I learned about the fraud triangle while studying for my ACFE exam many years ago. The fraud triangle was created by Criminologist Donald Cressey in the 1950’s. His hypothesis was based on interviews with prison inmates. Cressey theorized that you need three elements to be able to commit the fraud:
- Rationalization – the individual’s mindset and determination/justification that it’s okay to commit the fraud or crime. “I’ve been paying my premium for decades… it’s my turn to cash in.”
- Pressure – the motivation or reason to commit the fraud. Examples include financial distress, drug or gambling addiction, or the desire to maintain a lavish lifestyle.
- Opportunity – the ability to commit the fraud. Lack of business controls give fraudsters the opportunity to commit a crime.
If I am a Chief Claims Officer or an investigator for a P&C insurer, why should I care about the fraud triangle? Great question.
My view is that nobody has the ability to control another person’s rationalization. This is both fortunate and unfortunate. It goes back to how someone was brought up, including their morals and other life experiences. Further, life happens. Extensive medical bills or the loss of a loved one who is the main breadwinner can be a real hardship. This pressure can be a significant motivator, especially if there are creditors knocking on the door. An individual may believe that they have no way to get out of the financial hole that they are facing. Thus, rationalization and pressure are closely tied together. If a person believes it’s easy to steal and they will get away with it, then why not? There is the opportunity. Now they can go ahead and actually commit the fraud, since there is nothing in the way to stop them.
Insurance companies cannot control rationalization or pressure. What they can control is opportunity, by putting important controls in place or installing fraud detection technology. At FRISS, our hybrid fraud and risk detection platform stops fraudsters at both underwriting and claims. This model is made up of artificial intelligence, text mining, expert rules, anomaly detection, third party data sources and predictive models that close the opportunity gap, thus stopping the fraud from happening. It also has the potential of deterring opportunistic fraudsters.
Types of Insurance Fraud
Cressey’s underlying factor is that you need all three elements (rationalization, pressure and opportunity) to commit fraud. This theory applies to both opportunistic and organized fraud.
- Opportunistic fraud, sometimes called soft fraud, occurs when a policyholder exaggerates an otherwise legitimate claim. Common examples include exaggerating injuries in an auto claim or inflating the value of items stolen during a home burglary.
- Organized fraud, or hard fraud, is deliberate and takes planning often elaborate schemes among a group of people – sometimes including employees of an insurance company. Intentionally causing car accidents or submitting medical claims for services that were not needed or rendered are examples of everyday organized fraud that often go unnoticed and unpunished.
Fraud Triangle – Still True Today
Though the fraud triangle is decades old, the theory is still very real in society today. I believe we can “keep an honest thief honest,” by taking away the opportunity. By stopping what we can control – the opportunity to commit fraud – we can make the insurance industry, as well as individuals who rely on it, more honest. And that’s exactly our mission here at FRISS!
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About the author
Jim Murphy has a specialized Master’s degree in Economic Crime Management and is a 30-year veteran of the insurance industry. After serving as a police officer in New England and spending years running a Special Investigations Unit analyst team, he’s now the Vice President of Products for FRISS, helping insurers fight insurance fraud and making insurance more honest.