“Watch your pennies and the dollars will take care of themselves” is an adage that is often attributed to having been ‘coined’ by Benjamin Franklin in the late 1700’s. A little measure of fraud there in that he converted the long established British adage to reflect the difference between British pound and the American penny. With insurance companies, saving a few pennies here and a few pennies there can dramatically affect what you pay for your insurance.
An insurance trade journal known as The Standard recently had a front page article reviewing the impact “Insurance Fraud” is having on the insurance industry. When you, the average consumer, read or hear the term Insurance Fraud, you likely think of stolen cars being dismantled in “chop shops” or buildings burned to collect the insurance. Those are the big time fraud cases juicy enough to make the news. Insurance fraud is a major concern for insurance companies. It is on the rise, according to a recent study by the Coalition Against Insurance Fraud. In a 2012 study by the Coalition, they found that fewer than 50% of insurance companies deployed electronic anti fraud systems. The “pennies” such systems could save were then view as an inefficient use of resources. As companies with fraud identification systems began to demonstrate on a large scale how perverse insurance fraud had become and the savings that could be gained, other insurance companies took action themselves. A 2016 repeat of the 2012 study showed nearly 75 % now have automated systems in place and nearly all remaining companies are working toward installation such systems.
The studies reveal that a public perception is that “if you don’t catch me, it’s your loss”. What would your approach be to a few common situations? Do you consider these to be insurance fraud?
Let’s start with the initial application for coverage. A question on the standard homeowner application asks if you have a dog. If you have one, it then asks for the breed, sex, age and bite history. If you know you have one of the 10 breeds commonly rejected by insurance companies, do you say it’s a mixed breed of unknown decent –when you know it is mostly one of those breeds? All RI towns require your dog to be licensed. This becomes a public record which includes a description of the dog and which vet last administered its rabies shot. Not really an issue until your dog bites someone and you want the insurance company to defend you.
How about the auto insurance application where you are asked if you have had a motor vehicle violation or accident in the last 5 years? If you say nothing, some carriers in the past accepted your word for it. You may have gotten away with paying a lower rate despite having had a dismal driving history. Not anymore. Some companies go directly to the state DMV/ Registry to get your driving history. Virtually all insurance companies now utilize the Comprehensive Loss Underwriting Exchange or CLUE Report. Initially it was formed as a tool to identify insurance fraud for auto accidents. It tracked the cars involved in accidents in a given state as well as across state lines. It was expanded to show driver licenses for those involved, today all insurance companies are required to submit data on all losses they pay out. The system has evolved into a database drawing information from numerous public information sites and from insurance companies. If you car was in an accident, it will show up. If you were involved in an accident, or the owner of a car that was, that incident will show up on the CLUE report. Even periods where you had no insurance show up on this record.
Here’s where it proves very effective. When I am told by an auto insurance applicant that they’ve had no losses or violations in over 3 years, or that no one else drives their car. The clue report will show all the cars registered to that address and all the drivers residing at that address. It’s a little embarrassing for them when I present all of their recent experiences. Not only do I get to share the new found driving history with them, but the revised insurance quote.
One of the companies I use not only adds the updated rating factors that apply due to their driving record, but if no effort was made to report it by this customer, they also hit them with a surcharge for failure to disclose the history. The company philosophy is that if you lied before they took you on as an insured, what will happen when they do insure you?
Ever get into an accident and try to get the body shop to cover your deductible? Text books developed by the car manufactures and auto body associations guide the repair shops, and the appraisers, to know how much time is required to do each repair. It is an industry that no longer spends hours fabricating fenders. The industry manual indicates the time necessary to strip the damaged component of a car. They describe what hidden damage should be expected.
With the amount of information known today, the auto body shop and the insurance appraiser should both be pretty close in their estimates. To discount your deductible, the shop either charges less than their usual labor rate, replaces the damaged parts with used or aftermarket parts (rather than the new parts included on the estimate). Discounting a $500 deductible on a $3,000 repair means trimming 1/6 of the repair cost. The only real effective way to save a customer’s full deductible is to cheapen the job being done and that hurts you.
The most frequent perpetrator of insurance fraud is not the organized crime ring; it is you and I. Most people don’t think of their actions as fraud and they definitely don’t consider themselves a criminal. These are only three examples of how you and I may have perpetrated insurance fraud. Computers have made it much more difficult to cheat the system. There are numerous ways like those identified where consumers have been cheating their insurance company. You can bet the insurance companies know those weaknesses too and are developing new ways to crack down and curb these fraud opportunities. The few pennies lost to each fraud opportunity, and the cost incurred to police it, translates to the next rate increase, or decrease, depending on how well they get a better handle on day to day insurance fraud.