The True Costs of Insurance Fraud

Insurance fraud is often called a "victimless crime," but that's far from the truth. It affects everyone, directly or indirectly. A study done in 2022, by the Coalition Against Insurance Fraud (CAIF), showed that insurance fraud costs American citizens a staggering $308.6 billion annually. From inflated health care claims to staged auto accidents, fraud increases premiums for honest policyholders and strains government resources. This article briefly reviews the most common types of insurance fraud, their impact on society and the steps needed to combat this widespread problem.

Insurance Fraud Defined

This fraud occurs when individuals or entities deceive insurers for financial gain. It may include actions such as lying on applications, exaggerating claims or outright fabricating losses. Common types include:

• Life insurance fraud may occur when a scammer files a false death claim or a beneficiary attempts to alter a policy,
• Health care fraud sometimes involves billing for services not provided, billing for more expensive treatments than were performed (called "upcoding") or prescribing unnecessary procedures,
• Auto insurance fraud may include staging accidents or submitting claims for pre-existing vehicle damages, and
• Workers' compensation fraud sometimes occurs when employees exaggerate injuries or employers misclassify workers to reduce premiums.

Although these schemes may seem minor individually, their collective impact is monumental.

How Insurance Fraud Affects Individuals

Insurance fraud impacts the general public when insurers pass their financial losses to policyholders, raising costs for everyone. Premiums rise, causing consumers to pay most of the cost of fraud. However, taxpayers are also indirectly affected by the rising costs of government programs, such as Medicare and Medicaid.

Meanwhile, businesses pay higher operational costs because of fraudulent workers' compensation claims that raise premiums. Fraud strains companies' resources and sometimes causes small businesses to shut their doors forever. And that's not all. Law enforcement and regulatory agencies use significant resources to investigate and prosecute suspected fraud.  

What CAIF Recommends

According to CAIF, an effective plan to fight insurance fraud requires cooperation among insurers, policymakers and law enforcement. Here are four broad strategies the organization recommends to help mitigate the problem:

1. Better data collection and analysis processes. Improved data-sharing and predictive analysis can lead to more successful fraud detection. Technologies such as artificial intelligence can help identify patterns that indicate fraudulent activities.
2. Campaigns to heighten public awareness. Educating the public about the consequences of insurance fraud may deter would-be scammers and encourage citizens to report suspicious activities.
3. Stronger legal frameworks. Policymakers should review existing laws and strengthen fraud penalties to dissuade potential scammers.
4. Cooperation among industries. Insurers and law enforcement must work together to develop and enforce unified approaches to combat fraud.

The Road Ahead

Insurance fraud figures may be staggering, but they collectively represent an opportunity to identify and address vulnerabilities. By increasing investment in antifraud technologies and raising public awareness, the impact of fraud on the economy and society can be lessened.