Issue: Insurance fraud occurs when an insurance company, agent, adjuster or consumer commits a deliberate deception to obtain an illegitimate gain. It can occur during the process of buying, using, selling, or underwriting insurance. Insurance fraud may fall into different categories from individuals committing fraud against consumers to individuals committing fraud against insurance companies. Fraud not only inflicts extra costs on insurance companies, but it also financially impacts consumers and businesses. The Coalition Against Insurance Fraud reports that fraud costs consumers $308.6 billion a year. Additionally, the FBI estimates insurance fraud costs the average family between $4,000 and $7,000 in increased premiums over a 10-year period. 

Overview: While fraud is constantly evolving and affects all types of insurance, the most common in terms of frequency and average cost include life insurance, Medicare, property & casualty insurance (including auto theft fraud), health insurance, and workers’ compensation. As insurers begin to rely less on traditional methods, such as business rules and red flags, and more on technology, such as predictive modeling, link analysis, and artificial intelligence (AI), the cost of fraud to consumers is expected to decrease. According to “State of Insurance Fraud and Technology,” a 2021 white paper issued by the Coalition Against Insurance Fraud and SAS, nearly all respondents indicated they were utilizing anti-fraud technology to flag potential fraudulent claims.  

There are two recognized categories of fraud: hard and soft. Hard fraud occurs when a policyholder deliberately destroys property with the intent of collecting on the insurance policy. Soft fraud, which is more common, occurs when a policyholder exaggerates an otherwise legitimate claim or intentionally omits or lies about information on an application to obtain a lower premium. Soft fraud is often considered a crime of opportunity. 

The most common type of fraud scheme among insurance producers is premium diversion. This occurs when an insurance agent or broker keeps policyholders’ premium payments instead of sending them to the insurance company. Other types of diversion schemes include selling insurance without a license and collecting premiums without paying claims. 

Fraud can also be committed by insurance companies. Illegitimate insurance companies and dishonest insurance agents can defraud consumers by collecting premiums for bogus policies with no intention or ability to pay claims. These “companies” may offer policies at costs that are significantly lower than the traditional market price to attract consumers who are trying to save money. In many cases, a fake insurance company will provide consumers with documents that look real. In other instances, these policies may even be represented by legitimate insurance agents who themselves have been misled by fraudulent companies. 

Legitimate companies that are not licensed by the state to sell insurance might lead consumers to think they are selling 
“insurance” while evading state insurance regulations. For example, a company selling a health sharing ministry plan might call the plan insurance when it is actually an unregulated, non-insurance product. 

Employees of legitimate insurance companies can also deceive consumers for personal gain. For instance, an unscrupulous agent could collect premiums from a customer without delivering the insurance policy to the company. The insurance company could cancel or refuse to renew the policy. Signs of fraud with reputable companies include the failure to receive an insurance identification card or a copy of the written policy in a timely manner. 

Additional warning signs that may indicate to consumers that an insurance company is illegitimate are an agent or broker using intense sales pressure tactics, premiums from one company are 15-20% lower than other companies’ comparable coverage, and a company’s contact information not being readily available or easy to locate. 

Federal law does not directly address insurance fraud. It is, however, included in the Violent Crime Control and Law Enforcement Act of 1994, which gives the federal government jurisdiction over insurance fraud when it affects interstate commerce. 

Insurance fraud is a crime in 48 states and 30 states make insurer fraud a specific insurance crime. To address specific issues involving criminal activity, 42 states and the District of Columbia operate insurance fraud bureaus that investigate claims of illegal insurance activities. The fraud bureaus employ antifraud and criminal investigators who work closely with federal, state, and local law enforcement officials to prosecute insurance fraud. 

Fighting fraud is an important aspect of state insurance regulation. To help combat the growing problem of insurance fraud, the NAIC created the Online Fraud Reporting System, where consumers and insurance departments can electronically report suspected fraud to the appropriate insurance department. 

The NAIC encourages consumers to Stop. Call. Confirm prior to purchasing coverage from an insurance company. Before signing an application or paying for an insurance policy, consumers should stop and verify that the company they are about to do business with is legitimate. A phone call to their state insurance department can quickly confirm if an insurance company exists and is authorized to sell insurance in that state. It is also wise to get all coverage information in writing before purchasing a policy. 

The NAIC Antifraud (D) Task Force monitors all aspects of antifraud activities. The task force's mission is “to serve the public interest by assisting the state insurance supervisory officials, individually and collectively, through the detection, monitoring, and appropriate referral for the investigation of insurance crime, both by and against consumers.” 

On August 18, 2021, Delaware Insurance Commissioner and Chair of the Antifraud Task Force Trinidad Navarro announced the creation of the Improper Marketing of Health Insurance (D) Working Group. The working group aims to address consumer marketing of healthcare products via methods like robocalls, search engine advertisements, and telemarketers. The working group's 2026 charges include working with state insurance regulators to assist and guide monitoring of improper marketing activities, coordinate appropriate enforcement actions with other NAIC committees, and review existing NAIC models and guidelines addressing the use of lead generators in health insurance product sales.  

The Center for Insurance Policy and Research (CIPR), in partnership with The Institutes Griffith Insurance Education Foundation, hosted a webinar on insurance fraud in August 2022 that discussed the impact of fraud on the insurance industry, strategies for combating fraud, an overview of how regulators are tackling the issue, and the innovative ways technology and big data are being used to identify fraud. And to support consumers, the NAIC has published a Consumer Insight on insurance fraud, as well as creating and managing the Online Fraud Reporting System.