Between Buyer Fraud and Seller Fraud, a $30 billion problem
Insurance fraud is big business. At $30 billion annually, insurance fraud would be a giant revenue producer — if it weren’t illegal.
The fact though, insurance fraud is illegal, widespread and financed by honest people who pay their premiums regularly and only file legitimate claims. The Federal Bureau of Investigation says that usually dishonest policyholders, insurance industry insiders and networks of crooked medical professionals who use their insider knowledge to bypass anti-fraud measures.
As law enforcement has stepped up efforts against organized crime in other matters such as cyber security, many crime rings have diversified into insurance fraud — a more sophisticated form of crime. Even established crime families such as the Cosa Nostra have been connected to several crime ring investigations.
Organized crime rings are targeting insurance companies for six reasons:
- Competition between insurance companies drives many to pay claims as fast as possible making it difficult to recover money paid out for bogus claims.
- Insurance fraud is more lucrative, fewer dangers and comes with lower odds o being caught when compared to other illegal ventures by crime rings.
- The Internet facilitates communication, information sourcing and recruiting.
- Insurance plans may be purchased online. Criminals use the Internet as a doorway to information that can be used on its own or other information to identify an individual.
- Crime rings can file multiple claims resulting in millions of dollars in profits before being caught. Some crime rings fly under the radar for years.
- Insurance companies often lack the IT resources that allow them to investigate insurance fraud.
What You Need to Know
Everyone has heard stories of people who received millions after a car accident. Almost everyone is familiar with insurance firms that have refused to pay a claim based on a technicality.
What many don’t know is that insurance fraud is one of the oldest types of fraud recorded. In 300BC, a Greek merchant sunk his own ship trying to cash in on the insurance. If you’re a policyholder, insurance fraud affects you. The insurance field is wide, and fraud exists in every area. Insurance fraud comes in two flavors: seller fraud and buyer fraud.
Seller fraud happens when the seller hijacks the usual process in a way that maximizes profit. Buyer fraud happens when the buyer bends the method to obtain more coverage or get more cash — than they are rightly entitled to.
Seller fraud centers around four basic ways:
- Ghost Companies
Policies are assigned, and premiums accepted from policyholders, but the company underwriting the policy isn’t legitimate and doesn’t exist.
- Premium Theft
This scenario occurs when the insurance representative accepts premiums but doesn’t submit them to the company resulting in an invalid policy. Basically, the agent pockets the money.
When the insurance representative advises a customer to cancel, renew and open new policies is called churning. Churning often targets seniors and is driven by the agent’s greed.
- Mismatched Coverage
Similar to churning under or over coverage happens when an insurance representative convinces a customer to purchase protection they don’t need, or sells a lesser policy and represents it as a complete policy. In either case, the representative is attempting to maximize commissions.
Buyer fraud includes:
- Post-Dated Life Insurance
Post-date life insurance refers to a policy that has been purchased after the death of the person being insured.
- Falsified Medical History
Falsifying medical history is one of the more common types of insurance fraud. Omitting details such as smoking or a pre-existing condition, the buyer hopes to get the policy cheaper than they could if they were transparent.
Someone murders a covered individual for the proceeds.
- Non-Existent Insurable Interest
This is the act of insuring people you can’t legally insure in the hopes they die. Insurance is built on the idea of protecting people from financial loss. Using it to gamble on lives is a perversion of the system.
- Faking Death or Disability
Many life policies have riders for disability, producing the temptation to fake one to get the payout. Some people take it further and fake their own deaths. Risk analysis and probabilities are the two cornerstones on which the insurance industry is built.
Each instance of fraud — whether seller or buyer — puts pressure on the industry. Because of fraud, many companies build in generous contingency funds to protect against fraud. While planning for fraud is good business, it adds to the insurance premiums that all of us pay every day. Our premiums are larger than they would be in a more straightforward world.