The rising tide of insurance fraud: an estimated $308B problem

By Doug Bailey

Insurance fraud is a systemic problem that costs billions of dollars every year and impacts regulators, insurers, and consumers. It is not merely a passing fad. Rich Gibson, the American Academy of Actuaries' Senior Casualty Fellow, discussed the widespread occurrence and serious consequences of insurance fraud in a recent briefing organized by the academy. Gibson also shared findings from the academy's most recent studies.

A $308 billion issue

The Coalition Against Insurance Fraud estimates that insurance fraud costs the United States an incredible $308 billion a year. This amount includes all forms of insurance, with property and casualty fraud alone contributing almost $90 billion. To put things in perspective, this industry accounts for 12% of its total premiums, or $700 billion. According to Gibson, non-health insurance fraud costs the typical American household between $400 and $700 annually in inflated premiums, according to FBI estimates.

"Both consumers and businesses incur additional expenses as a result of fraud," Gibson stated. The elderly, people with language or cultural hurdles, and those who are already having financial difficulties are among the disadvantaged groups that are disproportionately affected by these charges, he continued.

And it's growing worse. Recent data show customers reported losing more than $10 billion to fraud in 2023, a 14% rise over the year before.

The various aspects of insurance theft

The insurance industry has a very varied range of fraudsters and schemes. "Virtually any participant in the insurance system," including policyholders, third parties, and corporate insiders, can perpetrate fraud, Gibson underlined. These are some of the most prevalent forms of fraud:

Making inflated or fraudulent claims is known as claim fraud.
Premium fraud is the practice of falsifying data in order to obtain cheaper rates.
Inflating service costs or invoicing for services that are not necessary are examples of third-party fraud.
Insider fraud is when agents or staff members steal money or change regulations.

Arson-for-profit, staged auto accidents, inflated property claims, and workers' compensation fraud involving fabricated or exaggerated injuries are examples of specific schemes. "Fraudsters are creative, coming up with new ways to exploit the system," Gibson noted.

The most costly kind of fraud is health care insurance fraud, which costs customers an estimated $105 billion a year. It includes things like medical identity theft, upcoding (charging for more costly treatments than were actually performed), and invoicing for services that were never rendered.

Auto Insurance Fraud: Typical methods include staged accidents and premium leakage, in which missing or misrepresented information results in erroneous rates. Auto insurers lose at least $29 billion a year as a result of premium leakage alone.
Premium diversion occurs when insurance premiums are embezzled, usually by agents who neglect to send the money to underwriters and instead keep it for themselves. It is regarded as the most prevalent kind of insurance fraud.
Workers' compensation fraud happens when workers make up injuries in order to get benefits or when businesses misclassify workers in order to lower premiums. An estimated $34 billion is lost each year as a result of such fraud.

The evolution of fraud perception

A change in the way society views insurance fraud was one of the most notable revelations. According to a survey Gibson cited, a sizable percentage of participants did not even think insurance fraud was a felony. The growing incidence of fraud is a result of both the normalcy of fraudulent activity and increased financial demands.

He ascribed this upward tendency to both shifting perceptions and the difficulties insurance have adjusting to ever-more-advanced fraud schemes.

Keeping up with emerging fraud tendencies was the top concern for 31% of insurers in 2022, followed by privacy and data protection concerns.

Additionally, fraud has been made easier by the proliferation of digital tools, which has led insurers to invest in cutting-edge detection systems.

The Actuarial reaction to deception

Actuaries are essential in the fight against insurance fraud. Gibson explained how actuaries use sophisticated modeling and data analytics methods to identify fraud trends and evaluate the efficacy of anti-fraud initiatives. Actuarial knowledge is crucial in measuring the work of special investigative units (SIUs) entrusted with detecting and combating fraud, and regulatory requirements frequently demand insurers to produce anti-fraud plans.

Gibson clarified, "Actuaries' work is guided by actuarial standards of practice, such as those on data quality and modeling, to ensure professionalism and reliability in anti-fraud efforts." He gave an example of how an actuarial team discovered a fraud hotspot associated with a particular apartment building, which resulted in focused interventions and increased market stability.

The wider consequences

Fraud has far-reaching effects on equity and market availability in addition to financial losses. Insurers may withdraw from specific regions or increase prices in response to the growing expenses associated with fraud, which would limit the availability of coverage for customers in impacted areas. As Gibson pointed out, this cycle makes availability and affordability issues worse, especially in areas where economic inequality is already a problem.

Going forward

In order to combat insurance fraud, the briefing emphasized the significance of cooperation between insurers, regulators, and legislators. The Academy's collaboration with the National Association of Insurance Commissioners (NAIC) involves keeping an eye on important topics that relate to anti-fraud efforts, such as cyber insurance, climate concerns, and sophisticated modeling approaches.

Gibson concluded that fraud is a social problem as well as a financial one. Vigilance, creativity, and a dedication to justice and equity are necessary to combat it. Stakeholders in the insurance sector are about to learn more about this urgent problem as the Coalition Against Insurance Fraud gets ready to publish an updated report.