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How do they know how many go undetected. If they know about them they didn't go undetected.
There was a study done a couple years ago, licensed by the US government, to attempt fraud in many different known ways and see how many were recognised by the insurance company. Of course all successful attempts were refunded.
Insurance companies know how much fraud takes place without actually putting a stop to it. They have very precise statistical models built by actuaries and they can see that what they should theoretically be paying out is out of line with what they are actually paying out. The difference between these numbers is the level of fraud taking place. On average, firms are then able to uncover the source of 68 percent of the fraud, while the remaining 32 percent is too difficult to track down.
There is also a considerable level of "intentional" inability to track down insurance fraud, according to a joint study by the Bureau of Labor Statistics and the Federal Trade Commission.
The amount of loss that an isurance company suffers due to fraud is an allowable tax write off, including the resources spent on fraud investigation... Thus, by keeping the unrecovered fraud losses at a given rate, large insurance providers are able to reduce their tax burden and thus increase their actual profits without increasing their profitability for tax purposes.
I hate insurance and actuaries.
Let's start from the beginning. Insurance started as follows: A guy walks into your store and offers to "insure" your car against having its tires slashed today. You pay, your tires aren't slashed today. You don't pay, your tires are slashed today.
Now, we require people to have insurance.
Insurance companies habitually have a "rejection letter" printed out when the case ID # is assigned. Actuaries know exactly what % of people will read the rejection letter and never follow up on their claim, legitimate or not.
There's a company (several actually) which sells these items:
You purchase a certificate in increments of $1000 up to $10,000. It costs $150 for the certificate. You then must give the certificate away as an incentive for business. {IE, you purchase a car of a certain value, you get a certificate worth a certain amount.} The person receiving the certificate must follow a procedure:
1> Send in a copy of the certificate with a receipt and photocopy of their ID by certified mail
2> Wait three years and one month
3> send in a copy of the certified mail receipt and the certificate
That's it. Nothing else required to receive thousands of dollars. It's not a rip-off. And yet, less than 15% of people will receive the money (hence, it costs $150 per $1000 certificate...)
And their actuaries will tell you what % drop off at step 1 (about 60%), what % at step 2 and what % at step 3.
It's all a big game based on human nature to these people. So yes indeed, the insurance companies know what % of insurance claims are fraudulent, and simply don't care because their rates are set to cover it or pass on this expense to the honest policy holders.
I get your point entirely, and I'm not trying to negate you. just want to pass on this tidbit about insurance;
it was actually started in london, the date escapes me but im thinking 1600s. there was a group of men in a tavern, sailors all of them, well fishermen really. and they devised a way to spread the risk of one of their boats getting destroyed in a storm. If they all put in some money into a pot, then if something happened to one of their boats, they could get a new one at a fraction of the cost, and at that point everyone would put in a fresh batch of money into the pot. and so on. anyway, insurance didnt really start as protection money, it was by a few sailors over a round of drinks in a london tavern!
Also the second half of your post is very similar to sales rebates. since only 50% of customers actually do it, and they make it as time consuming and complicated as possible, they can pretend to be giving a $200 rebate when infact they are only giving back an average of $100.
One of my favorite ways to think about and describe modern insurance is thus...
You walk into a guy's office - almost always a guy who's better at math and statistical probability than you are, and has way more data to work with - and you say "I bet something bad's gonna happen to me." and he says "I bet you're wrong."
An entire, huge, and grossly profitable industry based on pessimists betting against themselves. Lovely. :-)
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