5 Most Common Types Of Fraud In The Insurance Industry
The insurance industry is a conglomeration of more than 7,000 individual companies that cumulatively collect more than $1 trillion in premiums each year. With that much money flowing through the industry, it makes it a prime target for a wide range of fraudulent activities. In fact, the insurance industry may be the second biggest target of fraud after banking. Insurance fraud (not related to health insurance) is estimated to cost more than $40 billion per year, which is passed on to the insured in the form of increased premiums. On average, insurance fraud is estimated to cost American families between $400 and $700 per year in premium costs. Here are the 5 most common types of fraud in insurance.
- False Claims
One of the most common types of insurance fraud is making a claim for an accident that never happened or was staged or work that was never performed. There are a number of ways this occurs and for a number of reasons. Slip and fall claims are probably the most common type of staged accident because injuries are hard to prove or disprove and potential payouts can be high. In some cases, policyholders are in on the fraud and in other cases, they are the innocent victims. When an automobile owner owns their car outright, they will sometimes damage their own car and make an accident claim. Then, when they get a payout from the insurance company, they will either have the car repaired inexpensively or just not get it fixed. Homeowners will also sometimes make claims for supposed accidents or self-created property damage. Another type of false claim is for damage that was not an accident, such as arson. In some cases, a building may be worth much less than what it is insured for. The owner may hire someone to set fire to the building - or set it on fire themselves - in order to make an insurance claim. Other common causes of this type of fraud are homeowners who are upside down on their mortgages or business owners who are facing bankruptcy.
- Inflated Claims
Inflated claims can happen at any time, but they tend to be the most plentiful in the wake of natural disasters. Whenever there is a natural disaster large enough to affect an entire region, the area almost invariably becomes flooded with scam artists and hucksters trying to make a buck off the insurance companies. In some cases, homeowners may knowingly sign inflated claims for work that was never done and in others cases, they don't actually know that the work the insurance company is being billed for was never performed. Some types of standard home maintenance are also ripe for inflated claims, such as roof repairs. In some cases, the inflation doesn't come from work that was not performed but rather the insurance company is billed for high-quality materials that are switched for sub-par materials when the work is performed.
- Disaster Fraud
In the wake of any natural disaster, chaos generally ensues. This creates a perfect environment for a wide range of fraudulent activities. Because of the high volume of claims being made, insurance companies simply do not have the personnel available to go out and investigate every claim. It is not unusual for a single home to be left completely untouched right in the midst of a ring of homes that are burned, flooded or otherwise destroyed or a car or other valuable to survive in pristine condition. Insurance companies generally rely on data to determine which homes are eligible for coverage and which are not. When a home or other property remains intact in an area of major damage, policyholders can submit claims which are often paid sight unseen. Hurricane Katrina, for instance, caused roughly $100 billion in damages, yet more than $34.4 billion in insurance payouts were made in addition to $80 billion in government funding. It is estimated that roughly $6 billion in government funds actually went towards insurance fraud.
- Faked Death
Faking your own death is such a common type of fraud that it is even a common plot point in a wide range of books, movies, and television shows. The premise is fairly simple. A policyholder will take out a large life insurance policy on themselves and then fake their own death. When the beneficiary (or beneficiaries) receive the insurance payout, they simply ride off into the sunset with their supposedly deceased loved one. Or, as is probably far more common, they simply double-cross the supposedly deceased loved one and vanish into the sunset by themselves - with their generous insurance payout.
- Insurance Company Fraud
Not all insurance fraud is committed by policyholders or by defrauding policyholders. A great deal of insurance fraud is also committed by insurance agents or agencies. Some of the more common types of insurance agency fraud include premium diversion and fee churning. Premium diversion is actually the most common type of insurance fraud and it occurs when insurance agents or agencies simply pocket a policyholder's premium rather than sending it along to the underwriters. In some cases, unlicensed insurance agents will simply sell insurance, pocket the premiums and then refuse to pay any claims. This is particularly prevalent with worker's compensation insurance because of the high dollar amounts associated with that type of group insurance. Fee churning generally occurs when an insurance agent continually changes a life insurance policy to different insurance companies in order to receive a commission. Insurance agents are charged with choosing the best policy for the client, but instead, they will often move the policy around to get a commission for themselves from different companies. When this happens, the policyholder's premiums often go up because life insurance gets more expensive as you age and in many cases, their coverage also goes down.
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