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The Impact of Insurance Fraud
Quantifying the extent of insurance fraud is difficult because
much of it goes undetected. Private passenger auto insurance and
Workers’ Compensation are believed to be most susceptible from
the property/casualty (P/C) insurance standpoint. Health insurance
is also subject to a high incidence of fraud. The following points
provide a varied look at the impact of fraud:
- According to a January 2002 study released by the Insurance
Research Council, more than a third of the 353 insurance companies
responding indicated that fraud has increased in the past three
years compared to 6% who believe it has decreased.
- The Insurance Information Institute estimates that P/C insurance
fraud cost insurers $24 billion in 2000, the same estimate as
1999. It also estimates the total cost of all insurance fraud
(including life and health) to be between $85–$120 billion
annually.
- The Coalition Against Insurance Fraud (CAIF) estimates that
insurance fraud is the equivalent of a hidden tax of about $900
per US family on the cost of goods and services.
CAIF compiled a list of fraud-cost estimates from several key sources.
Since the industry is often asked to estimate the annual cost associated
with fraud in the US, several organizations provided their best-guesstimates
based on anecdotal evidence and observation. The
chart below provides a compendium of some the better-known national
fraud figures.
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.
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 the 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
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. The Privacy Rights Clearinghouse in San
Diego estimates that between 500,000–700,000 Americans were
victimized by identity theft in 2000.
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.
Source: Coalition Against Insurance Fraud (CAIF)
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.
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. The IRC study reported that insurers spent
over $650 million to combat fraud in 1996, up from $200 million
reported in 1992.
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:
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Computerized data bases (index systems)
that identify patterns of suspected activity including false
claims and payment duplication. 74% of insurers currently report
claims to the Insurance Services Office, Inc. (ISO) ClaimSearch
system for auto, property and liability claims. By cross-checking
new claims against millions of records, users can detect fraudulent
claims more efficiently.
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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.
Some companies in recent times have turned to out-sourcing SIUs
and turning to databases for assistance. Technologies (see previous
point) allow insurers to uncover repetitions and anomalies in
claims.
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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. There
are 46 bureaus as of May 2001. Most fraud bureaus are housed in
state departments of insurance. CAIF provides the following state
insurance fraud bureau statistics:
– The total number of convictions stemming from fraud bureau
investigations more than doubled between 1995–2000, from
961 to 2,123 in 2000.
– Civil actions pursued by 13 fraud bureaus in 2000 totaled
1,100. In 1995 eight bureaus reported bringing civil actions in
344 cases.
– Fraud bureaus received over 88,000 referrals or complaints
about suspected fraudulent activities in 2000, compared to 84,579
reported in 1999.
– In 2000, 38 fraud bureaus presented about 3,998 cases to
prosecutors. The number of cases presented for prosecution more
than doubled between 1995–2000.
In 2001, the Ohio Department of Insurance (ODI) Fraud and Enforcement
Division received 975 referrals with a total claim value of over
$20.7 million. The fraud unit referred 60 individuals to county
and federal prosecutors for criminal prosecution. An additional
36 were convicted of insurance fraud or related crimes. The enforcement
unit opened cases on 278 agents and referred 244 for administrative
action. The licenses of 79 agents were revoked and five were suspended
for various insurances 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.
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Visa and MasterCard reported that overall
fraud losses rose from about $700 million in 1996 to $1 billion
in 2000.
(Akron Beacon Journal, 3/27/02) |
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