Disaster Fraud — The Dark Side of Insurance Claims

Fraud opportunists often make waves following natural disasters and catastrophes. 

The times during and immediately after a catastrophic event are some of the most important — and challenging — for the insurance industry. Helping people through catastrophes and natural disasters by providing financial assistance during the crisis and when it is time to rebuild is what insurance companies are designed for. This is the time when insurers fulfill their promise to policyholders to be there during times of need. 

But natural disasters also create significant challenges for insurers to manage. Adjusters are working longer hours on cat duty and the high volume of losses makes it difficult to keep up with the administration and handling of claims. These conditions create the perfect environment for potential fraud attempts by bad actors who want to take advantage of the challenges exacerbated by natural disasters.

While most insureds and claimants are honest, some decide to commit fraud by exaggerating their loss or making up a claim. The Coalition Against Insurance Fraud reports insurance fraud costs consumers $308.6 billion annually and estimates that 10% of P&C claims contain an element of fraud. These costs add up, making the fight against fraud an important priority for insurers worldwide.

Disaster Fraud Becomes Big Business

The insurance industry has seen examples of fraud attempts during natural disasters across all lines of business, from life insurance and workers’ compensation to property and liability losses. Disaster fraud, as it has become known in the industry, happens after all kinds of losses.

After Hurricane Katrina, the FBI investigated over 900 people for fraudulent activity, including identity theft, which allowed fraudsters to gain access to funds earmarked for recovery efforts. Scammers have used cyberattacks to divert FEMA funds following catastrophes like Hurricane Ian that struck Florida in 2022. 

The NICB warns homeowners to use caution with contractors who offer to repair damage from natural disasters, estimating about $10 billion was lost to contractor fraud in 2022. Following the 9/11 tragedy, many fraudsters emerged to take advantage of the disaster, including a woman sentenced to prison for collecting disaster relief money for a fictitious husband she claimed perished in the attack.

FRISS recently released its 2024 Fraud Report examining global beliefs about fraud and actions taken to detect and prevent fraud in the insurance industry. The survey asked respondents about fraud following natural disasters and catastrophes in their regions. The responses seemed to confirm the phenomenon of disaster fraud around the world.

A majority of respondents, 62.84%, believed bad actors took advantage of catastrophic events to commit insurance fraud. But some of the responses were regional, as the report found respondents from LatAm and Europe felt the impact from natural disasters and other catastrophes on fraud was low. Respondents around the world agreed that new fraud schemes tended to develop following catastrophic events, however. 

How Insurers Can Manage Disaster Fraud

Insurers can take action against disaster fraud by making improvements in a few key areas. Bad actors often take advantage of the low severity/high frequency losses that follow in the wake of a catastrophe to file exagerated or made-up claims. These claims for losses like vandalism, theft, or food spoilage are often handled quickly to make time for the more complex, large dollar losses. Fraudsters count on the fact that insurers will be too busy to spend much time adjudicating a small dollar loss when they have hundreds of other claims to review. 

Some of these smaller claims do get routinely paid when they should be investigated further. Instead of being overwhelmed by volume, insurers that invest in fraud detection tools can sort through the high frequency losses to find the ones needing more investigation. Insurers should also invest in fraud awareness and prevention training for their employees — and refresh the training as often as needed. 

82% of the respondents to the FRISS survey said their firms invested in fraud awareness training programs and about half of respondents used other tools to help detect and prevent fraud, like behavior analysis and social mining. Empowering employees to educate consumers may also help reduce the occurrence of fraud following catastrophes, especially when it comes to contractor fraud. 

The survey found some insurers had a fraud detection and prevention platform in place, with 35% of respondents reporting having an external solution and 28% used a homegrown platform. Having a platform in place to help detect, prevent, and manage fraud is one significant way insurers can fight back against disaster fraud. 

Detecting and mitigating fraud within high-frequency losses is a challenge for humans to take on alone, but with the right platform in place, technology acts as a partner and first line of defense. 

To learn more, read the full 2024 Fraud Report at https://www.friss.com/Insurance-fraud-Insights-2024