November 25, 2021

Talking Numbers: How Much Money Is Being Lost in Fraudulent Payouts?

When it comes to the world of insurance, there are no small numbers. From payouts to claims and fraudulent activities, everyone has a role in ensuring that insured parties get what they deserve. According to recent research from Insurance Business America (IBA), one out of every five people who file an insurance claim is committing fraud. That means that 20% of all money paid out for claims is lost due to dishonest practices. In this article we look into and share real world examples of what are fraudulent payouts and why they’re on the rise.

What exactly is a fraudulent payout in the automotive industry?

‘Fraudulent payouts’ is a phrase that typically evokes thoughts of major scams, but the reality is much more mundane. Fraudulent payouts happen every day, in many kinds of ways and for many different amounts.

Specifically, auto insurance fraud ranges from misrepresenting facts on insurance applications to inflating insurance claims to staging accidents or theft and submitting claims for injuries or damage that never occurred.

With fraud possible from both companies/employees and also clients, we wanted to break down the two main categories for car insurance fraud — hard and soft insurance fraud.

Hard insurance fraud

Hard insurance fraud involves creating a situation that allows you to make a claim on a car insurance policy. A common example for this type of fraud is staging a car wreck or falsely reporting a theft with the goal of benefitting from the resulting claim. This kind of fraud is normally the type reported on and published about due to the high costs to the insurance provider and as it comes with higher penalties for those caught.

Soft insurance fraud

Unlike hard fraud creating entire incidents, soft insurance fraud is the exaggeration or fabrication of damages or expenses involved in an auto insurance claim. A common example for this type of fraud is a mechanic making unnecessary repairs to your car with the goal of charging the insurance company a higher bill or additional older damage being added to an accident claim.

This kind of fraud is a lot more common simply because it’s easier to commit and harder to spot. In fact,  according to a report from the Insurance Research Council (IRC), 15% of auto insurance collision claims contain buildup (inflation of otherwise legitimate claims). Additionally the IRC also claims that fraud accounted for between 15% and 17% of total claims payments for auto insurance bodily injury in 2012. This is estimated to have cost between $5.6 billion and $7.7 billion to insurers paying inflated claims from users committing soft fraud.

While claims adjusters do investigate claims, they do not always capture the fraud before it is approved. In these cases, where the fraud isn’t spotted the claimer will receive the money and this would equate to a Fraudulent Payout.

Why are insurance companies experiencing more fraudulent payouts?

Whenever there is a downturn in the economy, fraud risks seem to increase as insurers are viewed as having deep pockets capable of paying for whatever damages policyholders suffer. The Coalition Against Insurance Fraud found that “1 in 5 Americans think it is acceptable to plot against insurance companies under certain conditions.” It is this way of thinking combined with the sudden urge for less in-person interaction that has created a unique opportunity for fraud to thrive.

With the sudden impact of COVID 19, a range of digital InsurTech solutions have been hastily pulled together to cover for reduced staff or new restrictions in their regions. These solutions offer new ways for clients to fraudulently state or inflate their claims without detection.

An example of a flow on effect resulting in an increase in fraudulent payouts is police presence at car accidents. At the height of the pandemic, police departments were responding to fewer car accidents unless there was an injury. This allowed unrelated individuals to cite physical damage after the accident by claiming they were in the impacted car. Usually, due to lack of official reporting, there was inadequate photographic evidence captured to either prove or disprove the claim.

Fraudulent payouts can be simply opportunistic or potentially calculated by the defrauder based on any perceived slight against them by the insurance industry. Following any crisis, people can feel they were left without the support they or their small business needed to survive during the hardship. Some people will see these inflated claims as ‘victimless crimes’ or even a version of ‘payback’ for their earlier troubles. Regardless of their reasons, the haphazard digitalisation of the industry has offered many chances to inflate or create entire claims at the cost of the insurance company.

There are a few ways to avoid these fraudulent payouts. Firstly, companies must remain vigilant and avoid complacency with claims handling. Beyond this, companies may also look to publicise their up-to-date anti-fraud processes across their channels to show consumers and defrauders alike that they are able to handle deception and to discourage these actions during this desperate time. Awareness of the counter-actions being taken can be a large deterrent and discourage some of the more opportunistic defrauders. 

However a more concrete approach is to implement an insuretech solution that assists the users to capture relevant data for you. By using a solution that offers pre-inspection vehicle photo capture, insurance companies can see dramatic decreases in fraudulent payouts on inflated and fabricated vehicle claims. In 5 states in the US (Florida, Massachusetts, New York, New Jersey and Rhode Island), mandatory auto insurance photo inspection laws are in effect. According to the Carco Group, this regulation has had a measurable effect on fraud, with photo inspections uncovering about $1.8 billion in pre-existing auto damage in New York state from 2014 to 2018. This saved insurers from paying $128 million in false claims on vehicles. Additionally, they also found that for every $1 dollar invested in pre-insurance inspections, $34 in false claims payouts were avoided.

By learning what a fraudulent payment is, what kind of ways it can occur and why there has been a rise is critical to helping your company prevent it. Using specialist insuretech solutions offers a quick and effective way to begin combating your fraudulent claims and preventing excess payouts when not needed. Contact our team to hear more on how DriveX can reduce your fraudulent vehicle claims by up to 90%.


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