People hide their heads before being questioned at a police station on charges of insurance fraud in this undated photo. According to the financial authorities, insurance fraud is increasing through more sophisticated ways. / Korea Times file

By Kim Tae-jong

Taebaek, a gritty town of retired coal miners and unemployed youths mired in a decaying economy, piggybacking on a struggling casino, has certainly seen better days. And adding insult to injury, it’s known as the nation’s insurance fraud capital.

Last year, police took more than 400 people into custody from the Gangwon Province city to investigate a large-scale fraud that involved insurance brokers, city officials and staff at local hospitals. The thousands of fraudulent claims uncovered by police were said to be worth 14 billion won (about $12 million), making it the country’s biggest insurance scam ever.

Investigators said at least 1 percent of the town’s population were in on the scheme, showing that the city’s bad economy tempted residents to clear debt through dishonest means.

``About 95 percent of the patients at the three hospitals we investigated turned out to be fake, as they were never treated for imaginary injuries despite their names being on the documents,’’ according to an officer at the Gangwon Police Station who was involved in the raid.

``By falsely reporting injuries and fabricating car accidents, residents received insurance payments, while the doctors and hospital staff prepared the false documents to present to insurance companies in an under-the-table arrangement. Hospitals in the city had been long suffering from financial hardships as and many of the residents involved are poor and have been out of work for an extended period. Some describe the scam as pure greed, but many of these people turned to deception out of desperation.’’

While the case has left a permanent stain on Taebaek’s image, data from financial authorities and insurance companies prove that insurance fraud is a growing practice in many Korean cities. It has become so widespread that authorities are concerned that it is being viewed as casually as jaywalking.

Insurance fraud is not a victimless crime, as honest people are left paying higher insurance premiums. And those involve risk a criminal record and will find obtaining insurance and credit harder as well as more expensive.

Figures provided by the Financial Supervisory Service (FSS) show that the number of insurance-related crimes have increased significantly over the past five years. Fraudsters made 3.4 trillion won from false claims in 2010, 53 percent higher than in 2006. More than 70,000 people were caught by authorities last year for insurance scams and claiming payments of around 423 billion won.

Authorities admit that those caught represent a microscopic number. Critics wonder whether insurance companies and financial officials are doing enough to weed out the fake claims.

``Based on the numbers from 2010, we can say that the average household paid 200,000 won more in insurance premiums as a result, because 3.4 trillion won accounted for 12.5 percent of the total payments,’’ an FSS official said.

Cheating becomes more sophisticated

While insurance firms and financial authorities claim they are cracking down on insurance fraud, they also admit that the means are becoming more diverse and sophisticated, and thus harder to detect.

According to the FSS, the most commonly found scam is exaggerating and faking injuries, which often requires false hospital documents and being listed as a patient on paper only. These activities accounted for 70 percent of the insurance fraud detected last year and generated 300 billion won in unjust payments.

There are also times when people deliberately set up car crashes and hook the innocent victim into compensation payments. This made up 20 percent of the insurance fraud uncovered last year with claims totaling around 84 billion won.

According to FSS officials professionals including doctors and insurance brokers are increasingly abetting in the schemes. Apparently, it is no longer merely about the average Cheol-soo trying to beat his insurance company for pocket change.

There are too many doctors who have offered unnecessary treatments to patients to make more money. More and more of them are taking it to another level by fabricating medical records and inflating healthcare charges. Some doctors will even help patients fake their injuries in cash-for-cash scams.

This perhaps explains why the debt-ridden National Health Insurance Corporation is forced to raise its premiums yearly.

Motor insurance fraud is also a growing tide. According to industry data, the hospitalization rate of Koreans following traffic accidents is about 50 percent, almost 10 times higher than that of Japan, as people here will react to being grazed by a bumper like they’re being mowed down by a machine gun.

Consequently, insurers spend a huge portion of their income on compensation for medical treatments, accounting for 43 percent of it, and auto insurance policyholders have to pay high premiums.

Experts say many people think insurance fraud doesn’t qualify as a real crime and they also simply want to get back what they pay.

``Many people do not seem to acknowledge insurance fraud as a serious crime,’’ said Song Yoon-ah, researcher at the Korea Insurance Research Institute.

``They also think they can easily take advantage of loopholes and exploit insurance contracts.’’

Lack of preventive measures

Policyholders react angrily when told more will be taken from their wallets because of all the cheaters. But efforts to weed out insurance fraud have been at a standstill for years.

Non-life insurers have been lax about combating scams, and some insurers seem to think it’s cheaper to pay suspicious claims rather than taking legal action to prove them as fraudulent.

The government has been recommending firms come up with more detailed programs to fight fraud and form their own investigation units. However, there has been no breakthrough in this part.

Predictably, insurance companies say that it’s the government’s fault that the situation is out of control. It’s the lack of a legal framework and authority that is preventing them from clamping down on insurance fraud meaningfully, they claim.

``Under the current law, we don’t have the right to investigate. So if we begin to do what we have to, it can be seen as a violation of an individual’s privacy,” said an official from a car insurance firm.

``Then people will start to complain about our investigations, and that will damage our reputation. This is the biggest reason why we can’t actively cope with insurance fraud.”

While it is necessary to analyze claims with a higher probability of being false, through computerized statistical analysis or by referrals from claims adjusters and insurance agents, but the Protection of Personal Information Law makes this impossible, he said.

The government is not free from criticism due to its leniency.

The FSS has pushed hard to legislate a special law for years to systematically tackle the issue, like in other countries, but a bill has long been pending at the National Assembly.

“Now we have managed to reach an agreement that there should be a special law to weed out insurance fraud,” another official from the FSS said. “As a first step, we submitted a bill to cancel insurance agents’ licenses if they are found to be engaged in insurance scams in a move to crack down on fraud, but the bill has been scrapped as it failed to pass during the current Assembly session.”

If the bill is passed in the next Assembly, the financial regulator will add other clauses that can give insurers the right to operate legally-authorized investigation units to handle suspicious claims.

Many argue that the government should take stricter measures as in other countries where insurance fraud is specifically classified as a crime and scammers face harsh punishment.

But experts pointed out that the first step to tackle the issue should be redefining the concept of insurance fraud, as the protection of consumers’ rights and the prevention of insurance fraud has some conflicting aspects.

“Although it is important to prevent insurance fraud and punish those involved in it, the rights of consumers who make legitimate claims should also be protected. They should not be neglected in the name of a crackdown on insurance fraud,” Song from the Korea Insurance Research Institute said.

The focus should be on the protection of policyholders’ rights as efforts against insurance fraud will bring benefits to innocent customers in the end, she said.