Insurance fraud is far more prevalent than most companies realize, accounting for significant fraud losses to insurance companies - and American citizens.
Insurance companies have a lot to lose. According to the Coalition Against Insurance Fraud, insurance fraud in the United States amounts to $308.6 billion annually in fraud losses. But the impact doesn’t stop there. The fact is, insurance fraud has a far greater impact than the immediate fraud losses; it also means increased premiums, inflating costs for applicants in the future and putting insurance out of reach for many consumers.
To help companies navigate insurance fraud threats, we cover the following:
Let’s start by learning what insurance fraud is and the main industries affected.
Insurance fraud is any attempt to defraud an insurance company. This can be done by both buyers and sellers, and can be done in almost any insurance industry, including life, health care, property, and unemployment. Surprisingly, insurance fraud is most commonly committed by sellers.
For buyers, insurance fraud typically involves misrepresenting information on an application (premium fraud) or making false or exaggerated claims.
For sellers, it involves collecting premiums and never providing a policy to the applicant. Common methods include premium diversion, fee churning, and asset diversion.
Hard vs Soft Insurance Fraud
Before we explore the various types of insurance fraud and how they’re carried out, we need to look at the two main categories of insurance fraud.
Hard Insurance Fraud
Hard fraud involves entirely false insurance claims where the claimant either entirely fabricates a claim or intentionally inflicts damages that will lead to an insurance payout.
Hard insurance fraud is intentional, requiring significant planning and pre-meditation. The criminal engages in the process intending to commit fraud from the beginning. While the criminal may stage a genuine accident, there is nothing legitimate about this process, and it is done entirely for the purpose of making a fraudulent claim.
For example, a fraudster could make an entirely false claim of damage to their vehicle or intentionally crash it to make an insurance claim. Sometimes, the fraudster may enlist help to justify or validate their claim. In most cases, the insurer will want proof of damages and proof of repair costs; which will be a problem for a fraudster that has entirely fabricated their damages claim. However, if they have a mechanic in on their scheme, the mechanic can provide a false damage report and even claim that they repaired the vehicle. This adds legitimacy to the fraudster's claim, and helps them conduct the fraud undetected.
Soft Insurance Fraud
Soft fraud involves exaggerating legitimate insurance claims to increase their payout amounts or misrepresenting information on an application to obtain lower premiums.
Soft fraud is often considered a crime of opportunity. Some of these criminals may not even realize that what they do is fraud.
The participants aren’t seeking this out or planning this intentionally from the beginning; or at the very least, they are not initiating the entire process with the intent to defraud the insurer. They start with a legitimate claim, and at some point in the process, believe they have the means - and therefore an opportunity - to make more money than they are entitled to.
Some examples of soft insurance fraud would be: if an insured had a collision with their vehicle, but they claimed pre-existing damages were part of this incident; if an insured was robbed, and they claimed items were stolen that never were, or inflated the value of stolen items; if the insured misrepresented current or past medical issues on a life insurance policy to get a reduced premium.
Regardless of the category of insurance fraud your organization faces, preventative efforts are essential to minimize the impact. When looking to stop each category of fraud, it’s essential to understand the main differences. Typically, hard fraud requires preparation and planning, and may even need the help of another party to legitimize their claims. Soft fraud is often a crime of opportunity; the claimant is simply taking advantage of the opportunity at the time.
Hard fraud often has higher consequences for insurers on a case-by-case basis, as these are entirely fraudulent claims. This means that the entire claim amounts to fraud losses. With soft fraud, lower values are being tacked on to an existing claim, so the losses per case are less substantial. However, when compounded, these claims can have a significant impact on an insurance company’s fraud losses.
The fact is, insurance fraud can be committed in a variety of ways by both buyers and sellers. Because of this, it can be challenging to know what constitutes insurance fraud.
To help you understand what is (and isn’t) insurance fraud, we explore some examples below. The following are all examples of instances of insurance fraud:
- Misrepresenting or falsifying information on an insurance application
- Misrepresenting or falsifying information on an insurance claim
- Staging an accident or injury to make a claim
- Claiming existing automobile damage as part of a new accident
- Filing a claim for health care after the injured party has already recovered
- Selling insurance products from illegitimate or fake insurance providers
- Embezzling insurance premiums without ever paying them toward the policy
The fact is, there are many ways insurance fraud can be committed. This is not only because there are many different industries with unique weaknesses, but also because insurance fraud can be committed by both the buyer and seller.
There are a multitude of different insurance products available to consumers, including life, health care, automobile, property, and more. Insurance policies - regardless of the industry - operate similarly, so prevention efforts can be handled using many of the same tactics.
However, each industry faces slightly different fraud tactics based on the differences in insurance policies. This is because fraudsters operate differently depending on the type of insurance they are exploiting.
Below, we explore how insurance fraud differs based on the different industries.
Health Care Insurance
Any attempt to fraudulently obtain health care benefits by misrepresenting or concealing information constitutes health care insurance fraud. This can be done by the insured, by making false health benefits claims, hiding pre-existing health conditions on an application, and using false claims to gain access to drug prescriptions. This can also be done by physicians, by billing for falsified services, exaggerating the true cost of work done, providing services without a valid or active medical license, and overcharging customers.
In extreme cases, the insured can stage an accident (and the damages and injuries that go with it). The accident is ‘real,’ in the sense that an accident does happen. However, it’s not a legitimate accident as it’s been intentionally committed by the insured.
Property insurance involves falsely claiming, staging, or exaggerating claims for damaged property. This can be done to inflate the value of a claim, but it can also involve damaged items that could otherwise not be sold, in order to receive a payout. Many of these claims involve arson, as fire damage destroys evidence that would prove the insurance claim was staged.
Any attempt to gain unemployment benefits that an insured is not entitled to amounts to unemployment insurance fraud. The insured can entirely fabricate their unemployment status or simply claim they were unemployed for longer than they actually were.
Despite the fact that insurance industries offer very different products, the way that insurance products work means that they share many similarities across industries- similarities that fraudsters exploit in much the same way. Since all insurance policies are paid via premiums and are paid out via claims, fraudsters conduct insurance fraud using many of the same methods.
Below, we cover some of the most common insurance schemes to look for, regardless of the type of insurance being offered. To make it easier, we break down the types of fraud based on who the perpetrator is - the buyer or seller.
Insurance fraud committed by insurance buyers is often the first type of insurance fraud that comes to mind. Buyers can do this in a number of ways, including making entirely false claims, exaggerating legitimate claims, and lying for lower premiums.
The fact is, both hard and soft insurance fraud have devastating monetary consequences on organizations. Not only that, but this also affects the overall market, driving up premium costs for other consumers.
Below, we cover a few of the main ways buyers commit insurance fraud.
The insured makes an entirely false claim in order to receive an insurance payout. The claim submitted to the insurance provider is entirely fabricated for financial gain.
False claims can be filed in almost any insurance industry, including life, automobile, property, and unemployment. These can range from simple claims of minor property or automobile damage, and escalate all the way up to staged deaths for life insurance claims.
False claims can also be staged with the intent of receiving an insurance payout. In this case, there is an accident, but it’s been staged intentionally by the insured. These cases often involve falsifying or exaggerating the true damages from the incident. For example, an insured could stage an automobile accident, and claim injuries or damages to their automobile.
In some cases, fraudsters will employ others to legitimize their fake claims. For example, someone claiming an automobile accident may have a mechanic falsify documentation backing up repairs that were never done, have a police officer file a false damage report, or have a doctor document injuries that were never sustained. In most cases, additional parties aiding the fraudster are being monetarily compensated for participating in the scheme.
The insured exaggerates a legitimate claim, inflating the true damages they suffered for a higher insurance payout. The initial claim is real, but not all of the claims in it are legitimate.
Exaggerated claims can be filed in most insurance industries, including life, automobile, and property. The insured claims more damages or injuries than actually occurred to gain an inflated return on the insurance payout.
Let’s look at a couple of examples to illustrate:
- An insured gets in a completely legitimate automobile accident. When they file their damages claim, they report pre-existing damage to their vehicle. When they report injuries, they claim they have personal injuries that are greater than what they truly experienced.
- An insured is claiming unemployment insurance. They go back to work, but still claim unemployment for 3 months to get the unemployment insurance benefits.
Since the initial claim is legitimate, it can be difficult to know what is an exaggerated claim. Insurance companies will need reliable investigation tools that empower them to analyze claims for potential fraud. This includes validating documentation from claimants, and ensuring that information regarding their claim is truthful and legitimate.
The insured provides false or misleading personal information when applying for insurance to get a lower premium or to receive insurance benefits they wouldn't normally be eligible for.
This can be done in many different insurance industries, but it’s commonly done in the life insurance and health care insurance industries. In all cases, it occurs at the application stage; with the applicant misrepresenting or outright lying about personal information to get a reduced premium or qualify for a product they wouldn’t otherwise qualify for.
For example, an insured could attempt to receive lower insurance premiums by lying about pre-existing medical conditions, medications they are taking, their annual income, and other personal details. They can also lie about these things to qualify for products they otherwise wouldn’t qualify for. An applicant may lie about a pre-existing heart condition or previous medical history to qualify for a critical illness policy.
Companies can be responsible too; organizations may deflate the number of employees they have to get a lower premium on their group policy.
This type of fraud is so popular because certain versions of it are extremely easy to perform. Some of these criminals may not even realize what they are engaged in is actually fraud.
The fact is, premium fraud is extremely challenging to identify - and even harder to prove definitively. It’s extremely important to verify the personal information being submitted when the customer submits their application. It’s also imperative that a thorough investigation is conducted for any claim being submitted to validate its legitimacy.
Buyers are typically the first threat that comes to mind when you think of insurance fraud, but that’s not the only - or even the largest - threat organizations face. Insurance fraud can also be conducted by the sellers, and their position on the inside makes it increasingly challenging to detect and prevent this type of fraud.
Seller insurance fraud can have a devastating impact on not only the organizations but the consumers as well. This can also have a significant impact on an organization's reputation, even if it’s really one individual operating on their own accord. Consumers that think they have coverage can’t call on it when they need to - often at a time when they rely on this support the most.
Below, we look at some of the ways that sellers commit insurance fraud:
The insurance agent (or someone impersonating an insurance agent) collects premiums paid by a customer. When it’s a legitimate agent, the insurance agent simply collects the premium and fails to pay the client’s policy.
Surprisingly, this is the most common type of insurance fraud; more so than any type perpetrated by buyers. It can be rather lucrative, as insurance needs to be purchased through an insurance agent.
Many victims don’t realize they don’t have an active policy until it’s time to make a claim. There is also often very little recourse for victims, as the company has no record of a policy or application.
A lot of this responsibility lies with the customer. It’s vital that insurance customers ensure that they are dealing with a legitimate insurance agent. If the agent is using aggressive sales tactics, offering premiums that seem far below the competitors, or only taking suspicious payment methods, it could be a sign that they aren’t a legitimate agent. The agent should provide proof of payment, and the insured should record any premiums paid.
An insurance broker repurchases a new insurance policy or processes a reinsurance agreement with another provider, resulting in additional commissions. This process is repeated until no funds are left to pay the policy. Essentially, the insurance agent or broker extracts commissions, with no money going to a policy. The ‘insured’ never gets a real policy, and instead, the brokers get all the money paid.
Insurance companies looking to prevent this type of fraud must monitor transactions and agent behavior. An unusually large number of reinsurance agreements or replacement insurance policies could signal potential fee churning. Providing clear documentation to clients about insurance agent responsibilities, typical conduct, and more can help protect organizations from this type of fraud. When customers know how their agents are supposed to act, it’s easier for them to identify suspicious behavior.
In asset diversion, an insurance company's assets are wrongfully diverted or stolen. In most cases, this fraud is committed internally, as someone on the inside has access to the assets.
Oftentimes, this fraud can be facilitated because of an acquisition or merger, in which assets will be moved or reappropriated. Fraudsters within the company take advantage of the situation and divert - our outright steal - assets.
This can have a significant financial impact on a business, not just through loss of assets, but potentially through service failures or shortcomings due to the lost assets. If funds are misappropriated in this way, insurance companies may go bankrupt or fail to fully meet their responsibilities, such as paying out claims.
Detecting and preventing insurance fraud comes down to knowing when in the process fraud occurs and what schemes fraudsters use.
Typically, insurance fraud is done during three main points in the customer lifecycle: during the application stage (in the form of premium fraud, fee churning), at the point of the claim (in the form of false or exaggerated claims), or when premiums are being collected (in the form of premium diversion).
To actually catch and stop fraud, organizations need to look at how fraudsters commit these crimes, and then establish preventative measures. Below, we look at the top ways to prevent insurance fraud of all types and across all industries.
Insurance companies need to develop clear policies for team members to follow. These should establish the principles that guide the organization's decision-making and risk management process, but should also clearly define the procedures that team members need to follow to perform tasks.
Provide instructions that explain how team members should handle different cases and how they should address different types of suspicious behavior. It’s crucial that this policy is written - and easily accessible to all team members so they can perform their roles to the proper standard.
One of the first steps organizations need to take to prevent insurance fraud is to verify the customer - and their information - from the beginning of their relationship. From the point of their application, insurance companies need to make sure an applicant isn’t falsifying information - or worse, their identity.
Before a policy is issued, insurance companies need to verify their customer is who they claim to be. This means performing proper customer due diligence and KYC procedures that verify personal information and documentation. Essentially, you want to make sure that any customer you do business with is a legitimate person, and that their identity matches the information they are providing.
But it doesn’t stop there in insurance; not only do you need to verify the customer, but also all information related to the insurance policy they are applying for. Since applicants will misrepresent - and sometimes outright fabricate - details about themselves (including their personal information, medical records, income, and more), it's vital that organizations verify this information before approving and issuing a policy.
The age-old adage “Trust, but verify” rings so true in the insurance industry, it may as well have been written specifically for it.
Many insurance fraud schemes occur at the point of the claim - whether the claim is entirely false or simply exaggerated. To make sure these fraudulent claims aren’t going undetected, it’s important that claims are thoroughly investigated. The claim itself and any supporting documentation (such as receipts, bills, health records, medical fees, damage reports, police reports, etc.) should be reviewed and validated before a claim is processed.
It’s not enough to check that the claim is real; organizations need to examine whether the extent of the claims are reasonable for the case.
Investigators need to be looking for fabricated claims, as each case has a high cost associated with it. But investigators need to be just as diligent against exaggerated claims as well. While each individual case may not lead to significant fraud losses, when tallied up, insurance companies can be suffering significant losses to this type of fraud.
Policy changes can be great indicators of insurance fraud, as certain behavior often precipitates insurance fraud.
To detect insurance fraud conducted by the insured, you’ll want to authenticate any documentation submitted that would result in a policy change. If the insured submits new medical records, a change in income, or an update to their employment status, they should provide documentation that validates this. The insurance company should then verify that this documentation is legitimate and that the policy change is warranted.
Activity and event monitoring tools are ideal for tracking changes to their account, including changes to their password, contact information, or address. These changes can be indicators of Account Takeover Fraud (ATO), especially if they are followed by attempts to transfer the insurance policy, alter how the policy will be paid out, change the beneficiary, or make a claim.
Monitoring policy changes isn’t just great for looking for insurance fraud committed by buyers; it’s actually one of the best ways to monitor for insurance fraud committed by sellers.
Changes to policies should include a record of the client’s instructions to authorize the change - not only to validate the request but to validate the insurance agent’s actions. Audit programs should be in place as well to make it harder for staff to hide their tracks when conducting insurance fraud schemes.
Most insurance companies don’t suspect their team members of being the prime culprits of their fraud attacks, and instead focus on customers. However, according to the FBI, premium diversion is actually the most common type of insurance fraud. The fact is, most insurance companies should be looking at their own staff rather than customers.
Internal audits and investigations are a great way to find insurance fraud being committed by employees, as well as an ideal deterrent for most employees. Ensure that sellers are operating within their bounds, that premiums are being collected (and actually going toward policies), and that in-force policies are legitimate.
Detect and Prevent Insurance Fraud with Unit21
Adequately protecting against fraud means detecting, preventing, and deterring fraudulent activity.
Insurance companies must provide streamlined customer onboarding that verifies customers and validates their personal information and supporting documentation. Leverage activity and event monitoring to analyze customer behavior and look for suspicious activity and behavior. With the right rules in place, these tools can identify suspicious patterns and alert teams of potential fraud - or even step in to stop the fraud in its tracks.