Term Paper: Insurance Fraud After Tax Evasion

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[. . .] The Coalition Against Insurance Fraud estimates that healthcare fraud itself cost Americans about $54 billion dollars annually. More than one third of the people hurt in auto accidents exaggerate their claims so as to obtain additional and higher compensations from the insurance company.

Research into insurance fraud shows that certain types of insurance are more vulnerable to fraud than others: Health care, workers-compensation and auto insurance are sectors considered the most vulnerable. Fraud is also more prevalent during an economic recession than when the economy is doing well and the financial markets are on an upswing.

National Insurance Crime Bureau (NICB) noted that, historically, there have been increases in the number of fraudulent claims reported after a major disaster -- natural or man-made. For example, after the 9/11 terrorist attacks, several fraudulent claims were filed with New York's insurance companies. Insurers do not like asking too many questions during sensitive times, especially when human emotions and sentiments are running high. Criminals know this and use it to their advantage. Similar patterns of fraud were also observed after Hurricane Andrew hit south Florida in 1992. During such times, investigators and criminals become acutely aware of the fine line between investigating suspicious claims and harassing legitimate claimants. (FloridaDOI, 2001)

Many states also have a maximum time requirements by which the insurers must pay a claim. This requirement is imposed on the insurers by the Fair Claims Practice Regulations that each state sets up. This time-restriction makes it difficult for the insurance company to adequately investigate suspicious claims. Fraud is also more prevalent in some geographical areas than others. Cities and densely populated areas have more fraudulent claims reported, and a high percentage of these claims go uninvestigated or unpunished. It is more difficult to file a fraudulent claim in a small town where the communities tend to be closer-knit and interactions between members of the populace are higher. A study by the Insurance Research Council (IRC) showed the variation in the amount and type of fraud committed in different regions of the country and in urban vs. rural or suburban areas within the same state. For instance, the incidence of fraud was more than twice as high in California than in Michigan and Missouri. In the city of Los Angeles alone, 67% of claims contained element of fraud, versus 45% of claims for rest of the state of California. (Insurance Information Institute Inc., 2002)

There are many agencies currently established in the United States to identify criminals who are involved in Insurance fraud and bring them to justice. The Insurance Research Council (IRC); Coalition Against Insurance Fraud (CAIF); American Risk and Insurance (ARIA); National Association of Independent Insurers (NAII); The Insurance Fraud Bureau of Massachusetts (IFB) and International Association of Special Investigation Units (IASIU) are some of the agencies currently involved in helping solve the Insurance fraud problem.

The International Association of Insurance Fraud Agencies, Inc. (IAIFA) was set up in North America (the United States and Canada) when it was discovered that insurance fraud obeys no boundaries and there are no special governing factors that make it different than in countries around the world. Sharing knowledge, intelligence and know-how is important if the perpetrators must be caught and brought to justice in the shortest possible time. Globalization followed by the entrance of many foreign and multi-national insurance companies in different domains make it difficult to evolve a global, coherent policy to impede the incidence of fraud.

The organizations involved in fighting insurance fraud have to work closely with each other to help identify and trace repeat offenders and individuals trying to pad insurance claims. The National White Collar Crime Center (NW3C) is one such organization that provides services and logistical support to state and local agencies in preventing, investigating, fighting and prosecuting crimes that are involved in the high-tech and financial arenas.

The success of the battle against insurance fraud depends on two important factors: the resources devoted by the insurance industry itself to detecting fraud and the level of priority assigned by legislators, regulators, law enforcement agencies and society as a whole to eradicating fraud. There have been suggestions that a comprehensive industry database of all claims be created. When this database is combined with the sophisticated claim-analysis technology available today, this system can be a powerful weapon in the war against insurance fraud. Information technology can play a crucial role in helping the industry soften the blows of future natural catastrophes that affect the insurance industry and control the costs of fraud. Modeling various scenarios can help the insurance companies evaluate the condition of the industry and formulate a suitable plan to attack the problem.

On September 13, 1994, then-President Clinton signed the Insurance Fraud Protection Act (the "Fraud Act") into law. This act was a part of the anti-crime bill titled the "Violent Crime Control and law enforcement Act of 1994." Insurance fraud was, in the past and always is even today, thought of as a 'victimless' crime -- no one really sees the long-term and indirect consequences of such a crime on society. Simply put, fraud helps increase insurance costs for everyone. (Childers and Chism, 2002)

The purpose of the Fraud Act was to help protect consumers and insurance companies from the white-collar crimes. While laws can help bring the criminals to justice, the general population has to be made aware of what constitutes an insurance fraud crime. Large-scale Insurance frauds can drive many insurance companies into insolvency.

The fraud act includes a provision which prohibits any person who has been convicted of a criminal felony involving dishonesty or breach of trust from engaging or participating in the business of insurance unless that person has the written consent of an insurance regulatory official authorized to regulate the insurer. However the letter of the law does not give clear guidelines as to when the provisions should be utilized and the necessary procedures for complying with this provision.

How Insurance Frauds affects society:

Fraudulent Insurance dealers swindle a number of innocent people out of their life- savings by taking money and often an entire retirement savings for investment in fraudulent insurance investment schemes. Naive, elderly and uneducated people can be especially vulnerable to an expert con artist who can make sales pitches for the schemes with fabricated data. Insurance fraudsters use very elaborate accounting gimmicks to create impressive-looking documents by combining features from mediocre companies to produce a mission statement for a fabulous company.

The Health care industry is also very vulnerable to insurance crimes. The sale of non-existing health policies or the sale of policies involving the services of quacks and illegal medical personnel can seriously endanger the lives of the victims and can at extremes cases result in the death of the victim or a family member. Fictitious and fabricated companies that provide medical services also swindle the insurance companies for claim amounts with regards to services never provided.

Due to fraudulent claims and payments made by the insurance companies towards these claims, the premiums for auto and homeowner insurance are constantly increasing. The Insurance companies are for-profit businesses and they pass on the cost of running the business to the policyholders. Higher the cost of running the insurance business, the higher the premium people pay for routine insurance policies.

The cost of goods and commodities at the department or grocery stores are also constantly increasing. Businesses have to pass on the cost of higher business insurance and liability insurance to the customer.

Small businesses often have to undertake the burden of higher health insurance coverage for their employees and higher business insurance. Often small business may have an ideal product or service to market but the high insurance cost can reduce the profit margin thereby not allowing for greater expansion and improvement.

Damage to life and property can occur when individuals hoping to get retributions for the damage stage accidents and arsons. Children and the elderly are especially vulnerable when they are held as pawns and/or murdered to obtain life insurance money.

The overall economy of a state or region can be seriously affected when too many fraudulent claims are filed in a short period of time. The fund reserve that has to be available for an insurance company to operate may eventually end up being too low to sustain the business. Insurance is a very labor-intensive business; when the funds run low, the company has to file for bankruptcy and lay off all the employees thereby increasing the unemployment rates.

Individuals who are involved in fraud-schemes often move from company to company, wreaking destruction in their wake. Often this behavior-pattern reflects on the company for which they work. It is very difficult often to pin the fraud on individuals who may actually have committed the crime and often a scapegoat is generally held responsible.

Classification of Fraud by the Insurance Companies:

Insurers classify fraud as either 'hard' fraud or 'soft' fraud. When an accident, injury, theft, arson or any other loss… [END OF PREVIEW]

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Insurance Fraud After Tax Evasion.  (2002, November 1).  Retrieved March 23, 2019, from https://www.essaytown.com/subjects/paper/insurance-fraud-tax-evasion/2513757

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"Insurance Fraud After Tax Evasion."  Essaytown.com.  November 1, 2002.  Accessed March 23, 2019.
https://www.essaytown.com/subjects/paper/insurance-fraud-tax-evasion/2513757.