Rampant funeral cover fraud is a huge headache for life insurers
Buying and renting dead bodies to obtain fake death certificates has become a popular practice
Rampant fraud remains a challenge for SA life insurers, which detected 3,708 fraudulent and dishonest claims to the value of R1.06bn in 2018.
Although almost down 25% from 2018’s total number of irregular claims (2017 saw 5,026), the value of claims — in 2017 it was R1.13bn — remained almost the same, statistics released this week by the Association for Savings and Investment SA (Asisa) show.
The biggest portion of all fraudulent and dishonest claims (35%) was detected in KwaZulu-Natal, followed by the Eastern Cape (18%), Gauteng (17%) and the Western Cape (9%), with all the other provinces responsible for 5% or less of the claims.
Donovan Herman, convener of Asisa’s claims standing committee, says most of the fraudulent activity in 2018 took place in the funeral insurance space. Reports from the forensic departments of life insurers show that buying and renting dead bodies for the purpose of obtaining fraudulent death certificates is a popular modus operandi.
Herman says funeral policies do not require blood tests and medical examinations and are designed to pay out quickly and without hassle when an insured family member dies. “Unfortunately, this makes it tempting for criminals and dishonest individuals to take out funeral cover for people who do not exist with the intention of later submitting claims using death certificates issued for dead bodies rented or bought for the purpose of committing fraud.”
According to the stats, life insurers rejected 1,915 funeral claims worth R176.4m in 2018, of which 1,127 were found to involve fraudulent documentation. Another 156 fraudulent claims showed syndicate involvement, and in seven cases beneficiaries were found to have caused the death of the policyholder.
Fraud was also the biggest reason for declining death claims, with fraud detected in 481 of the 698 irregular death claims worth R417.3m. Seven cases involved syndicate fraud and another 15 dishonesty by financial advisers. A further 195 claims were declined due to misrepresentation and/or material non-disclosure.
Misrepresentation and non-disclosure
Despite a significant decrease in misrepresentation and non-disclosure across all long-term insurance categories in 2017/2018, it was by far the biggest reason for disability claims being declined in 2018. Out of the 530 disability claims worth R463.9m not paid, 463 were rejected due to misrepresentation or material non-disclosure.
Misrepresentation occurs when a policyholder deliberately provides misleading information to a life insurer; while material non-disclosure refers to the failure of policyholders to disclose important information about a medical condition or lifestyle. Herman says some policyholders do not disclose existing health conditions with the aim of securing lower premiums.
Fraudulent and dishonest claims against hospital cash plans continued to show a decline in 2018. A total of 519 claims worth R3.2m were declined compared to 989 claims worth R6.1m rejected in 2017.
On retrenchment benefit claims — which saw a significant dip from 126 in 2017 to 46 in 2018 in dishonest and fraudulent claims — life insurers declined 39 claims due to misrepresentation and non-disclosure, and seven due to fraud.
Herman says that while life insurers are frequently accused by the public of trying to avoid paying claims, the numbers tell a different story. In 2018, life insurers paid 99.3% of claims made against fully underwritten individual life policies alone. This amounts to R15.1bn paid out.
He says life insurers owe it to honest policyholders to protect the integrity of the long-term insurance model by preventing fraud and dishonesty. “If we allow fraudulent and dishonest claims, honest policyholders will ultimately end up footing the bill through higher premiums driven by untenable claims rates.”
Policy applicants are compelled by law to disclose all information likely to influence the judgment of the insurer when determining appropriate policy terms and premiums.
Information generally regarded as material includes medical history, state of health, family history, and lifestyle. Herman says that only when all the facts are disclosed honestly by the applicant is the insurer able to set premiums that are appropriate for a certain level of risk, thereby ensuring that every person pays a fair premium without subsidising someone less healthy.