Insurance fraud affects the cost of insurance primarily because it:

Why B is correct

Fraudulent claims inflate the insurer's total claim costs, and those costs are factored into the rates charged to all policyholders. As a result, honest policyholders pay more because of the fraud of a few. Beyond premium impact, insurance fraud is a crime that can result in criminal prosecution, including perjury for signing false claim documents, and insurers maintain special investigation units to detect and deter it. Consumers can help by reporting suspected fraud to the insurer or the Department of Insurance.

Why the other options are wrong

• A) Fraud measurably raises claim costs and therefore raises premiums for everyone. It has a very real effect on pricing. Fraud raises total claim payments, and rate filings must reflect those costs, so the effect on premiums is real.
• C) Fraud losses are absorbed by insurers and their honest policyholders through pricing. They are not paid by the government. No government fund pays for fraudulent claims; the losses are priced into the premiums honest customers pay.
• D) Higher fraudulent claim costs are reflected in rates. Policyholders ultimately bear the expense, not only stockholders. Rate levels must cover all claims, so fraudulent payouts flow through to every policyholder, not just owners.

Memory hook

Fraud is a tax on honesty: every phony claim is a small surcharge on every real policyholder.