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Life insurers decline paying 1% of claims

Reasons include non-disclosure of information and attempts to defraud insurance companies.
Policyholders are urged to disclose important information such as health issues that could affect the terms of the policy. Image: Shutterstock

Figures published by the Association for Savings and Investment SA (Asisa) show that life assurance companies declined to pay 243 claims for death benefits against fully underwritten individual life policies during 2019, with most citing non-disclosure of material information as a reason for their refusal to pay.

Other reasons for declining to pay claims included cases of suspected fraud, suicide, and events leading to the death of a policyholder that were specifically excluded under the policy.

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Rosemary Lightbody, senior policy advisor at Asisa, says declining to pay a claim is a “big deal” for insurance companies. “Obviously, clients want insurers to pay their claims quickly and insurers want to pay out quickly,” she told Moneyweb.

“It is in any insurance company’s best interests to pay claims quickly, but it is just as important to ensure that claims are paid correctly and to the correct beneficiary.

“Unfortunately, the insurance industry is a target for criminal syndicates due to the large amounts of money involved.”

Lightbody says death claims against fully underwritten life policies will always be paid by insurers, provided the claim is not fraudulent and the policyholder did not:

  • Commit suicide within the first two years of taking out the policy;
  • Withhold important information from the insurer when applying for the policy; or
  • Die as a result of an exclusion.

The Asisa figures show that the industry paid 99% of all claims received, refusing only 243 from a total of 27 547 claims submitted. The majority (145) were declined due to non-disclosure of material information, while 40 were refused due to suicide within the stipulated period and 31 for underwriting exclusions. Insurers refused 27 claims on the grounds of fraud.

The total value of claims paid against fully underwritten individual life policies increased by 62% since 2014 to reach R16.7 billion last year. However, the average amount paid under policies increased at nearly twice the rate – by 116% – as the number of claims has declined steadily year after year.

The average settlement for death benefits increased from R282 800 in 2014 to more than R611 000 in 2019, ranging from fairly small policies to some of several million rand.

In essence, the figures show that policyholders are taking out bigger policies, making it more tempting for criminals to try their luck.

Lightbody says fraudulent claims involve the submission of forged documentation and/or syndicate activity aimed at getting the life company to pay a claim to someone not entitled to the benefit.

How is fraud possible, considering the stringent processes involved in taking out a life policy – especially a fully underwritten policy?

Lightbody says most fraudulent claims are attempts by syndicates: “It might involve submitting a fraudulent death certificate to get payment when the insurer is not dead. Sometimes it is an elaborate attempt using a forged identity document to take out a life policy for a person that does not even exist. In some cases, criminals would collect an unclaimed body from a mortuary and forge documents to try to collect payment from an insurer.”

She notes that while 27 attempts of fraud were discovered, there might have been more. “Some might have slipped through.”

Based on the average amount of claims paid, the 27 attempts of fraud that were picked up by insurance companies would have amounted to a total of more than R16.5 million.

Asisa’s figures only include claims paid in respect of fully underwritten individual life policies, excluding partially underwritten policies and policies that are not underwritten.

The meaning of ‘fully underwritten’

Fully underwritten life policies are only issued if the individual policyholder has participated in a full underwriting process, which involves a comprehensive assessment of the client’s health and medical history, usually accompanied by a comprehensive medical examination. An insurer might also require a doctor to conduct certain blood tests.

A policy that is not underwritten would normally be a smaller policy that covers only specific events, in which case the insurer does not require a medical examination. Sometimes insurers only require clients to answer a few questions before issuing a policy, which might have a longer list of exclusions and other terms and conditions.

Lightbody says the total number of claims received in 2019 has been the lowest since Asisa started to consolidate industry figures in 2012, but the total value of claims paid has more than doubled from R6.8 billion in 2012 to the R16.7 billion in 2019.

The dangers of dishonesty

The majority of claims rejected by life insurers were due to non-disclosure of material information, which might involve dishonesty on the part of policyholders. Lightbody says this includes not disclosing existing health conditions or lifestyle issues, usually when people try to pay lower premiums.

“At the extreme, somebody might take out a policy knowing that they are very ill and do not have long to live,” says Lightbody.

She cautions people to consider the potentially devastating financial consequences for their families of not disclosing important information such as health issues that could affect the terms of the policy. “If you are not sure whether information could be considered as material by the life insurer, rather disclose it.

“If you cannot remember the exact technical details of a health event, like the medical diagnosis, then mention the year, the name of the doctor involved, and more or less what was wrong,” advises Lightbody.

In such a case the insurer can then obtain more detailed information from the relevant health care provider if they consider it material.”

Exclusions

Insurers all have (sometimes long) lists of exclusions, usually for risky part-time activities or hobbies. Policies might not cover rock-climbing, paragliding, participating in riots and recreational flying.

They may also have territorial exclusions, where people spend some time working in other countries under dangerous conditions, such photographers running around with their cameras in Afghanistan or a security guard working in Baghdad.

“This means that if the policyholder is killed as a result of the excluded activity, or in the excluded territory, the life policy will not pay the benefit,” says Lightbody.

During 2019, insurers refused payment of 40 claims resulting from events specifically excluded from policies.

The R16.7 billion that insurers paid to policyholders during 2019 only refers to death benefits, and excludes disability or dread disease benefits.

Read: Dread disease cover: How does it work, and do you need it?

During the last eight years, since 2012, life insurers paid out nearly R100 billion in death benefits on fully underwritten individual life policies, paying 99% of claims every year.

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Always looking for excuses not to pay

Obviously you didn’t read the article.
They pay 99% of claims.

That is like saying airline flights are dangerous because you see one crash in the media every now and then but none of the ones who arrived safe get reported on. The 2019 incident rate for airline flights were 3.2 incidents out of every 1 million flight departures.

Back to the article at hand:

The only time I had a claim declined for a client was because a client completely non-disclosed on application stage on purpose to try defraud the insurance company. Multiple health issues were not mentioned even though at claim stage 2 years later there was a long history of health issues and treatment. When one disclose nothing the insurance company accepts your word and don’t ask for further info or Dr reports about the condition you disclosed.

When he approached me for the first time (I didn’t know him) was “I had cancer 5 years ago if I had critical illness cover I would have had a lot of money now I regret that”. So I couldn’t offer him any cover obviously because he was a big risk.

His next move was to get his wife to take out cover. 2 years later she submitted a claim for Fibromyalgia. He called me to start the claim process for his wife. They wanted to claim for income disability. When we requested Dr reports from the current treating Dr of her condition his report indicated many many other health issues ranging over 10 years with multiple treatments and medication taken over all these years.

Bottom line: If him and his wife were honest at underwriting stage instead of acting like they don’t know about anything we would have probably declined cover due to get history. He probably knew this was going to be the case and what usually happens with these fraudulent attempts is that a client have spoken to another adviser before who told him/her that cover will likely not be given, but then approaches a new adviser to “take a chance”. He was out there to make money.

When I gave him the news of decline for his wife’s cover he even said I am his broker and I am supposed to “help” him bypass this to get a claim. So he thought it was my job to help him get a fraudulent claim.

Him and his wife are one of the 1% cases.

Another scenario is as an adviser trying to help a client with a potential claim that is marginal. A client broke his ankle and only has permanent disability cover not income disability with appropriate waiting period.

Client attempts to claim and the adviser tells the client that the cover will likely be declined as an ankle break will recover in about 6 weeks. The client is not happy with the answer and insists that a claim form be submitted. Claim gets submitted. Claim gets declined as his ankle is a full recovery, thus not a permanent disability. This gets registered as a claim being declined.

The ombudsman is an effective equaliser where one feels an insurance company stepped outside their policy wording with a claim.

Lol

End of comments.

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