A Basic Overview
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. Common Schemes Premium Diversion
- 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.
Fee Churning
- 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
- 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.
Scam Spotlight—Disaster-Related Fraud: Hurricane Katrina Massive Storm, Massive Cost
- In late August 2005, Hurricane
Katrina made landfall along America's Gulf Coast.
- The storm caused
approximately $100 billion in economic damages.
- Approximately 1.6 million
insurance claims were filed, totaling $34.4 billion in insured losses.
- Of
the $80 billion in government funding appropriated for reconstruction,
it is estimated that Insurance Fraud may have accounted for as
much as $6 billion.
Disaster Fraud Schemes
- False or exaggerated claims by policyholders.
- Misclassification of flood
damage as wind, fire, or theft.
- Claims filed by individuals residing hundreds
of miles outside the disaster-zone.
- Bid-rigging by contractors, falsely
inflating the cost of repairs.
- Contractors requiring upfront payment
for services, then failing to perform the agreed upon repairs.
- Charity
fraud scams designed to misappropriate funds donated for disaster relief.
The Government Response
- On
September 8, 2005, the Attorney General created the Hurricane Katrina
Fraud Task Force (HKTF).
- The HKTF was designed to deter, investigate, and prosecute disaster-related
federal crimes.
- The 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 over 60 guilty pleas (as of March
2007).
Insurance Fraud Resources For more information about Insurance Fraud or where to report it, contact
the following organizations. Fraud Bureaus
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. Insurance Companies
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)
(800) 835-6422
www.nicb.org
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. Coalition Against Insurance Fraud (CAIF)
www.insurancefraud.org
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)
www.naic.org
The NAIC assists state insurance regulators in serving the public interest
and achieving regulatory goals. You can find numerous fraud resources on
the NAIC website.
Individuals are always encouraged to report Insurance Frauds to their local
FBI offices.
For more information, see our Financial
Crimes Report.
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