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Can insurance fraud raise your premiums?

By Isabelle Coetzee

It’s estimated that 10% - 20% of insurance claims are fraudulent. According to the PWC Global Economic Crime and Fraud Survey, 2017 saw the largest amount of fraud since 2001.

But, as a diligent client who does not make fraudulent claims, does this affect you? Justmoney got in touch with insurance experts to find out more.

Tip: Protect yourself by taking out the correct insurance products today. Click here for more.

What is insurance fraud?

According to Precious Nduli, head of technical marketing at Discovery Insure, when someone buys insurance, they transfer the cost of a potential loss to the insurance company in exchange for a fee, known as the premium.

She explains that policyholders pay this regular fee in return for insurance protection against a future insured event – which we call a claim. Therefore, the main component of the premium is to cover the future claims of the policyholders.

“Fraudulent claims usually emanate from the misrepresentation or non-disclosure at the underwriting or plan inception stage. This means the policyholder is not paying the correct premium for their risk,” says Nduli.

“Alternatively, misrepresentation of information at the claims stage can lead to the insured unduly benefiting, which can increase costs for the insurer,” she adds.

Premiums higher because of fraud

Nduli believes that fraudulent claims lead to higher premiums for all policyholders because the insurer needs to recover these costs in order to meet its obligations to all policyholders in the future.

Christelle Colman, insurance expert at Old Mutual Insure, agrees that the impact insurance fraud has on premiums is immense.

“Claimants who attempt to defraud their insurance company not only put themselves in danger of criminal prosecution, but they also set off a chain reaction that results in increased premiums for others,” says Colman.

She explains that this is caused by the high cost of measures insurers must take to clamp down on fraudsters.

Do you know how to protect yourself from banking fraud? Have a look at this article to find out more.

Who commits insurance fraud?

According to Colman, the risk of fraud being committed increases during times of low domestic economic growth, high unemployment rates, and rising household costs placing additional strain on disposable income.

“Much like the situation many South Africans are facing at present. Economic distress promotes economic crimes, which disrupts business,” says Colman.

She refers to “The Fraud Triangle”, which shows that people are driven towards insurance fraud when they are faced with the following factors: 

  • Pressure – A person commits fraud because they are under pressure; they can’t find a way out of the difficult situation they find themselves in. The result is that they’re tempted to find illegal means to make money.
  • Opportunity – A person sees an opportunity to solve their financial problems illegally. The person may abuse their power or position, because they understand certain processes and how they can use this inside knowledge to make things work in their favour.
  • Rationalisation – A person has a “valid” reason or justification for committing fraud. This behaviour is rooted in a sense of entitlement or doing it for a “good cause”. The more pressure a person feels, the more they’ll rationalise that they’re in the right.

What is being done?

According to Louis Hay, head of short-term insurance propositions at Standard Insurance Limited, insurance fraud is tightly managed and mitigated by the industry to protect the consumer.

“Reductions in fraud through centralised interventions, such as the Insurance Crime Bureau (ICB), assist both the industry and the consumer to save money and attack the syndicates abusing the system,” says Hay.

In the Insurance Crime Bureau Annual Report, it outlines how one syndicate used false identities to submit false roadworthy certificates for 68 vehicles, which created a false history for them. They then insured them and shortly thereafter reported that they had been in serious accidents.

When the syndicate was taken down, the authorities found that in the three years they had been active, they managed to wrack up approximately R20 million.

Hay points out that the ICB is working hard on getting ahead of insurance fraud and that they have already completed 158 investigations, leading to the arrest of 105 people and 49 guilty verdicts.

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