New data from South Africa illustrates fraud’s ongoing threat to the insurance industry. However, by monitoring trends and remaining vigilant in addressing urgent challenges, insurers can continue to make progress in the fight against fraud.
Insurance fraud remains a serious threat to the industry; however, new data sheds light on progress made by South African insurers.
The fraud statistics released by the Association for Savings and Investment South Africa (ASISA) on November 6, 2024, show an alarming 46% increase in the number of fraud and dishonesty cases reported by South African insurers and investment companies. The report indicates the industry lost at least R175.9 million to fraud in 2023 – an increase of 128% vs. 2022.
The largest category by count was remuneration fraud (7,962 cases). This includes fraud committed by call center agents, tied agents, and independent financial advisors (IFAs), who can benefit from commissions on dishonest sales. Ranking second was policyholders’ fraudulent attempts to claim benefits, which totaled 4,130 cases and the highest rand value at R69.8 million in losses.
Fraudulent funeral benefits had the highest case count, followed by death, disability, and retrenchment (loss of income). From a monetary perspective, larger sums assured on fraudulent death benefits made these the costliest benefits subject to fraud, with R47.4 million in actual losses.
Encouragingly, fraudulent policyholder applications – including misrepresentation, non-disclosure, impersonation, and identity theft – decreased to 159 detected cases in 2023 – an almost 50% drop compared to the year prior.
While the cost of fraud is significant, a much higher number is the nearly R1.5 billion in fraud the industry prevented in 2023 – a 39% year-over-year improvement and more than eight times the reported fraud losses. This shows substantial progress in the industry’s ability to detect and prevent fraud.
Nevertheless, this is no time for complacency. Fraudsters move from insurer to insurer, adjusting their techniques as they learn from past mistakes. The state of insurance fraud in South Africa offers insights relevant in markets around the world, and the industry must remain vigilant and adapt to the evolving environment to keep pace.
Fraud is defined as the unlawful and intentional making of a misrepresentation that causes actual or potential prejudice to another. This may include material and deliberate distortion of the truth, acts or omissions (such as making false statements), not fully disclosing material facts when there is a duty to do so, forging documentation, or using another person’s identity for policies.
The cases portrayed in the media often distort the public’s understanding of insurance fraud. These include incidents where the fraudster’s own family members are the victims, often referred to as murder-for-money cases. However, these form a very small part of the overall insurance fraud picture. In fact, ASISA members were required to report such cases separately in 2023, and it was determined the beneficiary had some level of involvement in an insured’s death in only 14 of the 4,130 life insurance claims fraud cases reported.
The vast majority of fraud occurs via much less dramatic forms of material misrepresentation, i.e., through false or misleading statements or non-disclosure by way of an act of omission at the pre-contract stage. Such misrepresentation can occur intentionally or through negligence.
ASISA reported an increase in insurance sales fraud, which represented over 60% of all fraud cases recorded in 2023. This may be an unfortunate side effect of making the sales process simpler and faster for the customer. While insurers are obliged to verify an applicant’s identity – whether in person, on the telephone, or online – when transacting an insurance policy (FAIS Code of Conduct 11), it is challenging to avoid fraudulent impersonation, particularly with simplified processes and in an age of deepfakes and other emerging artificial intelligence tools so readily available.
Such behavior goes beyond consumers themselves. A dishonest intermediary may impersonate a customer using their personal data – name, ID number, or a signature copy – along with other information to collect a commission. In some cases, they may make the first policy payment to activate their commission. If the policy lapses due to non-payment of the subsequent premiums, the intermediary can make it difficult for the insurer to recover the commission. Such behavior contributed to reported insurer losses of more than R15 million in remuneration fraud in 2023.
Insurers have regulated guidelines for onboarding new clients. However, this risk-based approach can be loosened for lower-value policies, such as funeral and health cash plans. Ironically, because these types of policies have the sum assured capped at a relatively low maximum amount, they are deemed lower risk and thus have fewer risk-mitigating measures in place. They become prime targets for fraudsters as a result, with 78% of all claims fraud cases occurring on either a funeral or health benefit in 2023.
When using a simplified application process for these lower-value policies, insurers can be inconsistent in gathering and verifying pertinent applicant information. Although understandable, given that the low-value premium means less expense can be applied to onboarding the policy, it does expose insurers to fraudulent activity.
Several identifiers may indicate fraud is being perpetrated. For example, sales occurring at odd times of the day, such as late at night, might be cause for concern. Quality-assessment calls to policyholders can help confirm the validity of the policy sale and gather pertinent information.
On the claims side, insurers must tread carefully with early-duration policies and certain unnatural claims. They should also keep an eye out for handwriting or signature discrepancies, lack of documentation, and inconsistencies with the dates and details provided. In many instances, the information received for claims differs dramatically from the disclosures or personal data provided at the application stage, which should trigger further questioning.
Many of these indicators may not be cause for concern on their own – or they could be innocent mistakes – but when more than one occurs, it might warrant further scrutiny.
RGA has partnered with insurers to identify red flags to reduce the incidence of fraud and encourages clients to develop comprehensive fraud risk rules. As a starting point, insurers should:
Once insurers understand the elements of fraud to identify it, they should compile sufficient evidence to support the allegation. RGA recommends notifying law enforcement and providing evidence to assist with the investigation before it proceeds to prosecution. Too many cases, however, go unreported or are not prosecuted. Insurers can play a vital role in changing this and send a message to fraudsters that the industry is taking action.
In South Africa and in markets around the world, insurance fraud disrupts the industry’s efforts to provide financial protection to more people. By monitoring fraud trends and remaining vigilant in addressing urgent challenges, insurers can continue to make progress in the fight against fraud. With new technologies, tools, and techniques now available to fraudsters, such vigilance is more important than ever.
