Are Insurers Winning or Losing the Fraud Game?

Have you heard or read lately that the property/casualty insurance industry loses $30 billion each year to insurance fraud? Anti-fraud agencies, such as Pennsylvania’s Insurance Fraud Prevention Authority (IFPA), often cite that number when responding to media inquiries. It makes for a great headline, but it is an aged and two-edged sword.

One side suggests that fraud’s impact on P/C insurers has not been lessened by fraud-fighting efforts over the span of a considerable number of years, and the other raises the question of why more recent research has not been done. As states crack down on insurance fraud, we need P/C insurers’ support in reporting questionable claims to ISO’s AllClaims database and doing new research of those questionable claims. This helps us to know whether our efforts are helping to stop fraud and maintains the affordability of insurance for state residents.

The headline grabbing $30 billion number came from 1992 research done by the Battelle Seattle Research Center for the Insurance Information Institute, according to a recent blog posting by National Insurance Crime Bureau’s Public Affairs Director Frank Scafidi. Researchers estimated that fraud accounted for 10 percent of P/C insurers’ incurred losses and loss adjustment expenses. Incurred losses and loss adjustment expenses are variables that flow from factors other than fraud. New and more current research is needed to determine how much fraud exists in P/C insurance today, to gauge the progress of fraud fighting efforts.

Is Fraud Declining?

Interestingly, while current research of consumers’ attitudes and beliefs regarding insurance and insurance fraud tells us that fraud should be declining, the reporting of suspected insurance fraud in Pennsylvania has greatly increased.

The Insurance Research Council’s 2013 Edition of “Insurance Fraud: A Public View” reports a countrywide 9 percent decrease in consumers’ acceptance of fraud from 2002 through 2012. Internet polling of 2,005 adults showed that acceptance of claim fraud, via the “padding” of claims, decreased from 2002’s 33 percent of respondents who found claim padding acceptable to 2012’s 24 percent of respondents.

That decline tracks with IFPA consumer research, which in 2012 found a 4 percent drop since 2008 in likely fraud offenders. Survey respondents who were opposed to personally committing application or claim fraud rose from 69 percent in 2008 to 73 percent in 2012. Yet, insurers’ fraud reporting in Pennsylvania for 2012 saw 2,302 referrals of suspected fraud sent to law enforcement, a level that was more than double that seen in any year prior to 2008.

ISO’s AllClaims database system has also seen P/C insurers’ reporting of questionable claims increase, in Pennsylvania and other states, but those questionable claim numbers appear substantially less than would be expected if 10 percent of the total claims reported to ISO contained some element of fraud.

Has fraud increased in the P/C insurance industry or are P/C insurers just doing a better job of fraud reporting? Is the financial impact of today’s questionable claims more or less than that of past fraudulent claim estimations?

Ensuring that all questionable claims are reported to ISO’s AllClaims database system and commissioning new research of claims data is, indeed, needed, to determine whether we’re winning or losing the war on insurance fraud.