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The Impact of Insurance Fraud

Quantifying the extent of insurance fraud is difficult because much of it goes undetected. Auto and Workers' Compensation are believed to be the most susceptible insurance lines on the property/casualty side.

Health insurance is also subject to a high incidence of fraud. The following points provide a varied look at the impact of fraud:

• Not including the CardSystems breach in June 2005 involving 22 million Visa cards and 13.9 million Mastercards, 10 million consumers have had their information exposed in breaches between February and June 2005, according to Jefferson Data Strategies, which advises businesses on compliance with privacy laws and data protection.
  
• According to Federal Trade Commission 2004 National and State Trends in Fraud and Identity survey, identity theft victims spent an average of $1,200 and 60 hours clearing their name.
  
• The Coalition Against Insurance Fraud (CAIF) reports that phony health coverage being sold to small businesses around the US has affected more than 200,000 policyholders, causing at least $252 million in unpaid medical bills in the past three years, according to the General Accounting Office.
  
• John Richard Jamieson, former operator of Toledo-based Liberte Capital Group, was sentenced to 20 years in federal prison on 159 counts for his involvement in a viatical settlement and investments scheme that defrauded life insurance companies and nearly 3,000 investors nationwide of more than $105 million.
  
• According to a December 2004 report, the Insurance Research Council (IRC) estimates that fraud-related claims added between $4.3–5.8 billion to auto injury settlements in 2002, which represents between 11–15% of all dollars paid for private passenger auto injury insurance claims that year.

The insurance industry is often asked to quantify the cost of fraud. The chart below provides a compendium of some of these figures. These sources provide their best-guesstimates of annual fraud costs based on anecdotal evidence, studies and observation.

¹ Equates to $51 billion in 2003

Types of insurance fraud

Insurance fraud activities can be either internal or external. External fraud includes activities committed by insurance applicants, policyholders, third-party claimants or those who provide services to claimants.

External fraudulent activities range from inflating or “padding” claims to submitting claims for injuries or damages that never occurred. Staged accidents, a form of external fraud, accounts for 3% of fraudulent claims

Fraud can also be categorized as “soft” which is the exaggeration of otherwise legitimate claims. It’s often committed by individuals and is more common. “Hard fraud” activities are deliberate attempts to stage losses, often by organized rings.

Internal fraud, as the term implies, occurs within the insurance industry itself and includes misrepresentation of facts by industry employees for personal gain or to prevent regulators from taking certain actions. It also includes outright bribery.

In its 2004 Report to the Nation on Occupational Insurance Fraud and Abuse, the Association of Certified Fraud Examiners compiled a report on 508 fraud cases in which its members had been involved. The losses totaled more than $761 million. The insurance industry figured in 46 or 9.1% of the cases with a median loss of $172,500. The top industry for fraud, according to the study was manufacturing followed by banking, service and government. The insurance industry ranked sixth in the number of occupational fraud cases that certified fraud examiners handled in late 2003–early 2004, according to the report.

Identity theft

Identity theft, a form of external fraud, is the fastest growing crime in the US, according to the Federal Trade Commission. This is due in part to increased use of ATMs, the Internet and computers, enabling criminals to gain access to personal information. Identity theft is a crime involving the misappropriation of personal information in order to obtain credit cards, loans or to purchase goods.

In 2004, Consumer Sentinel, the Federal Trade Commission’s complaint database, received over 635,000 consumer fraud and identity theft complaints. 61% represented fraud and 39% were identity theft complaints. Consumers reported losses from fraud of more than $547 million. (2003 figures: Over a half-million complaints for losses totaling over $400 million.)

2004 Consumer Sentinel data for Ohio shows that there were 13,066 fraud complaints for $12.8 million, compared to 10,020 fraud complaints filed for over $17 million in losses in 2003. The average amount paid per loss was $1,261 in 2004 and $2,088 in 2003.

There were 6,956 identity theft complaints filed by Ohioans in 2004 (5,494 complaints in 2003). The top cities by ID theft complaints for 2004 were Cleveland (697), Columbus (620), Cincinnati (469), Toledo (305) followed by Dayton (214).

6% of a typical US company’s annual revenues are lost to workplace theft and fraud. (July 2004 report from the Association of Certified Fraud Examiners, from Business Insurance, 9/13/04)

Auto injury fraud

In its 2004 edition of Fraud and Buildup in Auto Injury Insurance Claims (December 2004), the IRC reports that the appearance of fraud (the misrepresentation of key facts of a claim) was found in almost one in ten paid bodily injury liability (BI) claims in 2002 and one in twenty paid personal injury protection (PIP) claims. Buildup (the intentional inflation of an otherwise legitimate claim) was more common–nearly one in five paid BI claims and one in eight paid PIP claims involved the appearance of buildup. The IRC study is based on data collected from about 70,000 private-passenger auto injury insurance claims.

In 2002, buildup alone was responsible for 47% of the excess payments attributable to fraud and buildup among BI claims and for 57% among PIP claims.

Although insurance fraud headlines often focus on organized fraud rings, planned fraud (staged or caused accidents) accounted for just 3% of the excess payments from fraud and buildup, according the IRC. Opportunistic fraud (such as the report of fictitious injuries from legitimate accidents) and other types of fraud accounted for half of excess BI payments and 40% of excess PIP payments.

Public attitude toward fraud

The Insurance Research Council (IRC) released findings from two 2002 studies in October 2003 on public attitude regarding insurance fraud in the US compared to those residing in NY. IRC found that 20% of the US respondents compared to 25% of NY respondents thought it was acceptable to increase the amount of an auto claim to make up for premiums paid when they did not file a claim. New York respondents were also slightly more likely to say it was acceptable to increase a claim to cover the deductible (32% versus 29% of US respondents). For additional information on the study, go to www.ircweb.org/news/200307241.htm.

Efforts to combat fraud

The battle against insurance fraud relies on resources devoted by the industry to detect fraud and the level of priority that it’s given by legislators, regulators, law enforcement and society to expedite its eradication.

An IRC study released in January 2002 found that 40% of the 353 insurance company participants report spending more to fight fraud during the past three years, in contrast to the 3% who indicated they were spending less.

Antifraud measures in place include:

• Computerized data bases (index systems) that identify patterns of suspected activity including false claims and payment duplication. 92% (based on premium volume) of P/C insurers report claims to the Insurance Services Office, Inc. (ISO) ClaimSearch system for auto, property and liability claims. Other participants include state Workers Compensation insurance funds, self-insureds, third-party administrators, several state fraud bureaus, and law-enforcement agencies involved in investigation and prosecution of insurance fraud. By cross-checking new claims against millions of records, users can detect fraudulent claims more efficiently.

• Use of SIUs (special investigation units) to help identify and investigate suspicious claims. The Coalition Against Insurance Fraud reports that more insurers are setting up special investigation units (SIUs) to fight fraud. In 1999 40% of P/C insurers had SIUs, and in 2001 the number increased to 82%.
  
  In the mid-1990s insurers said that for every dollar they invested in antifraud efforts, including SIUs, they got up to $27 back, but these returns have become harder to achieve as the more apparent fraud schemes have been uncovered and more effort is necessary to ferret out the sophisticated fraud that remains. A 2000 study by Conning Research & Consulting suggests that results vary widely. Using the ratio of “claims exposure reduction” to the expense of running SIUs, the study found ratios ranging from a low of 3 to 1 to a high of 27 to 1, depending on the year and line of insurance. Although some insurers are cutting back on fraud investigation by outsourcing investigations and dissolving their fraud units, advances in software technology, especially programs that sift though the millions of claims that large health insurers process annually, are proving effective in fighting fraud. These “data mining” programs can uncover repetitions and anomalies and analyze links to fraudulent activities or entities.

• Filing civil lawsuits under the federal Racketeering Influenced and Corrupt Organizations (RICO) Act. It requires insurers to prove a preponderance of evidence rather than the stricter rules of evidence required in criminal actions and allows for triple damages. Since 1997 some of the largest insurers, especially auto insurers, have been filing and winning lawsuits against individuals and fraud rings.

• Growth in state fraud bureaus: Many states have enacted legislation creating fraud bureaus, including Ohio. There are 46 fraud bureaus in 41 states and Washington DC. Most fraud bureaus are housed in state departments of insurance.
  
  A study of 43 fraud bureaus by CAIF found that bureaus opened a record 33,000 cases in 2002, compared to 27,000 in 2000. Cases brought to prosecution in 2002 rose 14% from 2001. Florida lead with 771 cases. Criminal convictions rose by a third in 2002, with a record of over 2,500 when compared to 2001 figures.
  
  In 2004, the Ohio Department of Insurance (ODI) Fraud and Enforcement Division received 1,257 referrals with a total claim value of $17 million. The fraud unit closed 97 cases in 2004. ODI investigators saw 31 indictments and 37 convictions for insurance law violations. The licenses of 69 agents were revoked and six were suspended for various insurance law violations. The Department’s confidential fraud hotline number is 1-800-686-1527.
  
  
• Fraud legislation: Fraud legislation has been enacted in at least 20 states, including Ohio. Am. Sub. HB 248, Ohio’s fraud bill, was enacted in March 1998. It requires insurers to adopt antifraud programs that include written procedures for pursuing insurance fraud. It also requires companies to report those suspicious of fraud to the ODI. The bill also includes legislation allowing ODI access to the Law Enforcement Automated Data System (LEADS) to assist in its efforts to combat fraud and other suspected criminal activities. For a list of state anti-fraud regulations from the Coalition Against Insurance Fraud, go to http://68.165.161.22/regulations.lasso#search.

Sources: Excerpts from “Issues Update,” Insurance Information Institute.

About 2.6% of Americans have their homes burglarized in a year. But about 4.25% of adults (or 9.3 million Americans) are hit by ID theft, the Better Business Bureau and Javelin Strategy & Research estimate. (CNN.com, 6/2/05)