There are many reasons, or excuses, for ignoring insurance fraud, even among insurance professionals. “The special investigations unit (SIU) handles all that,” or “Fraud is just inevitable, everyone does it,” or, worse, “We can just pass the costs on through higher premiums.” At the Coalition Against Insurance Fraud, we have heard all of these things said, and more. So why should you care?
First, insurance fraud is truly a crime that we all pay for. Every policyholder pays a hidden “fraud tax,” which adds up to some staggering costs. Insurance fraud is also on the rise. From increased natural disasters and the corresponding “storm chasers” to new reports pointing out the billions of dollars of fraud associated with COVID-19 federal payouts and their impact on policyholders’ willingness to commit insurance fraud because they feel they will not get caught. All of this is occurring as many insurers look to downsize, outsource, or even eliminate their SIUs. A shocking new report, however, will hopefully change both your mind and perspective on insurance fraud and the economic damage it inflicts.
The Cost of Fraud
In 1995, the newly formed Coalition Against Insurance Fraud held a press conference in Washington, D.C., announcing for the first time an estimate of $80 billion a year as the cost of insurance fraud in America. What they could never have guessed is that this number would become the most-cited insurance fraud statistic in America—it has even been included in federal and state legislation and cited by both federal and state courts in key decisions.
While impactful, for sure, that number was never intended to cover lines of insurance that were in place then or now. Problematically, the figure focused heavily on property and casualty and workers’ compensation fraud, and it was also never updated or adjusted over the years. If you take $80 billion in 1995 and only apply the minimum inflation rate, the figure would have increased to $151.2 billion in 2022. Plus, as hard as it may be to comprehend now, in 1995, what we now call the internet was then called the “world wide web,” and, by most accounts, had only been in existence for about four years. Like every other aspect of society, the internet has transformed insurance fraud. What was once a local crime can now be committed from anywhere in the world with just a laptop and internet connection.
After more than 25 years, the Coalition realized the old number must be updated to continue to have credibility. But how? The 1995 study was mostly a “best guess,” but in today’s age of data collection and analysis, it became clear that a more rigorous approach was required. Any new report would have to withstand industry, government, academic, and public scrutiny. Just a number was no longer sufficient; we needed to be able to “show our work,” as any eighth-grade math teacher might say.
The Coalition also realized that, while this was “our” study, a new report would garner far more support and credibility by involving key strategic partners. Outreaches were accepted immediately by the International Association of Special Investigation Units (IASIU), the National Insurance Crime Bureau (NICB), the American Property & Casualty Insurance Association (APCIA), and the Insurance Information Institute (Triple I). Each fully supported and contributed to analyzing the economic impact of insurance fraud on our nation.
These strategic partners, together with help from the National Association of Insurance Commissioners (NAIC) and others, became the “bakers” tasked with creating a recipe that included what may well be the largest collection of data on insurance fraud ever undertaken. Any good recipe, though, needs a secret sauce, and that came in the form of the Colorado State University (CSU) Global White Collar Crime Task Force. Under the leadership of Department Chair Dr. J. Michael Skiba, a team of PhD-level candidates worked for more than a year gathering and analyzing the data that undergirds this new report on insurance fraud in America.
Study Methodology
With the team in place, the challenge became how to proceed with everything from data collection; data validation and verification; analysis; and the identification of both key factors present and missing. Remember that thing called the internet from the 1995 study? It, too, played a role here with the creation of a digital “drop box” into which studies, statistics, reports, news and media stories, and much more were deposited. Federal, state, and local data from public and private sources were placed into the drop box in response to requests made over an 18-month period.
At this point, the CSU team went to work by first sorting what was meaningful to the study, verifying source data, clarifying information, and seeking more in-depth statistical data upon which reports or news stories were based. Perhaps more challenging was identifying where data gaps existed and taking on the arduous task of sleuthing to find data where, at first, none appeared to exist. Most were found, and where data was still lacking, the need to do better was noted and included in the report as a call to action for the benefit of future researchers.
Analyzing the Results
Everyone knew, largely based on simply looking at inflation, that the new number would far exceed the 1995 estimate, but even experienced anti-fraud professionals openly gasped when the number was unveiled for the first time: $308.6 billion. Once the shock wore off, though, an analysis of the 45-page report brings into very clear focus a number of important findings.
Not all fraud is claimant-driven. For the first time, this report, along with another study completed by the Coalition, addressed a deep analysis of workers’ compensation fraud. Workers’ compensation fraud accounts for $34 billion in the new study, but of that figure, “weekend warriors,” or those falsely claiming workplace injuries, only accounted for about $9 billion. By far the largest share, at $25 billion, was premium fraud, which we define as either not claiming workers who should be covered or misclassifying employees to save on premiums. That type of fraud harms insurers that are being cheated out of policy premiums for which they should have been paid, and workers who are not being afforded the protections they need in the event of a true workplace injury.
Life insurance fraud is the highest cost? At $74.7 billion, this is the largest line of business figure for insurance fraud in the report. Surprised? You are not alone, so some explanation is needed. Life insurance is a single-category form of fraud. Other categories, such as property and casualty, include injuries from slip and falls, auto accidents, and more. Injury claims normally involve medical treatment, so a portion of those fraudulent dollars appear in multiple categories. A death claim does not involve extended, questionable medical or chiropractic care. Also, life policies often involve very large single payouts, which may equate to hundreds or thousands of equivalent smaller claims. Finally, especially in recent years, the rise of organized fraud rings and identity theft has contributed to a rise in life insurance fraud.
Why does the report say the “economic impact” and not just “the cost of fraud”? We all pay for insurance fraud, and the cost is real. Based on this report, the amount equals about $932 annually for every living American, or more than $70,000 over a person’s lifetime. For a family of four, that is about $3,700 of after-tax money wasted every year. While the cost is real, coming up with an exact and accurate dollar figure of insurance fraud is impossible. Even at such a high number, the Coalition sought to document fully our sources and their reliability throughout the report. Where we could skew the number higher or lower, we went lower to be more cautious. Even then, we felt addressing the report from an economic impact perspective was both more accurate in explaining the purpose of this report and illustrating how insurance fraud directly affects every member and area of our society.
Are auto thefts considered fraud? Some auto theft is included, but only if the policyholder was directly involved. Most are not, though, and auto theft is a covered loss. So why did we list $7.4 billion annually as the cost of auto thefts in the U.S.? First, most insurance carriers investigate auto thefts for fraud, and it is a major focus of our strategic partners at the NICB. Those investigations are normally done by the SIU and require the use of staff time and resources. Second, Americans pay for auto thefts through higher premiums, and the real purpose of this study is to gauge the economic impact of insurance fraud in our nation. In the full report, we have a special section explaining this question in greater detail.
What Does $308.6 Billion Really Mean?
If you are still reading, then we have kept you interested in how much insurance fraud costs our nation every year. But if you are in underwriting, claims, or IT, why should you really care about insurance fraud?
Let’s start with the obvious. Regardless of your employment, you are an insured consumer. That means you are paying the insurance fraud tax every year. Do you carefully review your health insurance statements for billing irregularities or just assume they are correct? Additionally, almost all of us know a friend, family member, co-worker, or neighbor who is submitting a claim for property or an injury that we know is wrong. Do we ignore that and add more to an already huge number, or do we take appropriate action to help stop the fraud? The choice is ours.
In most insurance companies, the SIU is small, underfunded, and overworked. But while other employees may not be able to underwrite a policy or fix an IT issue, every insurance company professional can help to identify suspicious activity and notify the SIU or appropriate internal personnel. Agents also play a vital role and should be a part of the anti-fraud effort and every call center representative should have some level of anti-fraud training to help identify potential fraud early on.
Insurance fraud also involves more than just money—it can be life or death. Consider these examples. Alice Ross was a grandmother in New York who was tragically killed when her car was intentionally rammed as part of a staged auto accident. A bill that specifically criminalized staged accidents and their outcomes in New York was passed in her memory. Patrick Wolterman was a young, newly married Ohio firefighter who fell to his death when he entered a home set ablaze by an arsonist who was attempting to collect insurance. In Virginia, five-month-old Prince McLeod Rams was murdered by his own stepfather, who had purchased a life insurance policy on the young boy. In the investigation, the agent testified that he thought it was very suspicious but relied on the insurance company to investigate the application. The insurer testified it relied on the agent to screen policies. The result? A murdered child.
You play a vital role in fighting insurance fraud. If you see or suspect something, don’t turn a blind eye and contribute to the problem. We can all play a part in fighting these crimes, but insurance professionals are especially in a unique position to do so. When we work together to fight against insurance fraud, everyone wins—except the criminals. Do your part to help protect yourself and others from the crime we all pay for. K
FINAL ESTIMATE OF THE COST OF INSURANCE FRAUD IN THE UNITED STATES:
(figures are as of 2022)
Property & Casualty
$45B
Workers’ Compensation
$34B
Premium Avoidance
$35.1B
Healthcare
$36.3B
Medicare and Medicaid Fraud
$68.7B
Life
$74.7B
Disability
$7.4B
Auto Theft
$7.4B
$308.6 Billion Annually
INSURANCE FRAUD COSTS THE U.S. $308.6 BILLION A YEAR!
LET’S PUT THIS INTO PERSPECTIVE
HOW LONG TO SAVE?
Saving $10,000 every single day, it would take 82,192 years.
WHAT DOES IT WEIGH?
That number of one-dollar bills would weigh more than 11 tons.
TRAVELING THAT MANY MILES
Equals 12 million trips around the world.
or
628,000 trips to the moon and back.
HOW LONG?
If you lived for 300 billion minutes, you would be 570,776 years old.