Insurance Fraud and its RamificationsJune 9, 2019
Insurance fraud is any act committed by a policyholder, insured or policy beneficiary with the sole purpose of fraudulently obtaining money from an insurance company. Insurance fraud has existed ever since the beginning of insurance as a commercial enterprise. Fraudulent claims account for a significant portion of all claims received by insurers, and cost huge amounts of money yearly, worldwide.
There are many types of insurance fraud, and they occur in all areas of insurance; from slightly exaggerated claims to deliberately causing accidents or destruction to the subject matter of insurance. Fraudulent activities also have an impact on the lives of innocent people, both directly through accidental or purposeful damage or harm, and indirectly as these crimes cause insurance premiums to go up. Insurance fraud poses a lot of problems to the society, and governments and organizations the world over have been making efforts to fight such activities.
Causes of Insurance Fraud
The main motive in every insurance crime is financial gain. Insurance contracts provide both the insured and the insurer opportunities for exploitation. A good example of such opportunity is when there is over-insurance whereby the sum insured is greater than the actual value of the property insured. This problem can be very difficult to avoid, especially since an insurance provider might sometimes encourage it to be able to earn higher premiums. This enables fraudsters to make gains from the insurance contract by destroying their property because the payment they will receive from the insurance company is of greater value than the real value of the property they destroyed.
Insurance companies are also susceptible to fraud because false insurance claims can be made to appear like genuine claims. This enables fraudsters to make claims for loss or damage that never occurred, and so obtain payment with little or no cost to them. The most common form of insurance fraud is the inflation of loss amounts.
Losses Due to Insurance Fraud
It is virtually impossible to find out the exact value of money lost through insurance fraud. Insurance fraud is not easily detectable, unlike noticeable offences such as armed robbery or murder. Therefore, the number of insurance fraud that has been discovered is much less than the number of acts that are in fact committed. The best that can be done is to estimate the losses that insurance companies suffer from insurance frauds. The Coalition Against Insurance Fraud estimates that about $80 billion is lost in the United States to insurance fraud annually. Also according to estimates by the National Insurance Crime Bureau, insurance fraud accounts for about 10% of property and casualty insurance incurred losses and loss adjustment expenses.
The National Health Care Anti-Fraud Association estimated that about 3% of the healthcare industry’s expenditures in the United States were due to fraudulent activities, amounting to a cost of about $51 billion. Other estimates attribute as much as 10% of the total healthcare spending in the United States to fraud – about $115 billion annually. In the United Kingdom, the Insurance Fraud Bureau estimates that the loss due to insurance fraud in the United Kingdom is about £1.5 billion, causing a 5% increase in insurance premiums. In Nigeria, and many other developing countries, there are no reliable statistics on how much is lost by insurers as a result of fraudulent claims, but it is generally believed that such losses would be very huge.
Types of Insurance Fraud
Insurance fraud can be classified as either “hard fraud” or “soft fraud”.
- Hard fraud occurs when someone intentionally causes a loss, such as a collision, auto robbery, or fire that is covered by their insurance policy in order to receive payment for the destruction. Criminal rings are occasionally involved in hard fraud that can steal huge amount of money.
- Soft fraud, which is a lot more common than hard fraud, is sometimes generally referred to as opportunistic fraud. This type of fraud involves policyholders exaggerating what is otherwise legitimate claims. For instance, when involved in a collision, an insured person might claim more damage than what was really done to his or her car. Soft fraud can also occur when, while obtaining a new insurance policy, a person misreports earlier or existing conditions to be able to secure a lower premium on their insurance policy.
Fraud in Life Assurance
A good example of life assurance fraud is the John Darwin disappearance case. John Darwin, a former British teacher and prison officer, was reported “missing” in a canoeing accident on March 21, 2002 when he failed to report to work after the incident. However, he reappeared alive, five years after, on December 1, 2007 after he was thought to have died. Darwin claimed to have had no memory of the past five years.
Fraud in Healthcare Insurance
The most common perpetrators of healthcare insurance fraud are the healthcare providers themselves. According to Prof. David Hyman of the University of Maryland School of Law, the historically prevailing attitude in the medical profession is that of “fidelity to patients”. This incentive can lead to fraudulent practices such as billing insurers for treatments that are not covered by the patient’s insurance policy. To do this, physicians often bill for a different service, which is covered by the policy, than that which was rendered.
Another motivation for insurance fraud in the healthcare industry, as in all other forms of insurance scams, is the desire for financial gain. Medical professionals use several deceptive techniques to achieve this end. These can include:
- Billing for more expensive treatments than those actually provided
- Providing and eventually billing for treatments that are not medically necessary
- Scheduling extra sessions for patients
- Referring patients to another physician when no further treatment is really necessary
- Billing for services not rendered
- Billing for services to members of the family or those who are accompanying the patient but who did not personally obtain any services
- Performing unnecessary services or charging for more expensive services than actually provided
- Employing a “runner” to bring in motor vehicle accident victims for treatment
- Prescription fraud
Fraud in Automobile Insurance
It is estimated that about 21% to 36% of auto-insurance claims contains elements of suspected fraud. There’s a wide variety of techniques used to defraud vehicle insurance providers. These ploys may vary greatly in complexity and severity.
According to Insurance Fraud Bureau of Massachusetts, the most frequent types of automobile insurance fraud include:
- Staged auto accidents with faked reports of injuries
- Jump-in passengers who are added to the claim and/or accident report but were not in the vehicle at the time of the accident
- Exaggerated injury claims with prolonged treatment
- False reports of auto theft
- Vehicle damage enhanced after the accident
- Vehicle damage claims for pre-existing damage
- Vehicle is garaged in another town than listed on the policy
- Reports of falsified claims that occurred before the policy period began
- False report of a hit-while-parked accident
Fraud in Workmen’s Compensation Insurance
This form of insurance fraud comes in two forms, namely, claimant fraud and premium evasion fraud; and the most frequent types of each are given below.
1. Examples of Claimant Fraud
- Staged accident at work with a falsified report of injuries
- Working while collecting workers’ compensation benefits
- Exaggerated injury claims with prolonged treatment
- Report of a pre-existing or non-work related injury
2. Examples of Premium Evasion Fraud
- Company mis-classifies employees on payroll (such as classifying roofers as office workers)
- Company understates its payroll to reduce workers’ compensation premium payments
- Company claims employees are independent contractors
- Company fails to carry workers’ compensation insurance
- Company re-incorporates to avoid accurate modification classification
- Company pays for medicals directly to hide a potential claim
Fraud in Property Insurance
This can include obtaining payment that is worth more than the value of the property destroyed, or to destroy and subsequently receive payment for goods that could not otherwise be sold. According to Alfred Manes, the majority of property insurance crimes involve arson. One reason for this is that any evidence that a fire was started by arson is often destroyed by the fire itself.
The most frequent types of property insurance fraud include:
- False report of theft of property in a home or vehicle
- Exaggerating the value of stolen items or submitting falsified receipts for items reported
- Intentionally damaging property
- Inflating the estimate or bill to cover the policy deductible
- Concealing that the residence is used as a rental
Insider Insurance Fraud
Insurance fraud does not end with the policyholders, insured or claimants. Oftentimes, employees of insurance organizations also get involved in the act. According to the Insurance Fraud Bureau, the most frequent types of insider fraud include:
- Agents issuing authorized or unauthorized policies with premium billed and retained by agent
- Insurance company personnel creating fictitious claims in order to issue checks to themselves or others in complicity with them.
Insurance fraud continually takes more money each year than it did the the previous year from insurers and the insurance buying public. How can insurers fight back against this pervasive crime? This post, and the below infographic, try to provide some answers.