Consumer insurance fraud in the US property‐casualty industry
| DOI | https://doi.org/10.1108/13590790810907245 |
| Date | 10 October 2008 |
| Pages | 411-431 |
| Published date | 10 October 2008 |
| Author | William C. Lesch,Bruce Byars |
| Subject Matter | Accounting & finance |
Consumer insurance fraud in the
US property-casualty industry
William C. Lesch
Department of Marketing, University of North Dakota, Grand Forks,
North Dakota, USA, and
Bruce Byars
Department of Accountancy, University of North Dakota, Grand Forks,
North Dakota, USA
Abstract
Purpose – The purpose of this paper is to review the management of consumer insurance fraud in
the US property-casualty market, attending to definition, prevalence, insurer and regulatory
responses, and outcomes. A social marketing campaign is offered as a partial, long-term solution.
Design/methodology/approach – This paper explicates the difficulties associated with defining
and measuring consumer insurance fraud, then models the system of factors now in place in redress.
Findings – Little agreement was found for a common definition of consumer insurance fraud and
this was explained in part due to the decentralization of insurance regulation, competitive factors, and
inconsistency in claims processing. The paper concludes by offering a social marketing campaign as a
tool for reducing the incidence and severity of single-claims fraud, the latter believed to be the largest
source of consumer insurance fraud.
Originality/value – This paper affords a macro-level view of a common and expensive social
problem, suggests a practical solution with the promise of reducing long-term losses at all levels.
Keywords Consumers, Insurance, Fraud, Socialmarketing, United States of America
Paper type Conceptual paper
“When I use a word,” Humpty Dumpty said in a rather scornful tone,” it means just what
I choose it to mean – neither more nor less.” (Lewis Carroll, Through the Looking-Glass).
Introduction
Property-casualty insurance markets in the USA are large, diverse, and mostly private.
According to the Insurance Information Institute, property-casualty insurers doing
business in the USA paid-out some $275 billion on average annually between 2000 and
2007, with cumulative insured losses reaching in excess of $2.2 trillion during the same
time frame(Hartwig, 2008). Reimbursementfor covered losses,in exchange for premiums,
characterizes thebasic nature of this exchange. When the policyholder, or another seeks
reimbursementfor a contractually“covered” loss under cloak of legitimacy,when in fact, a
fraud or misrepresentation is being perpetrated, no coverage accrues and a denial is in
The current issue and full text archive of this journal is available at
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The opinions expressed in this paper are those of the authors and are not intended to represent
any member of the industry. The author expresses his gratitude to Ms Corrine Iverson for
artwork, and Dr Mary Askim-Lovseth for editorial remarks. Appreciation is also extended to
Mr Dan Basom for his research assistance.
Consumer
insurance fraud
411
Journal of Financial Crime
Vol. 15 No. 4, 2008
pp. 411-431
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590790810907245
order, and an actionable crime may have occurred. Concerns about moral hazard are as
longstanding as insurance itself, centering on the nature of consumer behavior and the
nature of the exchange among parties to thesystem of insurance.
The purpose of this paper is to review the literature on the nature and extent of consumer
insurance fraud. The paper begins with overview of how insurance fraud is defined, and its
nature and estimated prevalence. Then, a model of the system social institutions involved in
the management of insurance fraud is offered to capture the ongoing ambiguity in
treatment of insurance fraud and abuse. A closing section reviews the utility of a social
marketing campaign in redress of the problem. This paper presents strong evidence that
the nation’s “insurance fraud problem” is a social one involving multiple actors; its redress
must involve no fewer contributors or the problem will be perpetuated.
The nature and prevalence of the problem
Multiple, if not competing, definitions of consumer insurance fraud can be found,
ranging from the formal and legal, to the more practical and associated with industry
applications. In part owing to the origin of the problem (crime of deception) and in part
due to the varied nature of interpretation, precise estimates of the problem in terms of
number, value, or extent of policy-holder/claimant involvement in insurance fraud (will
always) remain elusive. This section provides:
.an overview of such definitions; and
.both qualitative and quantitative foundation to defining the scope of insurance
fraud both in terms of the (wide) ranging definitions and its occurrence.
Note that frauds committed by insurers againstconsumers at any point in the insurance
serviceprocess are not addressedin this paper. Rather, the focusis principally upon illegal
and/or illegitimate claimant activity by individual consumers-policy-holders or other
beneficiaries whoseclaims are typically classified by industry personnel as belonging to
“single claims” files – involved in the claims settlement process[1]. Coverage of
multi-claim fraud arising from organized, criminal conspiracies is recognized and
addressed, but not of primary interest here. The paper first departs from working
definitions of insurance fraud, then turn to modelingits institutional management.
Working definitions of insurance fraud
Insurance fraud can be characterized in many ways, including those describing the
nature of the fraud as well as the source of the infraction. In all cases, the Insurance
Information Institute’s (2008) broad definition of insurance fraud conveys both its
formal and informal dimensions:
Insurance fraud is a deliberate deception perpetrated against or by an insurance company or
agent for the purpose of financial gain [C]ommon frauds include “padding,” or inflating actual
claims, misrepresenting facts on an insurance application, submitting claims for injuries or
damages that never occurred, and “staging” accidents.
Insurance fraud may be classified as “hard or “soft.” Hard fraud is a deliberate attempt to
either stage or invent an accident, injury, theft, arson, or other type of loss that would be
covered under an insurance policy.
Soft fraud, which is sometimes called opportunity fraud, occurs when a policyholder or
claimant exaggerates a legitimate claim [...] [S]oft fraud may also occur when people
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