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October 5, 2015

Fraud: the Cost You Will Never See

Summary:

Fraud costs the average U.S. consumer $400 to $700 in increased premiums each year, but new tools and better data can make inroads.

Photo Courtesy of Wonderlane

Do you know one of the large drivers of your insurance costs may be something you will never see listed as a line item by your agent or insurer? This is not a hidden fee the industry masks. It is not one you could ever find or have disclosed. It is the cost we all share for insurance fraud, which is the second largest financial crime in America (behind tax evasion).

In Iowa, the crime of insurance fraud happens when a person or business provides false information to an insurance company in a claim for benefits or in an application for insurance, with the intent to defraud the insurance company. Federal laws also contain provisions related to insurance fraud.

Before being appointed insurance commissioner, I do not recall thinking about insurance fraud much. Because of my experience in the insurance industry, I certainly knew that there was insurance fraud.  I recall stories I heard second- and third-hand of people who filed claims on boats that became ruined and then were insured after the fact, or of healthcare providers that billed health plans for procedures that never occurred. But I admittedly did not think about insurance fraud much.

People often think of these types of acts as victimless crimes, because no one is hurt except big insurance companies. However, we are all victims of these acts because fraud affects how much we pay for our insurance.

Insurance regulators see all types of fraud and know the cost is great. According to the Coalition Against Insurance Fraud, nearly $80 billion in fraudulent claims are made annually in the U.S. This figure encompasses all lines of insurance. The Federal Bureau of Investigation estimates that fraud costs each insurance consumer in the U.S. between $400 and $700 annually in increased premiums. These are calculable costs, which probably are far less than the total cost we all pay as insurance consumers, because a lot of fraud is not reported.

In Iowa, we would like to think that there is no insurance fraud. However, the statistics demonstrate a much different picture. On average, the Iowa Insurance Division receives 1.97 referrals each day of potential insurance fraud. From Jan. 1 to Sept. 17, 2015, my team processed 532 referrals with a reported financial impact of $3.7 million. However, only about one quarter of the 532 referrals reported what the financial impact was. Therefore, the $3.7 million is far less than the total financial impact.

Fraud prevention and elimination is a major effort for insurance regulators and insurance companies. It is an area where regulators and companies collaborate. In 42 states and the District of Columbia, fraud bureaus receive and review potentially fraudulent insurance claims. States have robust laws in place to protect consumers and the insurance marketplace from insurance fraud. Companies are required by state statutes to report insurance fraud.

Although these reporting requirements and laws help protect our markets and mitigate the cost of insurance fraud, it is far from eliminated. The need to mitigate or eliminate fraud presents huge opportunities for insurance companies and entrepreneurs to develop innovative tools to combat insurance fraud.

As we all now recognize, insurance companies are big data companies. They possess vast data on their policyholders. This puts insurance carriers in an evolving position to better help deter and eliminate fraud. With advancing data analytics, predictive modeling and simply more data, catching and possibly preventing fraud should become easier.

State insurance departments operate within tight budget constraints. In Iowa, we see innovation and technological developments as very helpful in aggregating data and identifying trends and issues. We are looking to these developments to help us increase efficiency in our investigations so we can combat insurance fraud and protect our consumers.

However, I have no false hope that all fraud will be eliminated. I have every belief that those who want to continue to do damage by committing insurance fraud will also be innovative and adapt to change. In other words, while technology and innovation will help find fraud, the scammers will soon figure out how to get around the new detection methods, too.

Fraud is a fact in every industry, and insurance is no different. However, I believe in the insurance industry there is more opportunity and incentive to commit fraud because of the value of the items insured and the amount of money in play. In addition, because insurance fraud is seen as a victimless crime, it may even be viewed as justifiable. Insurance regulators and companies are improving the capabilities to combat fraud using more technological tools. Credit card companies made tremendous strides in cutting down fraud, and insurance is working toward that goal, too. Innovators and companies that figure out how to succeed in this area will have lower prices and increased market share, and in the end that rewards consumers.

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About the Author

Nick Gerhart served as insurance commissioner of the state of Iowa from Feb. 1, 2013 to January, 2017. Gerhart served on the National Association of Insurance Commissioners (NAIC) executive committee, life and annuity committee, financial condition committee and international committee. In addition, Gerhart was a board member of the National Insurance Producer Registry (NIPR).

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