The country’s insurance industry consists of an estimated 7,000 companies, collecting more than $1 trillion in premiums each year, according to the latest figures from the Federal Bureau of Investigation (FBI). The law enforcement agency adds that because of its sheer size, the sector contributes significantly to the cost of insurance fraud by providing bigger opportunities and financial incentives to those committing illegal acts.
The Insurance Information Institute (III) defines insurance fraud as a “deliberate deception perpetrated against or by an insurance company or an agent for the purpose of financial gain.” Such illegal acts may be committed by applicants, policyholders, third-party claimants, and even the insurance brokers and providers themselves.
According to the institute, some of those who commit insurance fraud include:
Common acts of fraud these people perpetrate include “padding,” or inflating claims, misrepresenting facts on an insurance application, submitting claims for injuries or damage that never occurred, and staging accidents.
Although the impact of insurance fraud can be felt across the industry, some sectors are more vulnerable than others. Among the industries most affected by fraud, the III notes, are healthcare, workers’ compensation, and auto insurance.
Different insurance bodies and law enforcement agencies have different calculations on how much fraud is costing the industry, but there is one glaring similarity – all the figures are massive.
The Coalition Against Insurance Fraud (CAIF) estimated that acts of fraud cost US consumers at least $80 billion each year, with the workers’ compensation segment accounting for more than a third ($30 billion) of losses annually. Data gathered by the coalition also revealed that between 1.3 million and 2.1 million workers were “misclassified or doing cash-only work” each month in 2020. During that period, CAIF found that false and fraudulent claims cost the healthcare sector almost $3.1 billion. In addition, almost 8,900 cars were intentionally set on fire across the US, seriously denting the country’s auto insurance sector.
Read more: Fraud and overcharging driving up premiums
Data from the FBI, meanwhile, showed that non-health insurance fraud amounted to around $40 billion each year. The bureau added that the massive scope of the problem could set back the average US family between $400 and $700 per year in extra premiums.
Insurance fraud takes on different forms depending on the industry. Here are the most common types of fraud committed against various segments of the insurance sector, according to industry experts.
Premium leakage, or what analytics firm Verisk defines as the “omitted or misstated underwriting information that leads to inaccurate rates,” is among the most common and costliest acts of fraud in the car insurance sector. Recent modelling conducted by the company estimated that auto insurers lost at least $29 billion annually to what it called several “information failures and fraudulent practices.”
Topping the list was unrecognized drivers, which accounted for $10.3 billion of the overall losses. This was followed by underestimated mileage ($5.4 billion), violations and accidents ($3.4 billion), and false garaging to save on premiums ($2.9 billion).
The financial impact of premium leakage, however, is not limited to insurance providers. Verisk’s analysis showed that as much as 14% of all personal auto premiums can be attributed to the cost of covering premium leakage.
Another practice that cost the auto insurance industry huge sums is padded claims. According to III, this usually happens in no-fault states, where “unscrupulous medical providers, attorneys, and others” pad expenses associated with legitimate claims. One example is billing an insurer for a medical procedure that was not performed.
The institute also received reports of counterfeit airbags being used by unscrupulous auto body repair shops, which then obtain reimbursement from insurance companies for legitimate airbags.
The National Health Care Anti-Fraud Association (NHCAA) estimated that the financial losses incurred by the insurance industry due to healthcare fraud amounted to “tens of billions of dollars each year.” The association said a “conservative estimate” was that these losses accounted for 3% of the overall healthcare expenditure, but some government and law enforcement agencies place the losses to as high as 10% of the US’ annual health spending, meaning it could be worth more than $300 billion.
The FBI’s latest financial crimes report revealed the most prevalent types of fraud that plague the healthcare insurance sector. These include:
III also cited the prevalence of health identity theft, where criminals steal a victim’s name, health insurance number, and other personal data to defraud insurance providers by making false claims.
One of the most common acts of insurance fraud involving workers’ compensation, according to III, is employers misrepresenting their payroll or the type of work carried out by their employees to save on premiums. The institute also cited employers who apply for coverage under different names to avoid paying claims or detection of their poor claims record.
On the employees’ side, there are cases where claimants “over-utilize” medical care to keep receiving lost income benefits or seek compensation for a work-related injury that never occurred.
Disasters often provide an opportunity for fraudsters to file claims that are “exaggerated or completely false,” according to III. These include seeking payouts for an intentionally damaged property. Another example is contractor fraud, which involves using a person’s homeowners’ insurance to pay for unnecessary repairs.
“A contractor will begin the process by finding damages and then offer the homeowner a way to get them fixed for little or no cost,” the III said.
To protect insurers and their policyholders from falling victim to fraud, the insurance industry has collaborated with different industry bodies and state governments to help develop measures to detect false claims.
One product of this collaboration is the creation of a national fraud academy. A joint initiative of the American Property Casualty Insurance Association (APCIA), FBI, National Insurance Crime Bureau (NICB), and International Association of Special Investigation Units (IASIU), the academy is designed to combat insurance fraud by educating and training fraud investigators. It also offers online classes through the NICB.
In the auto insurance sector, meanwhile, five states – Florida, Massachusetts, New Jersey, New York, and Rhode Island – have implemented mandatory pre-insurance inspections – also known as Carco inspections referring to the company that provides the fraud monitoring equipment – before customers can purchase physical damage coverage.
According to the Carco Group, these photo inspections have uncovered about $1.8 billion in pre-existing auto damage in the state of New York alone between 2014 and 2018. This saved insurers about $128 million in false claims. The group added that for every dollar invested in pre-insurance inspections, $34 in false claims payouts were avoided.
In the healthcare segment, laws have been implemented to boost the industry’s fraud-fighting efforts. These include the Affordable Care Act of 2010 that allows the US Department of Health and Human Services (HHS) to exclude providers who lie on their applications from enrolling in Medicare and Medicaid, and the Improper Payments Elimination and Recovery Act, which requires agencies to conduct recovery audits for programs every three years and develop corrective action plans for preventing future fraud.
Additionally, the HHS and the Department of Justice established the National Fraud Prevention Partnership to combat healthcare fraud. The partnership involves private and public healthcare groups, and several industry bodies, including the National Association of Insurance Commissioners (NAIC), NICB and NHCAA. These organizations share information on claims from Medicare, Medicaid, and private insurance, which are then administered by a third-party vendor.
To prevent opportunistic fraud resulting from weather-related catastrophes, some insurance companies have turned to forensic meteorologists. According to III, these experts can accurately verify weather conditions for an exact location and time, allowing claims adjusters to validate claims and determine whether more than one type of weather element is responsible for damage. In addition, these professionals use certifiable weather records, meaning their findings are admissible in court.
