The Real Cost of Insurance Fraud

One of the most commonly asked questions in the insurance industry is "why do rates keep going up?" This is especially true in the auto insurance field. Insurance companies base individual rates for drivers on the level of risk they impose. Factors such as annual mileage, driving experience and driving records as well as previous insurance claims are used to assess a driver's risk level. But there are also factors that can affect the insurance industry as a whole. At the top of that list is fraud. Insurance fraud costs the average family an extra $400-$700 a year in increased premiums.


In 2018, the FBI estimated that insurance fraud costs American consumers nearly $136 billion a year, $40 billion in P&C alone. According to Director of the Coalition Against Insurance Fraud, Matthew Smith estimated the cost of insurance fraud at over $80 billion. A Substantially lower number, but still alarming none the less. He also points out that $80 billion is more than the federal government will spend on the next 16 years of cancer research.



Insurance fraud comes in all sorts of colors. One of the most common is premium leakage. Premium leakage occurs when missing or inaccurate information is submitted to underwriting and costs personal auto insurers $29 billion a year. A 2017 Verisk Analytics Study breaks down premium leakage into six problem areas. They are as follows:


1. Unrecognized or unreported drivers- accounts for 36% of leakage and $10.3 billion annually

2. Underestimating mileage- accounts for $5.4 billion

3. Inaccurate information regarding violations or accidents- accounts for $3.4 billion

4. Unverifiable or inaccurate garaging information- accounts for $2.9 billion

5. Unverifiable or inaccurate identity information- accounts for $2.8 billion

6. Miscellaneous problems- account for $4.1 billion


A poll conducted by NerdWallet was taken in 2017 to see how consumers felt about fraud. Here's what they discovered:


- One in ten Americans have given false information when purchasing auto insurance

- 40% of people surveyed admitted to reporting lower annual milage

- 25% admitted to omitting drivers

- One in five lied about how their vehicle would used

- 10% gave different zip code then their actual garaging address allowing them to claim a discount that did not apply.




Premium leakage isn't the only type of insurance fraud out there. Here are some known car insurance fraud schemes:


- repair shops inaccurately charging customers for extra work or time

- charging for new parts but using used parts

- staged car crashes

- policyholders selling cars to chop shops and then reporting them stolen



It's not just car insurance either. Here are some of the known home owner insurance schemes:



- policyholders claiming they've been robbed of items they never had to get paid

- deliberately burning house down during financial hardship

- inflating insurance claims to get paid more than the actual loss

- not disclosing information or providing inaccurate information in an effort to get lower premiums



It's not just consumers committing insurance fraud. There is also fraud committed within the industry by insurers and agents. Here are some common schemes used by insurers:


- Premium diversion- this occurs when an agent fails to send premiums to underwriting and instead pockets the money.

- Fee churning- initial premium is reduced by repeated commissions until there is no money left to pay claims.-

- Asset diversion- theft of insurance company's assets, usually in the context of a merger with an existing company


The list of insurance fraud schemes could go on forever. Hopefully you get the idea. Lying to insurers might seem innocent. But in the end, it costs everyone money. Your cheap auto insurance rate might seem like a win, but without researching the company, it could cost you everything. Talk to an agent. Find out if there are any discounts available or if there's anything they can do to lower your premium without compromising your safety.


References: https://www.fbi.gov/stats-services/publications/insurance-fraud

https://www.iii.org/article/background-on-insurance-fraud

https://www.thebalance.com/extreme-cases-of-insurance-fraud-examples-and-list-4584227

https://rgare.com/knowledge-center/media/articles/how-demographics-and-attitudes-impact-insurance-fraud


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