By Gift Choweni
Insurance is based on the principle of mutual benefit and is designed to protect against significant, but uncertain, losses. Simply put, insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.
Like other financial products, the insurance industry is one that has been affected by fraud. Fraud is the wrongful deception or use of false representation intended to obtain financial or personal gain, or an unjust advantage over others.
In Zambia, insurance fraud is criminalised. The section 309A (1) and (2) (b) of the Penal Code Chapter 87 of the Laws of Zambia provides for the offence of obtaining pecuniary advantage by false pretences and it states as follows:
309A (1) Any person who, by any false pretence, dishonestly obtains for himself or another any pecuniary advantage, is guilty of a misdemeanour and is liable to imprisonment for five years.
(2) The cases in which a pecuniary advantage within the meaning of this section is to be regarded as obtained for a person are cases where-
(b) He is allowed to borrow by way of overdraft, or to take out any policy of insurance or annuity contract, or obtains an improvement of the terms on which he is allowed to do so.
Thus, in Zambia, the perpetrators may find themselves prosecuted for the offense of obtaining pecuniary advantage by false pretences.
Oftentimes, suspicions of fraud may arise, but insurance companies may opt not to report or pursue the matter through the legal process because of the cost implications. In other instances, suspected cases may not be reported because of perception, rightly or wrongly, that police lack sufficient expertise in insurance to investigate these cases.
Types of Insurance Fraud; Insurance fraud can be split into at least two distinct types on the basis which party to insurance transactions engages in the vice. The first type is insurance fraud against consumers, perpetrated by insurance companies and company officials within the industry. Often classified as internal insurance fraud, the activities include bribery, abuse, and misrepresentation of facts by insurance company insiders for their personal benefit and to the detriment of consumers of insurance products. In more broad terms, internal insurance fraud is often extended in definition to activities that insurance company officials may engage in to mislead government authorities.
The second type is insurance fraud committed by consumers of insurance or their representatives against insurance companies. Usually classified as external fraud, this covers all illegal activities that result in consumers accessing more benefits than they are legitimately entitled to, or illegitimately paying less in insurance premiums for the risk covered. Insurance fraud in this class includes acts committed by external parties whose interest in an insurance transaction is incidental to other non-insurance related transaction. The prime objective in this instance may be to secure a contract and obtain a loan.
Insurance fraud occurs in a variety of ways ranging from simple acts involving small monetary values to complex undertakings with large numbers of participants and huge sums of moneys at stake. Many people may not consider certain acts of this vice as serious, but that does not take away the criminality in the act.
In insurance, consumers with fraudulent intentions are likely to commit insurance fraud at the inception of the insurance policy, during the term of the insurance policy, or at the claim settlement stage. At the inception of the insurance contract, a prospective customer may purposely provide incorrect, or withhold material information from the insurer. This can happen when insurance cover is obtained after an event has already occurred. An individual may report the date of occurrence of an event days or weeks after the event and fraudulently claim for compensation. In a similar manner, an individual may collude with an insurance sales agent to indicate past dates on the receipt and cover note issued for insurance cover issued after an event of loss has already occurred.
Other insurance fraud schemes appear in the form of insured parties destroying their own properties for the purpose of cashing in on an insurance policy. This act may be coupled with an insured having already reported inflated values for the destroyed property or falsely claiming to have acquired inventory which in reality never happened.
In health insurance, an insured individual may allow another person to access health services on their name or another member of the insured family. Cases of spouses facilitating their “other partners” to access health services under the name of the registered spouse are not unheard of. Guardians may also take children not registered to access health services using names of those registered. Insurers are curbing this practice by widespread use of biometric identification technology.
Fraud committed against insurers by policyholders or employees is potentially one of the highest issues facing the industry and attracts increasing attention from regulators and the industry.
Insurance fraud is not a victimless or insignificant crime. The vast majority of honest customers end up paying for the dishonesty of the few through higher insurance premiums. This is why the industry is determined to do all it can to reduce the problem.
The Authority thus provides capacity building for insurance companies through industry workshops and targeted training upon request from insurance companies. Going forward, market conduct workshops or seminars will include material on prevention and tackling of financial crimes such as fraud in the industry. In addition, articles such as these one are part of the Authority’s efforts to create fraud awareness in the insurance industry.
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The author is an Inspector – Market Conduct in the insurance department at Pensions and Insurance Authority