Insurance fraud in Malawi: Who is to blame?

Of late a tug of war has ensued between the insurance industry and the Malawi Law Society (MLS) over allegations that the legal practitioners are perpetrating insurance fraud. This article attempts to answer the above question in a sober manner.

The allegations came to light by Eric Chapola, the former president of the Insurance Association of Malawi (IAM), who is currently overseeing the anti-fraud committee of IAM. He was quoted in the media as saying that private practicing lawyers hijack personal injury claims to defraud the insurers.

Fraudsterw will use a vehicle to stage an accident with an innocent party
Fraudsterw will use a vehicle to stage an accident with an innocent party

Insurance fraud has existed ever since the beginning of insurance as a commercial enterprise. Stereotyping lawyers as architects of insurance fraud is morally wrong.

The Oxford Advanced Learners’ Dictionary of Current English (Hornby, A.S, 1974) describes the word ‘fraud’ as criminal deception. In the United Kingdom (UK), the Fraud Act 2006 simply recognises fraud as a criminal offence.

According to Wikipedia (2014), insurance fraud occurs when any act is committed with the intent to fraudulently obtain some benefit or advantage to which they are not otherwise entitled or someone knowingly denies some benefit that is due and to which someone is entitled.

Insurance fraud can be hard or soft. Hard fraud is pre-meditatively perpetrated while soft fraud is opportunistically executed.

The prevalence of insurance fraud in the country takes three principal dimensions: insurance premium diversion staged claims and exaggerated claims.

Premium collection (from direct customers or intermediary channel) generates much of insurers’ revenue to meet their obligations.

Premium diversion is prevalent in the direct channel transaction. Perpetrators of this form of fraud are opportunistic but optimistic employees who potentially hack the company’s receipting system to serve their interest above the client’s, thus, internal fraud.

The Basel II defines ‘internal fraud’ as misappropriation of assets, including tax evasion, intentional mismarking of positions and bribery.

Premium diversion retards cash flow growth, leaving policyholders in dilemma of pessimism as to whether their current and future claims would be settled fairly and promptly in light of man- made crisis.

Prime and Charter are more vulnerable to insurance premium diversion.

Staged claims are premeditative and have a highest prevalence rate in motor insurance. To this end, fraudsters will use a vehicle to stage an accident with innocent party, resulting in three separate claims–third party property damage, personal injury and fraudster’s vehicle damage.

Premeditative fraud is a cause for concern for all insurers, trending with higher severity than exaggerated claims but General Alliance and Real Insurance companies have lowest frequency.

Exaggerated claims are externally driven and perpetrated by opportunistic policyholders who take advantage of highly porous, ambiguous policy wordings to ruin the systems for economic gain.

In this regard, a real accident may occur, but the dishonest vehicle owner may take the opportunity to inflate the insured repair estimates engineered by garage owner. Personal injuries may also be exaggerated, particularly whiplash.

Locally, there is no credible data to support the argument that insurance fraud is severe.

According to the Insurance Fraud Indicators 2013, it is estimated that insurance fraud costs the UK insurance industry £2.1 billion every year.

The Association of British Insurers (ABI)’s data reveals that £983 million of fraud was detected, comprising 138 814 fraudulent claims during the year, translating into a weekly frequency of 2 670 fraudulent claims.

Furthermore, the Coalition Against Insurance Fraud estimates that in 2006 a total of about $80 billion was lost in the US due to insurance fraud.

The CII Journal (February 2008) reveal that one in ten people admit making fraudulent claims while one in five believes everybody exaggerates when making a claim.

Fraud is a risk and risk is ethically analysed from both the positive and negative view points.

Arguably, the upside of insurance fraud is inevitable: the living standards of the fraudsters and other beneficiaries have tremendously improved in recent years.

Scammers’ disposable income grow overnight, allowing them to possess posh cars, mansions and other expensive but luxurious property to the delight of their families and friends.

The downside of fraud risk (at market level) is manifested through premium hiking at the expense of innocent policyholders following depletion of claims reserves. At national level, it denies government of taxable income. Proceeds of fraud breed HIV and Aids through unprotected extra marital sex in the face of extravagant life style.

As at December 31 2013, claims loss ratio for the insurance industry (excluding Prime) is 90 percent.

The recommended, profitable claims loss ratio is 60 percent. However, the claims loss ratio for general insurance (excluding life insurance) is much better (55 percent). The argument by the captains of the industry to spike premium rates for motor insurance due to fraud is objectively baseless.

Writing in the Malawi Insurance Times (Vol. No.1, January 2008), Eric Chapola identifies insurance personnel, medical staff, lawyers, insurance assessors and executives as some of the perpetrators of insurance fraud.

According to Andrew Dublin, executives are classified as C-level management comprising chief executive officer (CEO), chief operations officer (COO) and chief finance officer (CFO).

Depending on the size of the firm, other executives include chief risk officer, chief underwriting officer and chief actuary.

By virtue of whistle blowing the malpractice, Eric Chapola, as a CEO of Nico General Insurance Company Limited, is presumed fraud–free, otherwise his assertions  might be contradictory.

Share This Post