INSURANCE FRAUD Part 2

Insurance fraud occurs when any act is committed with the intent to fraudulently obtain some benefit or advantage to which they are not otherwise entitled or someone knowingly denies some benefit that is due and to which someone is entitled. False insurance claims are insurance claims filed with the intent to defraud an insurance provider. Insurance fraud has existed ever since the beginning of insurance as a commercial enterprise.

Fraudulent claims account for a significant portion of all claims received by insurers, and cost billions of dollars annually. Types of insurance fraud are very diverse, and occur in all areas of insurance. Insurance crimes also range in severity, from slightly exaggerating claims to deliberately causing accidents or damage. Fraudulent activities also affect the lives of innocent people, both directly through accidental or purposeful injury or damage, and indirectly as these crimes cause insurance premiums to be higher. Insurance fraud poses a very significant problem, and all stakeholders that Governments and Insurance Industry players should make efforts to deter such activities. The “chief motive in all insurance crimes is financial profit.” Insurance contracts provide both the insured and the insurer with opportunities for exploitation. Causes of Frauds: The causes vary, but are usually centered on greed and loopholes in the fraud fight.

Often, those who commit insurance fraud view it as a low-risk, lucrative enterprise. People who have entered insurance fraud think it’s safer and more profitable than working street corners or even drag peddling. Compared to other crimes, court sentences for insurance fraud are usually lenient, so scammers may try to take advantage of the system. Though insurers try to fight fraud, some will pay suspicious claims, since settling such claims is often cheaper than legal action. Another reason that this opportunity arises is in the case of over-insurance, when the amount insured is greater than the actual value of the property insured. This condition can be very difficult to avoid, especially since an insurance provider might sometimes encourage it in order to obtain greater profits. This allows fraudsters to make profits by destroying their property because the payment they receive from their insurers is of greater value than the property they destroy. Insurance companies are also susceptible to fraud because false insurance claims can be made to appear like ordinary claims. This allows fraudsters to file claims for damages that never occurred, and so obtain payment with little or no initial cost. It is therefore essential to be alert to likely indicators that a claim is fraudulent.

It is impossible to provide a comprehensive list of what these might be, just as it is impossible to guarantee that all fraudulent claims will be identified. However, some of the common indicators are :-

1. Overstatement of claims. This is the most common form of Insurance fraud.
2. Lack of evidence that the Insured possessed the property which is the subject of the claim
3. More than one named insured on a policy
4. Multiple Insurance policies covering the same risk and
5. Inconsistent or changing accounts of circumstances giving rise to the claim.

In all cases of suspected fraud, there is a balance to be struck between the merits of identifying the fraud and the cost of investigating or proving it. In some cases, sufficient proof may not be possible. The benefits of pursuing all fraudulent claims , however small, in order to convince the public that any kind of fraud will not be tolerated need to be offset against sometimes disproportionate cost of investigating smaller suspect claims.


Different insurers will have different internal policies for deciding each case. If the amount at stake is large, it is usual for investigations to occur. If sufficient evidence is amassed to give rise to a probability that a claim is fraudulent, then the insurer should as well as declining the claim, report the matter to the police or other appropriate authorities and co-operate with them in any prosecution that ensues. Losses due to insurance fraud It is hard to determine the exact value for the amount of money stolen through insurance fraud. Insurance fraud is designed by fraudsters to be undetectable, unlike visible crimes such as robbery or murder. As such, the number of cases of insurance fraud that are detected is much lower than the number of acts that are actually committed. The best that can be done is to provide an estimate for the losses that insurers suffer due to insurance fraud.


According to estimates, insurance fraud accounts for about 10 percent of the property/casualty insurance industry’s incurred losses and loss adjustment expenses. Fraud in the healthcare is estimated at 10% of the health care industry’s expenditures. Hard vs. soft fraud Insurance fraud can be classified as either hard fraud or soft fraud. Hard fraud occurs when someone deliberately plans or invents a loss, such as a collision, auto theft, or fire that is covered by their insurance policy in order to receive payment for damages. Criminal rings are sometimes involved in hard fraud schemes that can steal millions of dollars from the Insurance Sector. Soft fraud, which is far more common than hard fraud, is sometimes also referred to as opportunistic fraud. This type of fraud consists of policyholders exaggerating otherwise legitimate claims.

For example, when involved in a collision an insured person might claim more damage than was really done to his or her car. Soft fraud can also occur when, while obtaining a new insurance policy, an individual misreports previous or existing conditions in order to obtain a lower premium on their insurance policy.

TYPES OF FRAUD IN VARIOUS BRANCHES OF INSURANCE:

Life insurance Life insurance fraud may involve faking death to claim life insurance. Fraudsters may sometimes turn up a few years after disappearing, claiming a loss of memory. Another example is where a person will go missing and live under a new assumed name in another country. Health care insurance Health insurance fraud is described as an intentional act of deceiving, concealing, or misrepresenting information that results in health care benefits being paid to an individual or group. Fraud can be committed by both a member and a provider. Member fraud consists of ineligible members and/or dependents, alterations on enrollment forms, concealing pre-existing conditions, failure to report other coverage, prescription drug fraud, and failure to disclose claims that were a result of a work related injury. The most common perpetrators of healthcare insurance fraud are health care providers. One reason for this is that the historically prevailing attitude in the medical profession is one of “fidelity to patients”. This incentive can lead to fraudulent practices such as billing insurers for treatments that are not covered by the patient’s insurance policy. Provider fraud consists of claims submitted by bogus physicians, billing for services not rendered, billing for higher level of services, diagnosis or treatments that are outside the scope of practice, alterations on claims submissions, and providing services while under suspension or when license have been revoked. Independent medical examinations are used to expose/debunk false insurance claims and allow the insurance company or claimant to seek a non-partial medical view for injury related cases.

Health fraud depletes taxpayer-funded programs like Medicare, and may victimize patients in the hands of certain doctors. Some scams involve double-billing by doctors who charge insurers for treatments that never occurred, and surgeons who perform unnecessary surgery. One of the main reasons that medical fraud is such a prevalent practice is that nearly all of the parties involved find it favorable in some way. Many physicians see it as necessary to provide quality care for their patients. Many patients, although disapproving of the idea of fraud, are sometimes more willing to accept it when it affects their own medical care. Program administrators are often lenient on the issue of insurance fraud, as they want to maximize the services of their providers.

Another motivation for insurance fraud in the healthcare industry, just as in all other types of insurance fraud, is a desire for financial gain. Public healthcare programs are especially conducive to fraudulent activities, as they are often run on a fee-for-service structure. Physicians use several fraudulent techniques to achieve this end. These can include “up-coding” or “upgrading,” which involve billing for more expensive treatments than those actually provided; providing and subsequently billing for treatments that are not medically necessary; scheduling extra visits for patients; referring patients to another physician when no further treatment is actually necessary; "phantom billing," or billing for services not rendered; and “ganging,” or billing for services to family members or other individuals who are accompanying the patient but who did not personally receive any services. Perhaps the greatest total dollar amount of fraud is committed by the health insurance companies themselves. There are numerous studies and articles detailing examples of insurance companies intentionally not paying claims and deleting them from their systems, denying and cancelling coverage, and the blatant underpayment to hospitals and physicians beneath what are normal fees for care they provide.

Automobile insurance Fraud rings or groups may fake traffic deaths or stage collisions to make false insurance or exaggerated claims and collect insurance money. The ring may involve insurance claims adjusters and other people who create phony police reports to process claims. One tactic fraudsters use is to drive to a busy junction or roundabout and brake sharply causing a motorist to drive into the back of them. They claim the other motorist was at fault because they were driving too fast or too close behind them, and make a false and inflated claim to the motorist's insurer for damages. There is a wide variety of schemes used to defraud automobile insurance providers. These ploys can differ greatly in complexity and severity.

Some of them are:-

1. Staged collisions This category involves staging a collision where the fraudsters will use a vehicle to stage an accident with the innocent party. Typically, there would be 4 or 5 fraudsters in the vehicle which makes an unexpected maneuver causing the innocent party to collide with the fraudsters vehicle. Each of the fraudsters then claim for injuries sustained in the vehicle. Working with a “recruited” doctor, the injuries are typically whiplash or other soft tissue injuries which are hard to dispute later.
2. Jumping in front of Cars: Jumping in front of cars are usually common where the driving conditions and roads are dangerous. Many people will try to scam drivers by jumping in front of expensive-looking cars or crashing into them. This can be solved by use of dash board cameras installed to warn would-be perpetrators or provide evidence for/against claims.
3. Exaggerated claims A real accident may occur, but the dishonest owner may take the opportunity to incorporate a whole range of previous minor damage to the vehicle into the garage bill associated with the real accident.

Personal injuries may also be exaggerated. Examples Examples of such fraud (soft fraud) can include filing more than one claim for a single injury, filing claims for injuries not related to an automobile accident, misreporting wage losses due to injuries, or reporting higher costs for car repairs than those that were actually paid. Soft fraud accounts for the majority of fraudulent auto-insurance claims. Hard auto-insurance fraud can include activities such as staging automobile collisions, filing claims when the claimant was not actually involved in the accident, submitting claims for medical treatments that were not received, or inventing injuries. Hard fraud can also occur when claimants falsely report their vehicle as stolen. "Crash for cash" scams may involve random unaware strangers, set to appear as the perpetrators of the orchestrated crashes. Such techniques are the classic rear-end shunt (the driver in front suddenly slams on the brakes, possibly with brake lights disabled), the decoy rear-end shunt (when following one car, another one pulls in front of it, causing it to brake sharply, then the first car drives off) or the helpful wave shunt (the driver is waved into a line of queuing traffic by the scammer who promptly crashes, then denies waving). Organized crime rings can also be involved in auto-insurance fraud, sometimes carrying out schemes that are very complex. In this scheme, known as a “swoop-and-squat,” one or more drivers in “swoop” cars force an unsuspecting driver into position behind a “squat” car. This squat car, which is usually filled with several passengers, then slows abruptly, forcing the driver of the chosen car to collide with the squat car. The passengers in the squat car then file a claim with the other driver’s insurance company. This claim often includes bills for medical treatments that were not necessary or not received. These schemes generally consist of three different levels. At the top, there are the professionals—doctors or lawyers who diagnose false injuries and/or file fraudulent claims and these earn the bulk of the profits from the fraud.

Next are the "cappers (insurance fraud)" or "runners", the middlemen who obtain the cars to crash, farm out the claims to the professionals at the top, and recruit participants. These participants at the bottom-rung of the scheme are desperate people (poor immigrants or others in need of quick cash) who are paid money to place their bodies in the paths of cars and trucks, playing a kind of Russian roulette with their lives and those of unsuspecting motorists around them. According to investigators, cappers usually hire within their own ethnic groups. Property insurance Possible motivations for this can include obtaining payment that is worth more than the value of the property destroyed, or to destroy and subsequently receive payment for goods that could not otherwise be sold. The majority of property insurance crimes involve arson. One reason for this is that any evidence that a fire was started by arson is often destroyed by the fire itself. The insured hires accomplices to set fire to their store in order to collect insurance money. Detecting insurance fraud The detection of insurance fraud generally occurs in two steps. The first step is to identify suspicious claims that have a higher possibility of being fraudulent. This can be done by computerized statistical analysis or by referrals from claims adjusters or insurance agents. Additionally, the public can provide tips to insurance companies, law enforcement and other organizations regarding suspected, observed, or admitted insurance fraud perpetrated by other individuals. Regardless of the source, the next step is to refer these claims to investigators for further analysis. Due to the sheer number of claims submitted each day, it would be far too expensive for insurance companies to have employees check each claim for symptoms of fraud. Instead, many companies use computers and statistical analysis to identify suspicious claims for further investigation. There are two main types of statistical analysis tools used: supervised and unsupervised. In both cases, suspicious claims are identified by comparing data about the claim to expected values.

The main difference between the two methods is how the expected values are derived. In a supervised method, expected values are obtained by analyzing records of both fraudulent and non-fraudulent claims. This method has some drawbacks as it requires absolute certainty that those claims analyzed are actually either fraudulent or non-fraudulent, and because it can only be used to detect types of fraud that have been committed and identified before. Unsupervised methods of statistical detection, on the other hand, involve detecting claims that are abnormal. Both claims adjusters and computers can also be trained to identify “red flags,” or symptoms that in the past have often been associated with fraudulent claims. Statistical detection does not prove that claims are fraudulent; it merely identifies suspicious claims that need to be investigated further. Fraudulent claims can be one of two types. They can be otherwise legitimate claims that are exaggerated or “built up,” or they can be false claims in which the damages claimed never actually occurred. Once a built up claim is identified, insurance companies usually try to negotiate the claim down to the appropriate amount. Suspicious claims can also be submitted to supervisory Authority for further investigation. These units generally consist of experienced claims adjusters with special training in investigating fraudulent claims. These investigators look for certain symptoms associated with fraudulent claims, or otherwise look for evidence of falsification of some kind. This evidence can then be used to deny payment of the claims or to prosecute fraudsters if the violation is serious enough. Determining fraud committed by the health insurance companies can sometimes be found by comparing revenues from premiums paid against the expenditure by the health insurance companies on claims.

K.O.OBALLA TRAINING MANAGER ZSP-RE (PTA REINSURANCE COMPANY)