Insurance fraud can take many forms, including life, property, health, auto, and more. Detecting fraud is primarily the responsibility of insurance agents and companies, who employ underwriters, appraisers, and investigators to double-check claims. The importance of fraud detection is highlighted by the fact that hundreds of billions of dollars are paid each year for fraudulent claims, and if eliminated, premiums would drop significantly.
There are several methods of insurance fraud detection, often based on the type of insurance fraud attempted. Life insurance fraud, for example, is usually perpetrated at the time the life insurance application is filed and is best detected by the agent’s gut or insurers’ underwriting processes. Property insurance fraud, however, is typically committed after a certain period of policy time, by damaging, destroying, or stealing the insured property. The best way to detect property insurance fraud is to investigate after the loss.
The importance of insurance fraud detection and prevention is highlighted by the fact that hundreds of billions of dollars are paid each year for fraudulent claims. If insurance fraud were completely eliminated, premiums would drop significantly. Therefore, while insurance fraud detection is a named element of an insurance agent’s job, it is also the responsibility of all consumers.
Insurance fraud can take many forms. Health insurance fraud is the making of false claims, usually for injuries and illnesses that don’t exist. False claims are often filed after a staged car accident, usually through a doctor involved in the scheme, and can cost an insurance company hundreds of thousands of dollars. In some cases, legitimate claims are inflated, especially if an injury is difficult to verify, such as a back injury. The sheer volume of claims filed in the United States makes it virtually impossible for insurance companies to conduct thorough investigations of each one, so they must prioritize the potentially most costly claims in their investigations. Fraudsters, knowing this, will often try to avoid detection by making smaller claims. To combat fraud, many insurers routinely require health insurance policyholders to obtain a second opinion for serious diagnoses.
Auto insurance fraud is the making of false claims against an auto insurance policy. A popular scheme is to leave a car where it is likely to be stolen and then file a stolen car claim once the intended theft occurs. Auto policyholders sometimes attempt to perpetrate low-level fraud by having a body shop issue an inflated bill, with the deductible split between the policyholder and the shop. This type of insurance fraud can be difficult to detect, but insurance companies sometimes get tips from the general public.
Property insurance fraud involves man-made risks such as fire or flood. For example, a property owner may set fire to a facility to collect insurance or may claim that an insured item was stolen. Normal investigative procedures are often the best method for uncovering insurance fraud.
Life insurance fraud is somewhat different. The leak is real, but the investigation reveals that there were material misrepresentations on the claim and the policy should not have been issued. For example, many insurers outright refuse to insure anyone with cancer and those who charge significantly higher premiums. If someone has cancer, then, and they don’t disclose it when they take out a life insurance policy, that’s life insurance fraud. Even if the policyholder dies of some cause unrelated to cancer, most insurance companies would deny a death claim under such circumstances, instead of returning the premiums paid. In most cases, the only time an insurer can deny a life insurance claim for misrepresentation is during the first two years of the policy; most deaths that occur during the first two years of a life insurance policy’s existence are carefully studied.
Detecting insurance fraud is primarily the insurance agent’s responsibility and is a difficult job to perform. Those who file fraudulent insurance claims are usually smart enough not to alert the agent to their scheme, so the agent must be very conscientious of the possibility of fraud. Insurance agents are paid on a commission basis, however, which actually disincentivises them from trying to detect insurance fraud, because exposing a claim as fraudulent means that not only will they not earn a commission, but they will also waste time making the sale. .
Insurance fraud detection is also the responsibility of insurance companies, who take that responsibility very seriously, employing underwriters to screen claims, as well as appraisers and investigators to double-check claims. The underwriting process—the process of investigating an insurance application before it is approved and the policy issued—has become much more sophisticated, relying on multiple different sources of information to verify information about the application. Other people involved in the claims process, such as doctors and auto repair shops, are also responsible for insurance fraud detection, and most of them rely on their patients or third parties to report attempted insurance fraud.
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