The insurance industry consists of more than 7,000 companies that collect over $1 trillion in premiums each year. The massive size of the industry contributes significantly to the cost of insurance fraud by providing more opportunities and bigger incentives for committing illegal activities.
Costs of Fraud
The total cost of insurance fraud (non-health insurance) is estimated to be more than $40 billion per year. That means Insurance Fraud costs the average U.S. family between $400 and $700 per year in the form of increased premiums.
- Premium diversion is the embezzlement of insurance premiums.
- It is the most common type of insurance fraud.
- Generally, an insurance agent fails to send premiums to the underwriter and instead keeps the money for personal use.
- Another common premium diversion scheme involves selling insurance without a license, collecting premiums and then not paying claims.
- In fee churning, a series of intermediaries take commissions through reinsurance agreements.
- The initial premium is reduced by repeated commissions until there is no longer money to pay claims.
- The company left to pay the claims is often a business the conspirators have set up to fail.
- When viewed alone, each transaction appears to be legitimate—only after the cumulative effect is considered does fraud emerge.
- Asset diversion is the theft of insurance company assets.
- It occurs almost exclusively in the context of an acquisition or merger of an existing insurance company.
- Asset diversion often involves acquiring control of an insurance company with borrowed funds. After making the purchase, the subject uses the assets of the acquired company to pay off the debt. The remaining assets can then be diverted to the subject.
Workers’ Compensation Fraud
- Some entities purport to provide workers’ compensation insurance at a reduced cost and then misappropriate premium funds without ever providing insurance.
Scam Spotlight—Disaster-Related Fraud: Hurricane Katrina
Massive Storm, Massive Cost
- In late August 2005, Hurricane Katrina made landfall along America’s Gulf Coast.
- The storm caused approximately $100 billion in economic damages.
- Approximately 1.6 million insurance claims were filed, totaling $34.4 billion in insured losses.
- Of the $80 billion in government funding appropriated for reconstruction, it is estimated that Insurance Fraud may have accounted for as much as $6 billion.
Disaster Fraud Schemes
- False or exaggerated claims by policyholders.
- Misclassification of flood damage as wind, fire, or theft.
- Claims filed by individuals residing hundreds of miles outside the disaster-zone.
- Bid-rigging by contractors, falsely inflating the cost of repairs.
- Contractors requiring upfront payment for services, then failing to perform the agreed upon repairs.
- Charity fraud scams designed to misappropriate funds donated for disaster relief.
Statement of the Department of Justice Antitrust Division on the Closing of Its Investigation of the Louisiana Health Service & Indemnity Co.–Vantage Holdings Inc. Merger
Department of Justice Office of Public Affairs FOR IMMEDIATE RELEASE Tuesday, June 18, 2019 Assistant Attorney General Makan Delrahim of the Antitrust Division of the U.S. Department of Justice issued the following statement today in connection with the closing of the Division’s investigation into the proposed acquisition of Vantage Holdings, Inc. (Vantage) by Louisiana Health […]