a basic overview
Reading: How do you report insurance fraud
The insurance industry consists of more than 7,000 companies that collect more than $1 billion in premiums each year. The massive size of the industry contributes significantly to the cost of insurance fraud by providing more opportunities and greater incentives to commit illegal activities.
costs of fraud
The total cost of insurance fraud (not health insurance) is estimated to be more than $40 billion per year. That means insurance fraud costs the average American. family between $400 and $700 per year in the form of increased premiums.
- premium siphoning is the embezzlement of insurance premiums.
- is the most common type of insurance fraud.
- Generally, an insurance agent does not send the premiums to the insurer, and instead keeps the money for personal use.
- Another common premium siphoning scheme involves selling insurance without a license, collecting the premiums, and then not paying the claims.
- In rate rotation, a number of intermediaries charge commissions through reinsurance contracts.
- The initial premium is reduced by repeat commissions until there is no more money to pay claims.
- The company left to pay the claims is often a business that the conspirators have set up to go out of business.
- When viewed separately, each transaction appears to be legitimate; only after the cumulative effect is considered does fraud arise.
- asset diversion is the theft of insurance company assets.
- 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. remaining assets can be diverted to the subject.
- some entities purport to provide workers’ compensation insurance at a reduced cost and then misappropriate premium funds without even providing insurance.
- In late August 2005, Hurricane Katrina made landfall on the Gulf Coast of America.
- The storm caused approximately $100 billion in economic damage.
- approximately 1.6 million insurance claims were filed, totaling $34.4 billion in insured losses.
- Of the $80 billion in government funds allocated for reconstruction, it is estimated that insurance fraud may have accounted for as much as $6 billion.
- false or exaggerated claims by policyholders.
- misclassification of flood damage as wind, fire, or theft.
- claims filed by persons residing hundreds of miles outside of the disaster area.
- bid rigging by contractors, falsely inflating the cost of repairs.
- contractors who require payment in advance for services and then do not carry out the agreed repairs.
- charity fraud scams designed to misappropriate funds donated for disaster relief.
- On September 8, 2005, the Attorney General created the Hurricane Katrina Fraud Task Force (HKTF).
- the hktf was designed to deter, investigate, and prosecute federal crimes related to disasters.
- hktf has a zero tolerance policy for fraud related to hurricane katrina.
- In one Katrina-related fraud case alone, the FBI received more than 70 indictments and more than 60 guilty pleas (as of March 2007).
diversion of assets
workers compensation fraud
Scam Featured: Disaster-Related Fraud: Hurricane Katrina
massive storm, massive cost
disaster fraud schemes
the government response
insurance fraud resources
For more information about insurance fraud or where to report it, contact the following organizations.
Check to see if your state sponsors a fraud bureau that investigates insurance fraud; most states do. you may even be eligible for a reward if you report a scam.
Go directly to the insurer you think you’re being defrauded of. Some companies have systems for reporting fraud. If the company does not have a reporting system or fraud hotline, call or write to company headquarters.
national insurance crime bureau (nicb)
the nicb is a nonprofit organization that partners with insurance companies and law enforcement to help identify, detect, and prosecute insurance criminals. the nicb website is an excellent source of information.
coalition against insurance fraud (caif)
caif is a national alliance of consumer groups, public interest organizations, government agencies and insurers dedicated to preventing insurance fraud. CAIF’s website offers a wealth of information for consumers.
national association of insurance commissioners (naic)
the naic helps state insurance regulators serve the public interest and achieve regulatory objectives. You can find numerous anti-fraud resources on the naic website.
People are always encouraged to report insurance fraud to their local FBI field office.