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:

• Internet fraud continues to grow by leaps and bounds. Losses from Internet fraud reported to the Internet Fraud Complaint Center, run by the FBI and National White Collar Crime Center, was $54 million in 2002, compared to $17 million in 2001.

• A 2002 report from the California Bureau of Automotive Repair found that of over 500 vehicles inspected after repairs, more than 40% of the bills reflected charges for work that was never done or for parts that were not used. The average overcharge is $586, about one-sixth of the average auto insurance claim after an accident.

• The Coalition Against Insurance Fraud (CAIF) estimates that insurance fraud is the equivalent of a hidden tax of about $950 per US family on the cost of goods and services.

• An April 2003 BestWire story (A.M. Best) reports that for every claim dollar an insurer pays out, 15 cents goes to pay fraud.

The insurance industry is often asked to quantify the cost of fraud. The chart to the right provides a compendium of some of these figures. These sources provide their best-guesstimates of annual fraud costs based on anecdotal evidence, studies and observation.

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.

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.

¹ Equates to $39 billion in 2000
² From rating errors due to motorist fraud and omitted data

Identity theft

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 2003, Consumer Sentinel, the Federal Trade Commission’s complaint database, received over a half-million fraud and identity theft complaints. Losses from fraud in 2003 were reported to be over $400 million.

2003 Consumer Sentinel data for Ohio shows that there were 10,020 fraud complaints filed for over $17 million in losses. The average amount per loss was $2,088. There were 5,494 identity theft complaints filed by Ohioans. The top cities for ID theft cases were Cleveland (547), Columbus (533), Cincinnati (427), Toledo (178) followed by Dayton (163).

Public attitude toward fraud

The Insurance Research Council (IRC) released findings from two 2002 studies in October 2003 on public attitude regarding insurance fraud in the US compared to those residing in NY. IRC found that 20% of the US respondents compared to 25% of NY respondents thought it was acceptable to increase the amount of an auto claim to make up for premiums paid when they did not file a claim. New York respondents were also slightly more likely to say it was acceptable to increase a claim to cover the deductible (32% versus 29% of US respondents). For additional information on the study, go to: www.ircweb.org/news/200307241.htm.

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.

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:

• Computerized data bases (index systems) that identify patterns of suspected activity including false claims and payment duplication. 92% of P/C 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.

• Use of SIUs (special investigation units) to help identify and investigate suspicious claims. The Coalition Against Insurance Fraud reports that more insurers are setting up special investigation units (SIUs) to fight fraud. In 1999 40% of P/C insurers had SIUs, and in 2001 the number increased to 82%.

• 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. Since 1997 some of the largest insurers, especially auto insurers, have been filing and winning lawsuits against individuals and fraud rings.

• Growth in state fraud bureaus: Many states have enacted legislation creating fraud bureaus, including Ohio. There are 46 fraud bureaus in 41 states and Washington DC. Most fraud bureaus are housed in state departments of insurance.
  A study of 43 fraud bureaus by CAIF found that bureaus opened a record 33,000 cases in 2002, compared to 27,000 in 2000. Cases brought to prosecution in 2002 rose 14% from 2001. Florida lead with 771 cases. Criminal convictions rose by a third in 2002, with a record of over 2,500 when compared to 2001 figures.

  In 2002, the Ohio Department of Insurance (ODI) Fraud and Enforcement Division received 1,146 referrals with a total claim value of over $13 million. The fraud unit closed 234 cases in 2002, a 32% increase from 2001. ODI investigators saw 47 indictments and 43 convictions for insurance law violations. The licenses of 65 agents were revoked and eight 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.

Sources: Excerpts from “Insurance Issues Update,” Insurance Information Institute, Ruth Gastel, editor.

Insurance carriers pay $30 billion in fraudulent claims every year. That’s almost twice NASA’s entire budget, and it’s paid to criminals (filing fraudulent claims). (National Insurance Crime Bureau from Columbus Dispatch, 5/17/04)