The High Cost of Insurance Fraud

The insurance industry remains particularly susceptible to fraudulent activity, in part due to unchecked authority and controls.

Fraud accounts for 10 percent — or US $30 billion — of the U.S. insurance industry’s incurred losses and loss adjustment expenses per year, according to a May 2009 study by The Insurance Information Institute. Further, a report published by The National Insurance Crime Bureau shows that as the economic downturn continues to worsen, “opportunistic fraud” — when a policyholder has a legitimate claim but pads it to produce a larger payment — is on the rise.

The Insurance Information Institute breaks insurance fraud into two types: hard and soft. Hard fraud occurs when someone deliberately fabricates claims or fakes an accident. Soft — or opportunistic — insurance fraud occurs when people pad legitimate claims or, in the case of business owners, list fewer employees or misrepresent the work they do to pay lower workers compensation premiums. The Insurance Information Institute also points out that some lines of insurance (e.g., health care, workers compensation, and auto insurance) are more vulnerable to fraud than others. In 2003, The Blue Cross and Blue Shield Administration and the U.S. Government Accountability Office estimated that health-care fraud alone totaled US $85 billion.

Another report, The Association of Certified Fraud Examiners’ 2008 Report to the Nation on Occupational Fraud and Abuse, shows that the most common fraud schemes in the insurance industry were billing frauds, corruption, check tampering, and skimming. In fact, the report shows that check tampering was much more common in the insurance industry than in general. Insurance industry check-tampering schemes often involve the theft of checks to legitimate insureds or the generating of checks to fictitious insureds.

“Three Men and a Fraud,” featured in the April 2006 issue of Internal Auditor magazine, provides an example of how insurance brokers and a corrupt official conspired to scam three government agencies.

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