Car insurance fraud, like tax fraud, comes in two varieties: there’s “soft fraud” in which the magnitude of damage is exaggerated, and “hard fraud” in which an accident, theft, or vandalism is faked entirely.
DETECTING SOFT FRAUD
The biggest difficulty in detecting soft fraud is that in many cases it will cost more to detect the fraud than to simply pay up the fraudulent amount. Although 36% of car insurance claims are considered suspect for one reason or another, few are ever actually investigated. Most of the soft fraud that occurs involves small amounts of money.
The fraud involved tends to involve fairly innocuous behaviors like trying to stick the car insurance company with the bill for an injury that happened close to the time of a car accident, but was not the accident’s direct result. Another might involve the insured person registering in a cheaper locality (generally a rural location) in order to avoid the higher premiums associated with being a city driver.
Although fraud in all of its forms is morally wrong and illegal, the labor involved in tracking down every person who ever inflated the estimate of the damage to their car would be tremendous, and so expensive as to be a money loser. Ironically, there is also a very real risk of customer backlash against a company that keeps its customers honest.
The wisest approach to dealing with soft fraud is not to go after it in all its forms, but instead to pursue a random sampling of cases, and determine the average amount of money the company loses to soft fraud per consumer, and adjust everyone’s rates up accordingly.
DETECTING HARD FRAUD
Unlike soft fraud, which is usually perpetrated by an honest person who gave in to the temptation to make a quick buck scamming the insurance company out of some nominal sum, hard fraud is usually planned from start to finish, and is usually executed by trained professional criminals who are members of organized crime rackets.
Hard fraud will often be far more obvious, in some ways, then soft fraud. Rather than involving an adjustment of numbers, it will often involve the outright invention of numbers. For example, a “victim” might bill the insurance company for a crash that never happened (in which case the “victim’s” account would not mesh with the police report) or for a medical procedure that never happened (in which case there would be no hospital bill).
There are also three basic strategies that criminals will use to cause crashes. Each involves surrounding a fast-moving car with other cars, and then having the car out front slam the breaks, to cause a crash. Another involves an “innocent pedestrian” who forces a car to swerve and hit the criminal’s car. The criminal inflates the damages, and splits the profits with the pedestrian.