Four Faces:

Why Americans Do-and Don't-Tolerate Insurance Fraud

Executive Summary

Introduction and Background

This study was conducted to gain insight on why public tolerance of insurance fraud seems to be increasing. Both qualitative and quantitive research was used in an attempt to understand how public attitudes about fraud are formed and what factors influence them.

The coalition commissioned a national research firm to conduct a series of consumer focus groups as well as a telephone survey of 602 households in the United States. Among the areas explored in the focus groups and survey include opinions about insurance fraud and insurance providers.

Focus Group Findings

Respondents offered the following possible reasons for committing insurance fraud:

to save money or reduce costs.
to get expensive work done they would not otherwise be able to afford.
to "get back" at insurance companies.

Respondents acknowledged that fraud leads to higher premiums, but believed that premiums would continue to rise even if fraud were eliminated. Nor would premiums be lowered, they said. Respondents also felt the public has a moral obligation to report fraud, but most said they would not report a fraudulent act themselves for various reasons.

Reasons cited why people resist committing insurance fraud include a strong sense of right and wrong and fear of being caught and punished. Respondents said insurers could discourage fraud by rewarding customers for "good behavior," such as providing rebates or credits for not filing claims over a period of time, and aggressively pursuing customers who do commit fraud.

Quantitative Research

The objectives of this research included:

understanding public perceptions of unethical behavior;
determining experience with and attitudes toward the insurance industry;
measuring public perception of unethical insurance behavior;
determining personal knowledge of, and experience with, insurance fraud; and
measuring attitudes toward curtailing and punishing insurance fraud.

Using cluster analysis, researchers found that 98 percent of the sample could be grouped into one of our subgroups depending on their levels of tolerance and certain perceptions of why people commit insurance fraud. For the purposes of this study, the subgroups are identified as Realists, Conformists, Moralists and Critics.

The Realists have a low tolerance for insurance fraud but realize it occurs. They may feel some behaviors are justified depending on the circumstances; they don't advocate strong punishment. This group represents 21.6 percent of the survey's respondents.
The Conformists are fairly tolerant of insurance fraud, largely because they believe many people do it, making it more acceptable. For that reason, they tend to believe in more moderate forms of punishment. This group makes up 26.4 percent of the survey's respondents.
The Moralists have the least tolerance of insurance fraud. They believe there's no excuse for this behavior and are the most willing to punish perpetrators severely. This is the largest group of respondents-30.7 percent of the surveyed population.
The Critics have the highest tolerance for fraud and tend to blame the insurance industry for people's behaviors because they believe insurers don't conduct business fairly. They want little or no punishment for perpetrators. This group represents 21.2 percent of the survey's respondents.

Demographically, the four cluster groups varied only slightly.

Survey Findings

Unethical behavior. Virtually all respondents (98%) believe using someone else's credit card is highly unethical. They were somewhat less likely to consider as unethical the failure to declare income on a tax return. Two forms of insurance fraud - padding a claim and misrepresenting an incident to obtain coverage for a loss - fell in between at 91% and 93%, respectively.
Insurance industry. Nearly three-quarters of respondents (73%) rate their company either very positive or fairly positive, and 74 percent have similar feelings about their agent. On the other hand, 53 percent rate the industry in general as either very or fairly positive. Insurance agents are held in about the same regard irrespective of cluster subgroups. The Conformists and the Moralists are more likely to feel positively about their company and the industry in general.
Insurance premiums. More than half (63%) say they believe insurance premiums are either very or fairly reasonable. Among the cluster subgroups, the Conformists and the Moralists again are more likely to feel positively about insurance premiums and to rate them as very or fairly reasonable.
Claims experience. Respondents who had filed life and homeowners claims were more likely to have positive attitudes towards insurers.
Respondents who demonstrated a positive attitude toward insurers tended to have lower levels of tolerance for fraud.

Perceptions of Insurance Fraud

Most respondents believe so-called "soft fraud," such as padding claims, is common. The Conformists are the most likely cluster group to believe these actions are common, while the Critics are the least likely to believe insurance fraud is common.
About two-thirds agree that insurance premiums increase regardless of claims history and that companies make undue profits. About six in 10 agree that people who commit fraud are only looking for a fair return on premiums paid; nearly the same number (56%) agree that rates are based on the assumption that fraud occurs.
63 percent of respondents felt that a person's moral character was the prime deterrent to committing insurance fraud. Most respondents also said they were personally concerned about insurance fraud. Moreover, nine in ten respondents said they believe insurance rates are higher as a result of fraud. When asked to estimate the amount by which premiums are higher as a result of fraud, the mean response was 37 percent.

Personal Experience with Fraud

31 percent say they know someone who has committed insurance fraud. However, only 17 percent of those respondents say they have reported someone for committing fraud.

Curtailing and Punishing Fraud

Respondents overwhelmingly believe insurance companies should take a number of actions to curtail insurance fraud. About nine in 10 respondents believe the industry should verify applications more carefully; inform people how fraud increases costs; lower premiums for people with few or no claims; investigate claims more thoroughly; and prosecute suspected fraud more often.
57 percent believe people should be prosecuted for lying and falsifying information. Nearly the same number (53%) say that denying the unjustified portion of the claim also is highly suitable. The Critics are far less likely to believe the suggested consequences were appropriate, and more likely to believe all claims should be processed with no questions asked.

Recommendations

The coalition recommends that the insurance industry develop and fund an intensive, ongoing public information campaign to educate the public about insurance fraud, specifically convince the Realists that insurance fraud is not a victimless crime and communicate to the Conformists that fraud is not as widespread as they believe it to be. Moralists need messages reinforcing their low level of tolerance for this crime, and the Critics must be convinced that fraud is a major contributor to the rise in insurance premiums and that insurers are working hard to detect and deter fraud.

Other recommendations

Careful and cost-effective verification of applications targeting material misrepresentations should be a standard practice by all insurance companies. This practice also should be communicated to applicants to dispel any possible notion that insurers do not check applications thoroughly.
Claim submissions should be scrutinized for evidence of potential fraud and investigated accordingly.
Company anti-fraud activities should be widely publicized so consumers know the risk of committing fraud, and are aware of what insurers are doing to protect their customers from the cost of this crime. Diligent efforts need to be undertaken to uncover situations where anti-fraud efforts have led to reduced rates for consumers. Such cause-and-effect relationship needs to be publicized as broadly as possible to convince consumers that they will benefit from anti-fraud efforts.
In assessing which claims practices engender the most customer satisfaction, companies should consider the potential positive implications for attitudes about insurance fraud. The claims process should be viewed as an opportunity to build credibility with insureds, which likely will help to lower their tolerance for fraud.
The insurance industry should explore the feasibility of a reward system to encourage the reporting of fraud.
Prosecutors, especially elected officials, should recognize that consumers overwhelmingly support prosecution of insurance fraud. They should educate themselves about this crime, manage their resources in a way that allows more attention to be given to insurance fraud, and take an active and aggressive role in publicizing fraud cases.
Fraud bureaus, which are most familiar with fraud's warning signs, should play the lead role in consumer outreach and education about the nature and extent of insurance fraud. States lacking fraud bureaus should direct the insurance department to undertake the outreach efforts while evaluating the need to establish a bureau.

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