16 April 2004

South Africa: Insurance Companies' Calculated Risk Pays Off

Johannesburg — New move towards co-operation between firms means more crooks are now being arrested

THE insurance industry's decision three years ago to set up a central database to combat fraud and corruption is paying off, with an increase in successful prosecutions, according to the South African Insurance Association.

About 8%-35% of the claims paid out by insurance companies are believed to be fraudulent, costing the companies about R2bn-R3bn a year.

This translates into an increase of at least 5% in premium payments for consumers as companies attempt to cover their losses.

Since the introduction of the database, the industry is now able to pick up anomalies such as multiple claims across the sector.

The database also helps to identify those people who submit an unusually high number of claims, such as brokers or jewellers.

The industry intends taking a hard line against any fraudulent claimants they uncover, says the association's CE Caroline da Silva.

The association is investigating using new hi -tech detection mechanisms, such as voice stress analysis programmes which have proved popular overseas to determine if people are telling the truth when they submit claims.

"These mechanisms would have to be used carefully, taking into consideration discussions about the fallibility of the tests, and could only be used to further investigations not to repudiate a claim," Da Silva says.

In the past, key players in the industry had been more focused on protecting their information from competitors than in sharing it.

Greater co-operation recently led to the formation of a forensic investigations committee, consisting of representatives from the industry and members of the police's Organised Crime Unit and the Scorpions. The committee has been effective in identifying trends, the modus operandi of criminals and identifying organised crime syndicates.

"In SA, we see organised crime fraud in hijacking or arson, where syndicates offer to burn down a business or hijack a vehicle, so that a person can claim from insurance," says Da Silva.

"In the case of hijackings, people tend to wait a few days before reporting their vehicles stolen, so that the syndicate has time to get the vehicle to safety across the border. "We then liaise with border police to find out when the vehicle crossed the border and if the report was made afterwards."

Co-operation between Mutual & Federal, Santam, Hollard, SA Eagle, Alexander Forbes and the police recently led to the arrest of a Witbank panelbeater.

He is facing 120 charges, amounting to R650000, for defrauding 10 insurance companies and brokers. He is accused of claiming for car parts that were never used, issuing fraudulent invoices, as well as creating more damage to vehicles so that he could claim more for repairs.

"The insurance industry is sending a serious and strong message to dishonest service providers and policy holders that insurance fraud will not be tolerated," says Da Silva.

"Those who make themselves guilty of corrupt and fraudulent behaviour will be identified and action will be taken against them."

Recent claims from clients who were hijacked after advertising their vehicles in Auto Trader prompted an investigation that led to the arrest of three people working in a hijacking syndicate.

Da Silva says yet another form of fraud being investigated involves fraudulent bank-guaranteed cheques used to purchase vehicles.

Insurance fraud is not unique to SA. In the UK fraud costs companies £600m a year, in Australia A1,5bn and in the US 20bn a year.

The US figure is a conservative estimate as it includes only property and casualty claims, not liability claims.

Da Silva says that while insurance fraud has stabilised along with crime generally, research carried out by KPMG suggests that the public still does not see insurance fraud as a crime.

"(It believes) that their insurer is still going to give them less than they claimed for, so they may as well pad the claim," she says.

"If the premiums the public pay are not greater than the commission, management expenses and claims, then the premiums will have to be increased, affecting the man on the street."

Insurers have made a decision to go after fraudulent claimants even if the amount is small, to reduce fraud in the sector, says Da Silva .

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