What’s one word that sets off warning bells for most of us? Fraud, especially in the insurance world. For both policyholders and brokers, insurance fraud is a stressful and high-alert concern—unfortunately, fraudulent insurance activity steals at least $80 billion every year.
An especially challenging part of insurance fraud is understanding the different sources of fraud and the ways it’s committed. Insurance fraud includes organized crime activity that steals money via business dealings, insurance provider professionals who inflate, overcharge, or don’t actually provide insurance protection, and average citizens who see an opportunity to illegally make money with a faulty insurance claim.
Both policyholders and insurance brokers can both be victims of fraud, which is why there are more and more efforts being put into preventing fraud. The first step for anyone who wants to be prepared for fraud is to learn about the potential risks and fraud vulnerabilities. So, without further ado, here are the most common insurance frauds and how insurance companies mitigate risk.
Most Common Insurance Frauds
1. Premium Diversion.
As the most common type of insurance fraud, premium diversion is when someone, such as an insurance agent, embezzles insurance premiums. Often the agent will keep the premium money rather than sending it on to the underwriter. Premium diversion also includes an unlicensed insurance company that offers insurance, collects the premiums, and does not pay for any claims as agreed upon.
2. Worker's Compensation
One way that businesses attempt to save money is by misclassifying employees as independent contractors to avoid paying state-required worker’s compensation premiums. Instead of paying premiums, they pay employees under the table.
Another angle people try is misrepresenting the risk employees face to get lower premiums. The cost for premiums is largely based on staff labor, payroll size, and risk levels, so instead of paying higher premiums for high-risk jobs, employers won’t file for the right level of compensation. Doing so affects taxes, wages, and other business expenses, and by unethically saving that money, these businesses also unethically edge out competitors. This is especially unfair to employees who legally deserve compensation after being injured. On the other hand, employees also attempt to claim insurance for an injury that never happened, which is a form of fraud as well.
Learn more about how to prevent this type of fraud in this article: 10 Red Flags for Employee Work Injury Compensation Fraud.
In the healthcare industry, there is a large variety of potential fraudulent claims, which results in some of the most expensive fraud cases—the National Health Care Anti-Fraud Association (NHCAA) estimates that tens of billions of dollars are lost to fraud each year.
One example of fraud in this industry is when there are bills charged for services that were not rendered. Similarly, it’s also fraud when providers charge the insurance using the wrong code in order to get more of a payout than what the service was actually worth.
Filing duplicate claims or requiring unnecessary testing or services while offering kickbacks is considered fraudulent, too. This includes when a provider practices “unbundling,” when they charge certain tests or services individually when they should be billing certain things together for a lower cost. Taking advantage of patients and insurance providers by overcharging or misconstruing the services rendered is a primary source of insurance fraud.
Cybersecurity and identity theft issues are especially prevalent in the medical field. The healthcare industry, for example, has to deal with criminals who steal health insurance numbers or other personal data that allows them to make false claims.
4. Auto Insurance
One of the most financially damaging types of insurance fraud in the automotive industry is called premium leakage, which is where information is misrepresented or omitted entirely to affect rates and billing. This can include failing to inform the insurance provider of all drivers in the household, inflating the value of stolen equipment or parts, or using someone else’s address to get the lower rates offered in that area.
Repair shops that exaggerate the cost of repairs, charge for hours they didn’t work, or overcharge for parts are all fraudulent. Some people even replace airbags with salvaged airbags after a car is repaired post-accident, or approach drivers to replace their “unsafe” windshield, claiming their insurance covers everything. With the pricey upkeep that most vehicles need, it can be difficult to recognize this kind of fraud when you don’t know what to look out for.
5. Property Disaster
People may try and file a claim for damage to their property that was intentionally done in order to make a profit off of the insurance. Because homeowners’ insurance will often repair or replace damaged property, they can either get payouts, new property, or otherwise expensive repairs, which is illegal if they themselves damaged their property.
In the face of natural disasters, many people desperately need their insurance to recover from irreparable damages. However, others will exaggerate their property damage or make claims for their property when they live hundreds of miles away from the disaster site. It’s also important to look out for false charities that misappropriate funds and contractors who charge upfront for repairs and then fail to make the proper repairs.
How Insurance Companies Combat Fraud
Insurance fraud can pop up in random and seemingly unbelievable scenarios, like these 6 Crazy Insurance Fraud Cases. Still, insurance is available so that people feel more secure in their personal life and business dealings. The fear of fraud shouldn’t stop you from protecting your business; insurance companies are doing more than ever to prevent fraud, monitor untrustworthy activity, and mitigate risk. More specifically, here are some of the efforts being made:
- Detecting false claims. Most companies have a reporting system or fraud hotline for any suspicious activity. There’s also rising anti-fraud technology for different types of sectors, including AI and predictive analytics.
- Fraud prevention organizations. Insurance companies are working with all kinds of organizations, including the government, to reduce fraud. This includes the FBI, the American Property Casualty Insurance Association (APCIA), the National Insurance Crime Bureau (NICB), the Coalition Against Insurance Fraud (CAIF), fraud bureaus, and many others. These organizations dedicate millions of dollars to fraud identification and prevention each year.
- Training fraud investigators. Educating fraud investigators is an important practice, which is why different organizations are continually training their specialists to identify and prevent fraud.
Insurance can be a great tool for businesses to use to protect their company, employees, services, and money. However, being completely dependent on insurance only makes the fraudulent activity more powerful and damaging. Instead, HNI services help you de-risk your business and procedures so that you have greater control over your money and resources.