Fidelity guarantee insurance
– an absolute necessity for businesses
The socio- economic situation in South Africa has caused many job losses. With breadwinners struggling to feed their families, many are forced, in the absence of a regular income, to turn to crime in desperation and in the hope of not being discovered.
But the unemployed are not the only ones who resort to crime. Some employees turn to crime to enrich themselves, by misappropriating from their employers. Then, there are those who, in order to maintain a certain standard of living or, as the saying goes, “to keep up with Joneses”, have to supplement an insufficient income.
There are also those who struggle with an addiction and cannot afford a habit that needs feeding, be it alcohol, drugs or gambling. Eventually desperate and with no way out, they turn to illicit solutions, generally pilfering from their employers. Inevitably they are caught and land up with a criminal record. In an attempt to mitigate against these losses, employers generally insure and claim under a fidelity guarantee policy. But, as the morals, values and principles of both white and blue collar workers of South Africa have steadily deteriorated, so has the cost of, and difficulty risen, in obtaining fidelity cover.
The purchase of fidelity guarantee insurance has traditionally been a means of comfort and peace of mind to employers which they gain from transferring the risk to their insurer. Whether there is the theft of cash, stock or goods by employees, employers can be reimbursed for their losses by their insurer.
In former years it was the exception rather than the rule to purchase fidelity guarantee insurance. The premiums were low and terms not prohibitive because there was not a great demand for this insurance. A laborious procedure by insurers preceded the placing of such cover. Insurers often required references from previous employers, family and friends for employees joining a company; or from schools and church leaders for those leaving school who were joining the workforce for the first time.
Cover was usually required only for employees in a responsible position such as cashiers, bookkeepers, accountants and for those who made deliveries in vehicles and who could be acting nefariously in collusion with other employees.
Over the years and in more recent times, theft, fraud, corruption and dishonesty by employees has become a great concern of employers. Premiums charged for, and terms for the provision of fidelity guarantee insurance by insurers and reinsurers alike have become increasingly onerous and many employers have been forced to self- insure for this class of insurance. However, self- insurance also comes at a price. Employers are forced to take very stringent and often costly security measures, to prevent losses.
Responsible employees, such as risk managers, must be engaged to monitor banking procedures and the reconciliation of bank statements; to ensure regular stock taking in stores and departments of stores; to perform spot checks on a regular basis; and to ensure regular auditing of records both internally and by independent auditors at least annually. Insurers require submission of fully completed proposal forms which convey to them how employers conduct their businesses, especially the measures they take to prevent theft, fraud, corruption and dishonesty by their employees. With the information technology explosion of the past few decades and the utilisation of computerised systems, the challenge to insurers to keep abreast of the companies they insure is likewise burgeoning.
To alleviate the associated increase in risk, insurers must now insist on being provided with an in- depth insight into the modus operandi of the IT departments of their prospective clients so that they may assess whether the checks and balances that are in place to avoid computer fraud are adequate. All of these factors have contrived to increase the risk associated with fidelity cover and, in the absence of a commensurate improvement in internal controls and risk management generally of employers, to drive up the cost fidelity cover.
However, with rising crime rates, modern businesses have no choice but to purchase fidelity guarantee insurance even though the premiums may appear to be exorbitant and the terms onerous.
Jimmy Fermor risk administrator at Renasa Insurance Company Ltd