Insurance Fraud: Annual Accused Count

Insurance fraud is a deliberate deception perpetrated by or against an insurance company or agent for financial gain. It costs the US economy $308 billion annually, with the FBI estimating that the average family pays $400-$700 extra in premiums each year. Insurance fraud is committed by organised criminals, professionals and technicians, and ordinary people. The most common type of fraud is premium diversion, where an insurance agent or broker keeps policyholders' premium payments instead of sending them to the insurance company. Other common types of fraud include padding or inflating claims, misrepresenting facts on an insurance application, and staging accidents. To combat fraud, insurers are increasingly turning to technology such as predictive modelling, link analysis, and artificial intelligence.

Types of insurance fraud

Insurance fraud is a deliberate deception for financial gain, and it can be committed by applicants, policyholders, third-party claimants, or professionals who provide services to claimants. Insurance agents and company employees may also commit insurance fraud.

False or Inflated Claims

This involves submitting claims for injuries, damage, or theft that never occurred, or exaggerating the extent of the damage or injury to receive a higher payout. This can include false or inflated theft repair claims, false or inflated property damage claims, and false or inflated burglary or theft reports.

Staging Accidents

This involves deliberately causing damage to property or vehicles to receive insurance payouts. It can also include staging accidents that never happened or falsely reporting the circumstances of an accident to get coverage.

Unnecessary or Expensive Services

This type of fraud involves billing for services that were not provided, providing and billing for unnecessary services, or billing for a more expensive service than what was actually provided. It also includes upcoding, which is billing for a service or item using a code that yields a higher payment than what was actually provided.

Misrepresentation

This involves misrepresenting facts on an insurance application or providing false information to a consumer to persuade them to purchase a new policy. It can also include misclassifying employees' job codes or payroll to obtain lower premiums.

Fraudulent Disability Claims

This type of fraud involves submitting fake disability claims or forging documents to fraudulently continue receiving disability benefits.

Premium Diversion

This is the most common type of insurance fraud and involves embezzlement of insurance premiums. It can involve an insurance agent failing to send premiums to the underwriter and instead keeping the money for personal use, or selling insurance without a license and then not paying out claims.

Asset Diversion

This type of fraud involves the theft of insurance company assets, usually during an acquisition or merger. It often involves borrowing funds to acquire control of an insurance company and then using the company's assets to pay off the debt, diverting the remaining assets for personal use.

Workers' Compensation Fraud

This includes both claimants and employers committing fraud. Claimants may exaggerate symptoms, claim a non-work-related injury as work-related, or work while collecting benefits. Employers may under-report payroll or the number of employees to obtain lower premiums, misclassify employees' job codes, or fail to carry the required workers' compensation insurance.

Healthcare Fraud

This involves providers billing for services not rendered, performing unnecessary or excessive services, abuse and resale of prescription drugs, and medical identity theft.

Salvage Fraud

This involves selling vehicles that have been damaged by flooding as if they were regular used cars, without disclosing the true nature of the damage. It can also include using counterfeit parts, such as airbags, to obtain reimbursement from insurance companies.

How insurance fraud is committed

Insurance fraud is a deliberate deception committed against or by an insurance company, agent, adjuster, or consumer for financial gain. Fraud may be committed by applicants, policyholders, third-party claimants, or professionals who provide services to claimants. Insurance agents and company employees may also commit insurance fraud.

The most common type of insurance fraud is premium diversion, which involves embezzling insurance premiums. An insurance agent may fail to send premiums to the underwriter and instead keep the money for personal use. Another common scheme involves selling insurance without a license, collecting premiums, and then not paying claims.

Another type of fraud is fee churning, where a series of intermediaries take commissions through reinsurance agreements, reducing the initial premium until there is no money left to pay claims. The company left to pay the claims is often a business set up to fail by the conspirators.

Asset diversion is the theft of insurance company assets and occurs almost exclusively in the context of an acquisition or merger. The subject will often acquire control of an insurance company with borrowed funds, then use the assets of the acquired company to pay off the debt, diverting the remaining assets to themselves.

Some entities purport to provide workers' compensation insurance at a reduced cost and then misappropriate premium funds without ever providing insurance.

Other common types of insurance fraud include:

• "Padding" or inflating claims
• Misrepresenting facts on an insurance application
• Submitting claims for injuries or damage that never occurred
• Staging accidents
• Upcoding services and medical items to yield a higher payment
• Filing duplicate claims
• Unbundling, or billing in a fragmented fashion for tests or procedures that should be billed together at a reduced cost
• Performing excessive or unnecessary services and potentially offering kickbacks
• Abuse and resale of legal narcotics and other prescription drugs
• Medical identity theft, where criminals steal victims' personal data or insurance information
• False or exaggerated claims by policyholders
• Misclassification of flood damage as wind, fire, or theft
• Bid-rigging by contractors, who falsely inflate the cost of repairs
• Contractors requiring upfront payment for services and then failing to perform the repairs
• Charity fraud scams designed to misappropriate funds donated for disaster relief

Insurance fraud can be categorized into two types: hard fraud and soft fraud. Hard fraud occurs when a policyholder deliberately destroys property to collect on the insurance policy. Soft fraud, which is more common, occurs when a policyholder exaggerates an otherwise legitimate claim or omits/lies about information on an application to obtain a lower premium. Soft fraud is often considered a crime of opportunity.

Who commits insurance fraud

Insurance fraud is committed by a wide range of people, from organised criminal gangs to professionals, technicians, and ordinary individuals. Fraud can be perpetrated against or by an insurance company or agent, and it can occur at different stages of the insurance process, including buying, using, selling, or underwriting insurance.

Organised criminal gangs are often responsible for large-scale insurance fraud, stealing significant sums through fraudulent business activities. These groups may stage auto collisions, for example, by employing tactics such as the "sudden stop" or "swoop and squat" to cause accidents and then make false insurance claims. Criminals often target vulnerable groups, including seniors, recent immigrants, and small businesses.

Professionals and technicians can also be involved in insurance fraud by inflating service costs or charging for services not rendered. This can include unscrupulous medical providers, attorneys, auto body repair shops, and other professionals who pad costs or bill for unnecessary or fictitious services.

Ordinary people may also commit insurance fraud by exaggerating or padding legitimate claims, misrepresenting facts, or staging accidents to cover their deductible or make some extra money. Some individuals may not even realise that their actions constitute fraud, viewing exaggeration as part of the negotiating process or feeling justified in lying to an insurance company because they want something in return for their premiums.

Additionally, insurance company employees and agents can engage in fraud by embezzling or misappropriating funds, collecting premiums for bogus policies, or failing to send premiums to the underwriter and instead keeping the money for personal use.

The motivation for insurance fraud varies, but it often stems from the opportunity to gain financial benefits illegitimately. The massive size of the insurance industry, with over 7,000 companies and $1 trillion in premiums collected annually, provides ample opportunities and incentives for fraudulent activities.

The cost of insurance fraud

Insurance fraud is a costly issue that affects both insurance companies and consumers. The total cost of insurance fraud is estimated to be over $40 billion per year, with the average US family paying between $400 and $700 in additional premiums. This figure includes fraud across several liability areas, such as life insurance, property and casualty insurance, workers' compensation, and auto theft. Auto insurance fraud alone costs insurers at least $29 billion a year due to premium leakage, which occurs when omitted or misstated underwriting information leads to inaccurate rates.

The COVID-19 pandemic may have also contributed to the rise in insurance fraud, as technological innovations and the shift to a remote environment provided new opportunities for fraudulent activities. Organized crime groups have become more sophisticated, transitioning from physical threats to digital fraud, and even receiving sponsorship from state actors in some cases. Furthermore, fraudsters have become more adept at exploiting vulnerabilities in the system, such as using counterfeit parts for repairs or misrepresenting facts on insurance applications.

To combat insurance fraud, insurance companies and government agencies have implemented various measures. These include the use of technology, such as predictive modelling, link analysis, and artificial intelligence, to detect fraudulent claims. Additionally, the National Association of Insurance Commissioners (NAIC) created the Online Fraud Reporting System, allowing consumers and insurance departments to report suspected fraud electronically. The FBI and other law enforcement agencies also play a crucial role in investigating and prosecuting insurance fraud, with the FBI receiving over 70 indictments and 60 guilty pleas in a Katrina-related fraud case.

How to prevent insurance fraud

Insurance fraud is a serious problem that has gained increasing attention in recent years. It is a deliberate deception perpetrated against or by an insurance company or agent for financial gain. The cost of insurance fraud (non-health insurance) is estimated to be more than $40 billion per year in the US, with health insurance fraud costs being much higher. This means that insurance fraud costs the average US family between $400 and $700 per year in the form of increased premiums.

To prevent insurance fraud, here are some measures that can be taken:

• Public Education: Increasing public awareness about insurance fraud and its consequences can help people recognize and report it to the authorities. Pennsylvania's statewide public fraud awareness advertising campaign, for example, has led to a 26% increase in public reporting of insurance fraud since 2008.
• Aggressive Criminal Prosecutions: By enforcing strict penalties, such as jail time, probation, fines, and restitution, individuals may be deterred from committing insurance fraud. In Pennsylvania, public education and aggressive prosecutions have been cited as the most effective means of stopping and preventing insurance fraud.
• Improved Technology: Adopting data technologies and advanced analytics can help cut down the time needed to recognize fraud. Predictive modelling and link analysis, for instance, can examine the relationships between people, places, and events, aiding in fraud detection.
• Special Investigation Units (SIUs): Most insurers have established SIUs, which consist of trained investigators, including former law enforcement officers, attorneys, accountants, and claim experts. These units help identify and investigate suspicious claims.
• National Fraud Academy: Insurers have created a national fraud academy, a joint initiative of the American Property Casualty Insurance Association (APCIA), the FBI, the National Insurance Crime Bureau (NICB), and the International Association of Special Investigating Units. This academy educates and trains fraud investigators to combat insurance claims fraud.
• State and Federal Legislation: All states in the US have enacted laws that classify fraud as a crime and provide immunity for reporting insurance fraud. Additionally, federal laws such as the Racketeer Influenced and Corrupt Organizations Act (RICO) and the Health Insurance Portability and Accountability Act of 1996 make insurance fraud a federal crime under certain circumstances.
• Consumer Vigilance: Consumers should be vigilant and report suspicious activities to NICB or law enforcement agencies. They should also be cautious when purchasing insurance, ensuring that the insurer is authorized and regulated by the state.
• Collaboration and Information Sharing: Collaboration between public and private organizations, such as the National Fraud Prevention Partnership, allows for information sharing and a coordinated response to combat health care fraud.

Frequently asked questions