Auto insurance and the problem of fraud

A few years ago, there was quite a high level appeal case where a homeless man broke into a house to steal food, claiming that it was necessary to do so to save his life. Necessity is one of the slightly strange defenses to crime. In theory, it sounds great. On the way to put out the fire, the tender breaks the speed limit and runs red lights. We all want the tender to get to the scene of the fire to save the people and keep property damage to a minimum. This forces a decision on breaking the law. Balancing benefits and costs, we get more good outcomes than bad if breaking the law is genuinely necessary. Ah, but, our homeless man does not have to break into a home to steal food. There are almost always other options except in the Hollywood tradition of being caught in a freak snow storm and have no choice than to break into the empty farmhouse. So, more often than not, crimes are not justified by necessity. Why all this legal stuff here?

Over the last two years of the recession, there’s been a steady rise in the amount of crime committed. When people don’t have the money to put food on the table, they resort to theft. For larger amounts of cash, there’s always fraud and insurance companies are obvious targets. They have all this cash and thousands of people make claims. It looks good odds to add just one more claim and hope no one notices. To give you an idea of the scale of the problem, the National Insurance Crime Bureau (NICB) has reported the number of probably false claims has risen by 10% since 2009. Why should we care?

Well, for the obvious reason that fraud drives up the premium rates. Insurance companies rely on math geeks called actuaries to work out the odds of each type of accident. They predict the number of claims and the amount of money the insurer needs to pay everyone out (and leave a profit). If they “get it wrong”, the insurers make a loss and so put up the premium rates to get back into profit. Except, of course, they know what’s happening so they hire a small army of investigators called claims adjusters whose happy job it is to investigate suspicious claims. And all this extra cost gets passed on to us. We accept this because the adjusters “save” more than they cost. They either prevent the insurers from paying out on bad claims or, if the evidence of fraud only shows up later, they help recover some or all of the money from the criminals. Needless to say, these are popular guys.

So, when you are looking at those all-important auto insurance quotes, remember the problem of crime. Not that we should ever want you to inform on your friends and neighbors. But if there was less fraud, we would all pay less for our auto insurance and the only people who would be sad would be those out-of-work claims adjusters.

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