Insurance Fraud Boosts Cost of Premiums

By Richard A. McGrath, CIC, LIA

If not for fraud, insurance premiums would be significantly lower.

Fraud accounts for about 10 percent of the property/casualty insurance industry’s incurred losses and loss adjustment expenses, which comes out to about $30 billion a year, according to the Insurance Information Institute (III).

Healthcare fraud accounts for 3 percent to 10 percent of healthcare expenses, according to the Federal Bureau of Investigation, while the U.S. Department of Health and Human Services’ Centers for Medicare and Medicaid Services estimate the cost of healthcare fraud to be between $75 billion and $250 billion a year.

Fraud typically increases during tough economic times, which may be why the National Insurance Crime Bureau (NICB) reported a 23 percent increase in questionable insurance claims, from 85,018 in 2009 to 91,730 in 2010.

Fraud may be committed by many different parties – policyholders, insurance agents and brokers, those who provide services to the insurance industry and even insurance companies.  In the end, though, it is the consumer who ends up paying, as the costs of fraud and fraud prevention are reflected in insurance premiums.

Common Types of Fraud

Insurance fraud ranges in scope and seriousness from the insured person who provides false numbers to offset a deductible to the crime rings that arrange accidents so they can file lawsuits against insurance companies.

Many insurance-related cases settle out of court, as juries tend to be sympathetic to “victims” and insurance companies want to avoid the negative attention that comes with such cases.

Common examples of insurance fraud include:

  • “Padding” or inflating claims to receive a larger-than-warranted settlement, sometimes to cover the cost of a deductible, but often just to make a profit.
  • Misrepresenting information on an insurance application.
  • Submitting claims for injuries or damage that never occurred or for services never provided or equipment never delivered.
  • Staging of accidents.

Healthcare, workers’ compensation and auto insurance are especially vulnerable to insurance fraud, according to the III.

Doctors, hospitals, nursing homes, diagnostic facilities, medical equipment suppliers and attorneys have been cited in healthcare scams, including reselling of prescription drugs and identity theft involving the filing of false medical claims.

The most prevalent types of healthcare fraud cited by the FBI include billing for services not rendered; “upcoding” services and medical items to receive a higher payment than warranted for what was provided, filing duplicate claims, performing excessive or unnecessary services, offering kickbacks, and unbundling tests and procedures that would cost less if billed together.

Workers’ compensation fraud includes cases in which employees fake or exaggerate injuries, but it also includes cases where employers misrepresent their payroll or the type of work carried out by their workers so they can pay lower premiums.  Employers with poor claims records may apply for coverage under different names and medical providers may exaggerate treatment by “upcoding” to increase insurance payments.

Auto insurance fraud is far ranging.  In addition to staging accidents, which typically result in hard-to-disprove “soft tissue” injuries, consumers often seek to lower their premiums by misrepresenting information on applications.  Use of a false Social Security number to avoid revealing a poor credit score, misrepresenting the use of a vehicle and giving a false address to be insured where rates are cheaper are common forms of “rate evasion.”

In addition, auto sellers have been caught “title washing” by putting false serial number plates on vehicles that have been damaged in floods and other natural disasters.  By switching plates, dealers can sell salvaged cars for the price of used cars.

Carriers Fighting Back

Given the cost involved, insurance carriers are fighting back and are reaping benefits from their efforts.  For example, the antifraud efforts of Blue Cross and Blue Shield Association saved or recovered more than $510 million in 2009, a return of $7 for every $1 spent.

To battle fraud, most insurers have established special investigation units (SIUs), which often include professionals with experience in law enforcement.  States have also set up anti-fraud bureaus and the National Insurance Crime Bureau, a non-profit organization with nearly a century of experience fighting fraud, uses its expertise to help insurers prepare for major fraud cases.

Fraud investigators also are increasingly using data-mining programs to identify repetitive claims and cases that stand out or meet certain criteria.  The Insurance Services Office (ISO) has collected information about more than 700 million claims in its ClaimSearch database.

Regulatory changes are also helping to detect and deter fraud.  Under the Affordable Care Act of 2010, healthcare providers can be excluded from enrolling in Medicare and Medicaid if they lie on their applications, and the Improper Payments Elimination and Recovery Act requires agencies to conduct recovery audits for programs every three years and develop corrective action plans for preventing future fraud.

The consequences of being caught committing fraud can be severe, and include a loss of insurance coverage, legal and criminal action.  Under the federal Racketeering Influenced and Corrupt Organizations Act (RICO), for example, insurers can collect triple damages.

The increasing attention being paid to identifying fraud should make consumers and employers think twice about fudging their information or taking other actions that could lead to fraud investigation.


Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass.  He can be reached at rmcgrath@mcgrathinsurance.com.

This article is written for informational purposes only and should not be construed as providing legal advice.

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