Quantifying the extent of insurance fraud is difficult because much of
it goes undetected. However, health and auto insurance, and Workers’
Compensation are believed to be most susceptible. Estimates on fraud vary
by sources, and include:
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According to a study released in June, 2000 by the Insurance Research Council, 35% of Americans surveyed said that it’s all right to exaggerate insurance claims under certain circumstances. Nearly one-fourth (24%) said that it is acceptable to increase the amount of a claim to make up for insurance premiums paid when no claims were made.
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The Insurance Information Institute estimates that P/C insurance fraud cost insurers $24 billion in 1999, up from $21 billion in 1998. This equates to about 10% of all P/C claims.
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The National Insurance Crime Bureau (NICB) estimates that Workers’ Compensation fraud costs the industry $5 billion annually. NICB estimates that 10% of all 1996 P/C claims had fraudulent elements, costing policyholders $200–$300 a year in added premiums.
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According to a 1996 Conning & Co. insurance fraud study, “Insurance Fraud: The Quiet Catastrophe,” it’s estimated that P/C insurers detect about 20% of their fraud, while life/disability insurers find about 10% and health care insurers a mere 1%. The study estimates that fraud cost the entire insurance industry $120 billion in 1995.
Estimated claims fraud losses in 1997 (most recent information available at close of publishing) both nationally and for Ohio are provided from the Coalition Against Insurance Fraud (CAIF). The overall insurance fraud picture seems to be improving, based on data for the last three of the six years of the CAIF study. US fraud claims estimates for 1997 total $79.7 billion, compared to $85.4 billion in 1996 and $85.3 billion in 1995. 1992 fraud claims estimates were $67.7 billion. Ohio claims fraud estimates also improved slightly. CAIF overall estimates for Ohio in 1997 are $4.O billion, compared to $4.3 billion in 1995 and 1996.
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, accounted for 3% of fraudulent claims in the 1996 Conning study.
A newer form of external fraud on the increase is identity theft. This is a crime involving the misappropriation of personal information in order to obtain credit cards, loans or to purchase goods. The increase is attributed to use of the internet by criminals to gain access to personal information of consumers. In 1992 the US financial community reported about 35,000 cases of identity fraud. By 1997 the number rose to a half million, according to US Secret Service. The average loss to an identity victim is estimated at $20,000–30,000.
Internal fraud, as the term implies, occurs within the insurance industry itself and includes misrepresentation of the facts by industry employees for personal gain or to prevent regulators from taking certain actions. It also includes outright bribery.
Auto claims and fraud
“Fighting Fraud in the Insurance Industry,” an Insurance Research Council (IRC) study released in 1997, shows that more than a third of all auto accident injury claims involve fraud. According to the IRC, about 3% of claims are premeditated criminal acts such as staged accidents, but 10 times that amount (33%) is attributed to padding by doctors, lawyers and/or claimants. Translated into dollars, these fraudulent claims amount to 17–20 cents of every payment dollar, adding up to $6.3 billion annually.
Efforts to combat fraud
The battle against insurance fraud depends on resources devoted by the industry to detect fraud and the level of priority that it’s given by legislators, regulators, law enforcement agencies and society to expedite its eradication. The IRC study reported that insurers spent over $650 million to combat fraud in 1996, up from $200 million reported in 1992.
Anti-fraud measures in place include:
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Computerized data bases (index systems) that identify patterns of suspected activity including false claims and payment duplication. 4,000 insurers currently report claims to The Insurance Services Office (ISO) ClaimSearch system for auto, property and liability claims. By cross-checking new claims against 147 million records, users can detect fraudulent claims more efficiently. ISO estimates that it will add 25 million new claims to its database by year-end 2000.
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Use of SIUs (special investigation units) to help identify and investigate suspicious claims. There were at least 4,220 SIUs in 1996 compared to 1,505 in 1992, according to the 1996 IRC fraud study of 150 insurers representing 77% of the market. There now appears to be a softening in antifraud efforts and SIU staffing, according to CAIF.
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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.
- Growth in state fraud bureaus: Almost all states have enacted
legislation creating fraud bureaus, including Ohio. CAIF provides the
following state insurance fraud bureau statistics:
- The total number of convictions stemming from fraud bureau investigations totaled 1,800 in 1998, nearly triple the 1995 figure of 663.
- Civil actions pursued by fraud bureaus more than doubled from 549 in 1995 to about 1,300 in 1998.
- Fraud bureaus received over 91,000 referrals or complaints about suspected fraudulent activities in 1998, with 87,020 reported in 1997.
- In 1998, fraud bureaus presented about 3,200 cases to prosecutors, compared to 2,711 in 1997, and up nearly 50% from 1995 when 1,614 cases were presented.
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Fraud legislation: Fraud legislation has been enacted in at least 20 states, including Ohio.
Some companies in recent times have turned to outsourcing SIUs and turning to databases for assistance. Technologies (see previous point) allow insurers to uncover repetitions and anomalies in claims.
In 1999, the Ohio Department of Insurance (ODI) Fraud Division opened 91 cases, took 49 cases to prosecution and had 21 felony indictments and 28 convictions. ODI’s confidential fraud hotline number is 1-800-686-1527.
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.