Car Insurance Fraud - Case Study Example

Name Institutional Affiliation Instructors Name Date Running Head: Car Insurance Fraud Abstract Insurance fraud has remained a serious and costly problem to not only the insurance companies but also the policyholders across all the insurance industry sectors. This paper gives a special focus on car insurance fraud. This type of fraud occurs in Auto Physical Damage, APD which entails comprehensive and collision and claims associated with injuries under the Personal Injury Protection, PIP. This paper explores several situations that are prevalent within PIP and APD claims and the tactics employed by the insured people to execute fraudulent claims against the insurance companies. To identify these fraudulent activities and claims, the logistical regression as well as the statistical tool used. Many insurance companies opt for the units dealing with claim investigation to carry out an investigation on fraudulent claims. This unit collects sufficient information and evidence to either reject claims deemed to be fraudulent or give an authorization of payment in cases that lacks adequate grounds draw fraud intentions. Research also shows that the industrial estimates of 10-15% the premium cost are used in backing fraudulent related claims. The profitability of a corporation may be increased through appropriate identification and denial of claims of fraud. By so doing, the level of premiums can be managed at a lower level than they would have otherwise been. Keywords: Fraud, Insurance, Regression Logistic Introduction Basically, car insurance fraud can be defined as any form of trickery committed or executed against an auto insurance company with the motive of getting monetary gain. It can range from presented piled- ups to fibs regarding any form of damage that may occur after an accident which may be or not somewhat minor. The commitment of car insurance varies from slight exaggerations and omissions to deceptions that are quite obvious. The role of auto insurance is to ensure that any insured who encountered a loss is indemnified or reinstated to his or her previous financial position before the loss. Those who get involved in car insurance fraud tries to obtain undue benefits through an insurance policy which will see them over indemnified. Auto mobile insurance fraud is notable becoming a global problem and not in the U.S. only. While this paper gives a specific emphasis on the car insurance, it important to note that fraud exists as well in other in of insurance. Auto Physical Damage (APD) Fraud Car insurance fraud can occur in several ways. These forms of car fraud are as discussed as follows: i. Owner give up/ vehicle dumping This is the kind of car insurance fr45aud which occur when the car owner leaves his or her vehicle or disposes it, leave it in place, burn, sell or even dump it and goes ahead to claim that it was stolen. Under cases where a car is sold before it gets reported as stolen, the fraud can be paid in two ways. First, it is intended to be paid through the normal insurance payment to replace stolen car. The other way is by selling the original car (Dionne & Laberge, 1999). ii. False registration The payment of insurance for any car is dependent on the residential place of the owner. This form of scam in car insurance is intended to give a false impression on the side of the insurers as a way of evading high premiums (Hymes et al., 2013). Those drivers engaging in this kind of scam live often in expensive residential areas in a country. They can also live in neighborhoods with rampant cases of theft and have their cars registered in other states with low insurance premiums. iii. Exaggeration of car repair costs in the event of accident This fraud is usually committed by repair shops that are less up-standing. For instance, a person may take his or her car for repair after an accident but in the process of executing the repairs, the car is fitted with shoddy spare parts which are probably unsafe and the respective insurance company is billed for the unused parts or any work which was not done. On the other hand, the shops that sell the spare parts can get involved in this type of fraud by levying excess and unreasonable costs on the insurer as well as the customer. The can also over-state the extent of damage on the car with the motive of earning extra money for unnecessary repairs. iv. Replacement of faulty airbags This happens when the mechanics fails to do a replacement of the airbag after getting damaged due to accident. Shockingly, they replace the compartment with such objects as cans or even using peanuts as a way of keeping the sensors working. v. Replacement of faulty windshields This form of fraud can easily take those drivers who are unsuspecting by disbelief. The fraudster can approach a car owner especially in parking lots with claims of being a specialist in windshields with the intentions of convincing him or her that the that the his or her car windshield is damaged and hence need immediate replacement. Such people are not experts as they claim. What they would do instead is just replace your perfect windshield with a shoddy one. Going further, one can lose the car insurance if these fraudsters gain access to the insurance information and uses as a tool for making claims on windshield under the name of the car owner. In general, auto insurance fraud may be accomplished in a number of ways. However, there are two common situations which could make an insured perform an insurance fraud. To begin with is a situation where one attempts to create or make an exaggeration of a loss that has already occurred. An example of this case is when a person, on sustaining a legitimate loss thinks of the premiums he or she has been paying over the past years and decides to be opportunistic by including any damage that occurred prior to this in the current loss (Hymes et al., 2013). This could be a possible avoidance of extra deductions. In situation like this, the insured would want to regain initial financial position by having everything covered in a single claim and saving the costs associated with extra deductibles. In the second situation, the insured may behave or act recklessly knowing that he or she has is covered by the insurance. Though the insured have no intentions of making or exaggerating a loss, they get involved in risk activities that they would otherwise avoid if they were to carry the burden of the outcome by themselves (Rezaee, et al., 2002). A good example of such is when a person, intentionally takes a vehicle off-roading and encounter situations which are potentially capable of damaging the car. They do so because most like due to the fact that they are fully insured and are not liable to carrying the heavy financial damage on side. In auto mobile insurance, it is found that 10% of all insurance theft cases which are reported are not real. Some insurance frauds are less deliberate in that the defrauders may substantiate their actions by giving rational explanations. For example, a parent, knowing well that the insurance premium rates of the family would rise, gives his child who has just obtained driver’s license permission to operate the car without notifying the insurance company that the new driver has no reviews. This type of insurance fraud is referred to as misrepresentation. This forces the insurance company to issue an underwriting decision which could not be made under normal situations. Costs associated with car insurance fraud The cost of insurance fraud is high to companies that provide insurance services and the individuals. Individual costs of insurance fraud include; Every household pays on average greater auto insurance premiums in order to get the fraud cost covered. Consumer goods prices increase due to high premiums being paid by businesses as a result of rise in the cost of insurance brought about by theft claims. Those insured’s who are innocent undergo undue and scrutiny and may go through prolonged investigative periods in the process of resettling their claims. Consequently, insurance companies also incur some costs due to insurance fraud. Examples of such costs are a discussed as follows; The profitability of each insurance company is affected directly by every spending made on detection and prevention of insurance fraud. Employments of investigative fraud units make the companies incur additional costs in human resource. Eventually, those insurance companies without effective fraud prevention mechanisms may end up losing their business as a result of increased rates due to fraud. Personal Injury Protection (PIP) Fraud With respect to auto-insurance claims, protection against injury can contribute greatly to insurance fraud. As a result of injury protection, three kinds of payments can be made. First, payment which his given when a person suffers or develops a lifelong bodily impairment or injury. Secondly, an insured party is compensated for the loses that accrue from an injury and thirdly when one is hospitalized as a result of injury sustained after an accident as well as the any forms treatments in progress provided the injury exists (Rezaee, et al., 2002). Examples of Personal injury Protection frauds are: When affected person claims other ailments which are totally unrelated to the real loss, he or she is committing an insurance fraud. In some cases, all ailments and injuries that existed before are grouped together to form an auto-loss claim which occurred the moment the ailment started or claiming that an ailment sustained in future was a result of the previous incident which the insurance covered (Lundy & American Educational Institute, 2001). Injury only claims. For one to operate a car or any auto mobile, he or she is required to possess a Personal Injury Protection as well as the coverage of liability. Fraud occurs when those who are not able to afford medical insurance cover turn to the automobile insurer. This is a law requirement where the insurer is expected to pay all the medical benefits provided one is actively using a vehicle. If a person enters exits or touches a vehicle, he or she is using it as prescribed in the insurance policy. Such form of generalization paves way for those with no health insurance cover to extent costs to the auto-mobile insurers provided they give a story that is believable. Investigation of car insurance fraud As a way of staging fight against fraud in insurance, various insurance companies have employed specialized units to look into those claims that are believed to be fraudulent. Investigation of claims is done if recommendations of specific claims are given by a field adjuster to the unit mandated with investigation of claims. Companies ought to have models would assist in narrowing down the number of claims to be investigated. The development of such models is based on the characteristics of claims (McMillan, 2006). Among the notable models that are appropriate are the Standard Regression (OLS) and the Logistic Regression. Conclusion In conclusion, I can say that insurance fraud is a menace not only to the insurer but also to individual persons. The degree of spread of this menace is now felt worldwide and it is becoming a global concern. However, research done by Accenture in 2003 showed the existence of different perceptions of people on matters of car fraud insurance. While most people condone the act, others show partial negativity about with regard to insurance fraud. About 24% believes in the act of overstating the value of claim in order to gain additional money while 11% say that it is acceptable to give undue claims for those items which were not lost. Also, 30% conquer with fact that chances of people giving fraudulent information during lower economic times are higher than when the economy is flourishing, while 49% have a strong believe that car insurance frauds can be ridded. With this it is evident that there is still much to be done to fight fraud in insurance sectors. Better ways of detecting and investigating insurance fraud needs to be developed and implemented fully so as to maximize profitability on the side of the insurer and facilitate protection of customers from defrauders. References Dionne, G., & Laberge-Nadeau, C., (1999). Automobile Insurance: Road Safety, New Drivers, Risks, Insurance Fraud and Regulation. Boston [u.a.: Kluwer Acad Publ. Hymes, L., Wells, T., & Association of Certified Fraud Examiners. (2013). Insurance Fraud Casebook: Paying a Premium for Crime. Lundy, W., & American Educational Institute. (2001). Auto Insurance Fraud. Basking Ridge, N.J.: American Educational Institute. McMillan, J., (2006). Policies and Procedures to Prevent Fraud and Embezzlement: A Guide for Small and Mid-sized Businesses. Hoboken, N.J: Wiley. Rezaee, Z., Baker & Taylor, Inc. (2002). Financial Statement Fraud: Prevention and Detection. New York: Wiley. Read More