No one likes paying more for something than they need to, yet we all do. It’s a hidden tax built into just about everything we buy every day. And for the people responsible for the “tax,” the crimes leading to the tax may be viewed as acceptable – perhaps even laudable in certain groups. What is this tax? It’s insurance fraud.
Estimates are that insurance fraud costs Americans over $308 billion a year.[i] While the fraud may be perpetrated against insurance companies, everyone pays for it through higher insurance premiums. Worse yet, businesses, all of whom must purchase insurance, also pay the hidden tax that must be passed along in the cost of goods and services we buy. Insurance fraud is far from victimless despite what some may want to think. Assuming 89.1 million family groups in the United States,[ii] each family group pays nearly $3,500 a year in this “tax.”
Understanding the Fraud Triangle
Insurance fraud happens in many different forms and is as old as insurance itself. Each type of insurance will have its own unique set of vulnerabilities to deception. That said, there are common elements that most perpetrators possess when committing crimes: a motive or pressure to commit the act, the perceived ability to succeed, and a rationalization for committing the act.[iii]
The most common motive for insurance fraud is financial pressure and greed although there may be other motives. Catalysts for financial pressures can take many forms including loss of a job, a large unexpected financial expense, or simply wanting to live beyond one’s means. For some, committing fraudulent acts may start small and then grow as the additional income and success reinforce the need for still more income. Some may attempt to commit fraud in a desperate attempt to solve an unexpected problem whereas others may see defrauding others as just a way of life. This brings us to the second element common amongst fraudsters.
Rationalization: Justifying the Unjustifiable
Rationalization is the moral compass that allows a perpetrator to commit the act. Each person’s sense of right and wrong is different, and this moral compass can change with pressure. Seemingly “good” people may make bad decisions given the right amount of pressure. It may also be generational. Unfortunately, attitudes concerning committing insurance crimes are shifting. While as many as 96% of older people see insurance fraud as a crime, the number drops to only 64% for younger people.[iv] For insurance fraud, common rationales heard voiced are that “it is a victimless crime,” “I’ve paid too much in premiums and deserve some of it back,” and “I just wanted to cover my deductible costs.” None of these are legitimate excuses, but for some, it’s enough to justify the act.
Motive: From Financial Pressure to Greed
Some may commit a fraudulent act without realizing the consequences. For example, we often find that a person who experiences a loss of some sort and then purchases the insurance after-the-fact by lying about to loss. For life insurance, this may be lying about a recent medical issue or smoking habits on a new application for insurance. For auto insurance, it may be getting into an accident and then lying about the accident date or staging a theft of the vehicle.
Others are more methodical and organized in their fraudulent acts. One of the recent trends has been to either create fake identities or steal the identities of others for the purpose of taking out insurance. Ultimately, the goal is to collect the insurance benefits. Another focus of fraudsters, including organized crime groups, is account takeovers. There are nearly $4 trillion in annuity reserves alone with insurers,[v] and fraudsters are constantly testing insurance companies to find ways to penetrate identity screening methods and tools. One of the common methods utilized by fraudsters is to pose as the insured using stolen information about the prospective victim to gain access to their accounts. Perpetrators may also steal user IDs and passwords to gain online access to the victim’s accounts. This information is often obtained either through social engineering or is made available for purchase from data breaches.
Health insurance is also a large target for fraudsters. These schemes often involve providers billing Medicare and other insurers for services that were not provided or for equipment that wasn’t received or wasn’t necessary. It may also involve falsifying a patient’s diagnoses for higher insurance payouts.
There are steps to prevent insurance-related crimes that each of us as consumers can take.
- Educate yourself and your family, particularly elderly parents, on how to protect your identity so that your financial and insurance accounts are not put in jeopardy. Never give out your personal information to anyone or any business unless you know who you are dealing with and they have a legitimate need for it. For example, if someone calls offering a free service but requests your Medicare number to “verify” your eligibility, it is likely a scam to steal your Medicare number so fraudulent claims can be filed using your number.
- If you know of a fraud that has been committed, report it to the insurance company and the local authorities. At Diligence, we have acted on tips provided to our clients and have been able to assist our clients in recovering losses due to fraudulent activities.
- Monitor your financial and insurance statements for unusual activity, especially expenses that are listed that were not incurred by you.
- Freeze your credit with the three major credit bureaus, Experian, TransUnion, and Equifax, so that if someone tries to open an account in your name, it will be more difficult. It is free, and their websites are https://www.experian.com/help/credit-freeze/, https://www.transunion.com/credit-freeze, and https://www.equifax.com/personal/credit-report-services/credit-freeze/.
- Use strong and unique passwords for each of your online accounts. A reputable password vault such as NordPass, LastPass, or 1Password can be a helpful tool to store your passwords. Passwords are subject to being stolen through data breaches, and using the same password for multiple accounts can make all your accounts using that password vulnerable. Passkeys are also an option for additional security.
- Don’t fall “victim” to the temptation to commit insurance fraud. Tell the truth on insurance applications and claim forms. Insurance fraud is not victimless, and the penalties can be steep if caught.
- Don’t be a party to others committing fraudulent acts. If you are asked to witness an event that didn’t occur or are asked to alter the facts, don’t agree to the request and explain the consequences to the requestor.
As a person working in the field of fraud risk identification and mitigation for many decades, sadly, this author sees the schemes that are attempted every day. Some are very sophisticated while others are perhaps desperate attempts to remedy an unexpected situation. Some fraudsters are patient and are willing to pay the premiums on a policy for years until the scheme ripens. Some involve violent crimes and even homicide whereas others may involve switching the identity of a deceased person with that of the named insured on a policy. There are countless schemes and tactics, and whatever they are, we all pay the price. Don’t become a victim.
If you have questions are just have a story to share, please contact me. At Diligence, we serve the legal and financial services industries by helping clients identify risks at underwriting, policy administration, and at time of claim. We have a full range of consulting and investigation services from automated ID verification tools, desktop investigations, and social media screening, to covert surveillance and in-person interviews. Our reach is global with resources in the United States and just about every country on the globe.
About the Author
Kevin Glasgow is an insurance industry veteran with over 35 years working with both retail insurers and reinsurers in the United States and Canada. His roles have included leading claim teams in the United States and Canada, and as such, he has worked extensively collaborating with underwriters and others to mitigate fraud risks as well as defending companies against fraudulent activities. He has worked as an expert witness in insurance matters, and he is currently working with Diligence International Group which specializes in fraud mitigation and identification. He is also on the Advisory Board with Friendly, an AI company serving the insurance industry. He holds a bachelor’s and master’s degree in business administration and is the past president of the International Claim Association and the Eastern Claim Conference, and his designations include the ARA, FLMI, FLHC, CFE and CLU®. Articles written are from his thoughts and experiences and are not written by AI.
[i] Coalition Against Insurance Fraud, Fraud 101: What is Fraud, https://insurancefraud.org/fraud-stats/
[ii] United States Census Bureau, November 13, 2023, Family Groups 2023, https://www.census.gov/library/visualizations/interactive/family-groups-2023.html
[iii] Association of Certified Fraud Examiners, https://www.acfe.com/fraud-resources/fraud-101-what-is-fraud
[iv] Claimspages, July 6, 2023, https://www.claimspages.com/news/changing-perceptions-the-growing-acceptance-of-insurance-fraud-in-the-us-20230706/
[v] ACLI 2024 Life Insurers Fact Book, Chapter 3, page 31-32, https://www.acli.com/about-the-industry/life-insurers-fact-book/2024-life-insurers-fact-book