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.
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.”
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.
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.