Fake claims rob insurers Sh10b annually

By Kenneth Kwama

Kenyans could be forced to pay higher premiums for insurance as a result of a new breed of fraudsters who are claiming billions of shillings from insurance companies and in the course, driving up the cost of insurance.

The Association of Kenya Insurers (AKI) says 30 to 40 per cent of claims paid out are dishonest. This means the industry is paying out more than Sh10 billion annually to fraudsters.

Although the industry watchdog is yet to avail figures for last year, in 2009 the industry incurred net claims of Sh30.66 billion compared to Sh24.83 billion in 2008. This represents an increase of 23.50 per cent over year 2008 figures.

Fraudsters are minting cash frominsurance firms through fake accidentsclaims. [PHOTO: FILE

This means insurers paid out between Sh9.2 billion and 12.3 billion to false claimants in 2009. The figures are expected to significantly climb up once statistics for last year are released.

"Our estimates show that between 30 and 40 per cent of all claims are fraudulent," says AKI’s chief executive Tom Gichuhi.

Despite the negative developments, the combined industry profit after taxation increased by 14.4 per cent to Sh4.29 billion in 2009, compared to Sh3.85 billion in 2008.

Unscrupulous individuals

Penetration of insurance stood at 2.84 per cent compared to 2.63 per cent in 2008. Blue Shield Insurance says it has launched a massive operation to recover millions of shillings it has paid out to these unscrupulous individuals.

One of the people being pursued by Blue Shield includes a lawyer who made multiple claims on a single case last year. The company paid the lawyer Sh200,000 for a claim involving an accident in March.

Seven months later, the lawyer re-issued the same warrant, claiming the same amount of money, but through a different auctioneer.

"This is very common. In fact we are investigating a number of cases where people have made multiple claims on one item. There are also other cases in court," says Dennis Kavili, investigations coordinator at Blue Shield Insurance.

According to industry sources, the fraud is more rampant in Machakos, Nyeri and Kisii.

"In Machakos, some fraudsters have even stationed motorcyclists along the major highway who usually ride in search of accident victims. They say there is no rain in Machakos so their rain is insurance," says an insurer who requested not to be named.

Generally, the widespread fraud threatening to drive up the cost of insurance is coordinated by a ring of criminals who sometimes stage accidents in order to reap from insurance claims.

Cleverer gangs brake suddenly and deliberately while on high speed, making it almost impossible for the motorist behind to avoid hitting the back of their car.

They then claim for both damage to the car and personal injuries from the collision.

In one instance, Blue Shield got a strange claim involving 32 passengers who were all claiming to have been in a 14-seater matatu that was involved in an accident in Nyeri.

Payments doubled

"It was strange. In fact we thought of asking all of them to enact the scene by sitting where they were in the matatu before the accident," says Catherine Wahome, CEO Blue Shield Insurance.

AKI’s 2009 report indicates that out of the net premiums of Sh5.9 billion collected in the private motor vehicle segment, the industry paid net claims of Sh4.7 billion, representing a ratio of 80.8 per cent.

The cost of private motor vehicle insurance nearly doubled last year as insurers sought to stop massive revenue leakage resulting from fraud, careless driving and weaknesses in the courts system that make it difficult to resolve disputes quickly.

Last year, annual premiums for comprehensive insurance for private motor vehicles, jumped almost 75 per cent from 4.5 per cent of the value of the car to 7.5 per cent.

Other insurers have put in place premiums setting mechanisms that immediately enhance the cost of insurance in the next year if a client is involved in an accident and makes any claims in the current year.

The dramatic rise of insurance premiums come amid marked rise both in road accidents and fraudulent claims, developments insurance experts say could further drive up the cost of the already exorbitant premiums.

The rising cost of repairing cars has also added to the rise in premiums as insurers battle to offset the huge underwriting losses they have been making in the last couple of years.

Fraudulent claims

Ordinarily, insurers factor in the loss ratio when calculating premiums. Loss ratio is the amount of claims against premiums paid.

"This means that fraudulent claims have a big impact on the premiums paid because the higher the amount of money claimed, the higher the premiums," says Wahome.

The cost of car insurance has grown at its fastest rate, in large part due to a rise in fraudulent claims

The high premium rates have become yet another dent on motorists’ pockets coming at a time when the cost of fuel and spare parts is also on the rise.

Statistics from AKI show that the gross written premium by the industry was Sh64.47 billion compared to Sh55.19 billion in 2008, representing a growth of 16.8 per cent.

Kenyan insurers pay out on average 80 per cent of all premiums they collect from private motor vehicles in claims.

Insurers are warning that the cost of motor insurance could rise further as a result of the burgeoning cases of fraud.

"Insurers have been making huge underwriting losses, some estimates suggesting that for every Sh100 taken in premiums, Sh30-Sh40 is paid out in false claims," says an insurer who requested not to be named.

Cheaper insurance

Another costly form of insurance claims fraud that is growing in the country is referred to as "opportunistic retail fraud’. This is where individuals exaggerate or inflate genuine claims to increase the value of a payout.

The wave of insurance fraud has also drawn in individuals who provide false information and claim for non-existent personal injuries.

Other dishonest practices thought to be increasingly common also include drivers deliberately providing false information in applications to secure a cheaper insurance quotes.

Although Financial Journal couldn’t get the statistics, fraudulent claims make honest motorists pay extra money every year on their premiums.

"This is why insurers like Blue Shield are ramping up their crackdown to weed out the cheats. Anyone committing insurance fraud is more likely to get caught and will find future insurance and credit harder to obtain and more expensive."

There have been a few cases over the past two years in which insurers have successfully recovered substantial amounts from people who made false claims.

The insurers Financial Journal talked to were unable to put a figure on the amount the industry was spending on tackling fraud.