Fraud & the P/C Insurance Industry Focus on No-Fault Auto Insurance

Transcription

1 Fraud & the P/C Insurance Industry Focus on No-Fault Auto Insurance New York Insurance Fraud Summit New York, NY April 21, 2010 Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY Tel: Cell:

2 Presentation Outline Survey of No-Fault Claim Costs in the U.S. New York State: The Return of a Crisis in No-Fault Fraud & Abuse? Costs are up 58% since 2004 Average no-fault claim severity is at its second highest level ever The Costs of No-Fault Fraud and Abuse in NY State No-Fault fraud and abuse is costing insurers and drivers more than $200 million per year About 20% of the costs every no-fault claim in NY is attributable to fraud and abuse Benefits of Reducing No-Fault Fraud and Abuse Drivers can save hundreds of millions of dollars What Happened During New York s First No-Fault Crisis? Q&A Great success story 2

3 Survey of No-Fault Claim Costs Across the U.S. Skyrocketing No-Fault (PIP) Claim Costs Are a Major Concern in Several States 3

4 Average No-Fault Claim Severity, 2009:Q4 $40,000$37,489 $35,000 MI, NJ, NY and FL currently are the largest states that have the most severe problems in their no-fault system $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 $17,727 $8,862 $8,670 $8,186 $7,538 $6,944 $5,517 $5,198 $4,887 $4,327 $4,121 $4,031 $2,998 $2,895 $2,991 $2,551 $2,219 $1,749 MI NJ NY DC DE FL MN KY ND HI WA PA OR TX MD KS SC UT MA Several States Have Severe and Growing Problems With Rampant Fraud and Abuse in their No-Fault Systems. Claim Severities Are Up Sharply. Source: ISO/PCI Fast Track data; Insurance Information Institute. 4

5 Increase in No-Fault Claim Severity: * % $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 $24,385 $32,778 $12, % $17,198 $5, % +18.6%** $8,716 $6,674 $7,524 Michigan New Jersey New York Florida The no-fault systems in MI, NJ, NY and FL are under stress due to rising fraud and abuse which will ultimately lead to higher premiums for drivers *2009 figure is for the 4 quarters ending 2009:Q4. **Since 2006 the increase in Florida was 17.3% (average severity that year was $6,344). Sources: Insurance Information Institute research from ISO/PCI Fast Track data. 5

6 NY State No-Fault Costs & Evidence of Fraud Skyrocketing No-Fault (PIP) Claim Costs Are a Major Concern in Several States 6

7 New York State No-Fault Claim Severity, :Q4 No-Fault Claim Severity Avg. Claim Severity is up 58% since 2004:Q4 Sources: ISO/PCI Fast Track data; Insurance Information Institute. 7 $5,675 $6,063 $6,156 $6,052 $5,820 $5,991 $5,615 $6,094 $5,914 $6,250 $6,269 $6,699 $8,347 $8,327 $7,888 $7,507 $8,234 $7,773 $7,311 $6,958 $6,870 $6,530 $6,606 $7,063 $7,323 $7,378 $7,297 $7,670 $7,740 $9,235 $8,727 $8,577 $9,500 $8,443 $8,177 $8,507 $8,025 $8,562 $8,748 $8,690 $8,862 $9,000 $8,500 $8,000 $7,500 $7,000 $6,500 $6,000 $5,500 $5, % 2.2% No-Fault Claim Frequency Avg. Claim Severity Rose 63% in 5 years after 1997 Presbyterian Decision Avg. Claim Severity Frequency 2.0% 1.8% 1.6% 1.4% :01 1:03 2:01 2:03 3:01 3:03 4:01 4:03 5:01 5:03 6:01 6:03 7:01 7:03 8:01 8:03 9:01 9:03 No-Fault Claim Severity Avg. Claim Severity is at its 2 nd Highest Level in History = $8, % 1.0% About 20% of No-Fault Claim Costs Are Attributable to Fraud and Abuse

8 Suspected No-Fault Fraud Reports vs. All Insurance Fraud Reports, ,000 25,000 25,945 22,884 Suspected Fraud Reports Received Suspected No-Fault Reports Received 22,079 23,054 24,920 20,000 15,000 10,000 5, ,287 10,117 11,242 No-fault fraud reports are up 32.8% since 2006 compared to 8.9% for all types of fraud in NY state 12, ,433 The Total Number of Insurance Fraud Reports in NY State Would Have Plunged Nearly 15% Since 2006 Were It Not for the Return of No-Fault Fraud Source: New York State Insurance Department, Insurance Frauds Bureau 2009 Annual Report; Insurance Information Institute. 8

9 New York Auto Insurance Fraud Reports, ,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Auto Collision Damage Auto Theft No-Fault Auto No-fault fraud reports fell 35% between 2003 and 2006, but are rising once again up 33% since Other types of auto insurance fraud are flat Source: New York State Insurance Department, Insurance Frauds Bureau 2009 Annual Report; Insurance Information Institute. 9

10 The Cost of No-Fault Fraud in NY State No-Fault (PIP) Fraud is Costing Insurers and Drivers Billions 10

11 Estimated Cost of No-Fault Fraud in New York State, * ($ Millions) $300 $250 No-fault fraud cost NY drivers and their insurers an estimated $229 million in 2009, up 17.3% from 2008 and 90.3% from 2007 $229.1 $241.2 $200 $195.3 $150 $100 $50 $0 $1.7 $70.5 $120.4 The cost of no-fault fraud could rise to $241 million in 2010 if no reforms are enacted ** 2010F *No-fault severity reached a post-reform low in 2004 before, hence selection of 2005 as the first year of analysis. Actual no-fault losses in 2005 and beyond are higher than estimates indicate due to base level of fraud imbedded in 2004 data. **2009 figure is estimated based on 4 quarters ending 2009:Q3 (latest available). Source: Insurance Information Institute analysis and research. 11

12 Estimated Cumulative Cost of No-Fault Fraud in New York State, F* ($ Millions) $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 $2 The cumulative cost of no-fault fraud in NY state could rise to $858 in 2010 and more than $1 billion by early 2011 if no reforms are enacted No-fault fraud cost NY drivers and their insurers totaled an estimated $617 million from 2005 through 2009 $72 $193 $388 $617 $ ** 2010F *No-fault severity reached a post-reform low in 2004 before, hence selection of 2005 as the first year of analysis. Actual no-fault losses in 2005 and beyond are higher than estimates indicate due to base level of fraud imbedded in 2004 data. **2009 figure is estimated based on 4 quarters ending 2009:Q3 (latest available). Source: Insurance Information Institute analysis and research. 12

13 Estimated Per-Claim Cost of No-Fault Fraud in New York State, F* $1,800 $1,600 $1,400 The estimated per claim cost of no-fault fraud (a.k.a. Fraud Tax) in NY state was $1,561 in 2009, up 12.3% from 2008 and 78.4% from 2007 $1,390 $1,561 $1,644 $1,200 $1,000 $800 $600 $400 $200 $0 $12 $504 $875 No-fault fraud costs per claim could rise to $1,644 in 2010 without reform ** 2010F *No-fault severity reached a post-reform low in 2004 before, hence selection of 2005 as the first year of analysis. Actual no-fault losses in 2005 and beyond are higher than estimates indicate due to base level of fraud imbedded in 2004 data. **2009 figure is estimated based on 4 quarters ending 2009:Q3 (latest available). Source: Insurance Information Institute analysis and research. 13

14 Benefits of Reducing Fraud and Abuse NY s Drivers Will Save a Great Deal of Money if the Battle Against Fraud and Abuse is Won 14

15 Average Expenditure on Auto Insurance In NY State, * $1,300 $1,200 $1,100 $1,000 $959 NY ranked as the 2 nd most expensive state during its previous crisis, falling to 4 th by 2007 $960 $930 $939 $1,015 $1,100 $1,168 $1,172 $1,122 NY $1,083 US $1,047 $900 $800 $700 $705 $703 $686 $718 $726 $781 $824 $840 $829 $816 $795 $600 $ In the wake of NY s first no-fault crisis, the avgerage expenditure on auto insurance fell by $125 or 10.7% between 2004 and 2007, twice the 5.4% drop in the US overall *Latest available. Sources: NAIC; Insurance Information Institute. 15

16 NY State Direct Pvt. Passenger Auto Premiums Written, ($ Billions) $11 $10 $9 $8 $8.2 $8.2 $9.0 $9.9 $10.6 $10.7 $10.3 $10.0 $9.8 $9.8 The last no-fault crisis pushed the cost of auto insurance up sharply in the early 2000s $9.9 $7 $6 $5 Auto insurance premiums paid by NY drivers dropped by nearly 7% or $762 million from the end of the last no-fault crisis in 2004 to 2008, but the system is once again under siege from fraud and abuse Resurgent No-Fault Fraud in NY State Could Ultimately Cost Drivers Billions of Dollars Source: U.S. Department of Commerce; Blue Chip Economic Indicators (3/10); Insurance Information Institute. 16

17 Today s PIP Problem in New York State is Not Its First 17

18 No-Fault Fraud Was Front-Page News in

19 The Publicity Sparked Calls for Action 19

20 More Editorials Urging Albany to Act 20

21 The Campaign Was a Success: PIP Average Claim Severity Plunged $6,811 $6,729 $6,838 $7,188 $6,971 $7,060 $7,712 $8,271 $8,360 $8,076 $7,883 $7,600 $8,097 $8,308 $8,033 $8,597 $8,489 9,000 8,500 8,000 7,500 7,000 US excl. NY NY NY PIP claim severity, once the 2 nd highest in the US, fell well below the US average by Q after a crackdown on fraud, abuse. 00:4 $5,782 01:1 $5,929 01:2 $5,990 01:3 $6,009 01:4 $6,132 02:1 $6,299 02:2 $6,377 02:3 $6,526 02:4 $6,509 03:1 $6,548 03:2 $6,593 03:3 $6,599 03:4 $6,705 04:1 $6,052 04:2 $5,820 04:3 $5,991 04:4$5,615 6,500 6,000 5,500 5,000 *ISO Fast Track PIP data as of 2004:Q4 include the following states: FL, HI, KY, KS, MA, MI, MN, NY, ND, SC and UT. Source: Insurance Information Institute calculations based on ISO/PCI Fast Track Data.

22 But No-Fault Auto in New York Is Out of Control Again!

23 $5,615 $5,991 $5,820 $6,052 $8,271 $8,360 $8,076 $7,712 $7,883 $8,097 $8,308 $8,597 $8,489 $8,033 $7,600 $7,188 $6,811 $6,094 $5,914 $6,250 $6,289 $6,530 $6,606 $7,063 $7,323 $7,378 $7,297 $7,670 $7,740 $8,443 $8,177 $8,507 $8,025 $8,562 $8,748 $9,000 $8,500 $8,000 $7,500 $7,000 $6,500 $6,000 NY s No-Fault Fraud Problem Has Returned Average PIP Claim Severity $5,500 $5,000 $4,500 00:4 01:1 01:2 01:3 01:4 02:1 02:2 02:3 02:4 03:1 03:2 03:3 03:4 04:1 04:2 04:3 04:4 05:1 05:2 05:3 05:4 06:1 06:2 06:3 06:4 07:1 07:2 07:3 07:4 08:1 08:2 08:3 08:4 09:1 09:2 Sources: Insurance Information Institute calculations based on ISO/PCI Fast Track Data

24 540 NY s No-Fault Fraud Problem Has Returned Medical Care Cost Index Medical care index NY $9, Average NY PIP Claim Severity $8, Medical Care Cost Index Fraud Gap? $7, $6, :4 05:1 05:2 05:3 05:4 06:1 06:2 06:3 06:4 07:1 07:2 07:3 07:4 08:1 08:2 08:3 08:4 09:1 09:2 $5,600 Sources: Insurance Information Institute calculations based on ISO/PCI Fast Track Data

25 New York State s Resurgent No-Fault Auto Insurance Problem The average no-fault (PIP) claim in New York soared 56% from $5,615 at the end of 2004 to $8,748 in the second quarter of 2009 This is a 48% growth rate In that time span, the cost of medical care rose by 21% At the start of 2004, NY s average PIP claim was about equal to that of the rest of the U.S. Now, 5½ years later, the average cost per no-fault claim in New York is more than double (111%) that of the US median ($4,152) Sources: PCI Fast Track Monitoring data; I.I.I. 25

26 First-Party Bad Faith Liability Laws: How to Make a Tough Environment Tougher 26

27 The Courts & States Have Adopted 3 Procedures for Alleging Bad Faith Tort Action Based Solely on Bad Faith (a majority of states) Can recover costs beyond policy benefits including punitive damages 10 states use negligence standard; 15 states have intentional tort standard Contract Action (9 states) Broad definition of damages, but not punitive damages Private Cause of Action Statute Can recover costs beyond policy benefits including punitive damages Source: Tennyson and Warfel, First-Party Insurance Bad Faith Liability: Law, Theory, and Economic Consequences, National Association of Mutual Insurance Companies, September

28 Objective & Costs of Bad Faith Laws Objective: to deter insurers from denying or delaying payment on a valid claim Costs Can deter insurers from screening claims for fraud and from challenging questionable claims, to avoid possibly greater costs under bad faith allegations Can raise total claims payments (including LAE) and, ultimately, premiums in effect, taxing honest policyholders to pay dishonest ones Source: Tennyson and Warfel, First-Party Insurance Bad Faith Liability: Law, Theory, and Economic Consequences, National Association of Mutual Insurance Companies, September

29 Use of IMEs* in States with Different Bad Faith Laws % of Claims 15% 10% 5% 4.1% any tort action 14.8% no tort action 3.5% 13.8% Because an IME requires the notification and cooperation of the insured, insurers may be particularly reluctant to undertake this type of investigation when bad faith suits are decided under tort law. 0% IME requested IME performed *Independent Medical Exam Source: Tennyson and Warfel, First-Party Insurance Bad Faith Liability: Law, Theory, and Economic Consequences, National Association of Mutual Insurance Companies, September 2008.

30 Use of Medical Audits In States with Different Bad Faith Laws % of Claims 35% 30% 33.2% In states in which a Bad Faith tort is allowed, insurers were significantly more likely to use internal medical audits in claims evaluation. This adds to LAE in those states. any tort action no tort action 25% 20% 15% 10% 5% 22.9% Not a statistically significant difference. 6.2% 7.0% All else being equal, claim payments are 12.4% higher in states that allow tort-based actions. 0% internal medical audit external medical audit Source: Tennyson and Warfel, First-Party Insurance Bad Faith Liability: Law, Theory, and Economic Consequences, National Association of Mutual Insurance Companies, September 2008.

31 Fraud Suspicion Indicators at Scene of Auto Accidents % of Paid Claims 85% 80% In states in which a Bad Faith tort is allowed, insurers paid claims significantly more often when there was no visible injury (NVI) at the scene. Were some NVI claims fraudulent? 79.2% 84.8% any tort action no tort action 75% 70% 65% 70.0% In states in which a Bad Faith tort is allowed, insurers paid claims significantly less often when there was no police report at the scene. Were some of these claims fraudulent? 60% 62.4% 55% No visible injury at scene Police report at scene Source: Tennyson and Warfel, First-Party Insurance Bad Faith Liability: Law, Theory, and Economic Consequences, National Association of Mutual Insurance Companies, September 2008.

32 In Bad Faith States, Insurers Face/Pay More Questionable Claims % of Claims 70% 60% 69.1% 60.7% any tort action no tort action 50% 40% 30% 20% 24.7% 20.0% In states in which a Bad Faith tort is allowed, insurers paid claims significantly more often when the injury was harder to challenge 10% 0% Chiropractor % of claims Worst injury is sprain Source: Tennyson and Warfel, First-Party Insurance Bad Faith Liability: Law, Theory, and Economic Consequences, National Association of Mutual Insurance Companies, September 2008.

33 Insurance Information Institute Online: Thank you for your time and your attention! Twitter: twitter.com/bob_hartwig