A Guide to Recognizing, Avoiding, and Reporting Insurance Fraud for Insurance Agents

What can you, as an insurance agent, do to stop insurance fraud, or report fraud if you see it happening? Read on to find out!

I recently got into a car accident. It wasn’t my fault; a drunk driver rear-ended me. I wasn’t injured much, and my car didn’t suffer much damage. The total medical and repair bills amounted to under $3,000, which was comfortably covered by my insurance. 

When I told my friends about this, they told me I could have claimed a lot more. They told me I should’ve got an old scratch from ages ago repaired, and also billed them for treatment for my sore neck, which has been bothering me for a long time (from incorrect posture, not the car accident). 

It didn’t occur to me then, but I went home and found out that such an action amounts to insurance fraud. The most common type of fraud was the one my friends had suggested. People who face losses either make false claims or inflate what they are due by adding unrelated and previous damages to their current claims. 

Insurance Fraud in the United States

The more I read about insurance fraud, the more surprised I was. I did not think so many people would try to defraud insurers, but I was wrong. The FBI estimates that non-health insurance fraud in the USA costs $40 billion per year.

It affects policyholders the most. Due to inflated and fraudulent insurance claims, an average American family faces an increase of $400 to $700 in premium amount per year.

How does insurance fraud affect you?

Fraud is one of the main reasons that premium amounts are increasing every year. Disaster insurance fraud during Hurricane Katrina was estimated to have cost the government more than $6 billion.

It also caused insurers to hesitate when providing disaster insurance. With hurricanes and other natural disasters becoming more and more prevalent, it caused the cost of disaster insurance to skyrocket.

The Hurricane Katrina Fraud Task Force (HKTF) was created by the government to tackle disaster fraud during hurricane Katrina. A single fraud-related case pursued by HKTF received more than 70 indictments and 60 guilty pleas.

Types of Insurance Fraud

If you study different types of insurance frauds, you can see that there are two basic types:

  • Hard fraud is the kind of fraud done specifically to defraud insurers.
  • Soft fraud is the more common kind of insurance fraud. Here, people inflate legitimate claims to pocket more than what the actual loss is worth.

While you can’t always prevent soft fraudhard frauds are the ones that you should be actively trying to prevent.

The five most common types of fraud in the insurance industry: 

1. False Claims: This fraud comes under the hard segment. In this situation, people make claims even though the accident might not have happened. The usual cases are slip and fall, car accidents, and property damage. In some cases, homeowners make claims for self-created property damage.  

2. Inflated Claims: Cases like this are at a high when natural disasters strike. Vast amounts of inflated bills whether it be on worker’s compensation claims, property damage claims, cyber-crime claims, or claims on repairs sent to the insurance companies might not have taken place.  

3. Disaster Fraud: These cases happen when natural disaster hits. Often linked to hazard insurance. Insurance companies receive a lot of business interruption claims and, as a result, do not have enough time to investigate each case individually. Hurricane Katrina caused a total of $100 billion in damages. Over the government’s $80 billion funding, $34.4 billion were insurance pay-outs in which $6 billion went to insurance frauds.  

4. Faked Death: As seen in movies, people take out a significant life policy on themselves and fake their death. The beneficiary makes a claim, and they enjoy the enormous pay-out. 

5. Insurance Company Fraud: The insurance companies commit fraud too. There are two ways of doing so. Firstly, through premium diversion, insurance agents hold the premium for themselves instead of sending it to the insurance company. Secondly, through fee churning, insurance agents move around policies of different companies to get higher commission from the companies.  

The first step for stopping fraud is not participating.

Your job as an insurance agent does not include investigating potential insurance fraud. That is for the insurers to do. The first thing you should be doing to prevent fraud is not committing or abetting insurance fraud.

That’s right. One of the most common types of insurance fraud is premium diversion, a kind of fraud in which the agent does not forward the full or partial premium amount to the insurer.

Hard insurance fraud is very rare in the USA. That is not to say that it doesn’t happen, though. The Insurance Hall of Shame  lists the most severe insurance frauds of 2018. There are a few horror stories in there.

Committing hard fraud usually involves arson or auto insurance frauds. These can lead to deaths of firefighters, bodily injury, and pose a danger to the community.

Learn how you can flourish as an agent after one call!

Schedule a call right now and learn how you can ease your work, sell more, and increase your profits!

What can you do to stop insurance fraud?

Insurers are using a lot of different techniques to combat insurance fraud. Using Big Data and Machine Learning, they process each claim people make so that the system flags suspicious claims.

However, for this system to work, all data that you provide must be up-to-date and accurate. Insurers take note of claims history, client data, and other external information. They use this data to decide whether they should investigate a potential claim for fraud or not.

Insurers do not tolerate fraud

Insurers take a zero-tolerance approach to insurance frauds. They do not want to appear as a carrier which is easy to defraud. As per a news published by Insurance Business Mag, GEICO filed a lawsuit against an auto repair shop for false invoices. They filed the case under the civil Racketeer Influenced and Corrupt Organizations (RICO) Act statutes, as well as unjust enrichment and fraud.

Doing this sends a message out to potential fraudsters to not target GEICO since they will get into deep legal troubles if they do. All insurers are making examples out of people committing fraud to send a strong message.

How do you report fraud?

Despite all this, you might still come across a few fraudulent claims. The agent is usually the first point of contact for the insured, and so they might send the application to you to forward it to the insurer. 

The first thing you need to do when you find someone committing fraud is to gather the evidence. Hunches or gut feelings are not substantial grounds for reporting fraud. You can flag claims, sure, but reporting actual fraud requires proof.

Once you have the proof, you have various options. You can report fraud directly to the carrier. Each carrier has its own fraud reporting portal on their website. Additionally, you can also file reports at the National Insurance Crime Bureau’s fraud reporting portal.

There are also state-specific platforms for reporting insurance fraud. You can do a quick Google search and find more information about them.

You should not commit or tolerate insurance fraud

Insurance fraud causes premiums to increase, insurers to slow down claim processes, and even cause loss of life. As an insurance agent, you should not participate in it, and report it if you see people commit it.

Think we missed out on anything? Let us know with a comment below!

Learn how you can flourish as an agent after one call!

Schedule a call right now and learn how you can ease your work, sell more, and increase your profits!

Share This Infographic On Your Site

Pin It on Pinterest

Share This