Cracking Down on the Industry’s Fraud Problem

Fraud investigators in June busted a Tampa fraud ring that crashed cars at a private site, scooped up the debris and moved the wreckage to a public roadway. The members then called police so that they could file fraudulent PIP claims. Investigators say the group staged as many as 30 minor, low-speed crashes. The investigation, which took three years and involved one agent going undercover to participate in the staged accidents, resulted in charges against 22 suspects from Tampa and Miami. Investigators suspect the amount of fraud totaled at least $200,000.

-From Former Florida Insurance Commissioner Bill Nelson’s “Top 10” fraud schemes for fiscal year 1999/2000.

That case, along with thousands of others, is just one example of the recurring nightmare of fraud, which costs insurers and consumers billions of dollars every year. In 1999, the estimated cost of insurance fraud to the public amounted to more than $96.2 billion in premiums and more than $530 million in the cost of good and services. Behind tax evasion, property/casualty fraud is the second most costly white-collar crime in America, according to the National Insurance Crime Bureau (NICB).

With headlines every day such as: “Agent Pleads Guilty to Insurance Fraud,” “Man Arrested for Workers’ Comp Fraud,” “Three Held in Car Theft Ring Investigation,” and “Six California Residents Arraigned on Auto Insurance Fraud,” it’s no secret that fraud is a major problem.

But it’s nothing new to the industry. In fact, insurance fraud dates back to 1946, when the first state fraud bureau was formed. In its latest study, “Insurance Fraud: Renewing the Crusade,” Conning & Company reported that currently all but 11 states have formed fraud bureaus. And in 46 states and the District of Columbia, insurance fraud is defined as a crime.

Whether padding or inflating claims, falsifying an application, creating phony accidents, intentionally causing accidents to collect on claims, arson for profit, or falsifying a workers’ comp claim, fraud steals premium dollars paid by honest customers. So why is it that 35 percent of Americans surveyed feel that it’s okay to exaggerate a claim under certain circumstances?

According to a recent Insurance Research Council (IRC) survey, respondents agreed that it is acceptable to increase the amount of an insurance claim by a small amount to make up for a deductible.

The IRC has been tracking public tolerance for claims padding for many years. In 1997, the acceptance level hit its highest point ever. And although the 2000 results show fewer respondents are accepting this type of insurance fraud, a high percentage of people still believe that it is all right to exaggerate a claim to make up for the deductible.

Insurers’ poor public image contributes to the fact that much of the public does not take insurance fraud seriously, according to Conning. Its study notes that, in some cases, insurers have become “acceptable” targets of fraud.

The insurance industry as a whole needs to spread the message that fraud costs policyholders roughly $300 in extra premiums per household. The bottom line is that everyone pays for the cost of this crime through increased rates and higher prices for goods and services.

Unfortunately, Conning’s report reveals that the market might see an increase in fraudulent activity in the upcoming months, as the sharp drop in the stock market and record levels of personal debt are underlying conditions for a potential increase in fraud.

Carriers lend a hand
Over the past decade, insurers have done a great deal to combat the problem of fraud-but the fight is far from over. One way that insurance companies have hopped on the bandwagon is by establishing their own special investigative units (SIUs).

“GAB Robins decided to form an SIU program in 1997, and it was due to customer requests and state mandated laws that were emerging,” said John McNulty, national SIU director for GAB Robins. With affiliated operations in 42 countries, GAB Robins provides a comprehensive range of services to the insurance industry and the self-insured and alternative markets.

According to McNulty, fraud has many faces. “In the ’80s, when the formation of SIUs took off, the SIU personnel was mainly law enforcement and they concentrated on the automotive market-stolen cars, staged accidents, bodily injury, soft tissue injury,” he said. “It graduated from there-from the mid ’80s to the early ’90s-into the property arena, and from the property arena-in the early ’90s up until the present-it’s gone to workers’ comp.”

McNulty has witnessed a decline in fraud since GAB Robins formed its SIU. “Now, whether the SIUs have been successful in stopping the automotive [fraud] or whether the element that commits that type of fraud has noticed that there are bigger dollars in the medical arena, I’m not sure…so that could be the cause of the decline, or it could also mean that the SIU has been successful,” he explained.

The Coalition Against Insurance Fraud (CAIF) has estimated annual losses of $27.6 billion from insurance fraud, not inclusive of health-related losses. The estimated losses by lines, according to the CAIF, are: auto: $12.3 billion; homeowners: $1.8 billion; business/commercial: $12 billion; and life/disability: $1.5 billion.

Trade associations join the fight
The National Association of Independent Insurers (NAII) is forging ahead with its fight against insurance fraud through education, advocacy and innovative partnerships.

One of the association’s prime initiatives is the creation of the National Insurance Crime Training Academy (NICTA), a public-private partnership designed to train law enforcement and insurance investigators on detection, investigation and prosecution of insurance crime.

Joining NAII in the effort are the Federal Bureau of Investigation (FBI), the National Insurance Crime Bureau (NICB), the National White Collar Crime Center, the International Association of Special Investigative Units (IASIU), and other public-private groups.

“If you’re gathering statistics, information independently [rather than as a partnership], once you get the info, study it, build training, etc. and get to where you want to be, the crooks have taken an alternate route and the whole process starts over,” said John Eager, senior director of claims services for NAII.
“By working as a partnership, the training can get evaluated faster…and this allows us to stay more in a ‘live’ environment.”

According to Eager, NICTA will reduce redundant activity and provide high-tech resources for delivering measurable outcomes. Some of the target groups that will benefit from training include: agents, underwriters, claims handlers, auditors, CSRs, state fraud department personnel, law enforcement personnel and SIU personnel.

Why didn’t somebody think of this type of training years ago-when fraud first reared its ugly head? “Fraud has been a problem for a while, and it continues to be a real challenge for all of us-especially in the industry, because it takes so much money away from us. And it also harms the public in such a great way,” Eager added.

Since NAII published its Antifraud Task Force Report in 1992, state fraud legislation and statutes have grown, and legislative initiatives have strengthened the civil and criminal penalties related to fraud. However, the Task Force has concluded that none of the model fraud statutes available adequately address the full scope of the problem.

Multi-dimensional training
NAII’s Task Force believes that fraud training is necessary for insurance personnel to acquire the skills to bring about early recognition, investigation, and if appropriate, denial of claims proven to be fraudulent.

Based on the 1992 report, the Task Force recommends voluntary guidelines for companies wishing to establish or enhance their training programs, and encourages companies to involve agents, underwriters and adjusters in the process.

In his 10 years working for NAII, Eager has witnessed three big changes in how the industry is handling fraud. “Today, there is a different dynamic in terms of the number of people committed to fighting fraud at the state level, and also the number of people that need to be trained and skilled in fighting fraud,” he said.

Another big change has to do with the resources spent on the problem.

“Back then, years ago, we spent a couple hundred million dollars annually,” Eager said. “And when our study-Anti Fraud Task Force 2000-looked at this, we found that that expenditure had tripled, meaning we spent something like $650 million annually.”

Lastly, the role of technology is now taking the spotlight. “If you went to a training conference two or three years ago, probably 20-25 percent of the training was web-based,” Eager said. “Last year, we were at upwards of 80 percent of fraud training that could be delivered in a web-based format… Web-based training is a golden opportunity.”

Can’t we all just get along?
“The SIU and anybody involved in fighting fraud is actually only reacting, instead of being proactive, because you have to wait for something to happen for you to change it-or that’s the mentality,” GAB Robins’ McNulty said.

If all of the SIUs would break down the competitive barriers and share information found in their own fraud fighting initiative, things might be different. “For example, if I told you that XYZ happened to me today and shared it with you through trade publications or databases shared nationwide-whether it was names, an incident that happened, organizations that are involved, etc.-we’d be better off, because we would be able to control it,” McNulty explained. “The way the system works today, we’re not able to control it.”

As for what agents can do to help fight fraud, McNulty had a couple of suggestions. “Agents need to be careful-they need to look at the property they’re writing the policy for, and they need to look at the prior insurance history, the prior loss ratio history, and not be so concerned about getting their commission. And an agent should be careful with policy dates and not post-date anything,” he said.

In the end, it all comes down to training. “It’s the most important factor,” McNulty
said. “Either as a group or as a company, we need to go into the disciplines that we’re responsible for and train them on the fraud issue.”

Topics Trends Carriers Fraud Agencies Workers' Compensation Training Development