The Economic Impact of Insurance Fraud in New Zealand
Insurance fraud is a pervasive issue that has significant repercussions for economies worldwide, and New Zealand is no exception. While the immediate victims of insurance fraud are typically the insurance companies and their policyholders, the broader economic impact is far-reaching. This blog delves into the various ways in which insurance fraud affects New Zealand’s economy, including increased premiums, financial losses for businesses, strain on public resources, and overall economic inefficiency.
Understanding Insurance Fraud
Insurance fraud can be broadly categorised into two types: hard fraud and soft fraud. Hard fraud involves deliberate actions, such as staging accidents or inflating claims, while soft fraud is more subtle, involving exaggerations or misrepresentations on insurance applications or claims. Both types of fraud undermine the integrity of the insurance system and lead to significant economic costs.
Direct Financial Impact
The most immediate and obvious economic impact of insurance fraud in New Zealand is the direct financial loss to insurance companies. According to the Insurance Fraud Bureau (IFB NZ) insurance fraud costs the industry hundreds of millions of dollars each year. These costs are not absorbed by the insurance companies alone; they are inevitably passed on to policyholders in the form of higher premiums.
When premiums rise, it affects not only individuals but also businesses. For companies, particularly small and medium-sized enterprises (SMEs), increased insurance costs can be a significant financial burden. Higher operational costs can lead to reduced profitability, stunted growth, and in some cases, business closures. This, in turn, impacts employment and economic stability within communities.
Increased Premiums and Economic Behavior
Higher insurance premiums driven by fraud have a cascading effect on consumer behaviour. As insurance becomes more expensive, individuals and businesses may opt to reduce their coverage or forgo insurance altogether. This underinsurance can lead to severe financial difficulties in the event of an unforeseen incident, such as natural disasters, theft, or accidents. The lack of adequate insurance coverage can result in substantial out-of-pocket expenses, which can cripple household finances and destabilise small businesses.
Moreover, the financial strain caused by high premiums can lead to reduced consumer spending, which has broader implications for the economy. When households and businesses allocate a larger portion of their budgets to insurance costs, they have less disposable income to spend on other goods and services. This reduction in spending can slow economic growth, affect retail and service industries, and potentially lead to job losses.
Strain on Public Resources
Insurance fraud places a significant burden on public resources in New Zealand, involving extensive efforts from law enforcement agencies, regulatory bodies, and the judicial system to detect, investigate, and prosecute fraudulent activities. This diversion of resources detracts from other critical areas such as public safety and social services, and incurs substantial financial and operational costs. Additionally, fraud undermines public confidence, necessitates increased regulatory measures, and strains social services by increasing demand for support. The overall economic and social consequences include slowed economic growth and diminished public sector efficiency, highlighting the need for a coordinated effort to combat insurance fraud effectively.
Economic Inefficiency and Market Distortions
Insurance fraud contributes to economic inefficiency and market distortions. Fraudulent activities can skew risk assessments and pricing models used by insurers, leading to mispriced premiums and inefficient allocation of resources. When insurance companies are forced to account for fraud-related losses, they may become more risk-averse, tightening underwriting standards and making it harder for legitimate policyholders to obtain coverage.
This inefficiency extends to the allocation of capital within the economy. Resources that could be used for productive investments are instead diverted to cover the costs associated with fraud. Over time, this can hamper economic growth and reduce the overall competitiveness of New Zealand’s economy.
Efforts to Combat Insurance Fraud
Recognising the significant economic impact of insurance fraud, various stakeholders in New Zealand have implemented measures to combat this issue. In September 2019, the Insurance Council of New Zealand (ICNZ) launched the Insurance Fraud Bureau (NZ) which established guidelines and best practices for identifying and preventing fraud. Over the last three years (2020-22), IFB’s third Annual Fraud Survey found that 9.65% of claims were detected and investigated for potential fraudulent activity. Additionally, many insurance companies have invested in advanced technologies, such as data analytics and artificial intelligence, to detect suspicious patterns and fraudulent claims more effectively.
Public awareness campaigns are also crucial in the fight against insurance fraud. Over the past year the IFB team presented to 15 community and consumer groups to grow New Zealander’s understanding of insurance, and what constitutes being truthful with your policy as well as your claim (you can read more about this in the ICNZ Annual Review). In IFB’s fourth operational year we continued to undertake a range of activities to drive awareness and understanding of insurance fraud. Targeted campaigns on social media included seven informative and educational anti-fraud blogs. Communicating about fraud is important to IFB because educating policyholders about the consequences of fraud and encouraging them to report suspicious activities can help reduce the incidence of fraud. Collaboration between insurers, law enforcement agencies, and regulatory bodies is also essential to create a comprehensive and effective approach to tackling this issue, which is why we partner with the Insurance Claims Register (ICR), which holds up to 10 years’ data on insurance claims. The ICR captures claims information from participating insurers for the purpose of detecting and minimising insurance fraud.
The economic impact of insurance fraud in New Zealand is multifaceted and far-reaching. From increased premiums and financial losses for businesses to the strain on public resources and overall economic inefficiency, the consequences of insurance fraud extend well beyond the immediate losses to insurance companies. Addressing this issue requires a concerted effort from all stakeholders, including insurers, policymakers, law enforcement, and the public. By working together to detect, prevent, and prosecute fraud, New Zealand can mitigate the economic impact of this pervasive issue and ensure a more stable and efficient insurance market. If you believe you have seen fraud and you would like to report it, you can do so here.