Fraudulent activity is a critical issue that the insurance industry has been battling with for a number of years. As the years go by, and economic times become tough, fraudulent activity increases. This puts insurers in impossible situations. Do they believe in moral values such as good faith, or do they approach every claim with a measure of scepticism?
The other half
Just when you think you’ve seen it all when it comes to fraud, you get bowled over by the creativity and the lengths that some people will go to.
This was the situation regarding a spate of recent cases presented before the office of the Life Ombudsman where heart pacemakers are errantly implanted in healthy individuals who have enough medical cover to claim for what is an expensive procedure.
Enter the culprits
Judge Ron McLaren, the Life Ombudsman, points out that the complaint relates to insurers X, Y and Z. These names were left out by the Ombudsman.
According to the Life Ombud determination, it was submitted that on 3 February 2015 an application was made to Insurer X for insurance. The following cover commenced on 1 March 2015 with Insurer X: life cover worth R5.5m, illness benefits worth R5.5m and disability benefits worth R2.75m.
It must be pointed out at this time that in addition to the cover with Insurer X, on 4 February 2015 the complainant successfully applied to Insurer Y for the following benefits; life cover worth R6m, illness benefits worth R5m and disability benefits worth R1m.
Insurer Z also issued a policy to the complainant with effect from 30 March 2015 for the following benefits: life cover worth R6m and illness benefits worth R6m.
The heart of the matter
“In the application with Insurer X, the complainant was described as the owner of a business who had a monthly income of R30 000. Following an operation for a pacemaker implantation during August 2015, a claim for a policy benefit was rejected by Insurer X,” said McLaren.
The Judge added that the insurer produced evidence that the complainant was unemployed at the time of the application for insurance. Insurer X pointed out that the complainant answered a question in the application form relating to previous and existing assurance in the negative by leaving it blank.
After referring to the insurance cover which had been granted to the complainant by Insurers Y and Z, with effect from March 2015, Insurer X averred that the complainant was hugely over-insured.
The complaint was dismissed by the Ombudsman on the grounds of the complainant’s non-disclosure or misrepresentation.
Insurer Y also rejected the complainant’s claim for the insured illness benefit in respect of the pacemaker implantation. The insurer relied on the incorrect employment and income information which the complainant had furnished.
The insurer further raised the complainant’s false negative reply (by drawing a line through it) to a question in the application form relating to other insurance cover.
“Insurer Y referred to the policies which had been issued more or less simultaneously by it and Insurers X and Z. The complaint was, likewise, dismissed by the Ombudsman on the same grounds of the complainant’s non-disclosure and or misrepresentation.
Insurer Z received a claim from the complainant for R1.8m under the policy for the pacemaker implantation.
This insurer indicated that it was awaiting the outcome of the criminal investigation of the matter.
The Ombudsman made a provisional ruling that the complaint could not be taken further until notification was received that the said investigation had been completed.
Red flags and questions
Reflecting on the scam, Judge McLaren said that he came to the following conclusions relating to this case, and other similar cases.
• It is believed the insurer which reported the pacemaker scam to the Ombudsman’s office said that the scam is financed by people who find financially indigent (needy) participants to apply for insurance cover. For a couple of months substantial premiums are paid by means of loans from the financiers to the participating applicants at allegedly exorbitant rates of interest. It is yet unknown what happens to the proceeds of a successful claim against an insurer;
• When questioned about the complainants’ inflated income, the Ombudsman’s office expressed the view that it is an inescapable inference that the reason for the falsity of the complainants’ disclosed income is to justify the substantial cover applied for and that they can afford the premiums; and
Likewise, the complainants’ false negative replies to the questions relating to other insurance flow from their desire to hide from the insurers the extent of their cover for similar benefits, the Ombudsman’s office said.
If you have yet to pass your RE exams, put a huge effort in to pass it as soon as possible. The large amount of regulatory changes will have an impact on the exams.
Conduct of Business Reforms in 2017
At the conclusion of the Insurance Regulatory Seminar last year, Mr. Jonathan Dixon, Deputy Registrar of Insurance at the FSB, indicated that 2017 will be a year of substantial change.
The huge amount of information published as late as 28 December 2016 confirms this.
Over the last few years, a number of regulatory reform initiatives, focussed on conduct of business, were undertaken and consulted on. Certain of these reforms are necessary in the short-term, and cannot be delayed until Phase 2 of Twin Peaks, which will centralise all market conduct requirements in the Conduct of Financial Institutions (“CoFI”) Bill.
The regulatory conduct of business reforms will be implemented in two tranches during the course of 2016 and 2017. Tranche 1, scheduled between December 2016 and April 2017, will focus on reforms that can be brought about in the existing regulatory framework through the Regulations and PPRs.
Scope of Tranche 1
• the Retail Distribution Review, specifically the Status Update published on 13 December 2016 (“RDR Phase 1”);
• the Complaints Management Discussion Document and the Complaints Management Thematic Review published in October 2014 (“the Complaints Management Proposals”);
• draft amendments to the Binder Regulations that were published on 11 July 2014 for public comment until 1 September 2014, the finalisation of which was deferred until the publication of the detailed Retail Distribution Review Phase 1 proposals (“proposed Binder Regulations”);
• certain matters identified in the consultations on the Technical Report on the Consumer Credit Market in South Africa published on 3 July 2014, which signalled concerns with respect to consumer abuses in the consumer credit insurance market (“CCI proposals”);
• the draft Information Letter on Advertising, Brochures and Similar communications published on 13 December 2013 for comments by 28 February 2014 (“the Advertising IL”);
• appropriate minimum requirements for claims management (“Claims Management Proposals”);
• additional critical protections for policyholders and insureds identified through supervision (principles to inform premiums and premium reviews, minimum data governance requirements and negative option marketing and the like);
• alignment with the International Association of Insurance Supervisor’s Insurance Core Principles, specifically ICP 19;
• certain proposals of the Ombud for Long-term Insurance and the Ombud for Short-term Insurance relating to improved policyholder protection (“Ombuds proposals”);
• alignment, in certain respects, with the Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 of 2002) (“FAIS Act alignment”); and
• closing of regulatory gaps identified in existing provisions, effect improvements to certain provisions and effect technical amendments to clarify the intent and purpose of certain provisions.
The Tranche 1 regulatory conduct of business reforms that will be given effect to through the PPRs relate to all of the reforms referred to above, save for the proposed Binder Regulations.
A further, more comprehensive review of the PPRs will form part of the broader review of all conduct of business legislative frameworks across the various sectors regulated by the Financial Sector Conduct Authority that will be undertaken over the next two or so years as part of Phase 2 of Twin Peaks and the development of the CoFI Bill.
It is proposed that the Tranche 1 regulatory conduct of business reforms will take effect on 1 May 2017, with appropriate transitional provisions where necessary.
Moonstone Compliance clients will be receiving detailed bulletins containing the need-to-know information contained in these proposals. We will also be conducting workshops later in the year.
Billy Seyffert, COO of Moonstone Compliance, cautions against over-reaction:
“Please remember that at present these are proposals for comment only, although in combination all of these provide a pretty clear vision of where the regulator is going. While clients should take cognisance and give due consideration to this information and continuously assess the impact, I want to caution against knee-jerk drastic steps based on proposed amendments. Once the final regulations are published, there will be sufficient transitional time to make the required adjustments.”
Fasten your seatbelts, and sharpen your pencils. This is going to be a very demanding year.