Man in the Mirror

When you think of “insurance crime,” probably the first thing that comes to mind is some form of third-party fraud, with policyholder claims-padding on one end of the spectrum and Russian mob staged auto accident rings on the other.

But insurance companies are increasingly looking at their agency distribution force as a source of potential fraud, especially in financially tough times.

Within the industry, associations that track insurance fraud of all kinds say they've seen instances of producer-perpetrated fraud increase during the recession. 

Based on statistics from 37 state insurance fraud bureaus, agency fraud jumped 24 percent in 2009 at the height of the recession, said Dennis Jay, president of the Coalition Against Insurance Fraud (CAIF). That year, the largest average increases in fraud categories were in bogus health plans, drug diversion and fraud by insurance agents. A total of 69 percent of respondents said agent cases were up slightly higher or much higher in 2009.

And although CAIF data suggest that agency fraud had fallen to 2007/2008 levels by the end of last year, other numbers say otherwise.

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For example, a February 2012 report by the National Insurance Crime Bureau (NICB) finds referrals of insurance agent/adjuster fraud were up 33 percent between 2010 and 2011. 

A quick look at the bulletins put out by state insurance departments' fraud bureaus make it clear that crooked agents and brokers are definitely out there. 

For example:

• Earlier this year, federal authorities in New York arrested three life insurance agents in a $100 million scheme of conspiring to defraud major insurance companies into issuing life insurance policies to straw buyers, when the true owners of the policies were third-party investors and financiers. 
• A north New Jersey insurance agent pleaded guilty to defrauding nine clients out of more than $1.9 million. The licensed insurance producer, securities dealer and certified financial planner admitted he obtained the money to invest for clients, but used instead to fuel his online gambling habit.
• Two Pennsylvania insurance agents defrauded school districts in Berks County of more than $1 million. The agents used the premium money for luxury cars, expensive wine and other personal items—leaving the school districts without coverage.
• Five life insurance agents in New York were involved in a scheme that used identity theft, false business records and forgery to establish fake insurance policies, earning commissions and guaranteed bonuses based on selling those policies. They were arrested and charged with using the company-issued agent code of a former employee to write policies and forging his signature to cash the commission checks.

“Most agents are honest. But there are always a few bad apples and the challenge is in identifying them,” said James D. Ruotolo, principal for insurance fraud in the global fraud and financial crimes practice at security software company SAS.

For years, insurers and law enforcement alike focused on external insurance fraud claims generated by policyholders and third-party claimants. But as hard times linger, insurers are increasingly looking at significant exposure from internal fraud scams—not just by agents but by their own employees, Ruotolo said. “They have access to internal systems and very detailed information about workflow and protocol and become very educated in how to work the system.”

New technology is helping insurers stay one step ahead of the criminals. SAS, a software company specializing in business intelligence and analytics for financial institutions, has recently built out a security intelligence practice and created software to help detect suspicious activities in insurance, banking, healthcare and government.

Ruotolo, whose background is in the special investigations unit at The Hartford, is familiar with all the scams, from hard fraud to simple sloppy agency processes. “At the Hartford, when we examined claim experience reports and saw lots of fraudulent claims activity from a particular agency, it's obvious they're either not doing a good job of qualifying customers or there is active fraud going on,” he said.

Although producer fraud can be complex, probably the most common is misappropriation of funds  belonging to the policyholder, premium finance company or insurer, Ruotolo said. In this case, agencies having financial difficulties collect premiums from customers and don't pass it along to the insurer. Because these funds go unreported to an insurer or premium finance company, counterfeit insurance identification cards and certificates of insurance are often also involved, according to a 2010 report by the Louisiana Dept. of Insurance.

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“We always see this in tough financial times,” Ruotolo said. “And it's not a victimless crime—many people are negatively affected because the policy is not procured and the insured has no coverage.”

Other common producer frauds include:

1. Double dipping. Crooked property-casualty and life agents cancel a policy and then rewrite a new policy for the same insured. Because the coverage is uninterrupted there's no risk to the policyholder, but the agent gets a double commission.
2. Catastrophe fraud. In advance of a big storm, fraudulent agents try to write policies without any intention of providing coverage. After the storm hits, crooked agents collude with contractors and adjusters for kickbacks, promising customers expedited repair or other preferential treatment with no intention of delivering.
3. Crop insurance fraud. Because of the recent glut of bad weather, people who never even planted a crop are filing claims, and in some cases, they're colluding with crooked agents, said Jay of CAIF. 
4. Phony agents. Simply put, it's unlicensed agents selling policies. This scam is especially prevalent among immigrants and the disadvantaged who might not speak English and face high premiums. Because the fake agents are migratory, the crime is difficult to track.
5. Premium finance scams. Crooked agents collect 100 percent of the premium, then turn around and finance the premium, giving themselves an interest-free loan at the finance company and insured's expense. Because they might be paying off the premiums every month, this type of fraud may never come to light.
6. Phony insurance. Agents selling fake coverage from a phony insurance company, or bogus coverage using a legitimate company's name. This usually involves the use of fake documentation.
7. Worthless investments. Viaticals taken out on sick or terminally ill people can be a legitimate investment, but some can also be phony or misleading. Another scam involves agents promising quick, high and certain returns for investing in promissory notes supposedly backed by insurance. Often the promissory notes are fakes.

Although insurance crime knows no season, hard times are sure to bring it to the forefront, especially when a lagging economy is affecting both agencies and the businesses they serve. “There's more evidence of collusion between agents and businesses when both of them are desperate,” Jay said. “During the recession, a lot of premium went away because there were no new homes or cars and businesses weren't expanding. Economic stability has hardly come back for many businesses, so people are looking to cut corners any way they can.”

Technology, however, is making it easier for law enforcement and insurance companies to spot such scams. “The biggest factor over the last few years is technology,” Jay said. “They're running systems with predictive modeling and link analysis, programs that were initially designed to spot external fraud. But now they're putting everything through it, including claims handlers and agents. It's been an eye-opener because a lot of things came to light.”

During the last 15 years, insurers have added technology to their arsenal of anti-fraud weapons, which includes the creation and expansion of special investigation units and civil actions against suspected fraudsters. Insurers are using technology-based anti-fraud tools both inside the company and outsourced to vendors. 

A new study of 74 insurers by CAIF and SAS finds that: 

• 88 percent are employing anti-fraud technology. Less than half, however, are using technology for non-claims functions, such as underwriting fraud.
• Slightly more than half of insurers surveyed said they had been using anti-fraud technology more than 5 years.
• Three most common technologies employed are red flags/business rules, claim scoring and link analysis.
• 40 percent use text mining as an anti-fraud tool.
• 52 percent say the major benefit of anti-fraud technology lies in uncovering complex or organized fraud activity.
• Biggest challenges in deploying technology insurers cited were lack of IT resources and determining the cost-benefit analysis.
• 31 percent report that they expect increases in technology budgets next year. Predictive modeling and text mining are the top two areas in which insurers are looking to invest in the future.

Although most analytics do a deep dive on claims because that's where insurers are spending money, they are increasingly turning a suspicious eye to agents, a trend that Ruotolo expects will grow.

Insurers using the services of SAS have access to analytics modules specifically designed to detect certain types of fraud, he said. For instance, when analyzing all applications processed by a certain agent over a period of time, SAS can compare patterns to the agent's peer group or other agents in the same area writing the same business. SAS also can conduct an analysis in which it examines changes in a book of business over time to weigh whether an agency is writing more specific lines of business, handling riskier business, etc.

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A powerful indicator in such modeling lies in the measure of “velocity,” Ruotolo said. “When people go bad, they usually start with something small and then see that they can get away with it. Often in data analysis, we can see that grown quickly over time. A change in magnitude or velocity in data patterns is a strong indicator of fraud.”

SAS also analyzes social networks and links at the network level to sniff out suspicious patterns and relationships that could indicate fraud, Ruotolo said. By bringing in external data such as public records and social media, they can spot suspicious connections between an agent and policyholder suggesting collusion. When considering claims, they may examine first and third parties in an auto accident (“if they're friends on Facebook, it could be a staged accident”).

The trend toward fraud and its detection means that honest agents must take additional steps to protect themselves, Ruotolo said. Although stricter anti-fraud regulations are primarily focused on banking, it will eventually flow into insurance, especially on the life side. He suggests that agents:

1. Follow the rules. If there are guidelines or procedures, adhere to them. If a rule doesn't make sense in your area, contact someone, explain why and suggest alternatives. Don't just go your own way and hope no one notices. 
2. Be honest and encourage customers to do the same. Insurance is a business of trust. A small lie now to save a few dollars in premium could turn into a big nightmare later. 
3. When in doubt, document. Often there is a legitimate explanation for making an exception of some kind. Just make sure you have the information to back up that decision in case there is a question. 
4. Be on the lookout for fraud. If you suspect someone is gaming the system or intentionally trying to obtain benefits to which they are not entitled, contact the insurance companies' special investigation unit or the National Insurance Crime Bureau hotline at 1-800-TEL-NICB.