Why fraud makes everyone's auto insurance more expensive
Let’s imagine for a moment that you’ve been presented an opportunity to get back at Big Insurance. A friend of a friend tells you that he’s got a friend of a friend who will steal your car and sell it for scrap – all you have to do is look the other way when the time comes and file a stolen vehicle claim. This “friend” explains that the scheme isn’t hurting anyone but the insurance company. However, he couldn’t be more wrong – fraud costs drivers so much in auto insurance premiums that the scheme literally hurts everyone, including you.
How fraud hurts everyone
Insurance is meant to be more or less self-sustaining. Statistics, data and math help an insurance company estimate how much money it will need to pay out for claims. The company then charges premiums based (again) on statistics, data and math. That’s why your premiums will increase or decrease as your life situation changes and why premiums will increase after an unexpectedly expensive year for insurance companies (natural disasters, for example).
Fraud acts a bit like an unexpected natural disaster. Because the insurance companies can’t predict when someone will commit fraud, they can’t price it into their premiums. Without the cost of fraud being priced in, insurance companies can find themselves short, leading to a knee-jerk reaction of needing to raise everyone’s premiums.
What’s more, if men between the ages of 20-25 are the ones committing the most fraud, the number of claims for that age group will increase. Even without proof that these men committed fraud, the entire demographic becomes riskier to insure, leading to another auto insurance premium increase.
Other forms of fraud
Not all forms of fraud involve stolen cars. Some fraud can be self-inflicted – for example, if a vehicle was insured for more than its worth, the owner might intentionally damage it beyond repair. Similarly, a person who hasn’t paid for pricey collision coverage can lure you into an accident and have his vehicle repaired on your insurance company’s dime.
In both these cases, auto insurance fraud looks like a victimless crime. In both of these cases, all drivers end up paying more for premiums when they renew their policies, including the orchestrator of the fraud.
The big leagues
Although filing a small, fraudulent claim doesn’t seem like a big deal, every count of fraud matters. Because even big-time auto insurance fraud, like the vehicle theft usually flies under insurers’ radars, it can take years for fraudsters to get caught. Reporting any suspicious insurance claims to your local police can mean the difference between catching and not catching a fraud ring.
If you ever wanted to know why fraud costs drivers so much in auto insurance premiums, it’s because the fraudsters can commit many crimes before being caught. Although the financial value of these crimes is relatively small compared to insurers’ coffers, even a single case of fraud can cause premiums to increase, for everyone.