Insurance Fraud Costs the U.S. $308 Billion Annually
Posted in Legal Alerts on March 17, 2023
The Coalition Against Insurance Fraud (CAIF) has come out with a new study that shows the full extent of insurance fraud in the United States. For the first time in almost three decades, the figure that estimates total losses due to insurance fraud has been updated. According to the CAIF, total losses due to insurance fraud across the country are $308 billion. This figure is dramatically higher than the group’s $80 billion estimate in 1995, which is the last time it released an estimate of the cost of insurance fraud. The study may even underestimate the total amount of insurance fraud because some insurance companies may not realize that they have been defrauded due to sophisticated methods employed by fraudsters.
For years, people cited the 1995 estimate when discussing the amount of insurance fraud across the economy. This was understating a problem that was growing in scope and resulting in even more losses. The CAIF decided to update its estimate to give a full picture of the damage caused by insurance fraud.
This New Study Confirms What Is Obvious to Insurance Companies
While the headline number is certainly shocking, it should come as no surprise to insurance companies that have been experiencing increased losses in recent years. If anything, this study confirms what the industry has known all along, and which policymakers have been slow in addressing. This study provides a 12-figure number that now shows just how big of a problem insurance fraud is in the U.S.
The updated figure breaks insurance fraud out across numerous product lines. The type of insurance that has the most fraud each year is life insurance, with annual losses of nearly $75 billion. Medicare fraud is a close second, costing the federal government $68.7 billion annually. Workers' compensation fraud results in $34 billion in annual losses, much of it concentrated in claims fraud.
Property and casualty insurance fraud accounts for roughly $45 billion of the total. Industry estimates are that roughly 10 percent of property and casualty losses result from fraudulent claims.
Insurance Fraud Costs Families Hundreds of Dollars Each Year
To give you an idea of how costly insurance fraud is, the total gross domestic product (GDP) of the United States approaches $24 trillion. Thus, insurance fraud costs the economy about 1.5 percent of the GDP each year. The FBI estimates that the average family pays $400 – $700 extra each year in additional premiums because of insurance fraud. Presumably, the number would be even higher in Florida, where insurance is more expensive and the industry is under siege by the plaintiffs’ bar and contractors.
Insurance Fraud Losses Are Increasing Faster than the Rate of Inflation
In 1995, the total amount of insurance fraud across the economy was estimated at $80 billion. When adjusted for inflation, this amount would be almost $160 billion in today’s dollars—well less than the CAIF’s new estimate. In other words, insurance fraud has increased at a much higher rate than inflation. However, numbers alone do not tell the story.
When the figure estimating insurance fraud was last compiled in 1995, the internet was still in its infancy. Part of the reason why the increase in insurance fraud has greatly outpaced inflation is because the internet has spread new tactics and allowed fraudsters to gain new advantages when filing false claims. In addition, the 1995 figure also only included property and casualty and some other lines of insurance. The recent estimate encompasses additional types of insurance fraud.
Insurance Fraudsters Are Becoming More Sophisticated
In addition, insurance companies have suspected that the COVID-19 pandemic gave rise to a large increase in insurance fraud. COVID-19 spurred technological innovations as the economy adjusted to a remote environment. The flipside of this was that fraudsters also learned and gained new methods with which to commit fraud. As the economy turned towards increased digitization, those committing fraud had greater opportunities to take advantage of the system.
Finally, organized crime has become far more sophisticated in recent years, transitioning from physical threats and acts of violence to the digital realm. Criminal syndicates centered on digital fraud have sprung up. In some cases, they are even sponsored and supported by state actors. Other times, a syndicate may identify a potential claimant and then pair them with an unscrupulous attorney to handle their claim. This is a particular problem in Florida, especially in the wake of catastrophic storms.
Insurance fraud can also be carried out on an individual claimant level. The claimant could inflate their own losses and make false statements when filing a claim. Insurance fraud can be as “simple” as lying on a life insurance application. For example, when an application asks if an applicant smokes, and they check the box no, they are committing insurance fraud.
Regulators and Law Enforcement Now Have Their Marching Orders
The extent of the problem should be enough for regulators to take firm action against insurance fraud. With increased awareness of the problem should come additional measures to help American families as they are struggling under the weight of increased insurance costs. Policymakers now have a clearer picture of the extent of the problem. In addition, law enforcement should also focus on deploying innovative methods for catching offenders and punishing insurance fraud.
Insurance Companies Can Use Technology to Protect Themselves
Although insurance companies may struggle to stay one step ahead of the fraudsters who have honed their methods, they could rely on technological innovation themselves to combat fraud. Although the internet has given rise to new and devious forms of fraud, insurance companies can turn to Big Data to help detect insurance fraud. The rise of artificial intelligence is one way that insurance companies can fight back and lower the overall cost of fraud.