It might be thought of as a “victimless crime” where the only loser is a huge company, but insurance fraud has negative implications not just for those directly involved, but also for the wider community.
It can involve a range of activities, and it’s not just consumers committing fraud. A policyholder might make a false claim, for example, while on the other hand, an insurance company can also be guilty of unscrupulous behaviour.
Insurance fraud is estimated to cost billions every year, and plays a part in driving up the cost of premiums for everyone. It may even prevent those who really need insurance from taking out policies.
Here are a few examples of common types of fraud, and the impact it has on all of us.
What is fraud?
Fraud can be defined as dishonest acts that cause a financial loss to someone else. Unlike direct property crime such as burglary, fraud is more likely to involve misrepresenting the facts or falsifying documents to make a financial gain.
How can fraud be carried out?
There are a number of ways that policyholders can commit insurance fraud. These include:
- Exaggerated claims – where a policyholder lodges a genuine claim, but inflates their losses by a small amount to get a higher payout.
- Staged events – a customer might stage an event so they can lodge a claim. A classic example is that of arson, where a person is not able to sell or find tenants for their home, and so they commit arson and lodge a fire insurance claim. Other examples include staged vandalism, thefts and motor vehicle accidents.
- Faked thefts – for instance a person might sell their car to a wrecking yard and then claim it was stolen, or sell their home’s contents and make a claim for theft.
- Exaggerated injuries – where a person suffers a minor injury but uses stolen photos (for example from the internet) of more serious injuries to back up an insurance claim.
- Faked deaths – people have faked their own deaths so that their family can claim life insurance. British man John Darwin faked his own death in a canoe accident in 2002 in order for his wife to claim his life insurance, and was later found alive and well, living in Panama.
- Lack of honest disclosure – such as failing to disclose a past criminal record, or providing other false information on an insurance policy application or claim.
The Australian Institute of Criminology states that there are three types of insurance fraud offenders.
- Average offender – generally an otherwise law-abiding citizen with no criminal record, but who gets tempted (often due to financial hardship) to ‘pad out’ a legitimate claim. Average offenders do not belong to any specific socio-economic group or gender.
- Criminal offender – someone that also commits other types of property or fraud crimes, such as burglary or falsifying of documents.
- Organised crime offender – a person who is part of a group involved in major fraud, the proceeds of which are often used to fund other types of serious crime.
What about fraud committed by insurance companies?
Examples of the types of insurance fraud that can be carried out by unscrupulous companies include:
- Raising of premiums beyond reasonable or realistic levels.
- Offering below-market valuation insurance payments for stolen vehicles.
- Procrastinating on claims for such a long time that genuine claimants lose hope and give up.
- Refusal to pay a claim on a minor technicality.
- Cases of dishonest brokers that do not pass their clients’ premiums on to insurers.
- Fake insurance companies deceptively offering false policies at very low premiums.
- Aggressive fear-based marketing by insurance companies to entice customers to sign up – in some cases leading to people buying insurance they may not need.
- Mismatching of risk level to insurance – which may lead to people being over-insured in one area, and inadequately covered in another.
The implications of insurance fraud
We all end up paying for insurance fraud in one way or other.
In the case of policyholder fraud, bogus and fake claims can push up the cost of premiums for the rest of us. The Insurance Council of Australia estimates that about 10% of claims are fraudulent, and that this may cost Australia about $2 billion per year.
However, that’s just for claims. There may also be other costs incurred in terms of services – such as police investigators, fire services and the courts. There may even be higher welfare costs – such as in cases of staged workplace fires leading to workers becoming unemployed.
When insurance providers commit fraud or behave badly, it can create mistrust and suspicion of insurers in the general public.
This may lead to some people avoiding insurance altogether, or ending up with inappropriate or inadequate cover.
How to protect against fraud
The most important thing to do when seeking insurance is to check that the provider is backed by reputable APRA-regulated underwriters, and that the cover offered matches your level of risk and is fairly priced.
Cases of suspected insurance fraud can also be reported to the Insurance Fraud Bureau Australia, or to the police.