What is the Fraud Triangle and what should you know about it?

Cath Sandoval
Copywritter

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Insurance fraud has always existed and affects not only insurance companies but their policyholders as well. This article will discuss the Fraud Triangle and its impact on the insurance industry.

To give you an idea, it is estimated that the cost of insurance fraud amounts to 40 billion dollars annually, directly affecting the cost of premiums for policyholders.

What is the Fraud Triangle?

This is a model used to explain why an individual decides to commit fraud, helping us understand the motivation and mindset of fraudsters.

Starting with this, if we can understand why and how insurance fraud occurs, we can work to stop it. Let’s break down the three vertices of the triangle: Opportunity, Motivation, and Rationalization.

01. Opportunity:

Insurance fraud cannot happen unless an opportunity presents itself. These opportunities can be difficult to mitigate and even more difficult for insurance companies to control.

An opportunity for insurance fraud can arise from any situation, including “the ability to redefine or exaggerate claims.

A 2015 report by German economic researchers found that “redefining” and “exaggeration were the two most common forms of fraudulent insurance actions.

We will give you an example of this!

Imagine that a claim is made for a loss due to damage not covered by the insurance policy. This person will redefine what has happened so that the damage fits with some coverages and, with this, access the payment. 

These policyholders also take advantage of all the “loopholes” reflected in the company’s agent’s report to get their hands on an even higher amount of money than it should be. This is known as exaggeration.”

Incomplete information: another excuse to commit fraud

Altering information is another form of an opportunistic fraud. For example, a customer may see the price of their auto insurance policy go up by naming their 18-year-old daughter as the primary driver.

Faced with this situation, the insured has two options. Either he pays more, or he remains the main driver even though his daughter is the person who will be using the car the most (this option involves significant risk, but many policyholders opt for it).

Following an investigation by the Research commissioned by the Association of British Insurers, it was discovered that most cases of fraud are carried out because the insured trusts and believes that he will never be discovered or that he simply believes that what he is doing is not a crime.

Want to learn more about the other vertices of the fraud triangle? Keep reading!

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