The insurance industry consists of more than 7,000 companies that collect over $1 trillion in premiums each year. The massive size of the industry contributes significantly to the cost of insurance fraud by providing more opportunities and bigger incentives for committing illegal activities.
Costs of Fraud
The total cost of insurance fraud (non-health insurance) is estimated to be more than $40 billion per year. That means Insurance Fraud costs the average U.S. family between $400 and $700 per year in the form of increased premiums.
Premium diversion is the embezzlement of insurance premiums.
It is the most common type of insurance fraud.
Generally, an insurance agent fails to send premiums to the underwriter and instead keeps the money for personal use.
Another common premium diversion scheme involves selling insurance without a license, collecting premiums and then not paying claims.
In fee churning, a series of intermediaries take commissions through reinsurance agreements.
The initial premium is reduced by repeated commissions until there is no longer money to pay claims.
The company left to pay the claims is often a business the conspirators have set up to fail.
When viewed alone, each transaction appears to be legitimate—only after the cumulative effect is considered does fraud emerge.
Asset diversion is the theft of insurance company assets.
It occurs almost exclusively in the context of an acquisition or merger of an existing insurance company.
Asset diversion often involves acquiring control of an insurance company with borrowed funds. After making the purchase, the subject uses the assets of the acquired company to pay off the debt. The remaining assets can then be diverted to the subject.
Workers’ Compensation Fraud
Some entities purport to provide workers’ compensation insurance at a reduced cost and then misappropriate premium funds without ever providing insurance.
Go directly to the insurer you think is being defrauded. Some companies have systems in place for reporting fraud. If the company doesn’t have a reporting system or fraud hotline, call or write the company headquarters.
National Insurance Crime Bureau (NICB)
The NICB is a non-profit organization that partners with insurance companies and law enforcement to help identify, detect, and prosecute insurance criminals. The NICB web site is an excellent source of information.
The CAIF is a national alliance of consumer groups, public interest organizations, government agencies, and insurers dedicated to preventing insurance fraud. The CAIF website offers a wealth of information for consumers.
National Association of Insurance Commissioners (NAIC)