The plight of catastrophe victims–whose lives are forever changed by events such as the Sept. 11, 2001 terrorist attacks or Hurricane Katrina–moves us emotionally, but as insurers we must also deal with the troublesome long-term effects of a disaster–that being the threat of fraud. Regrettably, profiteers and fraudsters believe that the greater the misfortune of others, the easier it will be for them to seek their fortune.

During the worst of times, catastrophe fraud–or cat fraud, as it's sometimes called–runs rampant. And despite the past efforts of government, law enforcement and the insurance industry, the problem is getting worse, not better.

Catastrophe fraud is twofold. The first to feel its effects are the disaster victims, and they get hit twice.

First, a natural disaster destroys life as they know it, and then they can't get the help they need from the insurance company in a timely fashion because the insurers are tied up trying to determine who is legitimate and who is cheating.

Cat fraud directly affects insurers as well–they wind up settling questionable claims to the tune of millions of dollars over a period of years. It attacks their bottom line and they may be forced to raise premium rates–affecting, in turn, policyholders, who will have less to spend on goods and services. Fraud, then, has an impact on the economy as a whole.

The news isn't all bad, though. We can take action. If we invest more of our time, energy, ingenuity and money, we can successfully curtail cat fraud, and we have many tools already at hand to help in the effort.

First, we need to understand how the special case of the claims environment during a catastrophe can work in favor of the fraudsters.

Immediately after disaster strikes, claim representatives experience pressure from numerous policyholders at once–people who, understandably, want their claims settled quickly. Naturally enough, the sympathetic claim representatives want to settle claims quickly, too, so the victims can return to some normalcy.

At the same time, insurers also feel the pressure to settle catastrophe-related claims quickly. They want to help the victims, yet they realize that–especially with events such as major earthquakes, hurricanes or other newsworthy disasters–the media will scrutinize their actions.

Add to these difficulties the living conditions following a disaster. Often, claim representatives must use primitive, makeshift accommodations.

In many cases, they–along with the victims–will be without electricity, readily available water and food, heat, air conditioning or phone service. In addition, while they may not have experienced the initial trauma of the disaster, they must cope with the devastating aftermath.

It's easy to see how fraud can slip past the beleaguered claim representatives under such circumstances. That's why it's especially important for us all to understand and be vigilant for the classic indicators of fraud, as well as for emerging trends in fraud techniques.

More education and training of the kind offered by organizations such as the National Insurance Crime Training Academy are needed at every level. Every agent should receive materials explaining in clear language what to look for after a catastrophe, and every affected policyholder should receive a simple flyer or brochure warning them about common scams and explaining how to report suspected fraud.

In addition to initiating education and awareness measures, industry leaders also need to insist that all claims be submitted using the Insurance Services Office Universal Format. Currently, almost half of claims submitted use legacy formats, meaning there are fewer data matches, fewer suspicious claims flagged and, ultimately, fewer fraudsters caught than should be.

We must improve upon our existing analytic technologies to better detect the patterns and links that indicate fraud. Insurers need to provide their carriers with the proper technology and require ISO Universal Format compliance if they expect to get results, even if that means a major investment in system upgrades and software.

Unfortunately, there's no way around it–cracking down on fraud will require a greater financial investment. We need rules engines, predictive modeling applications and visualization tools, and then we need to find better ways to exchange the data we gather with others in the industry and with law enforcement and government agencies.

It can be done. A great example is the post-Katrina collaborative work done by the Louisiana State Police, the National Insurance Crime Bureau and NICB member-company staff.

Through physical inspections, data collection and investigative work, this team was able to create a database of over 309,000 flood-damaged vehicles' Vehicle Identification Numbers, which has seen 2.5 million Web site hits from insurance companies, consumers, finance companies and law enforcement over the course of a year.

This joint effort has prompted well over 300 investigations, 72 arrests and an estimated monetary fraud exposure of $11.3 million.

Sadly, though, the team has uncovered only the tip of the fraud iceberg, and it will take efforts outside the industry to have a greater impact on the problem.

We need to push for changes in state and national legislation. Inconsistency in the law has contributed toward poor conviction and jail-time rates for insurance fraud cases…and there is little deterrence.

We need a uniform legal definition of insurance fraud, and every state government should have an official fraud bureau. Further, we must urge lawmakers to establish consistent and comprehensive immunity statutes to protect all those involved in fighting fraud.

Without doubt, cat fraud is a challenge to the industry. But, working together, we can create a better system to track down fraudsters, and we can press for fraud statutes that will help victims of fraud obtain justice. Although we can't prevent disasters, we can, at the very least, work to thwart the unscrupulous from finding profit in the pain of others.

Special Reports /

Deluged With Cat Losses, Claims Reps Leave Door Open For Scam Artists

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