Insurance fraud is an act done to defraud an insurance process. It occurs when a claimant tends to get benefits that are not entitled to them or when an insurer knowingly denies some anticipated benefits.
Insurance fraud can be on both the seller and the buyer; from the insurer, it includes; selling policies from non-existent companies, failing to submit premiums, and churning policies to create more commission. Buyers’ fraud has; exaggerated claims, falsified medical history, post-dated policies, faked death, kidnapping, and murder.
According to the FBI of the United States, the most common fraud includes; Premium diversion, fee churning, assets diversion, and workers compensation fraud. This activity can be the insurance companies’ employees or claimants.
Insurance fraud has existed since the beginning of insurance as a commercial business. Insurers receive fraudulent claims and cost billions of dollars annually. Insurance crime severity ranges from slightly exaggerated claims to deliberately causing accidents or damages.
Fraudulent activities affect the lives of the innocent both directly or indirectly through accidents, intentional injury, or damages to crimes leading to higher insurance premiums.
Cost of Insurance Fraud
The FBI estimated that the cumulative cost of insurance fraud excluding health insurance is more than $40 billion per year.
Recent reports suggest that the percentage of fraud may double to 10 percent.
In a FRISS study insurance fraud report 2020, the impact of covid19 on health and digitization on insurance, respondents to an annual global survey believed that 18 percent of all claims on average contain an element of fraud, inflation, or misrepresentation.
This report also found that at a 2011 International Association of Special Investigation Units (ASIU) conference, investigators believed the proportion of fraud in global insurance claims to be 22 percent. Using all three measures would point to an estimate of fraud between $38 billion and $83 billion 9n average from 2019 to 2020.
The Coalition Against Insurance Frauds CAIF estimates that workers’ compensation insurance fraud alone costs insurers and employers $6 billion a year.
How Insurance Fraud Works
Insurance fraud is an act to exploit insurance contracts, and insurance is not meant to enrich the insured. It’s intended to protect against risk.
Insurance fraud by insurer dues takes place, although most cases have to do with the policyholder, exaggerating claims in attempts to gain more money, such as faking death or committing murder for the insurance money at comparatively rare.
One of the disadvantages of insurance fraud is that insurers pass on the increased cost of dealing with such issues to their customers in higher premiums.
Types of Insurance Fraud
Insurance fraud can occur during any stage of an insurance transaction by any parties involved in the transaction. This means that applicants, policyholders, third parties claimants, professionals who provide services to claimants, insurance brokers, or even companies may attempt to commit this insurance fraud.
Below are the most popular types of insurance fraud; knowing them can help avoid them and learn how to report them properly. They include;
- Application Fraud
This type of insurance fraud happens when you intentionally provide false information on an insurance application.
This is one of the most well-known types of insurance fraud as it’s a response for two-thirds of the life insurance claims alone, according to the Los Angeles Times.
This can involve any insurance; for instance, someone who provides false health information while applying for medical insurance or life insurance has committed application Fraud.
It’s important to understand that this only applies to intentional lying; people tend to get things wrong on their insurance forms, whether as a result of honesty, an estimate of the base, e.g., it’s not fraud to estimate your weight on a medical form, and yet it is wrong. It becomes fraud when you knowingly make a false claim.
- Illegitimate Denial Fraud
Insurance companies commit arguably the second most common form of insurance fraud. According to the Legal site, NOLO also known as “bad faith insurance practices”, defrauding activities on the part of the insurer include efforts.
Such as; denying reasonable insurance claims, denying coverage to an individual for specific conditions the company should cover, failing to investigate claims deliberately and adequately underpaying claims, sending patient bills for services their policy covers unambiguously, and deliberately sending confusing paperwork hoping the insured person to miss the fact that they have overcharged or denied fair coverage.
- False Claims Fraud
This type of insurance fraud covers the most extensive range of activities, like filing an insurance claim under pretense, E.g.
- Staging an accident or injury to file claims against someone’s insurance deliberately.
- Filling a claim for an accident, injuries, or other kinds of incidents that never actually happened.
- Filling a claim with false information.
- Intentionally causing damages to file a claim.
- Filing a claim for damages that never happened is expected in the wake of storms or natural disasters when people who have not been affected file a claim and hope the insurance company is too overwhelmed to investigate.
- Faked Death Fraud.
This is a specific type of insurance fraud, and it’s common for individuals to try to defraud life insurance companies by faking their death. When someone plays death and still fills a claim, it becomes a felony.
Often, in this plot, their beneficiaries file the claims, collect the money and share with the claimant. The fact is that it’s a lot harder to get away with faking your death, and if the beneficiary does kill the claimant, they lose the right to the money.
- Inflation Fraud
This might seem like nothing, but it’s a simple act of adding a little to the bill when filling the insurance claim. For instance, having the mechanic upgrade your car instead of repair or a doctor charging your health policy for a couple of tests he didn’t run.
Sometimes this type of fraud is Smallbore, so insurance companies turn a blind eye. Still, when someone is making a fender bender into a million dollars liability, then the company brings in investigators.
- Forgery and Identity Theft Fraud
People most of the time file an insurance claim under someone else’s insurance; this is most common with health insurance. Sometimes these are illegitimate claims for fair treatment.
It can also be a way to pocket cash, for instance, a criminal using the ID of an elderly medicare citizen to order medical equipment and resell it for profit.
- False Police Reports
Any accident which involves a vehicle should involve a report to the local police. The same goes with a property claim stolen, burnt, or intentionally damaged.
Most insurance requires a copy of a police report while making a claim. E.g., if your car gets stolen, report to the police to get the necessary paperwork before filing a claim for an insurance company.