BY Matthew Smith, Esq. | March 22, 2022
On the heels of the COVID pandemic, Americans now face the highest levels of inflation in 40 years. According to the U.S. Bureau of Labor Statistics inflation accelerated to 7.9% in February. Energy costs, gasoline, vehicles and food all are showing the highest rates of price increases many have seen in their lifetimes. Fraud fighters are already asking how will spiking inflation potentially impact insurance fraud? There is no easy answer to this question given many anti-fraud organizations, including the Coalition, were not even in existence the last time our nation faced this type of rising inflationary pressures. What we do know is the analysis of past economic upheavals, such as the Great Recession, led to increased levels of insurance fraud. History has also shown direct correlations between inflationary increases and financial crimes supports the validity of concerns that if this inflationary cycle continues its impact on insurance fraud may be significant.
Insurance fraud is always fueled by monetary gain. If the economy faces a downturn then it should be no surprise scams, schemes and lies become an alternative way for many to avoid or minimize financial distress by committing insurance fraud. When the Great Recession struck in 2008, the Coalition was at the forefront in showing the corollary impact of the financial crash and spiking levels of insurance fraud. Examples were cited showing states with 45% increases in insurance fraud convictions and carriers seeing 30% rises in the level of reported insurance fraud in 2009. At the very onset of the pandemic, in March 2020, former executive director, Dennis Jay, penned his last article for our Journal of Insurance Fraud in America discussing the comparisons we may see from COVID-19 with the higher levels of insurance fraud occurring in the wake of the Great Recession.
From a perspective few others could match, Dennis sounded a warning call: “During the Great Recession, many insurers and fraud bureaus were caught flat-footed by the scope and number of fraudulent claims. As the economy collapsed, the private and public sectors both cut back on their workforce. Insurers even reduced the numbers of investigators — the exact opposite of what they should have done.” Sadly, it appears little has changed either from the Great Recession or the pandemic. Will insurers and state fraud bureaus again be caught unprepared if the scourge of inflation leads to the next rise of insurance fraud? Perhaps, and the odds appear to favor a coming rise in insurance fraud if high rates of inflation continue.
To my knowledge no specific study exists to compare rising inflation and insurance fraud rates. Insurance fraud though is a crime and prior studies do exist analyzing the correlation between higher inflation and crime. It is certainly not too far a leap to look to these studies for information and guidance in helping to fight against a potential rise in insurance fraud as inflation now again plagues our economy.
One of the most comprehensive reports was published in February 2018. Three researchers from the University of Missouri. “Crime and Inflation in U. S. Cities” analyzed the relationship between crimes committed for monetary gain and inflation in a sample of 17 U. S. cities between 1960 and 2013. The study concluded changes in consumer prices over time is a robust predictor of crimes committed for monetary gain in the United States.
One of those who has been tracking the relationship between crime and inflation for many years is criminologist Richard Rosenfeld — a professor emeritus at the University of Missouri-St. Louis. Based on several studies released since the Great Recession, Rosenfeld has come to conclude that among the economic indicators, only inflation has consistent and robust short- and long-run effects on year-over-year change in financial crime offenses.
Correlations between inflation and crime are also not a new phenomenon. Noted security company Pinkerton published a blog on the subject in October of 2021. In the series “Perspectives in Crime” they noted: “The work of the historian David Hackett Fischer identified four major instances of inflation in Western history, in the 14th, 16th, 18th and 20th centuries. In each of these periods, violent and property crime rates increased, and then fell once prices stabilized. When inflation decreased in the early 1990s, both Europe and the United States saw a corresponding decline in crime.”
What can fraud fighters do? First, be prepared. Too many insurers especially are slashing staffing of budgets and personnel from SIU’s. They call it “right-sizing” but in truth it is purely for financial profit in many cases. Especially now, insurers should be seeking ways to more robustly protect both consumers and their companies from the rising risk of insurance fraud, whether fueled by COVID-19, inflation or simply greed. Many seem to be asleep at the switch.
Government leaders play a crucial role. Just last month “The Hill ” called on government leaders to take immediate steps to protect citizens from the higher risk inflation brings of increased crime. “Inflation has more immediate, direct, and widespread consequences for economic well being than any other economic factor, especially for those of modest means,” the article notes. While insurance regulators and legislators may not set U.S. monetary policy, they can work to better protect their state’s citizens from insurance fraud. Increased consumer awareness about fraud scams on state DOI websites is an easy and virtually no cost way of fighting back – and the Coalition provides a trove of free videos, infographics and related materials to do so at no cost. Legislators can also help by providing more funding for anti-fraud efforts and state fraud bureaus. Our most recent “Four Faces of Fraud” research study showed 80% of Americans are concerned about fighting insurance fraud. Today, legislators would be hard-pressed to find any issue they can support which provides such a high-level of voter approval.
In the 1970’s the slogan was “Whip Inflation Now”. No similar moniker has arisen yet in 2022, but the clear historical evidence shows all anti-fraud stakeholders need to mobilize quickly before it may be too late.
About the author: Matthew Smith, Esq. is the Executive Director of the Coalition Against Insurance Fraud. He can be reached at [email protected].