What is Insurance Fraud – How to Avoid it?

Insurance is meant to provide financial security and peace of mind, but there’s a darker side to it – Insurance fraud. 

Fraudulent activities in the insurance industry not only cost insurers crores of rupees but also result in higher premiums for honest policyholders.

Insurance fraud is a widespread problem that costs crores of rupees to Insurance companies every year. It’s a crime that affects not only insurance companies but also honest policyholders. According to Indianforensic Research, the Insurance Sector in India loses 30,401 crores of rupees every year due to fraud! 

The good news is that you can take steps to protect yourself from becoming a victim or unwittingly participating in insurance fraud. In this blog, we’ll discuss what insurance fraud is, the different types of insurance fraud, and most importantly, how to avoid falling prey to it.

What is Insurance Fraud?

Insurance fraud is when someone lies or cheats to get money from an insurance company or another person’s insurance. This can happen in many ways, such as individuals pretending they had more damage than what actually happened or making up accidents. They can also steal someone’s identity to get insurance money or sell fake insurance policies.

This fraud doesn’t just affect the insurance companies; it affects everyone who pays insurance premiums. As insurance fraud increases, insurance companies often raise premiums for all policyholders to cover their losses. That means regular people like you and me would have to pay more for insurance.

Example: 

Imagine this scenario: A car owner, let’s call him Rahul, plans to commit insurance fraud. 

Rahul intentionally crashed his vehicle into a lamppost, causing minor damage to the car. He then filed an insurance claim, stating that the accident resulted from a hit-and-run incident. He further claims a substantial amount for repairs. 

In reality, Rahul never experienced a hit-and-run; he orchestrated the entire incident to pocket an undeserved insurance payout. This is just one example of insurance fraud, a deceptive practice that costs insurance companies lots of money. 

Understanding Types of Insurance Fraud

Bogus/Misleading Claims

Bogus claims happen when policyholders file false or exaggerated claims to receive more compensation than they are qualified for.

For example, a homeowner reported that someone stole their valuable jewelry while they were away.They might also inflate the cost of repairs after a minor accident to claim a larger payout from their insurer.

To avoid this, always be truthful and accurate when reporting claims. Provide all required documentation and be honest about the extent of your loss.

Fabricated Accidents

Fabricated accidents involve staged or completely fake incidents meant to trigger insurance payouts.

For example, a group of people might intentionally stage a car collision to later claim compensation for injuries and vehicle damage. But in reality, the accident may never have occurred.

Be watchful while driving, and think about getting a dashboard camera that records your trips. This camera can be useful as proof if there’s an accident.

Falsified Records

Some individuals or businesses falsify records to lower their insurance premiums or secure higher coverage.

For example, a business owner might under-report the number of employees to lower workers’ compensation insurance premiums. Another case would be if someone falsely claims a spotless driving record to obtain a lower auto insurance premium.

Ensure that all the information you provide to your insurer is accurate and up-to-date. Any changes in your circumstances should be promptly reported.

Premium Deviation

Premium deviation happens when policyholders underreport their income or misrepresent their lifestyle to obtain lower premium rates.

For example,  someone might misrepresent themselves as a non-smoker to get lower life insurance premiums. In another case, someone might under-report their annual income to qualify for government-subsidized health insurance when they do not meet the income requirements.

Be honest during the underwriting process to avoid potential legal consequences and policy cancellation.

Numerous Assertions

This type of fraud involves filing multiple claims for a single loss.

For example, this happens when after a car accident, a consumer files separate claims for vehicle damage, medical expenses, and lost wages. It comes under numerous assertions as all these losses resulted from the same accident.

Keep good records of all the claims you’ve made in the past. If you see anything that doesn’t seem right or looks strange, tell your insurance company about it.

Phantom Regulations

Phantom regulations occur when fake insurance agencies or policies are created.

For example, fraudsters may create a fictitious insurance company and offer policies with attractive premiums and benefits but with no intention of providing coverage. When policyholders file claims, they discover that the insurer is fake, and they are left without coverage.

Always research your insurer and verify their legitimacy with the regulatory authority in your country. In India, check if the insurer is registered with the Insurance Regulatory and Development Authority of India (IRDAI).

Identity Theft

The theft of your personal information to purchase policies or file claims on your behalf is called Identity theft/fraud.

For example, a criminal may use stolen personal information to purchase life insurance policies on another person’s life. He would then attempt to collect the policy benefits after the victim’s death, without the victim or their family being aware of the policy’s existence.

Protect your personal information, use strong passwords, and monitor your accounts for any suspicious activity.

How to Avoid Insurance Fraud

Choose Reputable Insurers

Pick a good insurance company that has a good reputation and is known for treating its customers well. Research their financial stability and reputation to ensure you’re dealing with a trustworthy insurer.

Verify Agents and Brokers

When purchasing insurance, confirm the credentials of the agent or broker. Ensure they have obtained the appropriate license and registration from the regulatory authority. By doing this you can check that the person you’re dealing with is legitimate and knows what they’re doing.

Review Policies Thoroughly

Carefully review your insurance policy to ensure it accurately reflects your coverage and details. Keep an eye out for any inconsistencies or unclear language. You want to be sure you understand what you’re getting and that there are no mistakes or confusing parts in your policy.

Maintain Detailed Records

Keep thorough records of your interactions with the insurer, including communication, payments, and claims. This documentation can be crucial in case of disputes. If you ever have a disagreement with the insurance company, you can simply show proof of what happened.

Report Suspicious Activity

If you suspect insurance fraud or encounter any irregularities, report them to your insurer and local authorities promptly.

Reporting any suspicious activity helps to stop fraud and keeps insurance fair for everyone.

Educate Yourself

Stay informed and learn about the tricks people use to commit insurance fraud. The more you know, the better you can protect yourself from being fooled by fraudsters.

By following these steps, you can make sure you’re dealing with a good insurance company, understand your coverage, and protect yourself from insurance fraud.

In Conclusion

In simple terms, insurance fraud can take many shapes, but you can avoid being a victim by knowing the different tricks and taking precautions.

Make sure to pick well-known insurance companies, double-check the people who sell you insurance, and quickly tell someone if you see anything fishy. If you stay alert and truthful, you can use insurance without getting tricked by dishonest people.