Study 2: The Cost of Insurance Fraud Flashcards
The Effects of Fraud: What is the percentage of claims that are considered fraudulent in Canada? (2)
- Estimated that 10 to 15% of insurance claims in Canada are fraudulent.
- Does not include other possible fraudulent insurance transactions that cannot be quantified, such as the cost to insurers of improper risk rating due to info being withheld.
Is fraud a victim-less crime? (1) What effects does insurance fraud have on people? (6)
-No, Fraud can directly and indirectly effect people.
Not only does it effect insurers, it can effect normal people in the following ways:
- Fraud causes economic loss to individuals through direct physical damage.
- It causes direct economic loss to communities when resources of fire department, police, and other public services are used.
- Indirect losses are felt by enterprises that lose business because their clients have suffered damages.
- Can cause death, or physical injury to public (Staged Accidents)
- Indirect economic consequences come to insurance consumers who must pay higher premiums.
- Can cause emotional and psychological effects to victims of fraud.
What are the four consumer attitudes towards fraud? (4)
Realists - have low tolerance for fraud but realize that it occurs. Do not advocate strong punishment and may feel some behaviors are justified.
Conformists - Are tolerant of insurance fraud because they believe many people do it. Are advocates for moderate forms of punishment.
Moralists - Have least tolerance for insurance fraud, are willing to punish fraudsters seriously.
Critics - have high tolerance for fraud. They are ready to blame insurance industry for problem because they believe insurers do not conduct business fairly. Want no or little punishment for fraudsters.
Divergent Attitudes: How can insurers make people with different views and attitudes aware of insurance fraud? (3)
- They must first acknowledge that divergent attitudes exist and people have different views.
- Flexibility is required in order to communicate effectively.
- Age, Gender, level of education, and culture must be taken into effect when communicating about fraud.
Intangible benefit of insurance: Why might law abiding citizens try to defraud insurers? (2)
- Mindset of some ordinary consumers is that insurers owe them something if they have not had a claim, because they have been paying premiums for years without any benefit.
- The intangible benefit of a promise to pay is thus devalued by consumers, so they may decide try and commit fraud if they ever have a claim.
What is a key resource in trying to reduce insurance fraud? (3)
- Education is key,
- One way to educate is to provide info to consumers.
- The more you know about fraud, the higher chances you have in preventing it, and the less you know about it, the less likely you are to take action to stop it.
What are the three general categories used to classify types of insurance fraud? (3)
Opportunistic fraud - when insured deliberately inflates a legitimate claim. It is an unplanned act and arises when opportunity presents itself. (“soft” fraud)
Premeditated or planned fraud - Deliberate planning or inventing of claims to receive insurance benefits. (Staged accidents or committing arson) Known as hard fraud)
Padded Claims - Arise from opportunity to submit an inflated claim when a legitimate loss has occurred. (Ex: When you claim other damages on your car that were there from before)
What are some other types of fraud that are growing rapidly? (3)
Identity theft - When someone takes possession of your personal data. (Credit cards, SIN, License, Etc)
Mortgage fraud - Intentionally falsifying info on mortgage loan application with objective of receiving a larger amount of money. (Ex: Claiming to make higher income, false appraisal, etc.)
Title Fraud - When criminal steals identity of homeowner and uses that false identity to steal title of their home. This could allow criminal to sell their home or obtain mortgages to purchase other properties in homeowners name.
What parties can be involved in insurance fraud? (6)
Can basically be anyone remotely involved in insurance transaction but typically is:
- Third party claimants
- Insureds
- Agent or broker personnel
- Insurance company staff
- Any other professional
- Service suppliers
What is one of the most important attributes required by both insurers and insureds in insurance contracts? (3)
- Are both subject to utmost good faith.
- Good faith dealings promise not to take unfair advantage of another, and is used to describe fairness, and fair conduct.
- Unfortunately, this aspect has been a tool that fraudsters have used against the insurance industry.
What are the two essential functions of insurance? (2)
- Insurers reimburse and indemnify policy holders under terms of their policies.
- By providing protection and indemnity in the community at large, insurers help to maintain economic stability and confidence.
Check out reading on pg 37
What are some strategies that can be used to help restrict fraud? (13)
To control risk of fraud, two central techniques emerge. Those that prevent such losses from occurring, and those that reduce such losses when they do occur. Some strategies do both. The strategies include the following:
- Promoting fraud awareness - enables consumers and members of insurance industry to know what fraud is and how it can be prevented. Education is key here.
- Teamwork - Key element in managing fraud. Many groups work together and cooperate to deter fraud.
- Communication skills - Must communicate professionally and be respectful and polite when dealing with others. Its important not to frustrate claimants and be respectful of their wishes.
- Consumer hotlines - Provide citizens with means to report suspicious activity (Crime stoppers, etc)
- Detection - Many checklists of red flags have been developed in industry to identify factors that should alert insurance people to investigate further
What are some strategies that can be used to help restrict fraud? (13) continued…
- Reward - Some insurers reward claims free policyholders by reducing their premiums. This encourages consumers to act consciously.
- Train - Training and education are key to professional conduct and optimum job performance.
- Verify info - Ensure correct info about insured is collected and recorded, so that you can properly investigate claim.
- Data banks - Must be created and shared in accordance with privacy laws. Only appropriate entities should have access to this info. Analyzing these data banks may uncover illegal fraud ring activities.
- Evaluate service providers and experts - They must be investigated to ensure they are responsible and competent.
- Analyze the scope and cost of repairs or treatments - Ensure that only repairs or treatment relevant to the claim are authorized
- Security systems and practices - can help prevent claims and keep residences safe.
- Penalties for fraud - Consumers must be made aware that there are unpleasant consequences to fraud. Can help lower chances of those consumers than going on to commit fraud.
- See table on page 41
