Will Fraud be The Death of the Life Insurance Industry?

South Africans are not generally big fans of insurance. Although a 2022 Financial Sector Conduct Authority (FSCA) study shows a 12% penetration (in terms of premiums as a percentage of GDP) - over double the global average - most of this can be attributed to funeral cover. Coverage figures drop sharply when funeral insurance is removed from the equation.?

The same study shows just 10% of us have life insurance, which is concerning in itself, but the problem becomes more significant when you consider that South Africa’s long-term insurance sector is increasingly falling victim to fraud.?

?

Figures released by the Association for Savings and Investment South Africa in November last year show that reported cases of fraud and dishonesty increased by an alarming 46% between 2022 and 2023. Total losses ran in the region of R176 million - an increase of almost 130% on the previous year.?

Ironically, it’s not the policyholders themselves who commit the majority of insurance-linked fraud. Call centre agents, independent financial advisors, and agents, all of whom benefit from commissions linked to sales, were rated top of the list.?

?Policyholders came in a close second in terms of the number of reported incidents, although the total value of those incidents was the highest of all fraud-related insurance cases, accounting for around half of all losses.

?

In its report, Occupational Fraud 2024: Report to the Nation, the Association for Certified Fraud Examiners found that just under a third of all reported occupational fraud cases in South Africa are related to the insurance industry - 86% of which involve life insurance fraud.?

But what’s behind this worrying statistic?

KPMG’s 2024 Insurance Survey attributes the problem to a number of factors, including:

• Financial instability and economic recession, creating desperation and need
• Technological advancements, creating a happy hunting ground for cybercriminals
• Weak regulatory oversight and inadequate internal controls
• Increase in organised crime
• Social and cultural factors - insurance fraud is often viewed as a victimless crime
• Increased access to information
• Pressure to meet sales targets

?

Fraud is now so prevalent that South Africa’s big insurance companies have had to take strict proactive measures in an attempt to combat heavy losses. These include using data to cross-check applicants’ information right from the start of the application process and comparing current declarations with any previous disclosures to identify any red flags and discrepancies. These could relate to income and employment details, health and lifestyle, and legitimacy of declared dependents, among others.?

Measures like this are both costly and time-consuming, but they’re also unfortunately absolutely necessary. Fraudulent claims have a significant impact on the entire insurance industry, from the companies themselves to the clients they insure. High levels of fraud mean additional resources and time are needed to check, approve and process claims. We all know time is money, and these extra costs invariably get passed on to the consumer.?

?

When costs go up and processes become more complicated, the people who suffer most are the ones wanting legitimate insurance cover. But the more costs increase, and the more lengthy, complicated and invasive the approval process becomes, the less people feel insurance is worth all the hassle and expense.

Younger generations - especially Millennials and Gen Z - already question the necessity of insurance as it is, having seen their parents struggling with confusing terminology, volumes of paperwork and, often, the shock of discovering something they thought was covered, wasn’t. It all serves to reinforce their impression that insurance is complex, unapproachable and expensive.

These generations have grown up in the age of digital dominance. As the so-called “point-and-click” generation, they’re not used to having to spend hours pouring over confusing documentation before making a purchase. They’re used to easy, uncomplicated and frictionless transactions - attributes the insurance industry can sadly not lay claim to.

And yet, as Gen Z and Millennials account for around half of South Africa’s population, they represent a gold mine of potential clients insurance companies cannot afford to alienate.

?

As the 2024/25 Deloitte Insurance Outlook report states, “Insurers are urged to move beyond traditional risk aversion towards creating stakeholder value.”

Thankfully, there is some encouraging news in the middle of this negativity.

Jean van Niekerk, convenor of the ASISA Forensic Standing Committee, says there has recently been a significant increase in the number of detected incidents of insurance fraud. He says this trend must continue if the industry hopes to prevent losses from spiralling out of control and pushing up premiums for honest policyholders.?

“Seen in isolation, the fraud statistics paint a bleak picture,” he admits. “However, they should be considered as part of the bigger industry picture, which shows that the majority of policyholders and beneficiaries are honest. This is evidenced by the 95.9% payout rate in 2023 to the beneficiaries of 892 817 life and funeral cover policies to a value of R39.9 billion.”

The solution, as always, lies in prevention rather than cure. Many life insurance companies now have dedicated forensic departments focused on identifying criminal trends as they first appear, clamping down on them before they become claims.

?

Artificial intelligence, improved collaboration between industry players and enhanced identification authentication methods, are starting to make a difference.

But there’s a lot still to be done.

?It’s important to remember that the amendment to Section 34 of the Prevention and Combatting of Corrupt Activities Act means failing to prevent these activities is now a crime. This places a heavy obligation on the shoulders of insurance companies to implement - and enforce - robust fraud prevention measures to not only protect their customers but to also ensure they’re in a defendable position if investigated.?

These should include:

• Fostering an ethical culture within their business
• Offering training and awareness programmes
• Ensure they have healthy terms and conditions in place
• Develop internal policies that govern who to involve in the investigation of fraudulent matters and how to respond.

?Implementing appropriate prevention measures is no longer a “nice to have.” It’s an absolute necessity if the South African insurance industry is to survive and thrive for the benefit of both its individual policyholders and our country as a whole.

?