nsurance fraud is a deliberate deception perpetrated against or by an insurance company or agent for the purpose of financial gain. Fraud may be committed at different points in the insurance transaction by applicants for insurance, policyholders, third-party claimants or professionals who provide services to claimants. Insurance agents and company employees may also commit insurance fraud. Common frauds include “padding,” or inflating actual claims, misrepresenting facts on an insurance application, submitting claims for injuries or damage that never occurred, and “staging” accidents.
Insurance fraud may be classified as “hard” or “soft.” Hard fraud is a deliberate attempt either to stage or invent an accident, injury, theft, arson or other type of loss that would be covered under an insurance policy. Soft fraud, which is sometimes called opportunity fraud, occurs when a policyholder or claimant exaggerates a legitimate claim. A car owner involved in a “fender bender” who pads the claim to cover the policy deductible is committing soft fraud. Another example is exaggerating the number and value of items stolen from a home or business. Soft fraud may also occur when people purposely provide false information to influence the underwriting process in their favor when applying for insurance. To lower insurance premiums or increase the likelihood that the application for insurance will be accepted, people may underreport the number of miles driven, misrepresent where a car is garaged, fail to provide an accurate medical history when applying for health insurance, or falsify the number of employees and the nature of their work for workers compensation coverage.
The exact amount of fraud committed is difficult to determine. The proportion of fraud varies among the different lines of insurance, with healthcare, workers compensation and auto insurance believed to be the most vulnerable lines.
Questionable insurance claims rose by 16 percent from 100,201 in 2011 to 116,171 in 2012, according to the National Insurance Crime Bureau (NICB).
*Estimate based on research conducted by the Battelle Seattle Research Center for the Insurance Information Institute in 1992 (Fighting the Hidden Crime: A National Agenda to Combat Insurance Fraud. Insurance Information Institute, March 1992) and other industry reports (including Insurance Fraud, Renewing the Crusade, Conning, 2001).
In 2014 the Coalition Against Insurance Fraud and the SAS Institute published The State of Insurance Fraud Technology, to track how insurers deploy technology to combat insurance fraud. An online survey of 42 insurers compared 2014 results to a 2012 survey and found that by 2014, 95 percent of insurers reported using anti-fraud technology, up from 88 percent in 2012. These technologies focused on claims—71 percent of respondents said detecting claims fraud is the primary use of anti-fraud technology. Less than half use these tools for nonclaim issues such as underwriting and internal fraud.
Other findings of the Coalition study included:
- More than half of respondents to the study said the amount of suspected fraud against their company had increased over the past three years. Only 2 percent said it had decreased.
- When asked what benefits the insurers who use fraud-detection systems have received, the most-cited benefits were more and better referrals, uncovering complex or organized fraud activity and improved investigator efficiency.
- Compared to 2012, a larger share of referrals came from automated systems in 2014.
- One of the most common technologies used today are automated red flags, which automatically highlight suspected fraudulent activity. Eighty-one percent of respondents reported using automated red flags, followed by:
- Link analysis, a tool that enables insurers to unravel complex or organized fraud rings by recognizing the relationships between groups across multiple claims, used by 50 percent of respondents; and
- Anomaly detection, which warns investigators that information seems improbable, is used by 45 percent of respondents.
- Most insurers think that no single technology is sufficient to combat fraud. A combination of technologies is necessary to uncover both opportunistic and organized fraud.
- Eighty-five percent of insurers predict that funds for anti-fraud detection will remain the same or increase.
KEY STATE LAWS AGAINST INSURANCE FRAUD
(As of December 2015)