The Insurance Research Council estimates that each year insurers lose $5 billion to $7 billion to inflated auto accident claims alone, although the real cost of insurance fraud likely runs to tens of billions. Insurers pass those losses on to consumers via raised premiums, making fraud a multi-victim crime.

Most insurance companies maintain fraud detection departments whose only function is to prevent scams and to recover benefit monies paid out to scammers. The two major categories of fraud with which they deal most often are inflated claims and a too-high risk to premium ratio.

While inflated claims are the primary source of company losses, the second problem is more serious. Essentially, insurance clients hide or fail to disclose risk factors when they apply for their insurance coverage. Consequently, their premiums are lower than they should be.

In order to combat all instances of fraud, insurance companies have “whistle-blower” phone lines where anonymous calls can be recorded. Claims analysis and an examination of clients’ claims histories can also yield evidence of fraud.

In some cases, however, insurance company actually watch their clients. While this is most common in disability or other forms of health claims, surveillance can be used in a variety of insurance fraud cases.

All methods of combating fraud, however, involve a lot of effort and leg work on the part of insurers. While some expense for maintaining fraud detection departments may also be passed on to consumers, insuring accurate benefit payments and honest applications are a vital aspect of keeping auto and other insurance premiums at a fair level

According to figures compiled by the Consumer Federation of America, low to mid-level income Americans may be paying too much for their auto insurance policies, a situation which lowers their employment opportunities because they cannot legally drive an uninsured vehicle. On average, this class of driver pays $700 and up for their auto coverage.

Insurers rely on a variety of factors to determine premium levels including the location of the primary residence, the driver’s occupation, and their level of education. Insurers insist that when taken as a whole, these facts contribute to the degree of risk associated with the driver’s operation of a motor vehicle.

Stephen Brobeck, CFA president, said in a statement accompanying the release of the study, “As a society, we must figure out a way for lower-income families to purchase affordable liability coverage so that they don’t face the choice between breaking the law and giving up access to job opportunities.”

Unfortunately, this is too often a case of presumed “guilt” on the part of the car owner rather than innocence. One option for low-income drivers is to investigate the newly emerging class of “pay as you drive” coverage.

This insurance model includes the installation of a device on the car to collect data about miles driven, the time of day the car is in operation, and rate of speed. It may also look at behavior like abrupt stops and accelerations.

The policy’s premium levels are tied to actual driver behavior, which the motorist can monitor on the company’s website. Studies have shown that already safe drivers become even safer when they can see data about their own habits behind the wheel.

The “pay as you drive” model offers one solution to what would appear to be a “class-based” insurance dilemma. Every state in the union except New Hampshire and Wisconsin require motorists to carry insurance. Given the effects of the on-going recession, more drivers are having to weigh the dangers of breaking the law and driving uninsured because they cannot afford their auto insurance premiums.

The CFA study, “Lower-Income Households and the Auto Insurance Marketplace: Challenges and Opportunities” can be accessed at consumerfed.org.

Over the past decade, New York City has seen a 70 percent increase in personal injury protection claims including lost wages, medical bills, and other auto insurance-related claims.

This upsurge exists concurrently with a 49 percent jump in the cost of medical care in the city.

The Insurance Research Council (IRC), which conducted the study, says the average PIP claim in the city exceeds $15,000 while the amount for the rest of the state is just $7,000

The senior vice president for the IRC, Elizabeth Sprinkel said the statistics validate the issue of claims abuse in New York, which is made worse by medical providers who are over charging insurers and over treating their patients to get that claim money. These so called “medical mills,” as well as organized crime rings that turn auto fraud into what amounts to an industry are at the heart of the escalating problem.

Together, these fraudulent practices are elevating the price of auto insurance not just for drivers in the city, but for those across the state of New York. The monetary consequence of the fraud totals about $200 million annually in premium increases for New York state drivers. In the city specifically, drivers pay premiums 272 percent above the state average.

According to the IRC, approximately 23 percent of the claims examined to compile data for the study involved some sort of fraud. Of that group, claims that originated in New York were four times more likely to include some suspicious activity.

In February 2011, the national average rate for auto insurance premiums peaked for the six-month period of December 2010 to May 2011, standing at $1,236.38. By March, however, it dipped to an encouraging $1,162.18 driven by market pressure to bring rates in line with the needs of cash-strapped Americans.
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