Insurance fraud is an act to trick the indemnity process and claim the money by deceit.
Each year, insurance frauds cost billions of dollars to the industry and have serious consequences once noticed. The culprit can be an insurance company, an agent, or even a claimant.
So in this blog, we shall talk about the types of insurance frauds and how they can affect your wallet. Besides, we will also inform you about the measures that can protect you from insurance fraud.
What are the types of insurance fraud?
The insurance buyer is known as an insured. Upon getting insurance, he receives a contract that contains the terms and circumstances under which he will be compensated by an insurance company or insurer.
At present, this industry consists of around 7,000 companies that collect more than a trillion-dollar each year. With this giant amount of money involved, it becomes an easy target for frauds and takes up second place after banking. In total, these types of fraud cost more than forty billion dollars each year.
Now that you know a bit about insurance frauds let’s take a look at the most common types.
False claim
A false claim is one of the most common types of insurance frauds in which a person knowingly makes a claim for a fake accident. Since injuries are hard to prove or disapprove, fake accidents usually consist of falls or slips. Moreover, the potential payout is also high. On the other hand, the insured can sometimes damage their own vehicle and make an accident claim. When the claim gets approved, they either fix their car or use the money for other purposes. It also consists of self-created property damage or arson. These are usually those people who are facing bankruptcy.
Faked death
You must have seen a number of movies in which a character fakes his own death and shocks everyone at the end. Well, this happens in real life as well, especially to claim an insurance payout.
A policyholder takes out large life insurance on themselves and later fakes their own death. After receiving the payout, they move to a far off place and enjoy their time living off the insurance money.
Insurance company fraud
While sometimes policyholders commit insurance fraud, the other times, the perpetrator can be an insurance agent or company. In this case, the most common type of insurance fraud is a premium diversion and taking a heavy amount of money in the name of fees.
Premium diversion fraud occurs when an insurance agent or company hides the premium instead of sending it to the underwriter. In addition to that, insurance agents that are unlicensed sell the insurance and keep the premium to themselves. They later refuse to pay any claim.
Disaster fraud
Disasters create an ideal environment for deceitful activities. During this time, the claims are in bulk, and insurance companies cannot investigate each one of them. Since insurance companies cannot determine if a home is left untouched by flood, fire, or hurricane, they rely on the data and decide if a house is eligible for coverage or not. Once the data is lost, it becomes easier for people to claim an insurance payout.
How does it affect you?
Each year fraudulent claims cost around $1.6 billion to $2 billion. Not only that, but insurance experts also say that around 15% of the money that is paid in premiums ends up in fraudulent claims.
One single insurance fraud affects the other insured and puts pressure on their pocket. Taking an example of an auto insurance fraud, which includes deliberate damage to the vehicles, the fraudulent insured is paid more due to the wide repair expense. It further forces an insurance company to increase the premium for the other customers as well.
In short, insurance frauds can directly or indirectly affect the lives of innocent people. It can happen through intentional damage or a high insurance premium.
How can you prevent insurance fraud?
Although you might not be able to escape insurance fraud, you can take certain measures to prevent it beforehand.
If you, as a consumer, want to help correct the system and keep your premiums low, make sure to play the part.
Take a look at the tips stated below.
- Investigate if your insurance agent or company is licensed or not.
- Do not sign a blank form.
- Do not sign a document at the scene of an accident.
- Reexamine your claims to check if they are accurate or not.
- Read your insurance policy. Make sure to go through the terms and conditions of the coverage to understand it and find loopholes.
- While repairing your vehicle, ask for a bill that includes all the details.
How can you prevent fraud as an insurance company?
Insurance companies can also avoid frauds that involve a huge amount of money with ease. All you need is proactive measures that detect fraud before an occurrence. Here are some of the steps that can be taken to prevent fraud as an insurance company.
- Use data analytics to analyze past frauds. It will help you by producing a suspicion score that indicates if a fraud like that has occurred before or not.
- Make sure you review and resource the claims every now and then. A continuous review and resource will help you detect the patterns of fraud. You may notice them almost immediately. On the other hand, if you avoid this step, you may notice the fraud even after the claim payout is collected.
- Implement a different foundational framework that has a solution that automates the information regarding the claims and enables the management to analyze the parties that are involved. Insurance companies or agents can then add different tools that identify and investigate suspicious claims.
Conclusion
Insurance fraud is a serious offense, and once you are convicted of the crime, the consequences are pretty serious. It will eventually lead to the cancellation of your claim or may even put you at the risk of paying a high premium. So, to avoid such a scene, you must submit an honest claim and report if you come across someone committing the crime.
Insurance companies and attorneys often hire private investigators in order to assist with investigating false claims.