What Constitutes Insurance Fraud?
Insurance fraud is a crime committed by either the customer or the seller of an insurance contract. Selling policies from nonexistent entities, failing to submit premiums, and churning policies to increase commissions are examples of insurance fraud perpetrated by the issuer. Meanwhile, buyer fraud can include exaggerated claims, falsified medical history, post-dated policies, viatical fraud, simulated death or kidnapping, and murder.

The Workings of Insurance Fraud
Insurance fraud is an endeavor to exploit an insurance contract. The purpose of insurance is to secure against risks, not to enrich the insured.

It is possible for a policy issuer to commit insurance fraud, but the vast majority of cases involve the policyholder trying to receive more money by exaggerating a claim. More sensational cases, such as feigning death or murdering for insurance money, are relatively uncommon.
One of the disadvantages of insurance fraud is that insurers pass on the increased cost of coping with such issues to their customers in the form of higher premiums.
Insurance Fraud Scheme Varieties
Sellers
According to the Federal Bureau of Investigation (FBI), the following are three seller-side fraudulent schemes:
- Premium diversion: When a company or individual sells insurance without a license and then refuses to pay claims, this is an example of premium diversion.
- Fee rotation: When intermediaries such as reinsurers are involved in fee recycling. Each receives a commission that dilutes the initial premium to the point where there is no money remaining to pay claims.
- Asset diversion: Theft of insurance company assets, such as using borrowed funds to purchase an insurance company and then using the assets of the acquired company to repay the debt.
Buyers
Attempts by policyholders to unlawfully profit from their insurance policies can take many different forms. Automobile insurance fraud, for instance, may involve disposing of a vehicle and then alleging it was stolen to obtain a settlement payment or a replacement vehicle.
The original vehicle could be clandestinely sold to a third party, abandoned in a remote area, purposefully set on fire, or driven into a river or lake. If the proprietor sells the vehicle, they will attempt to profit by pocketing the cash and then claim the vehicle was stolen to receive additional compensation.

Illustration of Insurance Fraud
By using a false registration, the proprietor of a vehicle might attempt to reduce the cost of insurance premiums. If the vehicle owner resides in an area with high rate premiums due to frequent car thefts or other factors, he or she may attempt to register the vehicle in a different area in order to reduce their premiums.
Vehicle maintenance could also be a source of insurance fraud. For instance, a repair shop that expects to be paid by the insurer may charge for extensive work but then use inexpensive or even counterfeit replacements. In addition, they may overcharge the insurer by exaggerating the extent of the necessary restorations.