Luke Nel | The real cost of insurance fraud: how it happens, and why honesty is best policy
The long-term insurance industry plays a critical role in the financial services ecosystem, providing people with the peace of the mind and assurances that their financial futures are protected against life's uncertainties. However, the integrity of this vital sector is increasingly under threat due to fraud. This kind of deception erodes trust and can jeopardise the ability of insurers to provide these essential solutions. From a broader perspective, crimes of this nature can also have a negative impact on policyholders, their families and communities at large.
Health insurance fraud hazards
Insurance fraud takes many different forms. One big issue in health insurance is when policyholders fail to disclose pre-existing medical conditions. Some people leave these details out to dodge temporary exclusions on their policy. When they later claim benefits for these hidden issues, the truth usually surfaces through claims investigations, and their claim can be rejected and their policy cancelled for non-disclosure. International Fraud Awareness Week (17-23 November) highlights the different forms of fraud that could exist on claims, which include non-disclosure down to full dishonesty.
To manage this health insurance policies usually have general waiting period as well as temporary waiting periods for pre-existing conditions. If someone makes a claim during this time for something they didn't disclose, it's a red flag. Claims are verified and investigated before being paid. This helps insurers to check that claims are legit and based on honest information.
Unfortunately, there are very few lengths to which fraudsters won't go to commit these types of crimes. There have been cases where people have lied about being hospitalised and forged documents and evidence to support their claim. Over the years, cases such as these have taught insurers important lessons about what to keep an eye out for and how to investigate the validity of claims.
Common fraud tactics in life insurance
In life insurance, fraud often shows up as misrepresentation and non-disclosure. Misrepresentation is when someone knowingly gives false information like lying about their income, education, or health, while non-disclosure means leaving out important details about their health or lifestyle. People might use these tactics if they know that their real health status, or a certain medical condition may result in them being denied coverage or having to pay higher premiums.
These tactics are highly ineffective as policyholders get a false sense of security that they are covered, while in fact they do not qualify for the product or are paying the incorrect premium. Their claim may not be paid or only partially paid when the insured event occurs.
Another common type of fraud is when people take out a life insurance policy for someone they know is sick and in whom they don't necessarily have an insurable interest. The latter means that you would suffer financially or emotionally if the person insured were to pass away. Without this genuine stake, taking out a policy is purely for financial gain and voids the objective of insurance.
For this reason, it's important for people to ensure that they have represented their relationship with the insured person correctly, as part of their family or someone they depend on financially.
If in the event of a claim, the insurer discovers that the policy was in fact taken out on a non-insurable life, this may lead to the claim being invalidated, wasting valuable time, money and resources, making insurance more expensive for everyone.
Policyholders should check their policy documents to ensure that their disclosures are reflected accurately so that their policy is valid and that they are charged the correct premium.
Funeral fraud isn't worth the risk
In the case of funeral cover, there have been extreme cases where people take out policies for people who have already passed away. Those who are caught committing this level of fraud can face serious consequences, including criminal prosecution, jail time and significant fines.
Legally, cover on funeral policies cannot exceed R100 000 per insured life. There is, however, no limit on the number of funeral policies you can have with multiple insurers. This has led to some people taking out multiple funeral policies, but ultimately, this might not in your best interest. You could be much better off taking out a higher level of life cover, which can be a cheaper, more viable product to meet your real needs. Speak to your financial adviser about consolidating your funeral policies.
Fraud combat strategies
Many insurers, such as Metropolitan, employ both proactive and reactive strategies to combat fraud. Proactively, data is used during the enrolment process to cross-check applicants' disclosures with historical data. This helps identify discrepancies in health declarations and other critical information upfront. Additionally, verifying income and employment details ensures that the premiums charged, and the coverage provided, are appropriate and justified.
Reactively, at claim stage, the accuracy of the information provided during the application process is verified. This isn't about finding new information but ensuring that what was originally disclosed... or not... holds true. Further claims verification includes checking health and lifestyle disclosures, relationship legitimacy, and other crucial details.
Insurance fraud hurts us all
Fraudulent claims have a significant impact on the entire insurance industry. They increase the time and resources required to process claims, leading to longer processing times and higher costs for legitimate claimants. These aspects make insurance less accessible and more expensive in a market where financial inclusivity should be a constant, key objective.
By submitting fraudulent claims, individuals not only harm the insurance company but also other policyholders and communities. This unethical behaviour drives up costs and complicates processes, affecting the overall client service experience.
Your truth, our commitment
The key to a fair and effective insurance system lies in honesty and transparency. By providing truthful information, clients can ensure that they are protected, have peace of mind and that their claims will be processed smoothly and efficiently. Together, we need to work towards a system that benefits everyone and leaves no room for fraudulent claims.
*Luke Nel is Head: Protection Solutions at Metropolitan.
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