Which seems like a better use of money — more than a decade of federally funded cancer research or one year’s worth of fraudulent insurance claims? The price tags, it turns out, are the same: $80 billion.
Insurance fraud is a widespread and continuous problem in the United States, according to David Glawe, president and CEO of the National Insurance Crime Bureau. He and other industry experts say fraud is a factor in about 10% of property and casualty claims, a category that includes auto and home insurance.
How does insurance fraud affect premiums?
If you think insurance companies are content to pay the $80 billion annual bill for fraud out of their own pockets, you’re mistaken. The massive deficit caused by fraud “is directly translated to increased premiums for you and [me],” Glawe says.
The average American family spends an extra $400 to $700 on premiums every year because of insurance fraud, according to the FBI.
What is insurance fraud?
Fraud takes many forms and isn’t limited to serious and obvious acts of deception. All of these are examples of insurance fraud:
- Intentionally setting your own home on fire and then filing an insurance claim for the damage.
- Claiming that your stolen television was newer and larger than it actually was.
- Registering your car at a friend’s address to get lower auto insurance rates.
Bottom line: If you knowingly mislead your insurance company for the purpose of making money, you’re committing insurance fraud.
You might even be involved in insurance fraud without realizing it. Here are some examples:
- After an auto accident, your repair shop replaces your air bags with salvaged ones but bills your insurance company as if they’re brand-new.
- An agent collects insurance premiums from you but then keeps the money for himself.
Generally speaking, you wouldn’t be held liable in situations where someone else committed the actual fraud, Glawe says.
Fighting insurance fraud
Insurance companies are using digital technology to fight back. Matthew Smith, executive director of the Coalition Against Insurance Fraud, or CAIF, says 95% of companies use some kind of anti-fraud technology and nearly 60% use artificial intelligence.
This technology can detect possible insurance fraud in several ways. Artificial intelligence can scan hundreds of thousands of claims to find duplicates, for example, or alert the insurer if someone claiming to be injured posts a beach volleyball selfie online.
Automating fraud investigations can save insurers a lot of money, but it may not reduce your premiums, Smith says. He’s concerned insurers will rely too heavily on fraud-detection software, viewing it as a cheap substitute for human investigators, and pocket the savings.
This approach, Smith says, is an aspect of insurance fraud that organizations such as CAIF are watching closely. “In our view, if a company is knowingly and intentionally passing along the cost of insurance fraud and not doing everything reasonably in their power to investigate it, that too constitutes insurance fraud,” he says.
How to prevent insurance fraud
So how can consumers help prevent insurance fraud?
One way is to stay in close contact with your insurer after you file an insurance claim. Most can recommend auto repair shops, home contractors and other vetted service providers.
Vigilance will also help you avoid fraud. If someone calls looking for sensitive information or is using a number you haven’t seen, don’t take the call. Do the research yourself to ensure you aren’t falling victim to a fraud scheme.
If you suspect a scam, you can report it to your insurer, consumer-focused organizations such as CAIF or NICB, law enforcement such as the FBI, or insurance industry organizations such as the National Association of Insurance Commissioners.
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Doug Sibor writes for NerdWallet. Email: dsibor@nerdwallet.com.
