Insurance Fraud

Last Updated: 6/13/2023

Issue: Insurance fraud occurs when an insurance company, agent, adjuster or consumer commits a deliberate deception in order 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 indicates that fraud costs businesses and consumers $308.6 billion a year.  Additionally, the FBI estimates fraud costs the average family between $400 and $700 a year in premiums.

Overview: While fraud is constantly evolving and affects all types of insurance, the most common in terms of frequency and average cost include the following (data is from The Coalition Against Insurance Fraud and Colorado State University Global):

• Life insurance: $74.7 billion;
• Medicare: $60 billion;
• Property & casualty insurance: $45 billion; auto theft fraud totaled $7.4 billion;
• Health insurance: $36.3 billion; and
• Workers' compensation: $34 billion ($9 billion from premium fraud; $25 billion in claims fraud).

The above numbers should show a decrease next time they are updated, due in part to the increased use of technology in detecting fraudulent claims.

The role of technology: Technology is playing a bigger role in addressing fraud, as insurers rely less on traditional methods such as business rules and red flags, and more on predictive modeling, link analysis, and artificial intelligence. According to a 2021 white paper issued by the Coalition Against Insurance Fraud, nearly all respondents indicated they were utilizing anti-fraud technology to flag potential fraudulent claims.  Fraud technology has the most impact in property claims and personal auto, but has been increasing particularly in the detetection of property fraud compared to earlier years.

Types of fraud: Two categories of fraud exist: hard fraud and soft fraud.  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 on 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.

Insurance company fraud: 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 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.

Consumers should be aware of the following warning signs, as they may indicate that an insurance company is illegitimate:

• An agent or broker using intense sales pressure tactics, such as urging a consumer to buy a policy immediately, otherwise the price may change. 
• The premiums from one company are more than 15-20% lower than other companies’ comparable coverage.
• A company’s contact information is not readily available or is difficult to track down.

The NAIC encourages consumers to Stop. Call. Confirm before buying coverage from an insurance company. Before signing an application or paying for an insurance policy, consumers should stop and take the time to verify that the company they are about to do business with is legitimate. A phone call to a consumer’s state insurance department can quickly confirm whether 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.

Federal and state law: Federal law does not distinctly address insurance fraud. Instead, it is encompassed by The Violent Crime Control and Law Enforcement Act (1994), giving the federal government jurisdiction over insurance fraud when it affects interstate commerce.

Insurance fraud for at least some lines of insurance is a crime in every state and the District of Columbia. Thirty states make insurer fraud a specific insurance crime. To address specific issues involving criminal activity, 42 states, plus the District of Columbia, have 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 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 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, to promote the public interest through the detection, monitoring and appropriate referral for investigation of insurance crime, both by and against consumers.

On August 18, 2021, Delaware Commissioner and Chair of the Antifraud Task Force Trinidad Navarro announced the creation of the Improper Marketing of Health Plans Working Group.  The working group aims to address consumer marketing of healthcare products via methods like robocalls, search engine advertisements, and telemarketers.  A key concern is how consumers are being marketed away from Affordable Care Act (ACA)-compliant plans to plans that do not offer the same comprehensive coverage for pre-existing conditions. The working group's 2022 charges include working with state and federal regulators to help monitor the improper marketing of health plans, as well as reviewing and updating any NAIC models or guidelines that address the use of lead generators for sales of health insurance products. 

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.  The topics discussed included the impact fraud has 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. Guest speakers included academics, industry experts, and Delaware Insurance Commissioner Trinidad Navarro.  A replay of the event is available to view.