The state and challenges of insurance fraud

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1 Grand Hotel Union 14. maj 2013 The state and challenges of insurance fraud James E. Whitaker

2 Agenda 1. About ACFE 2. Statistics for insurance fraud 3. Insurance fraud schemes 4. Case study 5. Fight against insurance fraud: Special Investigation Unit and Awareness 2

3 About the ACFE

4 The Association of Certified Fraud Examiners (ACFE) 65,000 members worldwide CFE (Certified Fraud Examiner) designation recognized worldwide Special Investigation Units for some carriers are now making CFE a requirement 4

designation recognized worldwide Special Investigation

5 Statistics for insurance fraud

6 Cost of Insurance Fraud* Total cost of all kinds of insurance fraud (including life and health insurance) is estimated to be between $85 billion and $120 billion a year: Insurance Information Institute estimate property/casualty insurance fraud cost insurers about $30 billion in 2004, up from $29 billion in 2003 Insurance Information Institute estimates that 10% of every claim dollar goes to combat fraud; the Insurance Research Council puts the figures at 17% to 20%, or $6.3 billion per year. The National Insurance Crime Bureau states that insurance fraud adds $200 to $300 to total insurance premiums for the average household. * Source: Encyklopedia of Fraud, ACFE 6

Information Institute estimates that 10% of every claim dollar goes to combat fraud; the Insurance Research Council puts the figures at 17% to 20%, or $6.

7 According to one *Accenture Study the most common justifications of insurance fraud include: The belief that one can get away with insurance fraud (56%); The belief that insureds pay too much for insurance (32%); and To compensate one s self for payment of deductibles (24%); Almost all of the respondents (95%) said that it is important for insurance companies to investigate any potentially fraudulent claims. The foremost reason given was to control premium expenses (62%). More that half (56%) of respondents agree that as the economy gets better, people are less likely to commit insurance fraud. About half (49%) of respondents said that they believe people are discouraged from committing fraud as a result of the increase in conviction rates, severe punishments, and media coverage of high-profile corporate scandals. * Source: 2003 Accenture Study 7

fraudulent claims. The foremost reason given was to control premium expenses (62%).

8 Massachusetts * Study Finds Prosecution is Difficult 48% claims had some sign of fraud or abuse 9% had some perception of fraud 1% of claims were referable for criminal investigation 0.67% were acceptable for criminal investigation 0.33 % were preferable for prosecution 0.17% were prosecuted successfully * Source: 2003 Coalition Against Insurance Fraud 8

investigation 0.67% were acceptable for criminal investigation 0.

9 Insurance fraud schemes

10 Various Types of Insurance Fraud Schemes Agent or Broker Fraud Property Schemes Vehicle Insurance Schemes Bodily Injury Schemes 10

11 Agent or Broker Fraud Twisting: The replacement of existing policies for new ones. They may be unknowingly switched to a different company, or stay with the some company but issued policies they really don t need or want. Sliding: Including additional coverage without the knowledge or consent of the insured. Churning: Agents tell customers they can buy additional insurance for no extra cost by using current policy equity. Usually in fact, the cost of the new policy far exceeds that of the old policy. Premium Fraud: The broker pockets the premium funds and never applies to the carrier. He or she makes up a fraudulent policy for the insured and if a claim is never submitted, no one knows. 11

Sliding: Including additional coverage without the knowledge or consent of the insured.

12 Property Schemes Phony or Inflated Thefts: Occurs when an insured s car, home, rental property or business suffers a theft or catastrophic loss such as by fire, flood, malicious vandalism, etc. The claim may be totally false or legitimate, but then the insured tries to inflate the loss amount. Example: insured in the process of a divorce and knows the other party took household items, but claimed it was a burglary by unknown persons. Inflated Inventory: This can occur anytime, but the most expensive claims usually arise after a fire or flood loss. This can, and often does, occur with even a small theft claim. Example: an insured legitimately has his/her car broken into and the thief steals a camera. By the time the claim is submitted the loss now includes an ipad or iphone, a purse with cash, GPS, clothing items, etc. 12

Example: insured in the process of a divorce and knows the other party took household items, but claimed it was a burglary by unknown persons.

13 Property Schemes Arson for Profit: Personal or business dwellings are intentionally destroyed by fire for financial gain, to cover up evidence of a crime, to avoid seizure of documents, or for revenge. Sometimes even if the fire is of undetermined origin, a successful prosecution or claim denial can be obtained through careful examinations of the contents (or lack of said contents if the claim is inflated). Paper Boats: When claims are filed for a boat that has sank, a detailed and expedient investigation must commence. It is often difficult to show whether the boat ever actually existed, at least with the insured. It is not difficult to register a boat with just a bill of sale. There should be however supplies, equipment, photos, mooring contracts, etc. of the actual existence of the boat with the insured. 13

Sometimes even if the fire is of undetermined origin, a successful prosecution or claim denial can be obtained through careful examinations of the contents (or lack of said contents if the claim is

14 Vehicle Insurance Schemes Ditching: Owner give up: secreting a vehicle to avoid paying loan payments; borrowed for a drug deal or other criminal activity; to avoid identification in an auto accident or criminal activity; abandoned in hopes of the vehicle being really stolen or stripped for parts; may involve contents claims from a homeowner s policy. Past Posting: A scheme whereby the person is involved in an auto accident and doesn t have insurance at that time. They wait for some time then reports the vehicle as being in an accident after the policy has been issued. They may report it as a hit-skip or unauthorized use claim. 14

contents claims from a homeowner s policy. Past Posting: A scheme whereby the person is involved in an auto accident and doesn t have insurance at that time.

15 Vehicle Repair Scams: This involves mechanical or body shop repairs that either use old or not original equipment parts; charges for parts and labor that really doesn t exist; additional but unnecessary body work; or buying new parts to resell and placing the old parts back on the vehicle. Vehicle Smuggling: A new vehicle is purchased with maximum financing and a counterfeit title showing the car free and clear is issued. A minimum deductible is used so the insured is not much out of pocket. The car is shipped to a foreign port and reported stolen. The car is sold on the black market at its overseas location and the insured collects the insurance proceeds for the stolen vehicle. 15

Vehicle Smuggling: A new vehicle is purchased with maximum financing and a counterfeit title showing the car free and clear is issued.

16 Phantom Vehicles: A certificate of title has been issued for a car that has never existed or has been scrapped for salvage but a salvage title was never obtained. VIN switching is where a VIN is switched and replaces the VIN on a stolen vehicle of the same type and year. Inflated Damages: This is a scheme whereby the body shop owners of some establishments tells the insured that the shop will undertake the repair for whatever the insurance company authorizes. They will build in the insured s deductible so that the insured is not out of pocket. * These schemes are becoming more difficult with the advent of better tracking technology for law enforcement officials and insurance companies. * Sometimes the insured is not even aware there is anything wrong with this arrangement and is just glad to not have to pay the deductible. 16

Inflated Damages: This is a scheme whereby the body shop owners of some establishments tells the insured that the shop will undertake the repair for whatever the insurance company authorizes.

17 Bodily Injury Schemes: 17

18 18

19 19

20 How in the world?... 20

21 Subjective vs. Objective Injuries 21

22 Bodily Injury Organized Fraud Rings Lawyer Agent Doctor EMS Capper Claimant(s) 22

23 Case study

24 Ethnic Centered Case Organized fraud ring involving lawyers, doctors, agents, cappers, and phony claimants. The investigation involved: 21 attorneys Claims against 11 different insurance carriers 14 clinics 20+ doctors and chiropractors Over 110 different claimants 3 states 24

25 The Investigation Surveillance on all 14 clinics during all the open hours (before and after) It took over 2 years for the investigative process to conclude RICO statutes (Racketeer Influenced and Corrupt Organizations Act) both Civil and Criminal More than 84% of the cases withdrew their claims Shared resources with Immunity Statutes by all carriers involved Attorneys and physicians indicted and licenses revoked Depositions on all cases where there was a fraud indicator Some claimants deported Of the remaining 16% of cases, less than 3% prevailed 25

26 Fight against insurance fraud: Special Investigation Unit (SUI) and awareness

27 Insurance Carriers Must Implement and Support a Special Investigation Unit (SIU) Allows investigators to operate effectively Dedicates a core group to investigate possible fraudulent claims Encourages use of data and lawfully shared information sources Embraces technology Provides expert resources for today s technology driven environment Fraudsters are very well versed in the use of technology to commit their schemes we must try to stay one step ahead of them 27

28 i2 software 28

29 Reactive vs. Proactive Strategies We still need to play a reactive role to detect and deter fraudulent claims, but not rely on that strategy for long term success. Proactive education and prevention strategies are the key to an effective risk management program. 29

30 Hvala James E. Whitaker, CFE, CPP, PCI, U.S.A. 30

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