Ensure all is right with insurance

16 Nov 2009

I think that way too many South Africans are intrinsically schooled in the belief that cheating is fine, stealing is perfectly okay – as long as you don't get caught – and that disobeying the law is also fine, provided that you evade prosecution.

As the financial pressures mount, so the need to "crook the system" seems to increase and there are reports of widespread white-collar crime (fraud, if you prefer) escalating in South Africa.

And perhaps the most under-reported fraud levels occur in the insurance industry.

In a crime-ridden country like South Africa, insurance is considered an essential part of the monthly bills for the thousands of people who can afford to be covered. Moreover, any asset purchased using bank finance must, by law, be kept insured for the full duration of the agreement.

Properties, too, must be properly insured as well. Not just for the contents of the home, but also for the structure itself and this is usually arranged on behalf of the homebuyer by an institution that's providing the bond finance for the property.

The premiums charged by insurance companies are generally not trivial amounts of money. For instance, if you combine the premiums that you pay for homeowners insurance, contents, all risks cover, vehicles, jewellery and a host of other items, you'll find you're shelling out a lot of money every month.

While you pay your premiums, you're covered. And, for a large proportion of the South African population, a simple housebreaking represents a method of replacing the goods lost with higher quality stuff that's supposedly been stolen.

I find it surprising (it's my cynical nature I suppose) just how many valuable items seem to go missing when someone's house has been broken into. It's not just the jewellery and the leather jackets, the plasma TVs and the laptop computers, the DVD and music systems, but it's the large amounts of cash that just happened to be in the house at the time as well.

Are all these claims legitimate?

Not according to the insurance companies who recognise that insurance fraud in South Africa is on the increase and represents a significant threat to the insurance industry.

Adam Samie, chairman of the South African Insurance Association, estimates that insurance fraud is costing insurance companies at least R2bn a year – equivalent to about 10% of the claims submitted.

Vivienne Pearson, stakeholder relations manager for the Association, says that these statistics are way too conservative and she estimates that local insurance fraud is in line with international trends and that fraudulent claims amount to about 30% of the claims submitted annually.

The Association says that last year, the short-term insurance industry paid claims worth R22bn. If Pearson's estimates are correct then that means around R6,6bn of the money paid was fraudulently acquired by the insured people.

What is most surprising for me is that between 10% and 30% of all well-to-do South Africans – who can afford to be insured – are stealing money from the insurance companies. And they are doing so wittingly and without the slightest signs of remorse.

Insurance itself is a complex subject and in the simplest terms it's a straight-forward bet between you and your insurance company. You're betting (through your premiums) that your claims will amount to more than you've paid to the insurer while the insurance company is betting that your premiums will be more than the amount you claim.

The insurance companies, of course, have a lot more skill on their side: they employ highly intelligent and skilled actuaries to devise the "bets" or premiums and these people have a wealth of statistical evidence that they use to ensure that the insurance companies come out on top.

I don't know of many "poor" or "financially distressed" insurance companies in South Africa today so the actuaries are doing an excellent job. But if one considers that R6,6bn could be lost in fraudulent claims it means that you and I are paying a lot more to insure our goods than we actually should be.

For all property owners it's extremely important to make sure that your property is correctly insured and that the cover you're paying for is going to replace any items that might genuinely be lost or damaged through some unfortunate event.

The most important factor is not to be under-insured, because if you are, then the insurance company will only pay out a proportion of your losses. It works on this basis: if you've insured something for R100k, but its actual value is R135k, you're under-insured by R35k (say 35%), so when it comes to meeting your claim you will receive just 65% of the amount you've claimed. This is because your premiums are based on a lower figure of R100k instead of R135k.

It is this pattern of under-insurance that I believe is one of the key motivating factors behind much of the insurance fraud in South Africa today. It seems to me that individuals expect insurance companies to pay them only a part of their claim, so they "add on" things that were not actually stolen in the hope that they will extract more money than they deserve from an insurance company.

Such actions are fraudulent, can lead to prosecution and jail and can result in an insurance company disallowing the entire claim and refusing to pay a penny in settlement.

The attitude of 30% of insured South Africans is that, in the event of a claim for losses or damage, they have a right to get back more than they're actually entitled to receive.

Well, guess what people, that's called theft and if Pearson's statistics are right, then 30% of our more affluent working population are crooks. That's really scary, because if they are prepared to defraud the insurance company, how many other organisations are the defrauding at the same time?

Clearly, individuals who do so have no qualms about cheating the insurers.

And I know that there are cheats out there.

For instance, a buddy of mine had a rather motley set of golf clubs that were stolen when his house was broken into. Within six weeks he paraded around the course with a brand new set of graphite-shafted Taylormade irons and woods that certainly bore no similarity to the clubs he'd previously used.

We knew he'd crooked his insurance, we just didn't know how. Fortunately the new clubs didn't improve his golf at all – in fact he's still playing badly today.

Because of the high levels of insurance fraud in South Africa, the South African Insurance Association has now set up its own Insurance Crime Bureau to investigate and prosecute fraudulent insurance claims.

So be warned – the insurers are very aware of what's going on in South Africa. Insure your property with care and then submit your claim with the same level of care.

Otherwise you (and 30% of the rest of the population) could end up with a criminal record.

And, if you know anyone who might be defrauding his or her insurer, give the Insurance Crime Bureau a call. The quicker we stamp out insurance fraud, the quicker our own premiums will fall.

*Hartdegen writes a regular column for Property24.com. The content of his columns constitutes his personal opinion and doesn't pretend to be facts or advice. Contact him at paddy@neomail.co.za.

Readers' Comments Have a comment about this article? Email us now.

I have always received the short end of the stick with regards to insurance claims. I overturned my car on the way back from Margate. I had my bicycle on a bicycle rack at the back of my car. After all the excesses (at least 3 of them) were taken into account I barely got any worth out of the insurance. The value of the bicycle, the rack and other damaged goods was swallowed in total by the excess. I got less out what the car was insured for alone! So much for insurance companies suffering! They are looking for excuses to push up the premiums. My Golf was insured for 83000. When I asked what they would pay out in case of a wipe out, they said R71000?????????? – Pieter Harmse

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