake retrenchments and UIF fraud, credit life claims submissions, credit insurance losses, staged “Slip & Trip” type incidents and many more.

Christelle Colman, insurance expert at Old Mutual Insure, agrees: “The unprecedented financial pressure that consumers were under in 2020, has certainly increased the frequency and quantum of the fraudulent insurance claims that we’ve picked up to date. In response, the short-term industry is currently on high alert for fraud as Covid-19 financial pressures bite.”

In the end, the cost of insurance fraud needs to be recouped by insurers – this is one of the factors behind rising insurance premiums. “Money lost to the pot by insurance fraud compromises the ability of insurers to indemnify – or make good – the claims of those who have loyally paid their premiums for years and genuinely suffered loss,” Colman adds.

Each insurance fraud case costs resources, not only for the insurer but also for the police, legal system, and emergency services. According to IFB, this is an unnecessary involvement of organisations that could be using their resources to save lives and fight other more serious crime.

Article written by Janine Geldenhuys
Image courtesy of Moonstone.