How Do Insurance Companies Detect Fraud?

Insurance fraud costs consumers millions annually.

Insurance fraud is a pervasive problem that costs the insurance industry and its consumers millions each year. According to the National Insurance Crime Bureau, questionable claims rose by 14 percent in 2009. While criminals continually devise new ways to cheat insurers out of money, insurance companies have sophisticated systems in place for detecting insurance fraud.

Definition

Insurance fraud is the act of submitting a false or exaggerated claim to an insurance company for payment. A claim is fraudulent if the person seeking payment knew that the claim was false or exaggerated, and if the insurance company would not have paid the claim if it had known the truth.

Types

There are two primary types of insurance fraud. The first is the submission of an exaggerated claim. For example, the person filing a homeowner's insurance claim may sustain damage to his home but tell the insurance company that additional damage occurred. In some cases, the additional damage may have occurred a long time ago, while in other cases, it might not have happened at all.

The second type is the submission of a false claim. This occurs when a person files a claim for damage that never happened or property she never owned. For example, criminals have fabricated vehicle identification numbers (VINs) for cars that never existed, and then filed theft claims with their insurance companies.

Analysis

Insurance companies detect fraud by analyzing claim trends. They keep databases of claims payments and compare new claims against historical data. If a claim is unusually large, it is forwarded to a special investigator for additional research.

Insurers also analyze an insured person's claims history to detect fraudulent claims. If the person has a history of fraud or questionable claims, the insurance company looks at the new claim more closely before making a decision.

Leads

Insurance companies also rely on tips and leads from law enforcement officials, businesses and individuals to detect fraud. Police reports and tips from neighbors or family members can be valuable clues to help insurance companies avoid paying for fraudulent claims.

Regulation

Regulatory agencies work with insurance companies to detect insurance fraud. In many states, insurance companies are required to notify insurance regulatory agencies of suspected fraud. This allows the regulatory agency to keep records of people who might submit fraudulent claims in the future. Some states, such as Ohio, also require insurance companies to draft a written plan for identifying potential fraud.

References

• National Insurance Crime Bureau
• Ohio Department of Insurance: Fraud Unit
• Coalition Against Insurance Fraud: Model Fraud Bureau Act