Fraud threatens the sustainability of insurance business


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By Byron Mutingwende


Fraud has emerged as a thorny issue threatening the sustainability of the insurance industry, negatively impacting the regulators, policyholders and citizens alike.


Speaking at the insurance fraud investigation and insurance workshop organised by the African Association of Financial Forensic Analysts (AAFFA) at the Rainbow Towers Hotel last week, Pupurai Togarepi, the Head of Insurance and Microfinance at the Insurance and Pensions Commission (IPEC) urged stakeholders to be vigilant against this form of corruption that was eating at the core of the industry.


From a regulatory point of view fraud is not only considered as a crime but a risk to the sustainability of the insurance business. Insurance fraud increases the cost of doing business for insurers. It is a cost to society as it makes insurance more expensive. Career criminals do not commit insurance fraud and neither do large crime rings only but this also includes citizens who appear to be honest,” Togarepi said.


A snap survey by IPEC revealed that consumer tolerance of insurance fraud remains high in Zimbabwe. One in every 5 people interviewed believed that it was acceptable to defraud an insurer. A majority commit insurance fraud because of greedy or see an opportunity to improve their situation, view insurance companies as easy targets, some want to cover deductibles or excess, others want to ‘get back’ at insurers because they consider them unfair while 4 in 5 said insurance fraud is both illegal and unethical but they do it anyway.


Togarepi called for a multifaceted approach in crafting strategies to reduce fraud. On risk management initiatives as preventive measures, IPEC insists on pre-registration requirements for example Director’s questionnaire, police clearance and other background checks and proof of qualifications. It also issued corporate governance guidelines in terms of Section 6(c) of the Insurance Act, which empowers the commission to issue standards for the conduct of insurance business, which the players must comply with.


“The Commission has its own manuals guiding its operations. Players are expected to have their own manuals that include claims manuals, underwriting manuals, Investment policy statements and so forth. Do you take time to assess the risk before giving cover? Are there checks and balances in your claims processes?” Togarepi said.


To minimise insurer-to-policyholder fraud, each prospective player is required to demonstrate upfront the minimum capital requirements in terms of the law both in quantum and quality, for example, non-life ($1.5million), life ($2million).


“Is your capital structure responsive to your line of business? Do you reinsure adequately and pay for the treaty? Do you use properly registered intermediaries? As an intermediaries do you remit premiums?”


Hugo van Zyl from the South African Insurance Crime Bureau (SAICB) called for a zero tolerance approach to fraud. He said it was important to employ leading industry specialists and apply best practice fraud prevention systems and processes.


“In South Africa, SAICB is the only entity mandated by the short-term insurance industry to enable collaboration and facilitation in addressing organised crime and fraud prevention on behalf of the industry. We facilitate member company, stakeholder and government agency collaboration. We are addressing cross carrier fraud and organised crime impacting on the industry,” Zyl said.


He cited a case in which 31 people were killed in order to make a claim of R310 000 per body as an examp[le of insurance fraud that needed to be addressed. Zyl said it was critical to set up a confidential whistleblowing facility to report insurance fraud.


He gave study where the SAS Fraud Framework generated an alert where it was found that an individual employed by a National Brokerage changed the personal particulars of policy holders to commit fraud. The alert consisted of individuals who shared the same cellular phone number, postal addresses and bank account numbers.


After evaluating the network, the alert was allotted a project investigation name, “Loskop”. Investigations revealed that all claims were settled to the same bank account. The individual identified was employed as a claims handler at a brokerage and she submitted false claims by adding her personal particulars to the claims in order to benefit from the fraudulent claims submitted. During a period of 15 months the individual submitted 33 fraudulent claims to the value R350 000 and she used false invoices and damage reports to validate the claims.


The Insurer could not detect the fraud on these 33 fast track claims and only by data sharing was this employee apprehended.


Pensioners and policyholders had their long-time savings wiped away by hyper-inflation in 2008 and reduced them to paupers. Insurers like Old Mutual for instance, invested in shopping malls and buildings in town using the savings but could pay as little as $30 as payouts at the onset of dollarisation.


Tendai Karonga, the IPEC Commissioner, said a commission of inquiry had been instituted to look into the matter and its findings would be tabled soon as a way of correcting the anomaly.