Insurance Fraud: What Are the Costs?

Introduction

Insurance fraud happens daily in every state of the United States and other countries. It is a crime against human beings. People of all ages, races, and incomes are the victims of it. According to the Coalition against Insurance Fraud, the insurance schemes steal no less than 80 billion dollars a year (“Fraud: Why should I worry,” n. d.). Insurance crooks pick up the money from people’s pockets to line their ones. These thieves make a fraud that is one of the biggest crimes in the USA. The insurance industry estimates the scam at about 10% of property. However, this number might vary based on the business and economic conditions as well as other factors. Using this statistics, during the period from 2009 to 2013, property fraud was 32 billion dollars each year (Insurance Information Institute, 2016). As scam is widespread and expensive, there is a human anxiety about its costs. People feel despair with a sense of violation that might continue for the whole life. Thus, the issue of costs of insurance fraud is important to study and find the ways as well as an effective strategy to protect insurers against fraud that can prevent wasting their money.

Classification of Insurance Fraud

Fraud is organized by different parties that take part in insurance transactions: policyholders, applicants for the insurance, outside claimants, and experts who provide services to applicants. Most people who perform scam are professionals, organized criminals who steal money via fraudulent business activities, and technicians who overstate the price of services to enlarge their income. Due to the Insurance Information Institute, there are two categories of insurance fraud: soft and hard (Insurance Information Institute, 2016).

Soft Fraud

Soft insurance fraud happens in such a case a policyholder intentionally exaggerates a claim to make a larger payout. The common example is when such person overstates the damage made to his/ her car during an accident to cover the deductible cost. Moreover, the policyholder can increase the number of stolen items or their value during a robbery.

Another way to make soft fraud happens during the process of application. The policyholder does not tell the truth about the features of his/her car or house to get lower premiums. For instance, he/she misstates the age of property or is not truthful about other important characteristics.

Hard Fraud

Hard fraud occurs when an individual intentionally fakes an injury, accident, arson, theft or other loss to get the illegally large sums of money from insurance companies. Crooks usually act alone by burning down their houses or flats for cash or imitating a fake accident. Unfortunately, the number of organized crimes of big schemes along these lines has been increasing as their aim is to steal millions of dollars.

Overall Fraud Statistics

It is a reachless task to measure insurance fraud as gathering its statistics is a hard task for a single national agency. Thus, insurance companies, different associations, state and federal agencies gather fraud data that relate to their personal missions. However, their quality, kind, and volume collected differ a lot. According to the FBI, the costs of insurance fraud of the average American family are between 400 and 700 dollars a year in increased premiums. Besides, the FBI’s annual amount of 40 billion dollars does not count health insurance scam (HomeInsurance, 2015). Due to the Coalition against Insurance Fraud, the costs of all Americans reach at least 80 billion dollars a year (n. d.). Moreover, this issue is getting worse. The National Insurance Crime Bureau estimates that “questionable claims increased nearly 16% from 2011 to 2012” (HomeInsurance, 2015, para 3). It added that about10% of insurance accidents were fraudulent (HomeInsurance, 2015). The presented numbers of insurance fraud prove the fact that this problem is the biggest criminal enterprise in the USA after drug business (Tidball, 2015). Then, it is not surprising that these two fields are often interrelated.

The Costs for Insurers According to the Types of Insurance Fraud

Taking into consideration the insurance fraud statistics, it is clearly seen that the costs for insurers are quite high. The process of detecting scam before paying claims and upgrading the analytics are the main fraud-fighting priorities of insurers. Hence, about 30% of insurers do not feel protected well against fraud (FICO, 2013).

Auto Insurance Fraud

The study of the Insurance Research Council reports that in 2007 auto insurance fraud added between 4.8 and 6.8 billion dollars to the auto injury claim payments (Insurance Information Institute, 2016). It shows that a liability and state coverage cause such variations of costs. For instance, Florida was a state with the highest levels of scam and accumulation in body and personal injury protection (PIP) pretensions. In contrast, North Dakota presented the lowest rate of body injury and Kansas – the lowest level of PIP.

The most common rate evasions are the following ones: misrepresent facts on applications from policyholders that include using an incorrect Social Security number or a false address. The costs of such type of fraud for auto insurers are about 16 billion dollars a year (Insurance Information Institute, 2016). The cases when a car owner setting up the fire of his/her vehicle is also a scam of this kind.

One more example of auto fraud includes those vehicles that are damaged by storm flooding and later appearing in auction sales or used car lots. Thus, in some states, there are the automobiles that after being flooded could reach about 75 % of their value (Insurance Information Institute, 2016). Another way of car scam includes the thieves who use legitimate identification numbers for stolen vehicles of autos with the same model. Hence, 58% of insurers predict the growth for personal auto insurance by policyholders (“Fraud: Why should I worry,” n. d.).

Workers Compensation Fraud

Most of insurers (69%) expect the rise in the Workers Compensation Fraud caused by its different types to bring high costs (“Fraud: Why should I worry,” n. d.). One of the examples describes employers who often misrepresent their incomes or types of work to pay smaller premiums. Some managers use different names for the coverage to break the attempts in recovering money on previous policies. Medical care abuse in a workplace (the providers overstate the treatment applied to their injured employees) is also a common issue. Those ones who investigate fraud warn that the repeated suspect aspect of an employee claim can be a signal of scam.

Health Insurance and Medical Fraud

The Federal Bureau of Investigation estimates public and private healthcare fraud between 3 and 10 % of total healthcare spending that was from 81 billion to 270 billion dollars in 2011. In 2012, the Institute of Medicine reported that the healthcare system in the USA wasted 75 billion dollars a year on scam (Insurance Information Institute, 2016).

The healthcare system has many points of fraud and abuse. Hospitals, diagnostic facilities, nursing homes, doctors, suppliers of medical equipment, and attorneys have been admitted in fraud to deceive the system. The most repetitive fraud is the abuse and resale of legal narcotic and prescription drugs. In 2007, the Coalition against Insurance Fraud reported that fraudulent claims of drug diversion costs for health insurers about 72.5 billion dollars a year including 24.9 billion dollars every year for private health insurers (“Fraud: Why should I worry,” n. d.).

According to the Financial Crimes Report of Federal Bureau of Investigation, the most common types of healthcare scam are the following ones: bills for not rendered services, filing duplicate claims, performing not needed services, providing the codes for services and medical items having higher payments, and offering kickbacks. Every third doctor overstates a patient’s disease to help him/her avoid discharge untimely from hospital (Insurance Information Institute, 2016).

Private Healthcare Fraud

The Association of Blue Cross and Shield admitted that its antifraud search saved more than 510 million dollars in 2009 in antifraud efforts. This number includes preventing 318 million dollars from paying for fraudulent medical claims and 192 million in recoveries given away for those pretensions (Insurance Information Institute, 2016).

Federal Healthcare Fraud

Due to the US Department of Health and Human Services, within the last three years, the government has recovered the sum of $7.90 for every dollar spent on healthcare related to the fraud and abuse research. It was the highest average return in the American 16-year history of the Program of Health Care Fraud and Abuse. Thanks to the efforts of this campaign that aims mainly in Medicaid and Medicare, there was recovered a record of 4.2 billion dollars in the fiscal 2012 year (Insurance Information Institute, 2016).

The Department of Health and Human Services cooperated with the Department of Justice creating the National Fraud Prevention Partnership in 2012 to battle healthcare scam. This union that also includes public and private groups will share the information about claims from Medicaid as well as private insurance to be managed by an outside seller.

State Healthcare Fraud

Medicaid programs that also work at the state level are prone to fraud. For example, in Massachusetts, the Medicaid Fraud Division recovered more than 66 million dollars in 2010 that was a record amount. Moreover, in the past four years, it has added about 191 million dollars for the state Medicaid program (Insurance Information Institute, 2016).

Catastrophe-Related Property Fraud

The most damaged in the history of the United States catastrophes had the results in the cases of insurance fraud. Thus, some fires that broke out in the buildings in the affected communities, particularly in New Orleans after Hurricane Katrina in 2005 were suspected in the cases of arson. Besides, thousands of cars damaged by food were cleaned up to resell without making known their flood status.

That year, the Department of Justice created the National Center for Disaster Fraud (NCDF). Its purpose is to combat scam that relates to natural and non-natural disasters (for example, Deepwater Horizon oil spill). Since the beginning of its functioning, the center drew to account 1,360 people charged in the cases related to Rita, Hurricane Katrina, and Wilma.

One more example of natural catastrophes related fraud is a contractor cheating. The several states in the USA made the attempts to protect homeowners from the contractor scam. The enacting laws helped them through providing contract termination rights as well as a ban on compensation to urge homeowners to sign contracts.

Crop Fraud

The private market sells and services multiple peril crop insurance that is sponsored and reinsured federally. This type of insurance covers the losses of the harvest that is a result of all natural disasters as well as a way of financial protection for farmers. However, the Government Accountability Office in the United States has found the evidence of scam in such federal program. Thus, it has recommended the following actions: decreasing premium subsidies to people who file questionable claims several times, increasing the effectiveness of season inspections, and making stronger the oversight of quality controls by insurance companies. Government investigators more and more often use satellite images to match valid crop planting and the practices of growing especially in suspicious cases due to the information presented in pretensions. Federal prosecutors have noted that insurance fraud for a tobacco farming case in North Carolina in 2013 that included insurance agents and farmers cost about 100 million dollars (Insurance Information Institute, 2016).

Antifraud Legislation

State

Insurers can bring a scam case to a trial if they provide the information to prosecutors on the individuals they suspect of fraud. Today, immunity laws which permit insurance companies to notify the data without having a fear of civil or criminal prosecution are in all states within the USA. However, only separate laws cover insurance fraud specifically and allow reporting the information to law enforcement agencies and to state departments of insurance. Thus, some of them have certain limits by guaranteeing the protection against violation, libel suits or unfair claims. Their actions expand only to auto insurance scam. As a result, experts have convinced that it is necessary to extend immunity laws to include the exchanges of some kinds of information related to pretensions amid insurance companies.

Federal

Federal laws involve the Health Insurance Portability and Accountability Act (1996) that focuses mostly on uprooting fraud in some federal programs, particularly in Medicare. Besides, they also influence on private healthcare through identifying the crime of this type of scam. Despite the fact that healthcare insurance is outside the area of property/casualty insurance, this type of fraud affects all kinds of insurance coverage with the included component of medical care (for example, medical payments for employees injured in their workplace or the victims of an auto accident). Due to the Violent Crime Control and Law Enforcement Act (1994), insurance scam is a federal crime in the cases it has a negative impact on interstate commerce (Insurance Information Institute, 2016). Hence, the employees of any insurance company, including the agents who misappropriate the funds of their organization, might get a punishment. It happens if their actions negatively affect the fiscal solvency of any insurance firm.

New Technology to Combat Fraud

Advances made in analytical technology are important in a battle against fraud to keep steps with complicated issues. Considering the traditional approaches mostly concentrated on detection after paying operations, it is necessary to note the following fact. They have been made better by claims scoring, predictive modeling, and using other tools that help to solve fraud before finishing payment.

An effective technology of data-mining programs that scan the insurance claims has been improved by the integration of insurance industry. It claims such a structured set of data as ISO Claim Search that is the biggest complete database of pretension information in the globe. The systems that can identify anomalies in the data are used to create the rules that allow an insurer to stop claims automatically. An expert in insurance technology has admitted that such approach produced between 20 to 50 % declining in fraud loss for some clients of insurance (Insurance Information Institute, 2016). Hence, new programs that make an analysis of text and patterns can find different types of data formats regarding key terms as well as word patterns.

Additionally, insurance investigators have started scanning more and more often such social media sites as YouTube, Facebook, and Twitter when they consider some compensation claims from one group of workers to another. Developers of software suggest systems that scan available web resources for applicants who post the activities and then they would be restricted from them due to presented pretensions.

Protection against Insurance Fraud as a Way to Prevent the Costs

Prevention Strategy to Protect People from Fraud

As it has been mentioned before, insurance fraud is a common issue in the USA as well as in the world. Thus, it happens every day in every state. A lot of humans suffer from it. To protect an individual from such kind of fraud, it is important to find an effective prevention strategy. It should include deterring fraudulence before it might happen. Here, it is necessary to check whether all information presented in the applications is correct. Passing the leading-edge technology to law enforcement agencies will help to decrease the vehicle stealing. Partnering with some anti-fraud groups, such as the Coalition against Insurance Fraud and the National Insurance Crime Bureau in cooperation with law enforcement agencies, is also an essential feature of an efficient prevention approach.

Simple Steps that Help Reduce Costs

Considering the conditions of successful work of prevention strategy, the National Insurance Crime Bureau proposes some simple steps. Following them will increase human insurance fraud protection and thus save their costs. It is essential to check for accuracy the bills for medical services as well as make sure that free services are not included in the insurance bill. It is not saved to buy insurance coverage from door-to-door or people who trade them via telephone. Paying attention to the price of insurance that seems too cheap to be true is also important. Before buying any insurance coverage, it is useful to contact the nearest Department of Financial Services to check whether the company and agent are licensed. After a purchase, the person should keep the insurance identification number in secret. The crooks might steal it and then involve him/her in scams if revealed.

Protection of Auto Insurance Fraud

Accidents refer to the most destructive cases of car insurance fraud as they usually cost time, money, and often result in injuries for the victim. Fraud related to an accident usually refers to a hard auto insurance scam. That is why calling the police to report the incident that the individual just seen is essential. Then, it is important to get their report with the included officer’s name even if there were only minor damages. Such actions will cause some difficulties for criminals to damage purposely an automobile to try collecting a bigger claim.

Using a phone or camera will help to document the following facts: harm of an accident, the number of passengers in another car, and any other useful features. Recording the details of the incident such as names, witnesses, addresses, license numbers, and any other data can be crucial.

Advice to Protect Healthcare Scam

The last couple of advice refers to healthcare issues. It is better to avoid unknown individuals who suddenly appear at the place of an accident scene and want to direct the person to certain physicians or attorneys. Such people might be a part of a scam ring. Moreover, such individual should be cautious with doctors who insist him/her to prepare a personal injury claim after having an incident, especially if he/she is not hurt. Finally, if someone knowing or suspecting any person is organizing insurance fraud, he/she should contact the Department of Financial Services or the National Insurance Crime Bureau to report this scam (“Insurance fraud,” 2016).

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