Insurance Fraud in the Wake of Innovation

For the insurance industry, the fight against insurance fraud is a perpetual arms race. Just when we think we’ve developed airtight defenses, fraudsters find new vulnerabilities, often by cleverly exploiting the very innovations designed to make our lives easier. This isn’t a new phenomenon; a look back through history reveals a clear pattern: fraud always follows. Understanding this evolution can help us anticipate the next wave of deception.

Early Insurance Scams

Insurance has ancient roots, and so does fraud. One of the earliest known cases dates back to 300 BC, when a Greek merchant by the name of Hegestratos attempted to defraud an insurer. A ‘bottomry’ loan allowed him to borrow money using his ship as collateral, to be repaid only if the ship completed its voyage safely. His plan? Sink the ship and keep the money. But when the crew uncovered his scheme, Hegestratos threw himself overboard – preferring the sea to facing justice from these first-generation fraud fighters.

He wasn’t the only one. In the centuries that followed, shipowners deliberately scuttled or torched their own vessels at sea to collect payouts. These acts were hard to prove across vast distances and without modern investigative tools. They set the stage for modern-day arson or staged accident claims, where the insured party intentionally causes damage for financial gain.

By the 1800s, with the rise of reliable postal services, insurance fraud found new avenues. While not as flashy as sinking ships, mail fraud schemes often targeted life insurance. “Tontine” schemes, for example, rewarded the last surviving policyholder, which led some to forge death certificates or assume fake identities through the mail. Fraud rings even created shell companies to sell fake policies or file false claims, taking advantage of slow information-sharing to stay one step ahead of the authorities.

Insurance Fraud in The Telephone Era

The telephone, once a marvel of instant communication, quickly became a tool for the deceptive. Gone were the delays of mail; now, a con artist could directly pressure a potential victim or quickly file a dubious claim. We saw the rapid rise of “phantom passenger” scams in auto insurance, where individuals would claim injuries for non-existent passengers. The ease of a phone call made it simple to coordinate these fake witnesses and file multiple, often exaggerated, bodily injury claims with different insurers.

Similarly, early “slip-and-fall” schemes became more coordinated. Fraudsters could call in false reports, quickly arrange for accomplices to “witness” the fabricated incident, and follow up with inflated medical bills, all orchestrated through a series of phone calls.

This era saw the spread of organized “accident rings” that used the telephone as their primary coordination tool to recruit participants, report fraudulent incidents, and push through multiple claims simultaneously, marking a significant shift from isolated incidents to more professional, network-based schemes. The telephone’s ability to facilitate quick, direct, and often anonymous communication made it a powerful enabler for these types of organized, low-tech frauds, stressing the need for more rigorous claims investigation processes beyond a simple phone interview.

Radio, TV, and the Rise of Organized Fraud

The growth of mass media – radio and then television – brought new challenges. These platforms influenced public perception and created new opportunities for large-scale operations. We saw the proliferation of “medical mills” in the mid-to-late 20th century, particularly in auto accident hotbeds. Radio and TV advertisements, sometimes subtle and overtly misleading, could be used to lure in potential “patients” or “accident victims” promising easy payouts.

Example

Imagine a radio ad in a busy metropolitan area: “Been in a fender bender? Don’t suffer in silence! Even a small bump can cause lasting pain. Call ‘Accident Solutions Now!’ Our experienced legal and medical team specializes in auto injuries. Zero out-of-pocket costs! Get the settlement you deserve. Call 1-800-CLAIM-IT today!”

While not overtly fraudulent, this ad has the potential to funnel patients toward a network of doctors, chiropractors, and lawyers who might then engage in practices such as generating fraudulent medical bills, prescribing unnecessary treatments, and inflating legal fees to maximize insurance payouts.

Medical mills could leverage mass media to cast a wide net, drawing in both legitimate accident victims who might be overtreated and individuals potentially willing to participate in outright fraud. They created an ecosystem where the public was subtly conditioned to think of injury claims as an easy path to cash, laying the groundwork for widespread systemic fraud.

Insurance Fraud in The Internet Age

The internet, with its speed, anonymity, and global reach, made it easier than ever for scammers to operate. In its early days, “phishing” scams surged. Criminals posed as insurers or government agencies, to steal sensitive personal information like Social Security numbers, policy numbers, and banking details.

With stolen data in hand, fraudsters could:

• Create Fraudulent Insurance Policies: Using stolen or fake identities, criminals could open new insurance policies without the real policyholder’s knowledge. These were then used to submit fake claims, such as reporting a “stolen” car that never existed or filing a fake life insurance claim for someone that is already deceased.
• File Fake Claims: Stolen policy numbers and personal details allowed fraudsters to file entirely fake claims on existing policies. The internet made it easier to submit supporting “documentation” – doctored photos, fake invoices, or forged medical records – without the need for physical interaction.
• Organize Large-Scale Scams: Stolen policy numbers and personal details allowed fraudsters to file entirely fake claims on existing policies. The internet made it easier to submit supporting “documentation” – doctored photos, fake invoices, or forged medical records – without the need for physical interaction.

The sheer volume of information available online and built-in privacy made it a fertile ground for fraudsters to operate. The principle remained consistent: exploit the system and leverage the new communication channels to execute highly organized insurance fraud.

COVID-19 and Telehealth

The rapid adoption of telehealth during the COVID-19 pandemic inadvertently opened new avenues for insurance fraud. The lax regulations and increased reliance on remote interactions created vulnerabilities that fraudsters quickly exploited. We saw an explosion of fraudulent claims related to medically unnecessary COVID-19 testing, where individuals were billed for tests they didn’t receive or for excessive testing.

More sinister were schemes involving durable medical equipment and prescription fraud. Corrupt providers would leverage telehealth to “diagnose” patients they never physically examined, then prescribe expensive, unneeded equipment like braces or wheelchairs, billing insurers for massive amounts. The convenience and perceived anonymity of telehealth appointments made it easier for fraudsters to operate without direct patient interaction or traditional oversight.

The AI Horizon

Today, we face the most sophisticated fraud frontier yet: Artificial Intelligence. AI’s ability to generate incredibly realistic fake media (“deepfakes”) and create convincing “synthetic identities” presents an unprecedented challenge for the insurance industry.

Deepfakes are a looming threat for claims. Imagine a deepfake video of a policyholder seemingly confirming a legitimate accident, only for it to be entirely fabricated. Or an AI-generated audio recording of a witness corroborating a staged event. The realism can bypass traditional human scrutiny, making it difficult to distinguish truth from deception. For bodily injury claims, an AI could theoretically generate detailed, consistent narratives of pain and suffering, complete with convincing “testimony,” making it harder to prove exaggeration or fabrication.

Synthetic identity fraud is already a significant concern. Fraudsters leverage AI to combine real and fabricated information to create entirely new, fake personas – often with pristine credit histories – that can apply for insurance policies. These synthetic identities can then be used to stage accidents, file fraudulent property claims, or even claim fake deaths to collect on life insurance policies. The Coalition Against Insurance Fraud consistently highlights the growing threat of synthetic identity fraud, noting its increasing sophistication and the billions it costs the financial sector annually. AI makes the creation of these seemingly legitimate, untraceable identities faster and more scalable than ever before.

Staying Vigilant

The history of insurance fraud in the wake of innovation offers a clear, sobering lesson: the game never ends. For the insurance industry, continuous adaptation is not an option; it’s a necessity.

The future of insurance fraud will undoubtedly be hyper-personalized and highly automated, driven by AI. We can expect more sophisticated deepfake schemes, advanced synthetic identity fraud, and AI-powered automation of fraudulent claims submission, making large-scale attacks easier to execute. Fraudsters will leverage AI to analyze vast amounts of data to identify policy vulnerabilities, craft hyper-personalized scams, and even generate fabricated evidence to support their claims.

However, just as AI empowers fraudsters, it also offers powerful tools for defense. Insurers are already deploying AI-powered solutions to detect fraudulent behavior across the claims lifecycle, analyzing unstructured data (text, images, audio, video) to identify patterns, anomalies, and inconsistencies that human eyes might miss. Machine learning can flag suspicious claims in real-time, allowing human investigators to focus their expertise on the most complex and high-value cases.

The key to staying ahead lies in a multi-pronged approach:

• Continuous Education & Awareness: Stay informed about emerging technologies and their potential for fraudulent misuse. Share this knowledge across your teams.
• Proactive Technology Adoption: Invest in and leverage AI-powered fraud detection tools, including those designed to identify deepfakes and synthetic identities.
• Robust Data Analytics: Utilize advanced data analytics to identify patterns, network connections, and anomalies that signal organized fraud rings or emerging schemes.
• Maintain Human Expertise: AI is a powerful tool, but it complements, rather than replaces, the critical thinking, investigative skills, and intuition of experienced human claims professionals.

The history of insurance fraud is a testament to human ingenuity – both good and bad. By understanding how deception has consistently followed innovation, and by embracing the very tools that fraudsters seek to exploit, we can continue to protect our policyholders and safeguard the integrity of the insurance industry.

Don’t let history repeat itself. Talk to us today. 

Check out our sources:

Coalition Against Insurance Fraud. (2024, May 15). The rising tide of synthetic identity fraud. Retrieved from https://www.insurancefraud.org/

Deloitte. (n.d.). Financial services industry predictions. Retrieved from https://www2.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-outlooks.html

ICW Group. (2022, June 30). The History of Insurance Fraud – Work Comp Connect – ICW Group. Retrieved from https://www.icwgroup.com/articles-insights/work-comp/history-of-fraud-greek-grain-merchant-thwarted-300-b-c/

Insurance Information Institute. (n.d.). Facts + Statistics: Fraud. Retrieved from https://www.iii.org/fact-statistic/facts-statistics-fraud

National Insurance Crime Bureau. (2023, Fall). Hot wheels and hotbeds: Trends in auto theft and fraud. Retrieved from https://www.nicb.org/

Verisk. (n.d.). AI and deepfakes: What insurance needs to know. Retrieved from https://www.verisk.com/insights/ai-and-deepfakes-what-insurance-needs-to-know/