The Psychological Profile of Insurance Fraudsters: A New Zealand Perspective

June 17th, 2024

Insurance fraud is a global issue that costs the industry billions annually. In New Zealand, the Insurance Fraud Bureau reports significant losses due to fraudulent claims. By the end of  2024 it is expected that losses will reach $995 million (an increase of $150m on the year before). A calculated average percentage over the past four consecutive years gives an estimated figure that suggests that approximately 9.94% of claims are potentially fraudulent, which is in keeping with national and international estimates of circa 10%.

Fraudulent claims ultimately affect premiums for all policyholders. Understanding the psychology behind insurance fraud is crucial in combating this problem. By delving into the motivations and profiles of those who commit such acts, we can better tailor prevention strategies and reduce the incidence of fraud.

Understanding Insurance Fraud

Insurance fraud encompasses a wide range of dishonest acts, including inflating claims, staging accidents, and submitting false information. While the specific methods may vary, the underlying psychological drivers often exhibit common patterns. Understanding these patterns can shed light on why individuals engage in fraud and help insurers develop more effective prevention and detection measures.

The Psychological Drivers Of Insurance Fraud

Financial stress and desperation is one of the most common motivators for insurance fraud. Individuals facing severe financial difficulties may see fraud as a quick and easy way to alleviate their problems. This sense of desperation can cloud their judgement and lead them to rationalise fraudulent behaviour as a necessary means of survival. In New Zealand, where the cost of living has been rising, some may feel cornered and resort to fraud as a last-ditch effort to secure financial stability.

The perception of low risk and high reward plays a significant role in motivating fraudsters. When individuals believe they can get away with fraud without facing severe consequences, they are more likely to take the risk. This is often exacerbated by the belief that insurance companies are faceless entities that can absorb the loss. The notion that “everyone does it” can also contribute to normalising fraudulent behaviour.

Many fraudsters engage in a process of moral disengagement, convincing themselves that their actions are justified. They may rationalise their behaviour by blaming the insurance companies, thinking that they are simply getting back what they believe they are owed. This cognitive dissonance allows them to commit fraud without feeling like they are doing anything wrong. However, insurance fraud increases the cost of insurance policies for everyone.

For some, insurance fraud is not just about financial gain but also about the thrill and challenge of outsmarting the system. This group of fraudsters often enjoys the intellectual challenge of crafting a convincing fraudulent claim and sees it as a game. The success of their deception can give them a sense of accomplishment and superiority. This type of fraudster is often more difficult to deter, as their primary motivation is psychological rather than financial.

Profiling Insurance Fraudsters

Research into the profiles of insurance fraudsters reveals that there is no single type. However, certain patterns do emerge. Typically, fraud fall into a category of either  Soft and Hard.

Soft insurance fraud is insurance fraud that’s only committed when someone is provided with an opportunity through circumstance or chance and can involve various deceptive practices. These include claiming for items that were never owned or weren’t lost, inflating the value of items to make them appear newer or more expensive, and consolidating losses from separate incidents to exceed the policy’s excess. Fraudsters may also falsely report that someone else was driving a vehicle involved in an accident to reduce the excess, claim that one person in a shared flat owned everything stolen or damaged because another member doesn’t have insurance, or report losses from separate events as occurring in one incident to pay a single excess. Additionally, they might claim the same loss on multiple insurance policies or submit multiple claims for the same loss.

Hard insurance fraud is a type of fraud meticulously planned with the primary intent of deliberate deception for financial gain. It involves premeditated and repeated actions designed to secure insurance payouts for losses or damages to which the policyholder is not legitimately entitled. This form of fraud can include staging a burglary, staging a car crash , setting a house or car on fire, or intentionally damaging property, such as a smartphone, to claim a newer model. It may also involve enlisting friends, acquaintances, or relatives to carry out these fraudulent acts.

Prevention and Detection Strategies

Understanding the psychological drivers and profiles of fraudsters is key to developing effective prevention and detection strategies. Here are some approaches used in New Zealand.

Public Awareness Campaigns

Many New Zealanders don’t realise that insurance fraudsters increase the cost of insurance for everyone. Therefore, educating the public about the consequences of insurance fraud and its impact on premiums can help deter opportunistic fraudsters, and encourage others to report insurance fraud when they see it. Highlighting successful prosecutions can also serve as a deterrent by emphasising the risks involved.

Enhanced Detection Techniques

Utilising advanced data analytics and machine learning can help insurers identify suspicious patterns and anomalies in claims. By flagging high-risk claims for further investigation, insurers can reduce the incidence of fraud.

Stricter Penalties

Imposing stricter penalties for fraud can increase the perceived risk and deter potential fraudsters. Ensuring that fraudulent activities are prosecuted and publicised can reinforce the message that fraud is a serious crime.

Insurance fraud is a complex issue driven by various psychological factors. By understanding the motivations and profiles of fraudsters, insurers in New Zealand can develop more targeted and effective prevention strategies. Public awareness, advanced detection techniques, and stricter penalties are all critical components of a robust anti-fraud framework. Addressing the root causes of fraud can help create a fairer and more efficient insurance system for all New Zealanders. Want to be part of the fight against insurance fraud? Report fraud now.