An Excerpt from Zalma on Insurance Claims
Identifying Insurance Fraud – Introduction
Next to tax fraud, insurance fraud is the most practiced crime in the world. It is perpetrated by members of every race, religion, sexual orientation, and nationality. Insurance fraud is perpetrated by members of every profession. The temptation to commit insurance fraud is great because prosecutions are rare, convictions are rarer and the convicted serve little or no time in prison. The possibility of a tax-free profit, coupled with the commonly held belief that it is not a crime or morally wrong to steal from an insurer is often too difficult for normally honest people to resist.
Each year, the effect of insurance fraud runs to billions of dollars. It is estimated that insurance fraud takes between 3% and 30% of the premiums collected by insurers doing business in the United States. It drains from $80 billion to $300 billion from the assets of insurers and similar amounts from government supported “insurance” programs like the National Flood Insurance Program, Medicare, Medicaid, and Obamacare.
Insurance fraud is not limited to the US. It happens in every country where insurance exists. For example, in the United Kingdom, insurance fraud is estimated to take £1.4 billion a year. In Canada, insurance fraud accounted for between 10% and 15% of premiums in 2009-or an estimated $C1.3 billion, according to the Insurance Bureau of Canada (IBC).
The Association of Certified Fraud Examiners (ACFE) estimates that the typical organization loses 5% of its annual revenue to fraud. Applied to the estimated 2009 Gross World Product, this figure translates to a potential global fraud loss of more than $2.9 trillion. The median loss caused by the occupational fraud cases in the ACFE study was $160,000. Nearly one-quarter of the frauds involved losses of at least $1 million. The ACFE also found that antifraud controls appear to help reduce the cost and duration of fraud schemes. It looked at the effect of 15 common controls on the median loss and duration of the frauds. Victim organizations that had these controls in place had significantly lower losses and time-to-detection than those organizations without the controls.
Insurers should learn from this report that the best way to avoid insurance fraud is to act proactively with a fraud hotline, a professionally staffed Special Investigation Unit (SIU), and well-trained insurance claims personnel who can recognize the red flags or indicators of insurance fraud. Fraud reporting mechanisms are a critical component of an effective fraud prevention and detection system. The ACFE recommends that organizations should implement hotlines to receive tips from both internal and external sources. Such reporting mechanisms should allow anonymity and confidentiality, and employees should be encouraged to report suspicious activity without fear of reprisal.
The ACFE study also found that occupational frauds are more likely to be detected by a tip than by other means, such as internal audits, external audits, or internal control.
Although the report’s estimate of overall fraud losses is based on the collective insight of hundreds of antifraud professionals, the true amount of fraud taking place, especially in the business of insurance, cannot really be measured because “Fraud, by its nature, is hidden, and so the true amount of fraud taking place in US businesses at any one time cannot be calculated,” John Warren, General Counsel, ACFE, said in a statement. “Even attempts to measure the amount of fraud that has already been detected will lead to incomplete results.” Statements made about the amount of insurance fraud is, therefore, nothing more than an educated guess.
Unfortunately, most insurance frauds succeed and are never identified. Many are for such small dollar amounts that even when identified, insurers decide it is better, and less expensive, to pay the minor frauds rather than refuse to pay or seek prosecution.