What is insurance fraud?
Insurance Fraud has proven to be a big problem in the insurance industry. In our series on insurance fraud we will explore “Insurance Fraud, how it’s Defined & 7 Common Types of Fraud“, “How can Smart Systems help you prevent fraud” and finally we will give you five tricks to prevent fraud.
Insurance Fraud can be divided in two categories.
- Criminal Fraud is typically professionals trying to take advantage of the system.
- Cultural Fraud is a genuine claimant being opportunistic or exaggerating a claim.
Whether it is life, health, auto, property, or other types of insurance, fraud is criminal in nature, and regulated by both state and federal law.
Types of Insurance Fraud
According to The Coalition Against Insurance Fraud, (https://insurancefraud.org) “Insurance fraud is the crime we all pay for costing consumers more than $80 billion each year.” In their latest study, statistics show how insurance fraud (https://insurancefraud.org/fraud-stats/) impacts customer attitudes. Below is a summary of their most important findings:
“six out of 10 Americans believe fraud is higher than the year before”.
- Medicare fraud is estimated to cost $60 billion each year.
- The FBI estimates non-medical insurance fraud to be at least $40 billion every year.
- Property-casualty fraud steals about $30 billion each year.
- Cyber-fraud remains the highest risk for organizations. About 83% of respondents have seen an increase in these schemes, and 90% expect a further increase over the next year.
Unfortunately, fraud is common in the insurance industry. The FBI estimates that the total cost of insurance fraud in the United States is more than $40 billion per year. This number correlates to the increasing annual premiums of the average U.S. family’s insurance policies. There is an enormous amount of money at risk. Even worse, there are a lot of ways to commit insurance fraud.
According to the Reinsurance Group of America (https://www.rgare.com/knowledge-center/media/articles/modernizing-insurance-fraud-prevention), the insurance industry suffers from:
- Community fraud: actions of certain groups for whom life insurance fraud is, in a manner of speaking, a way of life.
- Anti-selection: refers to an applicant’s withholding of important medical or behavioral information.
- Ghost writing: an agent submits the insurance application in place of a terminated agent.
- Twist: A broker or agent replaces an existing policy with a new policy from the same carrier to generate additional commission revenue.
- Rebate: An agent, after commissions are paid out, refunds a portion of the premiums back to the applicant in the form of cash or in-kind items.
As you can see, fraud is a complex problem. A smart system can help detect and prevent fraud. Learn more about fraud prevention in part two and three of our insurance fraud series!