Insurance fraud has been with the insurance industry since it began. There is a misconception that insurance fraud a "victimless crime where nobody personally suffers a loss because huge wealthy insurance conglomerates make extra payouts from their wealth funds". Everyone who pays premiums suffers when fraud occurs as all insurers bear those costs. An Insurance Council fraud survey in 2005, found 13% of respondents said that insurance companies can easily afford to pay.
The reality is that insurance fraud has to be paid for by honest policyholders. Insurance fraud is a crime and a cost to our community and every policyholder.
Most insurance fraud occurs at claim time, through claims for;
- events/losses that didn't happen
- staged losses - for example arson, vehicle theft
- exaggerated claims
In addition, a large number of fraudulent claims occur for non-disclosure of information that insurers require, in order to match the correct premium to the risk.
The extent of insurance fraud
While New Zealand always scores well in "international honesty surveys", unfortunately this is not reflected in insurance fraud statistics. An Insurance Council survey in 2007 found that insurance claims fraud was approximately $150 million per annum. International surveys suggest that insurance fraud in most countries is somewhere around 10% of total premiums, which in New Zealand would make it around $450 million. Somewhere between these two figures is the true level of insurance fraud in New Zealand. Obviously no one is going to admit to a claim being fraudulent for statistical purposes, so any estimate must inevitably be quite subjective.
Different classes of insurance have varying levels of fraud. The lowest levels of fraud tend to be in the domestic building class (6.1%), pleasure craft class (5%) and health and personal accident (9%). The highest levels of fraud is found in the motor insurance classes (10%), commercial material damage class (13.3%), with the highest level of fraud in travel (20%).
Insurance fraud is often portrayed as a victimless crime, but nothing can be further from the truth. When a fraudulent claim is made, all policyholders bear the cost.
What's the insurance industry doing about insurance fraud?
Insurance fraud adds to the cost of insurance premiums. It is an inevitable cost of the business of insurance; it has to be paid for by honest policyholders. International research shows that the higher the cost of insurance, the lower the uptake of insurance i.e. fewer people can afford it. If insurers can reduce the amount of fraud through efficient policing of claims, the cost of insurance will be lower and more people will be able to afford to insure.
Some of the things that insurers are doing to reduce the amount of fraud include:
- Specialist claims training - all insurance claims personnel have fraud detection training. Insurance companies have a list of fraud indicators and if claims include one or more of these fraud indicators they are referred to specialist claims teams or investigators for closer review. Some claim specialists have an innate ability to spot fraud and can refer cases for further investigation just on a hunch.
- Specialist investigators - insurers have teams of specialist claims investigators who are mainly ex-police. These personnel undergo insurance training and fraud detection training. They are the front line of the fraud detection sector of the industry.
- Just because claims are referred to investigators, does not necessarily mean that there is fraud involved. Often claims are referred for further clarification of the circumstances of a loss.
- Insurance Claims Register - the insurance industry has a register of insurance claims, which is used to check whether full disclosure of claims history has been made and whether claims for the same loss are being made on more than one insurer. The ICR has been operating for 12 years and has over 6 million claims in the database. Some companies check the ICR when policies are taken out to ensure they have been given correct information and that the policy premium has been set at the correct level that reflects the risk.
- Zero tolerance of insurance fraud - insurance companies will prosecute fraudsters through the courts when they have clear evidence that a claim is fraudulent. The insurance industry has a Memorandum of Understanding with the Police, which sets out procedures for the prosecution process.
- Specialist fire investigators - arson is a major problem in insurance claims and for almost all large fires, insurers appoint specialist fire investigators to check for suspicious circumstances that might indicate fraud.
- Fraud Hotline - the Insurance Council has a toll free number 0508 FRAUDLINE (0508 372 835) where the public are encouraged to call and report information about potential insurance fraud cases. This information can be made anonymously and no details are passed to the alleged fraudster.