Our fight against fraud has improved, but the scope of the problem can only bedescribed as enormous. The FBI reports that one in four claims hasan element of fraud. Some of us can argue it is much higher. Wehave successfully formed fraud-fighting special investigation units(SIUs) that have had spectacular individual success. This is aresult of talented and aggressive SIU investigators and claimspersonnel.

But the Coalition Against Insurance Fraud (CAIF) politely citesthe foundation of the problem on its Web site: “Measuring insurancefraud is an elusive target. No single national agency gathersomnibus fraud statistics. Insurance fraud data thus are relativelypiecemeal, making our understanding of insurance fraud an ongoingwork in progress…”

The depth of the problem is highlighted by data provided by TheNew York State Insurance Frauds Bureau reflecting investigationsresulted in 522 arrests for the first three quarters of 2011,compared with 482 for the corresponding period in 2010 and 490 in2009. They received 17,811 reports of suspected fraud during thefirst three quarters of 2011, down from 18,504 received in theJanuary-September 2010 period. Considering their limited allocatedresources they have done a remarkable job. The statistics, however,reveal the size of the problem and economic loss we, and thereforethe general public, suffers. We have to remember, it is likely thatmost fraud cases remain undetected.

I have outlined 10 critical roadblocksaffecting the fraud fight:

1. Inadequate resources.Generally speaking, there are too few special investigationpersonnel, coupled with a lack of support services. In-serviceeducational opportunities for claims personnel are not standardizedacross the industry and may be nonexistent for some. The flat-ratestructure for investigation service partners results in low-qualitypersonnel and low-quality results. Allocated funds for the fraudfight are too low compared to the massive problem we are charged tomitigate.

2. Inadequate prosecutorial and lawenforcement resources. If prosecution is low, thendeterrence will be low. The issue of inadequate resources variesfrom state to state; however, one common problem is that there arehigh monetary thresholds for district attorneys to accept—and bewilling to prosecute—an insurance fraud case. Some prosecutors maynot be interested unless there is a loss of $100,000 or more. Belowthat, cases will simply not be reviewed or considered worthy ofpursuing. They simply do not have enough prosecutors.

DA Detectives, some of the best in the business, are simply notin a position to conduct ancillary investigations causingsuccessful prosecutions to be unlikely. Therefore, the insurer hasto either complete the fraud investigation or hire a highly skilledvendor capable of preparing the case and its evidence in a mannerthat is acceptable to the district attorney.

3. Privacy regulations.Prosecuting insurance fraud is clearly in the public's bestinterest. Privacy regulations are also in the public interest. Yet,these interests are often at odds with each other. When legislatorsintroduce new privacy bills, a balanced approach should be adoptedwhen contemplating their benefit versus the risk regarding thepubIic interest as it relates to the massive cost of fraud.Legislation enacted as a knee jerk reaction to a sensationalizedmedia story, without forethought of the unintended consequencesregarding insurance crimes, should first be evaluated for theirnegative economic impact.

4. Lack of a clear industry standardfor success. Statistics can be misleading. For example, ifyou have an effective fraud program with effective prosecutions, itmay seem to some that your company has a higher degree of fraudoccurrences than a company with a less effective program. Bycreating an industry standard of measurement, everyone is on sameplaying field. Reported fraud savings will then enjoy morecredibility. There should be a standardized actuarial economicmeasure to determine the success of a fraud program.

5. Emerging technology is fueling cyberfraud. Every day there are media reports of financialfraud, identity theft, credit card fraud, and security systembreaches relating to insurance fraud. Special skills are requiredto solve these cases. Partnering with forensic computer andfinancial firms will smooth the road to success.

6. Organized crime is penetrating everytype of business. They have seemingly endless resources.They have partnered with a small number of corrupt attorneys,physicians, and other healthcare professionals who help propagatefraud against insurers and the public. Although their numbers arerelatively small, their economic impact is incalculable. Undercoveroperations by skilled and experienced service partners is the keyto creating a deterrent.

7. More 'white collar' crimes.New and evolvingschemes often combine to some degree with cyber-crimes, includingbankruptcy fraud, hedge fund fraud, and mortgage fraud. Insurablecommodities are often not detected or investigated fully either bythe government or insurers because of a lack of resources.

8. Globalization. There are minefields of riskconducting investigations overseas as a result of the differentsystems of law. If one is unfamiliar with elements of civil lawversus common law—or lacks an understanding of local custom orcivil regulations and stricter privacy laws—then the result can bea severely diluted investigations or regulatory violations thatcarry international corporate penalties, including corporate veilpiercing criminal prosecution.

9. Poor public relations. The publics view ofinsurers remains, well, terrible! Public perception of insurancefraud as socially acceptable is the common theme. The averageperson has no concept of how much insurance fraud costs themeach year. It's hidden surcharge is built into the cost of allproducts and services they consume. An ongoing industry educationalpublic relations campaign may be the answer.

10. Adverse insurance legislation. Many statelaws and regulations are slanted in favor of the claimant. Theburden of proof (for insurers) are unrealistically difficult. Insome states the level of benefit remuneration can be so high thatan injured worker makes more money staying home than going to work,leaving little incentive to return to the workforce. IndustryLobbying efforts can be one answer.

One example of carriers successfully lobbying for reasonable legislation occurred in Florida. Florida recentlyenacted major PIP reform, HB19, which passed in the state Senate bya vote of 22:17. Manybelieve that lobbying by Gov. Scott was critical to the bill'spassage. Reportedly, fraud has driven PIP costs to about $1.4billion since 2008 in Florida, which logs a significant number ofstaged auto accidents compared to other states. The new legislationtightens the requirements for filing a claim.

The solutions to most of the roadblocks are self-evident. Datais the key to recognizing that carrier margins are adverselyaffected, whether or not the cost of fraud is passed onto theconsumer. I submit that an effective industry wide fraudinitiative, will save billions; and we'll all wonder–why didn't wedo this sooner.