Fraud is not only a problem for insurers
Insurance fraud is more common than people may think and it is one of the most serious problems facing the insurance industry today. Fraud causes an estimated $115 billion in financial damage in the U.S. alone and this damage is not only felt by insurance companies. Because insurers are pressured to recover from losses, the financial damage caused from fraud often trickles down to policyholders, who must pay for the fraudulent activities of others through increased premiums or fewer benefits being offered by their insurance provider.
Fraud takes a variety of forms in the U.S., with fraudulent activity become particularly pronounced in the wake of a major natural disaster. In the aftermath of 2005’s Hurricane Katrina, the U.S. government committed some $80 billion to reconstruction efforts. It is estimated by the Federal Bureau of Investigation that approximately $6 billion of this sum was lost through fraudulent activities. Fraud also takes form in exaggerated claims coming from policyholders. In these cases, policyholders claim that the damage caused by a disaster, real or imagined, is significantly more severe than it actually is.
Auto insurance is a common target for fraud
Auto insurance is another arena where fraud is currently thriving. Conservative estimate that auto physical damage fraud leads to approximately $3 billion in insured losses each year in the U.S. The majority of these losses are seen in states with no-fault insurance laws. These laws require insurance companies to provide benefits for medical care regardless of who is to blame in the event of a vehicular accident. Staged accidents are relatively common in these states, but there is some effort being made to revise no-fault laws to make them less prone to exploitation.
Ultimately, the cost of insurance fraud affects insurers more than others. Insurers do, however, respond to fraud in a variety of ways. Because losses cannot be recovered immediately, insurers often the premiums on the coverage they provide. Rate hikes like this could be in place for years before insurance companies manage to overcome the losses they accrued from fraudulent activities.