Insurance frauds are a financial crime. The US insurance industry consists of more than 7,000 companies, collect over $2 trillion in premiums each year. The size of the industry contributes significantly to the cost of insurance fraud by providing opportunities and incentives for committing illegal activities. The total cost of non-health insurance fraud is estimated to be more than $80 billion per year. It means Insurance Fraud costs the average U.S. family between $800 and $1000 per year in the form of increased premiums. This does not include a number of insurance companies that go bankrupt because of excessive claims. The following are common fraud schemes:
Premium Diversion
Premium diversion is the embezzlement of insurance premiums. It is the most common type of insurance fraud. This fraud happens when the insurance agent fails to send premiums collected to the insurer and keeps the money for personal use. Another premium diversion scheme is selling insurance and collecting premiums without license.
Fee Churning
In this type of fraud series of intermediaries take commissions through reinsurance agreements. Thus, the initial premium is reduced by repeated commissions until there is no longer money to pay claims. The company left to pay the claims or declare itself bankrupt. These transactions when viewed alone, each transaction appears to be legitimate, only after the cumulative effect is considered does fraud emerge.
Asset Diversion
This is the theft of insurance company assets, which occurs almost exclusively in the context of an acquisition or merger of an existing insurance company. It 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.
Workmen’s Compensation Fraud:
Some bid organizations appear to provide work men’s compensation insurance at a reduced cost. They will then misappropriate premium funds without providing insurance.
Disaster-Related Fraud:
Allow me to explain this with an example. In August 2005, Hurricane Katrina made landfall along America’s Gulf Coast. The storm caused approximately $100 billion in economic damages. Around 1.6 million insurance claims were filed, totaling $34.4 billion in insured losses. It is estimated that Insurance Fraud may have accounted for over $6 billion. This fraud can take various forms:
§ False or exaggerated claims by policyholders.
§ Misclassification of flood damage as wind, fire, or theft.
§ Claims filed by individuals residing outside the disaster-zone.
About the Author
Dr. K. Raja Gopal Reddy is a seasoned internationally qualified Insurance professional.
What you are reading here, may not answer all the questions we have, but has the absolute power of asking unsettling questions which increase the interest in the strange world, and show the contradictory wonders lying just below the surface of the commonest things of life. Look at this disturbing but beautiful thought of Friedrich Nietzsche “God is dead. God remains dead. And we have killed him”.
Dr. Reddy can be reached at: raja66gopal@gmail.com
