Insurance fraud affects everyone. Insurance fraud involves lying. It’s despicable behavior, and small business owners can do a lot to stop it.
Even if you’re aware of insurance fraud as a small business owner, you might be shocked by how pervasive insurance fraud is, and how much insurance fraud costs.
Insurance fraud may be happening all around you if:
- An organized crime ring has faked a rear-end accident and received personal injury damages as a result of a ‘rear-end collision’ for which your truck driver was at-fault.
- An employee submits small inflated claims to your human resources department or directly to the company’s insurer. If there’s no risk involved in submitting fake claims, it may be possible for some to pocket thousands of dollars in “free money” each year.
Of course, it’s not free. Educate yourself and your employees about the costs of insurance fraud. Work with law enforcement in your local community and state to stop it.
What Does Insurance Fraud Cost?
According to the National Insurance Crime Bureau, property and casualty insurers estimate about 10 percent of claims (about $30 billion) are lost to insurance fraud every year. Health care insurance fraud estimates are higher.
Although insurance companies are adept at insurance fraud detection and claims investigation, they often work with local and state governments to stop some types of insurance fraud before it begins. The FBI says that insurance fraud translates to hundreds of dollars in higher annual premiums each year.
As more insurers automate claims, it may be more challenging to identify potentially fraudulent claims.
What are the Common Types of Insurance Fraud?
Some types of insurance fraud are associated with organized crime, but not always. The Coalition Against Insurance Fraud reports that a rising percentage of smaller claims are fraudulent.
Organized crime rings are responsible for large insurance fraud losses, but a growing number of individuals commit opportunistic insurance fraud.
In the state of Pennsylvania, younger adults between the ages of 18 and 34 are most likely than other age groups to commit opportunistic fraud. For example, a resident of New Jersey or New York might register a vehicle and insure a vehicle in Pennsylvania to save money on insurance premiums. Claims adjusters may discover the fraud when the insured submits a claim that occurred in another state.
Other types of insurance fraud include:
- An insured uses his or her vehicle for work but doesn’t disclose it to the insurer to obtain cheaper insurance premiums.
- A driver submits a comprehensive claim instead of declaring an at-fault accident claim. This fraud saves the policyholder money because the insured’s premiums won’t rise for a comprehensive claim. The policyholder may say that damage to the vehicle was caused by a falling object or a collision with a deer.
- Unscrupulous brokers or agents defraud “policyholders” of premium dollars to purchase property and casualty coverage for a business. The business pays premiums for years and doesn’t realize the broker or agent is pocketing the payments.
Why Is It Important to Be Aware of Insurance Fraud?
Insurance fraud costs insured businesses and consumers billions of dollars each year. To avoid common types of insurance fraud:
- Never pay an insurance premium in cash. Never make a check out to an individual broker or agent. Get a receipt for any premium paid.
- Demand a copy of the insurance policy. The appropriate human resources or manager of the business should read the policy to review the endorsements and declarations page(s) that outline coverage and limitations of coverage. If you don’t receive your policy by mail, ask your broker, agent, or insurance company to provide it. Contact your state department of insurance or financial services if you don’t receive the hard copy of your policy. You might not have purchased the insurance coverage promised by the insurer, agent, or broker.
- Stay alert after a motor vehicle accident. Auto insurance fraud is a major problem for businesses and insurance companies. Look for 1) staged accidents, in which a vehicle suddenly stops in front of you/your employee, claims a rear-end collision, and then frequents doctors who manage the medical claim and lawsuit; 2) runners, in which an individual solicits an injured person at an accident scene in order to direct him/her to a scammer medical facility; 3) inflated accident claims: evaluate the accuracy of damage claims estimates. Certain body shops may inflate damages or work with scammer adjusters to increase the repair estimates. They do the accident repairs and pocket the excess cash.
Steps for Preventing Insurance Fraud
- Public education about insurance fraud helps business owners and employees to realize that insurance fraud isn’t a victimless crime.
- Business owners should advise employees that submitting false insurance claims can be a criminal offense. Aggressive criminal prosecution, including fines, probation, restitution, and jail time, may be imposed on offenders convicted of insurance fraud.
- If convicted of insurance fraud, the offender faces a lifelong permanent record available to future employers. It may be challenging to find a new job as an ex-convict.
- Insurers and businesses should work together to establish proactive fraud detection strategies.
Insurers may use various scoring engines, criminal history data, third-party captures, and other fraud claims tools. Most realize that the claims staff is integral to fraud detection. In addition, insurers:
- Assess the relative fraud potential of a claim:
- Alert the insurer’s special investigative unit (SIU) for suspected fraud claims
- Focus on common false claims “schemes,” such as misreporting costs of car or truck repairs
- Use data analytics, such as predictive models, to identify fraud:
- Criminal fraud (organized crime professionals)
- Cultural fraud, or opportunistic “exaggerated” claim fraud
- Adjusters enter claims data; claim is assigned “Suspicion Score”
- Continue to rescore and review claims to identify insurance fraud:
- Detect patterns to reveal fraud
- Monitoring suspicious claims is more effective and accurate than time-worn methods
- Human analysts initiate the review process after suspicious claims are flagged
- Use a “Layered Approach:”
- No single model or method will detect all fraud
- Combine technology, detection tools, and other approaches
- Search for livestreaming, videos, or photos to document a crime scene or vehicle crash
- Revise Methods on Market Conditions
- Criminals adapt methods to insurers’ analytic tools
- Identify trends, recognizing more claims are submitted in a down economy
Don’t Commit Insurance Fraud
It’s never a good idea to commit insurance fraud:
- In a down economy or poor market cycle, some business owners reason that they’ve paid premiums into a commercial policy for years but never submitted a claim. Unless you have a valid covered claim, don’t submit a fraud claim.
- Your premiums—and others—are likely to increase because of fraudulent insurance claims. If you submit a false insurance claim, and the insurer detects, investigates, and involves law enforcement in the matter, you could face criminal prosecution and a permanent record.
- It’s important for small businesses to review employees’ health, dental, Health Savings Account/Flexible Spending Account, and related benefits’ claims. Submitting fraudulent claims to the insurer will ultimately cost the business money. Can you, the business owner, afford to have employees who falsify insurance claims?
Educate your employees about insurance fraud. Encourage them to identify suspicious activity.