The True Cost of Insurance Fraud
“Identity theft.” “Consumer fraud.” “Insider trading.” “Falsifying data.”
Many of us may instantly know what each of these words mean thanks, in part, to the rising numbers and types of fraud that plague customers and corporations, making headlines globally. Over the past two years, fraud has become a growing menace, with an average of 6 frauds being reported per company.
Nearly every industry incurs some amount of financial loss from external threats or malicious insiders who intentionally defraud organizations through process loopholes. But the insurance industry is particularly susceptible due to a wide canvas that includes many channels, products, and processes for fraudsters to manipulate. Insurers report different types of fraud, including internal fraud, external fraud, underwriting fraud, and claims fraud, each having varying degrees of deceit and preparation. Fraudsters are also constantly evolving their techniques, becoming more and more sophisticated with convincing threat actors that exploit system ambiguities, especially in newer digital channels and networks. More recently, banking, financial services, and insurance (BFSI) companies are seeing a spike in what is being termed as ‘cross-channel’ fraud, whereby hackers steal user credentials from one channel to execute fraud on another channel. But setting aside the higher risk posed by digitalization, even in-person and traditional fraud techniques are advancing and remain a serious threat.
Drivers of insurance fraud
As in any other industry, the drivers for insurance fraud boil down to three aspects – pressure, opportunity, and rationalization. People who are overwhelmed by financial pressure may deliberately look for easier ways to make money. Some may find opportunities to derive financial gain through weak links that can be exploited. Others may rationalize padding a claim or exaggerating an incident with the view that they have paid their premiums diligently and yet have never claimed anything to date.
Insurance scams are executed by individuals or corporations engaging in ‘opportunistic’ or ‘professional’ fraud. Opportunistic fraud is more common, and perhaps a part of human nature often found at the nook where opportunity and rationalization meet. Examples here are inflating a medical bill or falsifying the value of stolen/damaged goods. Professional fraud involves a group of individuals that defraud insurers through schemes like arson-for-profit where owners deliberately set fire to their property to claim their policy or staged auto accidents that entrap unsuspecting motorists into collisions.
While many consider insurance fraud as a ‘victimless crime’ affecting only insurance giants that can easily stomach the losses, its true impact is far larger than imagined.
The actual losers of fraud
- Fraud losses cost insurers steeply.A study of global claims fraud showed that 3-4% of all claims filed are fraudulent. The Coalition Against Insurance Fraud puts the global cost of insurance fraud at USD 80 billion. It is important to note that these losses do not include corporate spending on anti-fraud controls, compliance, and employee training. What is often unknown is that when insurers pay out large sums in fake claims, it weakens their financial position, causing grave consequences to other stakeholders.
- Policyholders suffer escalating premiums.Theoretically and socially, insurance is a boon. It protects society’s wealth from risk and maintains cash flow despite adverse events. For example, in light of COVID-19, some American auto insurers have actually issued rebates of 15-25% on premium payments of policyholders. However, escalating fraud losses compromise an insurer’s ability to refund gains to stakeholders. To make matters worse, underwriters often increase the price of the insurance products and plans to combat these losses, forcing honest policyholders to bear higher or excess premiums for a reasonable risk. In effect, everybody loses.
- Fake pay-outs drive organized crime globally.Ill-gained proceeds from insurance fraud can fuel terrorism and organized crime across the world. It also acts as a prime channel for money laundering. In one such case, prosecutors in the state of New York uncovered a massive auto-insurance fraud that cost insurers millions of dollars. The perpetrators included an outfit of Russian gangsters, doctors, and lawyers that set up fake accident scenes and clinics. Soon after the incident, the New York Senate passed three bills to crackdown on auto-fraud through tougher measures.
One of the biggest obstacles to combating insurance fraud is the fact that most countries across the globe do not consider insurance fraud as a crime. This means that reporting insurance fraud to a policeman is usually ineffective because law enforcement agencies lack the protocols to investigate insurance fraud. It is no wonder then that the global insurance fraud detection market has been seeing steady growth, accounting for nearly USD 4.1 billion in 2018.
Faced with the rising frequency and sophistication of fraud coupled with a lagging regulatory pace, it is up to insurers to identify modern, faster, and more effective ways to shield themselves and their stakeholders from fraud.
Learn more on Insurance Fraud: Building a multi-faceted defense in a risky digital world
Tarun Kumar Singh is the CEO & MD of Finexure consulting, a Strategic Risk Consulting firm delivering solutions to corporate clients across India, the Middle East, and Southeast Asia.
With over 20 years of experience in the Insurance Fraud & Risk Management domain, Tarun brings in thought leadership and drives innovation towards helping organizations build new-age products. He is also an active contributor in the education industry, focusing on delivering quality education to rural & urban underprivileged children.