Insurance Fraud in The US Property (1)

Consumer insurance fraud in the US property-casualty industry

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The purpose of this paper is to review the management of consumer insurance fraud in the US property-casualty market, attending to definition, prevalence, insurer and regulatory responses, and outcomes. A social marketing campaign is offered as a partial, long-term solution.

Introduction Property-casualty insurance markets in the USA are large, diverse, and mostly private. According to the Insurance Information Institute, property-casualty insurers doing business in the USA paid-out some $275 billion on average annually between 2000 and 2007, with cumulative insured losses reaching in excess of $2.2 trillion during the same time frame (Hartwig, 2008). Reimbursement for covered losses, in exchange for premiums, characterizes the basic nature of this exchange. When the policyholder, or another seeks reimbursement for a contractually “covered” loss under cloak of legitimacy, when in fact, a fraud or misrepresentation is being perpetrated, no coverage accrues and a denial is in order, and an actionable crime may have occurred. Concerns about moral hazard are as longstanding as insurance itself, centering on the nature of consumer behavior and the nature of the exchange among parties to the system of insurance.

The purpose of this paper is to review the literature on the nature and extent of consumer insurance fraud. The paper begins with overview of how insurance fraud is defined, and its nature and estimated prevalence. Then, a model of the system social institutions involved in the management of insurance fraud is offered to capture the ongoing ambiguity in treatment of insurance fraud and abuse. A closing section reviews the utility of a social marketing campaign in redress of the problem. This paper presents strong evidence that the nation’s “insurance fraud problem” is a social one involving multiple actors; its redress must involve no fewer contributors or the problem will be perpetuated.
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	When Does Home Insurance Fraud Happen?
Consumer insurance fraud in the US property-casualty industry

The nature and prevalence of the problem

Multiple, if not competing, definitions of consumer insurance fraud can be found, ranging from the formal and legal, to the more practical and associated with industry applications. In part owing to the origin of the problem (crime of deception) and in part due to the varied nature of interpretation, precise estimates of the problem in terms of number, value, or extent of policy-holder/claimant involvement in insurance fraud (will always) remain elusive. This section provides:

1. An overview of such definitions; and
2. Both qualitative and quantitative foundation to defining the scope of insurance fraud both in terms of the (wide) ranging definitions and its occurrence.

Note that frauds committed by insurers against consumers at any point in the insurance service process are not addressed in this paper. Rather, the focus is principally upon illegal and/or illegitimate claimant activity by individual consumers-policy-holders or other beneficiaries whose claims are typically classified by industry personnel as belonging to “single claims” files – involved in the claims settlement process[1]. Coverage of multi-claim fraud arising from organized, criminal conspiracies is recognized and addressed, but not of primary interest here. The paper first departs from working definitions of insurance fraud, then turn to modeling its institutional management.



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