Fraud is hardly a new problem, but it is a serious issue, and recent fundamental changes in societal norms are exacerbating fraudulent conduct and making detection and deterrence less of a priority than warranted. The scope and scale of fraud are truly shocking, especially among government-funded medical and social programs currently under scrutiny, where enormous costs are somehow tolerated.
Fraud not only creates significant economic loss but also undermines confidence in its public and financial institutions, including insurance. Yet preventing and combatting fraud is seemingly episodic and random.
All of this serves to bring renewed attention to the long-standing concerns about ever-expanding fraud in general – and specifically insurance fraud. Insurers need to heed the wake-up call.
COST OF INSURANCE FRAUD
Quantifying insurance fraud's impact is difficult and spans from premium fraud to claims fraud, whether opportunistic or through deliberate scheme. According to the Coalition Against Insurance Fraud (CAIF), insurance fraud costs American consumers more than $300 billion a year. This amounts to an individual policyholder $900 annual “tax,” as insurer costs are passed on in form of premiums. Claims fraud is said to occur in about 10% of property-casualty insurance losses. Medicare fraud alone is estimated to cost $60 billion every year.
There are also several limitations when it comes to detecting fraud. According to the National Association of Insurance Commissioners (NAIC), there are key differences between “hard” and “soft” types. Soft forms of fraud are widespread and can be a common exaggeration of a legitimate claim. Hard types are described as intentional acts to create or fabricate “damages” and claims. Still, these general headers fall short of telling the whole story.
Claim fraud can be perpetrated by an individual or involve others including organized crime rings recognizing there are entire ecosystems designed to inflate, embellish and even fake an accident. Billing for unperformed medical procedures pales in comparison to fake “victims” being paid to undergo surgery. A single case in New York uncovered a $31 million scheme between a doctor and lawyer in trip-and-fall “accidents,” paying "victims" to endure surgery, simply to initiate a claim, justify damages or both. So-called runners are paid finder-fees to produce participants.
Further, many frauds go undetected for long periods or are missed altogether because there is much reliance on the “honor system,” whether at point of sale in which premiums are based or when making a claim. Although any healthy system checks and verifies, it is impractical, unnecessary and risky to deeply investigate a large percentages of cases. Insurers balance customer service, state regulatory requirements involving timeliness and potential complaints that can escalate to lawsuits.
Meanwhile, internal special investigative units (SIUs) likewise have finite resources and bandwidth, only concentrating on the most actionable cases. Law enforcement agencies have similar constraints, and insurance fraud is a lesser priority than other crimes. Altogether, this dilutes the efficacy of combatting fraud, leading to uncaptured and under-reported figures.
Instead, anecdotal case examples tend to do the best job of illustrating the magnitude of fraud. Phony medical clinics, staged auto accidents, even faked deaths demonstrate the amounts at stake and the lengths fraudsters will go. More frustrating is how obvious some of the schemes are, revealed as in the infamous empty day care center stories.
But what happens when technology pushes the boundaries beyond such traditional fraud methods?
The Yin and Yang of AI and Insurance
The rapid emergence of artificial intelligence has brought greater business risks, and the financial services industries are among the largest victims of related fraud. Ironically, business is quickly learning to harness the power of AI to fight fraud more effectively – but so are the fraudsters.
The potential of AI in claims fraud detection is among the most powerful applications, and particularly so in life & health and accident, according to a February 2026 report from Gallagher Re and CB insights: "Global InsurTech Report."
AI has many benefits. It can improve efficiency, help make better decisions, and encourage innovation across different industries. But these advantages also come with serious risks – especially the potential for misuse in fraud or deception.
Like any powerful technology, AI can be used for both helpful and harmful purposes. This makes strong and thoughtful governance essential to maximize its benefits and protect against misuse.
Hackers and other criminals can easily commandeer computers operating open-source large language models (LLMs) outside the guardrails and constraints of the major artificial-intelligence platforms, creating security risks and vulnerabilities, researchers said.
Hackers could target the computers running the LLMs and direct them to carry out spam operations, phishing content creation or disinformation campaigns, evading platform security protocols, the researchers said. Roberto Copia, director at IVASS Inspectorate Service, spoke about this issue at the 4th National Congress of the CODICI Association in 2025. He pointed out a growing concern: While AI can improve the efficiency of the insurance industry, it can also give fraudsters more advanced tools to commit fraud.
AI and Insurance: An inseparable alliance
AI is cautiously becoming an indispensable tool in the insurance sector. Its applications range from risk assessment to customer services, claims processing and fraud detection. Predictive algorithms, neural networks, and machine learning models allow the processing of vast datasets, improving underwriting accuracy, accelerating claim settlements and strengthening insurers' anti-fraud capabilities.
But these very tools – powerful, scalable and increasingly accessible – are also being weaponized by fraudsters. “Those who seek to commit fraud are often skilled innovators – frequently one step ahead of those tasked with stopping them,” Copia has said.
A quantum leap in criminal sophistication
Insurance fraud has always been a structural problem in the sector. Yet today, it’s undergoing a qualitative shift. We’re no longer dealing solely with fraudulent damage to property or fictitious claims. Modern fraud is digital, automated and highly sophisticated. AI has become a powerful enabler for those seeking to manipulate data and images, forge documents or create false digital identities.
A March 2026 report, Verisk State of Insurance Fraud Study, finds, based on surveys of 1,000 U.S. consumers and 300 insurance claims professionals:
- 55% of Gen Z say they would consider editing a claim photo or document
- 98% of insurers say AI editing tools are fueling digital fraud
- Only 32% of insurers feel very confident about detecting deepfakes
- 69% of consumers believe fraud will raise premiums for all policyholders
A paradigmatic example is the Ghost Broker scam: insurance websites that appear legitimate, often employing advanced social engineering techniques, real logos, and data stolen from unwitting intermediaries. AI allows these fraudulent portals to appear increasingly credible, complete with chatbots simulating customer service, AI-driven profiling of potential victims, and the delivery of highly personalized fake offers. The result is a seemingly flawless customer journey. But the buyer is left uninsured and unknowingly defrauded until subsequent inspection reveals the deception.
Another example involves "synthetic" identity fraud, in which fraudsters create an identity with a mix of fabricated credentials. According to Lexis Nexis, fraudsters may create synthetic identities using potentially valid Social Security Numbers (SSNs), with accompanying false personally identifiable information (PII). This newer challenge raises the bar for insurers to validate identity at point of sale and other policy lifecycle stages.
THE FRAUD FIGHTING IMPERATIVE
We believe that insurers have an obligation to prioritize fraud detection and avoidance in this growing, too-big-to-ignore dynamic. This obligation is moral, economic and legal. An insurer’s duty to its policyholders includes protecting their investment while managing fair and accurate premiums alike.
