Precise estimates of the number of fraudulent insurance claims, or the associated cost, are as varied as definitions of the phenomenon.
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Post By: Insurance Top Stories
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Dollar estimates of the magnitude of the insurance fraud problem include that offered by CAIF of approximately $85 billion in 1995 and 1996, equating to an out-of pocket cost per insured-household of about $1,000 (CAIF, 2008b). This estimate included health insurance fraud, asserted to be the single largest contributor, at about $58 billion (CAIF, 2008b). (It is assumed that this total number reflected both single- and multi-claim components.) An estimate by the Insurance Information Institute published in 1996 placed the cost of all insurance fraud at about $100 billion, with about 20 percent of that attributed to the property-casualty sector (Esters, 1996, p. 40). Zalma (2003a) estimated losses to the Medicare and Medicaid Programs (public health insurance) at about $100 billion annually in 2003; he attributed the same number to total loses for the property-casualty industry in the private sector. The National Association of Mutual Insurance Companies – NAMIC (2008) asserts fraud losses at about $875 per person, per year, in the USA, with total insurance fraud costs at about $80 billion annually.
Estimates of the prevalence of insurance fraud
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A number of researchers have attempted estimates rooted in more rigorous and potentially replicable (reliable) methods. These have often included the use of “closed” claim files for post-mortem reviews. The Insurance Research Council (IRC) performed among the first such publicly available studies in 1992, and replicated it again in 2002. Results suggested a reduction in the incidence of “fraud and buildup” over the time frame, with the incidence of the former pegged at between 17 and 20 percent of claim dollars paid in 1992, and ranging between 11 and 15 percent of those paid in 2002. In 2002, it was estimated that this problem “...added between $4.3 and $5.8 billion to auto injury settlements” (IRC, 2005). The bulk of this (97 percent) was NOT associated with organized criminal rings; rather, it originated from consumer-policy holders.
The study was largely focused on payments under two policy provisions, personal injury protection (PIA) and bodily injury (BI). The Conning Company (consultant to the industry) issued a report in 1999 summarizing the costs of property-casualty insurance fraud, asserting that they cost the “...average American household more than $5,000 a year in the form of higher premiums and higher prices for goods and services...” while premium costs associated with the problem were in the range of $96 billion (Property and Casualty.Com, 2001).
Recent state-level estimates by the IRC of abuse using closed-claim file analyses originating from accidents in New York, Florida and California underscore the rising costs of the problem. In Florida, for example, claims costs relating to injuries between 2002 and 2005 rose well above the rate of inflation, while the seriousness of injuries declined (IRC, 2006a). The agency estimated the cost of fraud and buildup in auto injury claims cost an unnecessary $400 million in 2002 alone, with an estimated statistical range of between $319 and $432 milllion (IRC, 2006b). In New York City, the differences in claimant behavior for personal injuries resulted in payments for personal injury protection nearly four times larger than those paid-out in the remainder of the state; in city, these averaged $11,500, whereas these were in the range of $3,900 in the remainder of the state in 2002 (IRC, 2006c). This led to fraud and buildup charges relating to PIP coverage for accidents in 2002 estimated at ranging between $600 and $720 million in that year (IRC, 2006c).
The incidence of fraud and abuse in claims files as a raw percentage has been a subject of considerable inquiry. Again, quoting from Derrig (1993):
Pick a number and you may be right. For example, according to our data in Massachusetts, fraud and abuse combined for automobile bodily injury claims can be anywhere from 48% to 0.2% of the claims, based on the definition.
Derrig’s rigorous examination of the treatment of a (criminal) fraud claim – not insurance abuse – from initiation through to the judicial outcome (where applicable), is insightful. Beginning from a base of more than 17,000 suspicious “referrals” from within the state of Massachusetts over a ten-year period (1991-2000), the actual verified yield of fraud was fractional. Only 6,700 cases were accepted by the Bureau as worthy of investigation, with about 3,400 resulting cases being opened. Some 2,100 were closed with no further pursuit, leaving roughly 550 cases presented for prosecution.
Prosecution was completed on about 300 cases, with a validated fraud conviction obtained in about 250 cases. Following Derrig (2002, pp. 271-87) analysis and conclusions, criminal-level fraud was verified in less than 1 percent of referrals. This is considerably less than other industry estimates, which of course, do not follow the same operationalizations, nor the same life-tracking of a referred claim as Derrig afforded. Above-referenced studies of closed claims estimated the incidence of both fraud and abuse in two narrowly defined coverage lines, BI and PIP:
California (appearance of fraud – 9 percent; buildup – 22 percent), and New York City (appearance of fraud – 21 percent; buildup – 42 percent). Nationally, according to the IRC, buildup accounted for 47-57 percent of excess payments in BI and PIA claims, respectively; fraud was identified in 10 percent of BI claims paid, and 5 percent of personal injury claims paid (IRC, 2005, 2006a, b).
Earlier studies by RAND (Carrollet al., 1995) provided empirical estimates of fraud and buildup that had resulted in excessive payments. Costs of excessive claiming accounted for as much as 40 percent of the payments in their sample of closed claim files, contributing $100-$130 per policy in force and an estimated increase in premiums charged of $13-$18 billion (Carrollet al., 1995, p. 22). A follow-up review of closed claim files using data from 1987 suggested that as many as 55 percent of claims paid in tort-states had evidence of excessive payment; in no-fault states that number was in the range of 30-40 percent[5].
The National Insurance Crime Bureau (NICB) asserts generally, that “[I]nsurance industry studies indicate 10 percent or more of property/casualty insurance claims are fraudulent,” but affords no further support for the Figure (NICB, 2008).
In sum, the industry does not have an agreed-upon definition for insurance fraud with the possible exception of those involving a criminal element, those most subject to and likely to survive a judicial test. Even those are subject to state-by-state variability since standards differ. As a result, the industry struggles with estimates of how much fraud (or abuse) exists, and therefore, cannot arrive at a reliable estimate of the costs to the industry, or, society. Certainly, industry studies varied widely in their estimated costs and incidence of insurance fraud and abuse, owing in part to different definitions and methods, different lines of insurance under study, and different years of inquiry. No good, comparative and publicly available/verifiable studies utilizing reliable methods, over time, enable the industry to benchmark and then estimate change in the overall problem. The industry’s position is perhaps strongest with conclusions drawn from closed-claim files, but those published reports do not include detailed methodological reporting necessary to replication. And, the industry has not invited independent review, nor made those data and files available for independent analyses.
At best, a company would be in a position only to accurately and reliably estimate internal losses from their lines and customers, providing of course, that the process for identification and subsequent processing were uniformly applied. Only then could one reliably distinguish a likely fraud from abuse. This review found no published studies along these lines and, it would be contrary to the competitive interests and position of a firm to disclose such data and results. The closest would be the RAND studies, or IRC inquiries, but these data have not been made publicly available, and are for contemporary purposes, dated and limited to specific lines.
To cite this document:
William C. Lesch, Bruce Byars, (2008) "Consumer insurance fraud in the US property-casualty industry", Journal of Financial Crime, Vol. 15 Issue: 4, pp.411-431, doi: 10.1108/13590790810907245
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