I’m not sure how it happens but lately it seems more and more of my conversations wind up on the topic of insurance, insurance premiums and the inherent evil nature of the insurance industry.
Recently I was speaking with a friend who was all too happy to explain to me how unfair insurance was because it was so expensive. Then the topic turned to how the insurance companies dial up their rates and charge more premiums just to line their own pockets while taking advantage of policyholders.
Then I asked this person a question: “If you owned a business and each month 10% of your inventory walked out the door without being paid for, how long could you stay in business without raising prices?”
The response was something along the lines of, “What?”
Insurance companies raise and lower rates for any number of reasons but rarely do they raise rates to screw policyholders or engage in profiteering. More often than not, insurers adjust rates in response to economic or environmental factors that affect their ability to generate money to pay claims.
Some factors are high profile such as storms, fires, floods, etc… And others are not so obvious – such as fraud.
Depending on the statistics one chooses to believe, anywhere from 5% to 10% of claims filed with US insurers are fraudulent – with some insurers reporting fraud rates potentially as high as 20%. This results in US insurance companies paying out anywhere from $80,000,000,000 to $300,000,000,000 in fraudulent claims across all lines of insurance. That’s right -$80 Billion to $300 billion annually.
Lets look at 2017. As a result of Hurricanes Harvey and Irma, US insurers paid out approximately $650,000,000 in recreational boating claims alone - which means it wouldn’t be a stretch to assume $65,000,000 of recreational boating claims for those two events were based on fraudulent claims submissions.
Lets go further. Lloyds’ share of Hurricanes Harvey and Irma losses were in the neighborhood of $4,500,000,000 - which could mean that as much as $450,000,000 in claims could have been fraudulent. That’s nearly half-a-billion dollars for two events.
Switching gears, The Economist has reported in the past that in the United States the level of health insurance and Medicare/Medicaid fraud could be as high as $270,000,000,000 annually. $270 BILLION.
So what does this all mean?
It means insurance companies usually have a good reason to raise rates which results in everyone paying higher premiums – and the general public is usually an active participant in giving them permission to do so.