By Phil Zinkewicz
For the insurance industry, and for the public as well, insurance fraud is an $85 billion a year problem, according to the Washington, D.C.-based Coalition Against Insurance Fraud (CAIF). With a figure as sizable as that, it is no wonder that the industry is making significant efforts to battle this cancer. The industry has targeted making the public aware of the magnitude of the problem as a possible solution but, as yet, has apparently not made the inroads it has intended.
For example, a new study by CAIF shows that Americans divide themselves into four distinct groups regarding the insurance fraud problem.
Four faces: Why Americans Do--and Don't--Tolerate Insurance Fraud is the first national study to attempt to uncover why some Americans are tolerant of insurance fraud, according to the CAIF. The national survey revealed that Americans tend to fall into one of four groups, according to shared levels of tolerance and their beliefs about why people commit insurance fraud. The groups, according to the Coalition, are:
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% of the surveyed population.
The Realists have a low tolerance for insurance fraud but realize it occurs. They may believe that some behaviors are justified depending on the circumstances; they don't advocate strong punishment. This group represents 21.6% 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 means of punishment. This group makes up 26.4% of the survey's respondents.
The Critics are fairly tolerant of insurance fraud and tend to blame the insurance industry for peoples' behaviors because they believe insurers don't conduct business fairly. They want little or no punishment for perpetrators. This group represents 21.1% of the survey's respondents.
"The good news in Four Faces is that those who firmly believe that insurance fraud is wrong represent the largest group, and those who are most tolerant of fraud are the smallest group," said Dennis Jay, the Coalition's executive director. "There's a large group in the middle that we believe exhibits attitudes amenable to change."
The coalition strongly believes that public attitudes are crucial to curtailing fraud. For example, a willingness to tolerate what's known as "soft" fraud contributes to an atmosphere in which individuals may easily rationalize ripping off the system, knowing there's little or no social stigma attached to these actions, says the Coalition, adding that public support is needed to pass legislative initiatives designed to curb fraud.
"Consumers' pockets are being picked by perpetrators of fraud to the tune of more than $1,000 per year for each American family," said Ken McEldowney, coalition co-chair and head of Consumer Action. "This study shows that Americans rightly believe that fraud costs us money. We need to take the next step, recognize the problem belongs to all of us, and that the responsibility for solution also lies with us."
As a result of the Four Faces study, the coalition's board of directors recommends that the insurance industry develop and fund an intensive, ongoing public information campaign to educate the public about insurance fraud. The coalition believes that the four groups need to hear the following messages:
The Realists should be informed that insurance fraud is not a victimless crime; they are in fact the victims on a very personal level.
The Conformists should be told that fraud is not as widespread as they believe it to be. They also should be informed that the acceptability of fraud is lower among their peers than they believe.
Moralists need messages reinforcing their low level of tolerance for this crime.
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.
"We're appealing to individuals' sense of right and wrong in an effort to save money for us all," McEldowney said. "We invite other consumers, government and insurance groups to help us meet that challenge."
The results of the CAIF study provide the opportunity to look more deeply into the public attitudes that they reflect. Why does each of the four consumer groups feel the way it does? The Four Faces study asked 602 Americans how common they thought certain types of fraud were, and most respondents believe fraud is common. The Conformists are the most likely group to believe it's common, while the Critics are the least likely to believe insurance fraud is common.
When asked for reasons why people might commit insurance fraud, about two-thirds of the respondents said that insurance premiums increase regardless of claims history and that companies make undue profits. About 6 in 10 agree that people 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. They are less likely to agree that people would not lie to insurance companies if they were treated with more respect (39%); that people are forced into this behavior to get insurance (33%); or that nobody tells the truth on applications (27%).
What does this say? It says that the public perception of the way the insurance industry operates is that, regardless of whether fraud increases or decreases, insurance rates will not be affected. Right or wrong, that is the perception and the insurance industry has done little to change it. While insurers have been more vocal in the last decade about the need for fraud prevention, what they haven't done is convince consumers that rates will go down if fraud is prevented, detected and punished.
Let's continue on with the survey. Most respondents said they were personally concerned about insurance fraud. Moreover, 9 out of 10 respondents said they believe insurance rates are higher as a result of fraud. The Conformists tend to justify fraud with their belief that everyone does it, while Realists are more likely to believe that premiums will continue to rise regardless of claims history, suggesting there's no incentive not to commit fraud. The Critics are more likely to cite insurers making too much money and causing people to lie to them. But the Moralists join them in being more likely to justify fraud as a way to get a fair return on premiums paid.
So again, we see a picture of most respondents linking fraud with an assumption that insurers will not pay a fair claim unless it is padded to get that fair return.
In addition, and this is not addressed in the study, when consumers hear the words fraud and insurance companies in the same sentence, they are likely to think about other matters as well. Most recently, we have read about major life insurance companies cheating policyholders by "churning" existing life insurance policies just so that agents could take advantage of the "front loading" of commissions. If that it not fraud, it is certainly unethical behavior to the detriment of the consumer.
Years ago, a series of frauds was perpetrated by licensed insurance industry representatives--POSA and Kennilworth, to name just two scandals. Those frauds caused many millions of dollars in losses to the insurance industry. Is it possible to convince the average consumer that those losses were not just passed on to consumers in the form of higher premiums?
The critical issue here is that the CAIF is correct. There is a feeling on the part of the public that insurance fraud is reprehensible but inevitable and that the insurance industry is going to do what it wants to anyway in the way of premium rates. This perception exists despite the increased attention the industry has paid to exposing insurance fraud and combating it.
What hasn't been tried in the fight against insurance fraud is for the insurance industry--companies, agents, brokers, MGAs, intermediaries, program administrators, etc.--to disseminate information to the public that calls attention to ills in the industry that contribute to insurance fraud problems. *
©COPYRIGHT: The Rough Notes Magazine, 1998