Insurance Fraud Prevention: 11 Proven Strategies in 2025

Insurance fraud is getting worse as more services go online and the damage goes beyond just financial, it leads to higher premiums, making insurance more expensive for everyone, and in some cases, it might make it hard for people to get coverage at all.

How can financial institutions fight back and implement insurance fraud prevention strategies against this growing problem? We’ll see in this weblog what can be done to prevent insurance fraud!

What is Insurance Fraud?

People (this can be a. Policyholders b. Claimants c. Insurance providers themselves) sometimes lie or deceive the system to get money they don’t deserve, and this can happen at any point, whether when applying for insurance, filing a claim, or even when underwriting the policy.  

When looking at preventing insurance fraud, we should keep in mind that the people behind these schemes can range from individuals who see a quick chance to cheat the system, to organized crime groups running complex fraud operations.

Hard Vs. Soft Insurance Fraud

• Hard Insurance Fraud: is when people deliberately a) make up accidents like setting fire b) cause harm, or c) create false claims to the point that some people might fake a death certificate, for the sake of getting insurance money.

• Soft Insurance Fraud: is when people exaggerate the truth to get more money (1. they might say stolen items are worth triple what they really are, or 2. They might make their injuries sound worse than they are to get a bigger payout).

What is Insurance Fraud Prevention?

Insurance fraud prevention involves actions and strategies to detect and reduce insurance fraud. Insurance fraud prevention includes identifying false claims whether they are a) fully made up or b) exaggerated.

Effective insurance fraud solutions use data analysis and real-time monitoring to ensure preventing insurance fraud.

What is Insurance Fraud Detection?

With the assistance of tools that look for insurance fraud warning signs (like mismatched information or unusual claim amounts), insurance claim fraud detection identifies fraudulent activity during or after a claim has been made.

Insurance claim fraud detection focuses on catching fraud as it happens, while insurance fraud prevention stops it before it starts. Insurance fraud prevention involves setting up systems to verify customer identities and analyze patterns that can help you identify and block fraud before a claim is ever filed.

The Impact of Insurance Fraud

Insurance fraud doesn’t just affect the people or companies directly involved but also has broader effects on the insurance industry and the public.

1. Economic Impact

Every year, billions of dollars are lost to fraud, and unfortunately, those costs don’t just disappear, those costs usually end up being passed on to policyholders in the form of higher premiums. So, people pay more for their insurance, making it harder for everyone to afford the coverage they need.

2. Operational Strain

Fighting fraud takes up a lot of resources like time, money, and effort to investigate suspicious claims, deal with legal issues, and set up insurance fraud solutions. This takes away from normal operations, driving up costs and putting a strain on your resources.

3. Reputational Damage

People expect fairness and honesty; if insurance companies cannot match that by detecting insurance fraud, this will lead to more complaints, and make it harder to retain current customers, let alone attract new ones.

4. Impact on Public Resources

Insurance fraud also puts pressure on public services, for example, in the healthcare or car insurance sectors, false claims take up resources that could be used for real cases. Hospitals, police, and emergency services spend time verifying these fake claims and in insurance claim fraud detection, which means they have fewer resources to handle actual emergencies.

8 Common Types of Insurance Fraud

Insurance fraud manifests in numerous ways, with schemes tailored to exploit various types of insurance policies.

1. Application Fraud

Application fraud occurs when individuals misrepresent or falsify information during the insurance application process to obtain coverage they wouldn’t otherwise qualify for or to reduce their premiums.

For individuals, applicants may lie about their health status, income, occupation, or the value of their assets. Businesses might understate operational risks or misrepresent the nature of their operations.

For example, Sarah, a 37-year-old marketing manager, applied for a life insurance policy worth $300,000. On her application, she claimed to be a non-smoker who exercised regularly and maintained a healthy diet. This information qualified her for a premium of $44 per month.

In reality, Sarah smoked a pack of cigarettes daily and had a family history of heart disease. A routine investigation after her untimely death revealed the truth, leading the insurer to deny the claim and cancel her policy retroactively.

2. Claims Fraud

Claims fraud are very common and they involve false or exaggerated claims made by policyholders to receive undeserved payouts.

Policyholders submit fraudulent claims for accidents or losses that didn’t occur. They inflate the value of legitimate claims to maximize their payout.

For example, John, a 41-year-old small business owner, took out a car insurance policy with a premium of $79 per month. A year later, he staged a car accident by deliberately rear-ending his friend Mike's car. Both John and Mike filed claims for injuries and vehicle damage, totaling $15,000 in medical expenses and $10,000 in repair costs.

As part of insurance claim fraud detection, investigators noticed inconsistencies in their stories and obtained CCTV footage from a nearby business that showed the two men shaking hands and inspecting the cars before calling the police. The claims were denied, and both were prosecuted for fraud.

3. Premium Diversion by Agents

Dishonest insurance agents or brokers may collect premiums from policyholders but fail to forward the money to the insurer, pocketing it instead.

In other words, agents sell fake policies and keep the premium payments or they may issue valid policies but divert a portion of the premium for personal gain.

For instance, Tom, an independent insurance broker in Chicago, convinced several small business owners to purchase commercial liability insurance policies, collecting $2,347 per policy annually. But Tom never forwarded the payments to the insurance company and instead used the funds for personal expenses.

When one of Tom’s clients, a bakery owner named Amal, filed a claim after a fire caused $46,365 in damages, she discovered that her policy was invalid. While detecting insurance fraud, investigators uncovered Tom’s fraud and sentenced him to prison.

4.Organized Fraud Rings

Sophisticated fraud rings involve coordinated efforts by multiple parties to defraud insurers. These rings often include policyholders, medical professionals, mechanics, and even legal professionals.

For example, a fraud ring operating in New York City included doctors, chiropractors, and accident “victims.” The ring staged minor car accidents and sent the “victims” to fraudulent medical clinics for unnecessary treatments. Each claim averaged $23,000, and the ring filed 68 such claims across multiple insurers, netting over $1.2 million.

In the process of insurance claim fraud detection, the scam unraveled when an insurer noticed multiple claims involving the same clinic. Law enforcement arrested 12 people, including two doctors, and recovered $816,000.

5. Identity Theft Fraud

Identity theft fraud involves the use of stolen personal information to purchase insurance policies or file claims fraudulently.

So, fraudsters use stolen IDs to open policies or file claims for payouts, they may also alter beneficiary details on existing policies to redirect funds.

An example would be: Emma, a 28-year-old teacher, who received a notification about a $24,000 life insurance policy she didn’t remember purchasing. After following strategies to prevent insurance fraud, she discovered that her stolen ID had been used by a fraudster named Kim, who intended to file a death claim and collect the payout.

6. Online Fraud

As more insurers move their operations online, fraudsters exploit digital platforms to commit various scams. So they use fake accounts and forged documents to file claims. They also might take advantage of automated systems with minimal human oversight.

Here is an example: Ali created 17 online accounts using stolen IDs purchased from the dark web. He insured several smartphones through a digital insurer, paying $30 per device. Over the next two months, Ali submitted claims for “lost” devices, receiving $459 per claim.

The insurer’s AI insurance fraud detection system flagged the repeated claims and linked them to Ali’s IP address. Investigators found all 17 devices in Ali’s possession, leading to his arrest and the recovery of $6,315.

Read more: AML in Insurance: The Importance of AML Compliance for Insurers

7. Ghost Broker Scams

Ghost brokers pose as legitimate insurance agents, often targeting vulnerable individuals who are less tech-savvy. They sell fake policies online or offline, pocketing the premiums. Real victims only discover the fraud when they try to file a claim.

An example of this would be David, a college student in Miami, found an insurance broker advertising cheap car insurance on social media. He paid $399 upfront for a policy that was supposed to last six months.

Two months later, David was involved in an accident and discovered his policy was fake. The ghost broker had disappeared, leaving David to cover $5,000 in repair costs out of pocket.

8. Specific Industry Frauds

1. Life Insurance Fraud: Khaled faked his death while traveling abroad, claiming a $1 million life insurance payout. As part of the life insurance fraud detection process, the insurer’s investigation revealed that Khaled was alive and living under a new identity in another state.

2. Health Insurance Fraud: Dr. Sawsan, a dentist, billed insurers for procedures she never performed, inflating claims by $132,000 over two years.

3. Automobile Insurance Fraud: Brian staged a car theft, reporting his vehicle as stolen to collect $22,000. How to detect insurance fraud? Investigators found the car abandoned in a nearby town with no signs of theft.

4. Property Insurance Fraud: A couple intentionally burned their warehouse to claim $226,000 in property insurance. How to detect insurance fraud? Firefighters found evidence of accelerants, proving arson.

5. Unemployment Insurance Fraud: Anna claimed unemployment benefits for six months while secretly working under a different name, defrauding the system of $15,000.

11 Strategies to Prevent Insurance Fraud

Insurance fraud prevention requires a multi-faceted approach that combines technology, strong organizational policies, and vigilance. Below are proven strategies to prevent insurance fraud:

1. Implement Advanced Data Analytics

Advanced data analytics, including predictive modeling and machine learning, can identify patterns and anomalies that signal fraudulent behavior. Advanced data analytics analyze large datasets to enable insurers to spot connections and suspicious activities that might go unnoticed through traditional methods.

An example of detecting insurance fraud using insurance fraud solutions would be an insurer using predictive analytics to review historical claims data. The system flags Susan James, who has filed five car insurance claims in three years.  

The insurance fraud prevention and detection system identifies an important pattern for the investigators to dig deep in: all claims are made within one week of renewing Susan’s policy, and this might be a fraud scheme of staging accidents.

2. Conduct Thorough Investigations

Thoroughly evaluating claims ensures that fraudulent or exaggerated claims are identified before payout, meaning; investigators should review documentation (this can be medical bills, police reports, or damage estimates) to validate claims.

What is insurance fraud detection in this case? Here is an example of insurance fraud detection: Mary files a homeowner's insurance claim for $13,000, citing fire damage to her property.  

Investigators discover that the fire occurred after she increased her coverage limit by 43% and find inconsistencies in the receipts she provided for damaged items. Further insurance fraud detection uncovers evidence of arson and an inflated claim, meaning: payout denied.

3. Leverage Artificial Intelligence (AI)

AI-based insurance fraud solutions analyze behavioral patterns and detect suspicious activities in real time. They help insurers automate the identification of potentially fraudulent claims and reduce processing times.

When insurance fraud solutions detect unusual behavior in claims filed by a health insurance policyholder, Wilson Jack. He claims for multiple expensive treatments from the same clinic over a short period. Upon insurance fraud detection, it’s discovered the clinic has been colluding with patients to submit fraudulent claims.

4. Establish a Robust Anti-Fraud Culture

Fostering a culture of integrity and awareness across the organization ensures that employees at all levels are vigilant against fraud. Regular training equips teams to identify and report suspicious activities.

5. Collaborate with External Entities

Partnerships with law enforcement, regulatory bodies, and other insurers allow for the sharing of data and fraud alerts, which can uncover patterns of coordinated fraud schemes.

Example: a life insurance company joins a fraud prevention network and receives an alert about fraudulent claims linked to a serial fraudster. The company cross-checks its records, identifying and halting a suspicious $100,000 life insurance payout.

6. Use Device Fingerprinting and IP Analysis

Tracking device and IP data helps identify accounts with suspicious connections. Fraudsters often use multiple accounts and proxy tools to disguise their activities.

A fraud prevention system flags multiple life insurance accounts registered using the same device and IP address. Investigation reveals that the accounts were created by a fraud ring using stolen identities to claim death benefits.

7. Verify Customers Before Issuing Policies

Proper KYC (Know Your Customer) processes ensure that the information provided by applicants is accurate and legitimate, reducing the risk of fraudulent policies.

8. Monitor Policy Changes

Tracking changes such as beneficiary updates, contact details, or policy limits can highlight suspicious activity. Monitoring tools flag these changes for review.

9. Conduct Internal Audits

Fraud by employees, such as premium diversion, can go unnoticed without regular audits. Audits ensure compliance and deter fraudulent behavior.

To give an example, an internal audit reveals that an agent, Mark, has been pocketing premiums from clients without issuing policies. The insurer identifies and stops his actions, by cross-referencing applications and payment records.

10. Leverage Data Enrichment

Data enrichment uses existing data points, such as email addresses or phone numbers, to verify the legitimacy of applicants or claims.

An applicant uses an email address with a suspicious pattern (e.g., "Rami1111 @ gmail.com") to apply for car insurance. Data enrichment tools reveal no associated social media profiles or online activity, prompting further investigation, which uncovers a stolen identity.

11. Consistently Train Employees

Providing ongoing fraud prevention training ensures that employees stay informed about new schemes and tactics used by fraudsters.

Prevent Insurance Fraud with FOCAL

FOCAL takes a complete approach to fraud prevention, combining the latest technology with the best practices in the industry to protect financial institutions from fraud. With the power of advanced data analytics, FOCAL can spot patterns and unusual activity that might signal fraud, making sure risks are caught early before they get worse.

FOCAL also uses real-time monitoring system, so suspicious activities are tracked and addressed right away.

If you’re interested in learning more about how FOCAL can help you stop fraud, schedule a demo today.

Conclusion

Insurance fraud prevention enables organizations to stop fraud before it actually takes place and this can be more achievable by making use of AI and data analysis because it catches any suspicious actions early on. Real-time monitoring helps too so if something does not add up you'll know it quickly.  

Investing in life insurance fraud detection enables financial institutions to save millions annually by preventing unnecessary payouts to fraudsters.