Anti-Fraud Efforts Become Top Priority For Departments of Insurance

In an effort to assist insurers and departments of insurance, the National Association of Insurance Commissioners has undertaken the daunting task of compiling a directory of how departments of insurance across the country deal with, and investigate, fraud.

Greg Sacco, vice chair of the NAIC Anti-Fraud Task Force, said the survey, which began nearly two years ago, will provide insurers with fraud reporting information in different states as well as other key information such as how departments do business and whether they have subpoena power, mandatory power and what types of databases they use.

“The intent when I designed this was to provide a guide book for the industry,” Sacco said. But the project grew from there and, as a result, could take until early next summer to conclude. It will be the first compilation of its kind and should give an interesting comparative perspective of how insurance fraud investigation and regulation has become an important part of many departments of insurance.

Leading the pack
Before 1976, only one state—North Carolina—had an insurance fraud bureau. It was established in 1945. Other departments o insurance across the country began implementing efforts to curb insurance fraud, with many creating fraud investigation bureaus to assist both consumers and the industry.

Today, 35 states have operating bureaus or units to investigate fraud in one or more lines of insurance, according to a study conducted by the Coalition Against Insurance Fraud, more than doubling the 14 bureaus that existed in 1992. These existing bureaus range in size from three to 237 employees and differ extensively in the strategies they use for detecting and deterring fraud.

A handful of those states that do not have separate investigative units handling fraud do have an anti-fraud plan in place, including Colorado, Maine, Minnesota, Washington. Similarly, Washington, D.C. has an anti-fraud plan in place, but does not have an insurance fraud bureau. In some jurisdictions, fraud detection efforts are made by insurance departments, by offices of the attorney general and/or, in the case of workers’ compensation, by the states’ departments of labor.

While North Carolina was first, Florida took the lead in the mass movement over the last 25 years toward establishing state department of insurance fraud units. The Sunshine State founded its Division of Insurance Fraud in 1976. By 1996, the division employed 112 personnel, including 58 investigators. The unit has full police powers and focuses on the full spectrum of insurance fraud. The division receives most of its funding from a $12 biennial license fee paid by insurance agents doing business in the state. In 1996, Florida reported $16.5 billion in total premium written in property casualty business.

Following close on Florida’s heels was the California Department of Insurance’s fraud division established in 1978. It has become the country’s largest anti-fraud bureau in terms of manpower and budget, and focuses on organized fraud rings in both the automobile and workers’ comp lines.

In all, the division has 237 employees, including 165 investigators and, like Florida, has police powers, an official relationship with prosecutors and a fraud hotline. The fraud division’s total budget for 1996 was $43 million. That year, California reported $33.3 billion in total premium written in property casualty business.

The second largest fraud unit in the country based on annual budget and manpower in 1996 was the New Jersey Fraud Division. The unit, with an annual budget of $10.5 million in 1996, is funded by assessing all insurance companies operating in the state. There are 144 people employed with the unit, including 111 fraud investigators. The unit does not have police powers, but does operate a fraud hotline.

Texas falls behind
By comparison, Texas established its fraud unit in 1991. Just 12 of the unit’s 18 employees were investigators in 1996. Budget figures for the department for that year were not available because the fraud unit was part of the Legal and Compliance division and budgetary figures were not separated. The total Legal and Compliance budget for that year was $4.8 million. Texas reported $18.8 billion in total premium written in property and casualty business for 1996. For fiscal year 2001, the fraud unit’s budget will be $1.62 million. “We have 15 investigators at full complement,” said John D. Watson, associate commissioner and head of the fraud unit.

“There’s no doubt in our mind that we could use as many investigators as we could get and we could use as much money as we could get,” Watson said. But that won’t be happening any time soon. The legislature has requested that state offices keep their budgets and employment figures status quo, according to TDI Commissioner Jose Montemayor.

TDI followed the lead of numerous other states this year by implementing a fraud hotline in an effort to call consumer attention to the matter. Watson said he anticipates a slight increase in complaints received, but probably little if any increase in the number of investigations handled by his department. The fraud unit only investigates cases that could constitute a felony.

Because of the limitations on funding and staffing, Texas and the fraud unit could be served well by increasing consumer awareness of fraud through the hotline.

A pervasive problem
Insurance fraud is estimated to cost more than $79 billion per year nationally according to the Coalition Against Insurance Fraud. This “hidden tax” as it is commonly called, costs American families more than $900 each on the costs of goods and services, yet one of the primary reasons fraud is so prevalent is public attitude.

“These estimates of the costs of external insurance fraud suggest that it is the second largest economic crime in America, exceeded only by tax evasion,” the report said. “Individual studies also provide evidence of how pervasive the problem is:

• A study of injury claims from auto accidents in Massachusetts found that 48 percent have some aspect of fraud or abuse;
• 1992 audit of workers’ compensation policies in Florida indicated 46 percent of employers underreported the level of their payroll or misclassified employee occupations;
• At least 30 percent of 302 property/casualty insurance company insolvencies between 1969 and 1990 were due to fraudulent activities;
• A 1995 study by the Rand Institute for Civil Justice concluded more than 35 percent of people hurt in auto accidents exaggerate their injuries, adding $13 – $18 billion to the nation’s annual insurance bill.”

The study shows that many Americans tolerate insurance fraud because they mistakenly think it is a victimless crime. In fact, a 1995 Roper study for the Insurance Research Council found that 24 percent of Americans feel it is acceptable to pad a claim to make up for premiums paid in previous years. Nearly 40 percent of residents in large cities found the practice acceptable, as did those in New York, New Jersey and Pennsylvania.

Insurer claims practices are also a hindrance in the fight against fraud. Many insurance companies, according to the CAIF report, unwittingly promote fraud by paying suspicious claims rather than fighting them. Insurers sometimes reason that it would be less expensive to pay a suspicious claim than to pay more in legal fees to fight them. Many insurers also resist fighting suspect claims, the study continued, for fear of multi-million dollar “bad faith” lawsuits.

NAIC’s Sacco thinks his survey could help insurers overcome many of these hindrances by providing them with proper information. And state departments of insurance could benefit, too. “I think they’re doing well – there’s certainly plenty of work to go around – but when you look at their restitution figures, they’re getting it done.

“The fraud was always there,” he concluded. “I think what has happened is, with more communication between the states, fraud has become a top priority.”

Topics Florida Carriers Texas Fraud Workers' Compensation