Ren Otto
Fraud is rife in the short-term insurance market in South Africa. Millions of rands are being paid out to unscrupulous fraudsters. As a result, honest people’s insurance premiums are disproportionately high. The wrong people are suffering. The situation worsens: many consumers argue that it is simply not worth the trouble, so they go uninsured.
A sombre picture indeed. The worst part is that the industry is not playing a constructive role to combat fraud. Consider this: no blacklisting of fraudsters exists in the short-term industry. No sharing of information regarding fraudulent or false claims exists. Previous efforts in this regard have failed.
There seems to be a difference of opinion as to the size of the problem. Mutual & Federal managing director Bruce Campbell has been quoted as saying: ”Full-scale fraud – people deliberately inventing a loss incident – is not common.” But Santam’s recent announcement of its fraud line, where the public is encouraged to report fraud, indicates a different view.
Our experience at Outsurance indicates that three out of 10 motor theft claims are fraudulent, while 50% of household claims as a result of burglary are either fraudulent or inflated. In the light of my previous experience at Auto & General, Hollard and Aegis, these statistics do not surprise me.
How does this picture compare with other countries? In an article in the Financial Mail last year, it was estimated that 60% of claims have a fraudulent component. And during a recent visit to the United States, Dr Derrig of the Insurance Fraud Bureau (IFB) of Massachusetts confirmed my suspicion that insurance fraud is a worldwide phenomenon.
What can be done?
There are different ways to combat the problem. Most companies employ specialist investigators to validate large burglary and motor theft claims, with considerable success. Santam’s insurance fraud line is another effort to stem the tide.
Some of the more questionable practices involve the use of lie detectors to verify the truthfulness of a claim. Polygraph testing, used by some of the underwriting managers with Lloyd’s binders such as Bonus Plan, as well as the firm Multi Rand Insurance Brokers, is becoming a popular alternative. It is claimed to improve loss ratios significantly. My concern with the practice is that honest clients are subjected to a rough experience.
A more questionable variation of a lie detector is the so-called voice-stress- analyser used by one of the prominent direct insurers. Apparently this system can pick up indications that a client is lying over the phone. The obvious advantage is the fact that a client who passes the test gets the benefit of quick claim settlement, and only clients who ”fail” get investigated further.
My problem with this approach is that it is done without the client’s knowledge or consent, which makes it unconstitutional.
In my opinion, information sharing is the most effective way to clean up the mess and bring premiums down. The IFB of Massachusetts is a successful case study. By centralising claims information and analysing fraudulent trends, it managed to bring premiums down to mid-1980 levels.
In conjunction with information sharing, scoring models predicting propensity to commit fraud can be used. In essence, an applicant is credit- rated similar to an applicant for motor finance. The link between a poor credit record and insurance fraud is unquestionable.
In the last instance, insurers still have the obligation to investigate suspicious claims thoroughly.
It is claimed that up to 40% of vehicles on the road are uninsured. Surely insurers have a duty to do everything in their power to make premiums more affordable? If the industry cannot regulate itself, it could become an issue for the government to consider.
Ren Otto is the managing director of Outsurance. This article first appeared in Cover magazine