Our fight against fraud has improved, but the scope of the problem can only be described as enormous. The FBI reports that one in four claims has an element of fraud. Some of us can argue it is much higher. We have successfully formed fraud-fighting special investigation units (SIUs) that have had spectacular individual success. This is a result of talented and aggressive SIU investigators and claims personnel.
But the Coalition Against Insurance Fraud (CAIF) politely cites the foundation of the problem on its Web site: “Measuring insurance fraud is an elusive target. No single national agency gathers omnibus fraud statistics. Insurance fraud data thus are relatively piecemeal, making our understanding of insurance fraud an ongoing work in progress…”
The depth of the problem is highlighted by data provided by The New York State Insurance Frauds Bureau reflecting investigations resulted in 522 arrests for the first three quarters of 2011, compared with 482 for the corresponding period in 2010 and 490 in 2009. They received 17,811 reports of suspected fraud during the first three quarters of 2011, down from 18,504 received in the January-September 2010 period. Considering their limited allocated resources they have done a remarkable job. The statistics, however, reveal the size of the problem and economic loss we, and therefore the general public, suffers. We have to remember, it is likely that most fraud cases remain undetected.
I have outlined 10 critical roadblocks affecting the fraud fight:
1. Inadequate resources. Generally speaking, there are too few special investigation personnel, coupled with a lack of support services. In-service educational opportunities for claims personnel are not standardized across the industry and may be nonexistent for some. The flat-rate structure for investigation service partners results in low-quality personnel and low-quality results. Allocated funds for the fraud fight are too low compared to the massive problem we are charged to mitigate.
2. Inadequate prosecutorial and law enforcement resources. If prosecution is low, then deterrence will be low. The issue of inadequate resources varies from state to state; however, one common problem is that there are high monetary thresholds for district attorneys to accept—and be willing to prosecute—an insurance fraud case. Some prosecutors may not be interested unless there is a loss of $100,000 or more. Below that, cases will simply not be reviewed or considered worthy of pursuing. They simply do not have enough prosecutors.
DA Detectives, some of the best in the business, are simply not in a position to conduct ancillary investigations causing successful prosecutions to be unlikely. Therefore, the insurer has to either complete the fraud investigation or hire a highly skilled vendor capable of preparing the case and its evidence in a manner that is acceptable to the district attorney.
3. Privacy regulations. Prosecuting insurance fraud is clearly in the public’s best interest. Privacy regulations are also in the public interest. Yet, these interests are often at odds with each other. When legislators introduce new privacy bills, a balanced approach should be adopted when contemplating their benefit versus the risk regarding the pubIic interest as it relates to the massive cost of fraud. Legislation enacted as a knee jerk reaction to a sensationalized media story, without forethought of the unintended consequences regarding insurance crimes, should first be evaluated for their negative economic impact.
4. Lack of a clear industry standard for success. Statistics can be misleading. For example, if you have an effective fraud program with effective prosecutions, it may seem to some that your company has a higher degree of fraud occurrences than a company with a less effective program. By creating an industry standard of measurement, everyone is on same playing field. Reported fraud savings will then enjoy more credibility. There should be a standardized actuarial economic measure to determine the success of a fraud program.
5. Emerging technology is fueling cyber fraud. Every day there are media reports of financial fraud, identity theft, credit card fraud, and security system breaches relating to insurance fraud. Special skills are required to solve these cases. Partnering with forensic computer and financial firms will smooth the road to success.
6. Organized crime is penetrating every type of business. They have seemingly endless resources. They have partnered with a small number of corrupt attorneys, physicians, and other healthcare professionals who help propagate fraud against insurers and the public. Although their numbers are relatively small, their economic impact is incalculable. Undercover operations by skilled and experienced service partners is the key to creating a deterrent.
7. More ‘white collar’ crimes.New and evolving schemes often combine to some degree with cyber-crimes, including bankruptcy fraud, hedge fund fraud, and mortgage fraud. Insurable commodities are often not detected or investigated fully either by the government or insurers because of a lack of resources.
8. Globalization. There are minefields of risk conducting investigations overseas as a result of the different systems of law. If one is unfamiliar with elements of civil law versus common law—or lacks an understanding of local custom or civil regulations and stricter privacy laws—then the result can be a severely diluted investigations or regulatory violations that carry international corporate penalties, including corporate veil piercing criminal prosecution.
9. Poor public relations. The publics view of insurers remains, well, terrible! Public perception of insurance fraud as socially acceptable is the common theme. The average person has no concept of how much insurance fraud costs them each year. It’s hidden surcharge is built into the cost of all products and services they consume. An ongoing industry educational public relations campaign may be the answer.
10. Adverse insurance legislation. Many state laws and regulations are slanted in favor of the claimant. The burden of proof (for insurers) are unrealistically difficult. In some states the level of benefit remuneration can be so high that an injured worker makes more money staying home than going to work, leaving little incentive to return to the workforce. Industry Lobbying efforts can be one answer.
One example of carriers successfully lobbying for reasonable legislation occurred in Florida. Florida recently enacted major PIP reform, HB19, which passed in the state Senate by a vote of 22:17. Many believe that lobbying by Gov. Scott was critical to the bill’s passage. Reportedly, fraud has driven PIP costs to about $1.4 billion since 2008 in Florida, which logs a significant number of staged auto accidents compared to other states. The new legislation tightens the requirements for filing a claim.
The solutions to most of the roadblocks are self-evident. Data is the key to recognizing that carrier margins are adversely affected, whether or not the cost of fraud is passed onto the consumer. I submit that an effective industry wide fraud initiative, will save billions; and we’ll all wonder–why didn’t we do this sooner.