According to a survey conducted by Allianz Commercial, insurance frauds worth $87.33 Million in 2022 were found, which rose from $78.56 million in 2021. It means, the rate upsurge of 11.2%. Well, this is the major reason, insurance companies are continuously looking for some ways to prevent the industry from such fraudulent activities, such as money laundering or fake claims.
Whether it’s causing a minor car accident intentionally or staging home fires purposefully for insurance claims, insurance agents have to remain aware of such frauds. However, before executing insurance fraud prevention and detection, it is crucial to recognise different types of insurance fraud.
In this KYC/AML Guide, you’ll find out the most common insurance frauds that smart financial criminals may commit for money laundering.
What is Insurance Fraud?
Insurance fraud is the deliberate act of deceiving an insurance company to receive financial benefit or advantage by making false or exaggerated claims, presenting false information, or hiding relevant information.
However, this action can result in higher insurance costs for honest policyholders and can harm the insurance industry as a whole. It is illegal and those who engage in it can face significant fines, penalties, and even jail time.
7 Types of Insurance Fraud Examples
There are numerous types of insurance fraud with the objective of intentional deception of an insurance organisation to acquire illicit or unauthorised benefits. These forms lie in different sectors such as:
A. Property Insurance
i. Staged Water Damage
Staged water damage is an act of creating fake or exaggerated water damage insurance claims in order to get insurance benefits. This type of insurance fraud usually involves breaking house windows, fiddling with plumbing systems, or any other cause of property or home destruction to demonstrate water damage appearance.
The purpose of staged water damage is to get reimbursement for the damage from the insurance company. Although the damage was caused intentionally. Thus, this type of fraud can lead to a significant loss for policyholders. Insurance criminals who are involved in such illegal activity can face huge penalties, fines, or even imprisonment.
ii. Arson Fraud
Arson fraud is one of the insurance fraud examples, which is a false act of setting fire to a property for fake insurance claims. The objective of this insurance type is to obtain compensation from the insurance company for the caused damage. Besides, this type of insurance fraud involves intentionally setting fire to one's own property to collect insurance money for the damage.
In addition, this type of fraud can result in a drastic financial loss for the insurance institutions as well as other innocent people whose property might be affected by the fire. This illicit act can cause the criminal significant fines, penalties, and even gaoling.
iii. Burglary Fraud
Another type of insurance fraud is burglary fraud which refers to a financial crime in which a person breaks into someone’s property with the intention of committing theft or any other crime. However, the act of breaking into the house is intentional or pre-planned in order to claim insurance benefits for the damage to one’s own property or becoming a victim. It is considered a serious crime which is punishable by law and results in huge fines and imprisonment.
B. Vehicle Insurance
iv. Car Accidents
Car accident insurance fraud is a type of fraud where people intentionally cause or fake car accidents to claim insurance money or other benefits from the company. This type of insurance fraud involves faking or exaggerating claims about car accidents or damage, such as crashes for cash or causing injuries from real cash.
v. Vehicle Theft
Financial criminals might have some friends whom they use to steal their cars or vehicles for fake insurance claims. Vehicle theft insurance fraud is a type of fraud where a person makes false claims about the theft of their vehicle to acquire insurance benefits. Yet, it has not happened in reality. This type of insurance fraud is pretty difficult to analyse since insurers will have particular exclusion policies for their policies.
C. Employer’s Liability Insurance
vi. Personal injury or Illness
Personal injury or illness insurance fraud refers to an illicit act of making fake claims about one’s own severe health damage in order to claim financial benefits from the insurance company. It may include exaggerated symptoms of some illness, forging the cause of injury, such as an accident, or showing false documents. This type of insurance fraud is illegitimate and can result in huge penalties or jail time.
D. False Insurance Company
vii. Ghost Brokers
Ghost brokers are individuals or organisations that deceptively sell invalid or fake insurance policies to innocent clients. These agents usually promote their services through social media or other unauthorised platforms. They often make fake promises about insurance coverage provided by insurance companies. Yet, later on, when these clients make claims, they may discover that these claims were fake making them lose all their investments.
Therefore, it is important to make insurance investments through licensed and authorised insurance agents and execute thorough research about the coverage provided by them before becoming their victims.
How KYC Helps Fight Against Insurance Frauds?
Integrating KYC compliance regulation can help fight insurance fraud by verifying the identity of the policyholder, ensuring that they are not using false or stolen identity information to commit fraud.
By having a clear understanding of who the policyholder is, the insurance company can better detect and prevent fraud by detecting any inconsistencies or red flags in the policyholder's information. Additionally, integrating KYC compliance standards and policyholder protective measures can also help detect potentially fraudulent activities such as money laundering, which can be used to facilitate insurance fraud.
Insurance fraud is a growing concern for insurance companies and policyholders alike, causing millions of dollars in losses and damaging the industry as a whole. It is crucial to understand the different types of insurance fraud, such as staged water damage, arson fraud, car accidents, personal injury claims, and ghost brokers.
Hence, to prevent any type of insurance fraud, it's important to integrate KYC measures and to only invest in insurance policies through licensed and authorised agents. By staying informed, we can protect ourselves and the industry from these financial crimes.