Vehicle pre-insurance inspection Deterring the serious economic crime of vehicle insurance fraud by Bill Frink Marketing Manager CARCO Group Inc. April, 2010 The serious economic condition of the past few years, heightened by the near-collapse of our financial markets in 2009, has made it more important than ever before to reduce the staggering impact of property crimes related to vehicle insurance fraud. This is especially applicable to the motoring public where vehicle-related crime represents almost half of the yearly property crime pay-outs, of which billions of dollars in false insurance claims are paid to clever criminals. The result is tantamount to significant rewards for criminal ingenuity. In 2008, for example, the most recent year of tabulated crime statistics, total property crime losses exceeded $17 billion. It s significant to note that while the reported incidents of property crime have decreased, nationally, during the past decade, with a decline in the number of motor vehicle thefts down approximately 8 percent, the estimated dollar loss, excluding arson, has increased slightly, from $16.2 billion in 2004 to $17.2 billion in 2008. Of the $17.2B total, however, crimes related to reported motor vehicle theft, which by conservative estimates at least 15 20 percent, or more, are deemed by law enforcement investigators to be fraudulent, the total has been relatively unchanged during the past decade ($7.4B in 1992, $6.4B in 2008) attributed in large measure to the increased value of vehicles involved in reported thefts offsetting the decrease in vehicle crime. The property crime losses published in the FBI s publication, Crime in The United States, which are based primarily on reported theft claims, because of other cost factors, may not reflect the total economic impact of vehicle-related insurance fraud. In addition to the property crime losses shown in the chart (Major roperty Crime Losses 1992 to 2008), as a case in point, are the enormous additional costs borne by law enforcement agencies for the investigation of suspicious claims, as well as insurance industry Special Investigation Units (SIU s) and, in certain cases, the court system involved in processing cases. In the long run, however, taxpayers pay the bill. Major roperty Crime Losses 1992 to 2008 Category 1992 2000 2008 Larceny-Theft $7.6B $8.1B $10.8B & Burglary Vehicle Theft $7.6B $7.8B $6.4B Source: Crime in the United States - 2008 $15.2B $15.9B $17.2B age 1 of 8
Consistent with the relatively unchanged dollar value of reported vehicle thefts from 2004 to 2008 is the similar distribution of offenses, by region, with little more than a one-percent change in any category. Offense Distribution by Region 2008 Region % opulation % roperty MV Theft National Crime Northeast 18.1% 12.2% 10.0% Midwest 22.0 21.3 18.3 South 36.6 42.7 37.8 West 23.2 23.8 33.9 Source: Crime in the United States - 2008 Although too often considered by the general public as law enforcement or insurance company issues, and not of direct concern to the individual premium payer, the cost of insurance fraud is ultimately borne by the motoring public in the way of increased or sustained high premiums. Surprisingly, despite the overall decrease in reported vehicle crimes seen over the past twenty years, insurance rates have not decreased in any tangible way. One of the most innovative and effective measures ever taken to deter clever criminals from perpetrating vehicle insurance fraud are the mandatory vehicle inspection programs that have proven their effectiveness for many years in a number of states. re-insurance inspection provides insurers with validation that a vehicle actually exists, while graphically documenting the significant condition and details of a vehicle that are extremely valuable to law enforcement personnel or insurance company Special Investigation Units (SIU s), looking into suspicious claims. Effective anti-fraud, cost containment benefits hysical inspection can produce dramatic results in preventing large financial losses from being incurred and in helping recover losses paid on fraudulent claims. In this regard the importance of the information contained on the Standard label is invaluable. Insurance rates remain high because of increased vehicle crimes such as theft, vandalism and accidents, and the dramatic escalation of fraudulent personal injury protection (I) claims related to bodily injury. Results of the past few years show that the increase in the percentage of vehicle crime related to insurance fraud is lower in states with strong inspection laws. The net result is a containment of costs by insurance companies, stabilization of rates for the consumer and improved productivity for law enforcement agencies. re-insurance photo inspection is a result-oriented pro-active process, which allows insurance carriers to take action to prevent frauds from occurring, rather than allowing criminal activities to go unchallenged. Inspection also provides a dynamic investigative tool. hysical inspection reduces the possibility of future claims for theft of nonexistent or phantom cars or the repair of vehicles with prior damage. The first major breakthrough in implementing a fraud deterrent program with teeth occurred in New York State in 1977, when the state legislature passed the Auto Insurance Reform Act. This was followed by the enactment of Regulation 79", also known as the re-insurance Inspection rogram, and the hoto Inspection Law, almost immediately dealt a severe blow to a thriving vehicle-related insurance fraud industry. Almost immediately after passage, the vehicle inspection program, organized rings were sent scurrying to other states without such deterrents. age 2 of 8
Since its implementation of New York s Regulation 79 in the early 70's, the regulation has been updated and expanded to effectively deter and detect vehicle theft and insurance fraud. As a result of the combined efforts of the re-insurance Inspection rogram, and the creation of fraudfighting organizations, such as New York s Anti Car Theft and Fraud Association (ACT), mandatory membership of insurance carriers in the National Insurance Crime Bureau (NICB), and the requirement that each carrier have a Special Investigative Unit (SIU) were important measures implemented to reduce insurance fraud and its related economic consequences, theft rates have decreased by 82% since 1990. As a measure of performance of pre-insurance inspection, loss ratios for physical damage coverage have decreased 20% during the last 15 years to a current level of 6.9% below the national average. Coupled with the fact that prior to the pre-insurance inspection program, New York s theft rate was 65% higher than the national theft rate and is now 55% under the national rate. Inspection works! Although vehicle pre-insurance inspection is not new in concept, the process and benefits provided are as relevant as ever, perhaps greater considering the nation s economic problems during the past few years. Although the process and methodology of pre-insurance inspection are simple, the supporting technologies are remarkably versatile and powerful, supported by advanced digital imaging systems and sophisticated devices that provide near-instant capture and transmission of vital inspection report information. inspection system, supported by advanced imaging, a powerful database system, and unique data mining capabilities, enable law enforcement personnel and insurance industry SIU s to track down even the most experienced criminals profiting from insurance fraud. Small Fee, Huge Results Given the extremely modest cost to inspect a vehicle, the benefits to insurance company SIU s, law enforcement personnel involved in investigating suspicious and/or fraudulent claims, not to mention the vehicle s owner, and taxpayers, easily outweigh the modest cost of inspection. The extremely small cost of the one-time inspection process is insignificant contrasted with an insurance settlement for a fraudulent claim related to an expensive vehicle: in states with mandatory preinsurance inspection, even considering the existence of waivers that exempt certain vehicles from inspection regulations, a viable line of defense exists; in states without inspection programs, vehicle fraud rings have a far wider range of opportunities to profit handsomely from insurance fraud. In New York state, as an example, only 8.5% of all vehicles require inspection. The balance of vehicles are exempted, or waived from the requirement based on a variety of categories included in New York s inspection statute, Regulation 79, where, for example, vehicles with liability only coverage (app. 25% of all vehicles) are exempted from inspection regulations. Other waivers include categories such as: As proven in New York City by the innovative system implemented under former police commissioner, William Bratton, a former CARCO resident, data-driven police work pays off, as does the data-driven vehicle pre-insurance inspection system introduced about 30 years ago, and advanced year-by -year, by the CARCO Group, the pioneer and longtime leader in vehicle preinsurance inspection. The company s dynamic New vehicles purchased from a new car dealer. Commercially rated vehicles in a fleet of five or more. Vehicles older than seven years. Vehicles covered by insurance with the same carrier for four years or more. age 3 of 8
[Waiver categories Continued] Vehicles involved in transfers of books of business, from one carrier to another. A policy owner s vehicle that was inspected by prior carrier, when moving insurance to a new carrier. owerful Fraud Deterrents Vehicle pre-insurance effectively deters a variety of costly schemes to defraud an insurance carrier. In addition to invaluable deterrents, the process also provides investigators with dynamic tools. In states with mandatory programs or even in voluntary programs, the inspection process produces dramatic results when used as a requisite to obtain insurance coverage on a newly purchased used vehicle. It is, in fact, one of the most effective means to contain insurance premium costs. A system that requires a vehicle owner to demonstrate that the vehicle being insured actually exists, and to have its condition documented before a policy is issued, arguably deters knowledgeable criminals from attempting to perpetrate a fraudulent claim. In the event that a suspicious claim has to be investigated, inspection data and investigative tools are exceptionally valuable. As part of the inspection process, the vehicle s physical condition, and documentation, are carefully examined and recorded by an inspector, as part of an inspection report, which may also include notations of expensive accessories and optional equipment. The inspector s report is supplemented by high quality digital color images including exterior views of the vehicle and a close-up photo of the all-important Federal Motor Vehicle Safety Standard Label, often referred to as the EA Label, which provides investigators the most reliable information about the vehicle. The label is typically found on the driver s side door or door post. Typical Inspection Report The inspection report, supplemented by digital color photos, creates a powerful investigative resource: a permanent record of the vehicle's birth certificate: documentation, manufacturing information, appearance, and condition. Benefits of the Safety Standard Label One of the most versatile informational derivatives of the inspection process is the digital close-up image of the EA Label. The twofold value of the information shown on the label photo or even missing information that can provide the investigator with additional clues, such as indications of tampering allows law enforcement and SIU s to acquire distinct clues to be used in evaluating suspicious claims, while providing the means to track and detect salvaged and/or stolen vehicles. It also sheds light on the method of operation of crime rings or individuals regularly involved in insurance fraud. age 4 of 8
The proven vehicle fraud deterrent Federal Motor Vehicle Safety Standard Label Numerous visual and discreet data-related irregularities shown in the label photo provide starting points for investigators to assess irregularities and alert signals of an attempt to alter information. In addition to its value as a permanent record of the VIN, the label photo provides the means to check the vehicle's authenticity and identify imported vehicles that do not comply with U.S. safety standards. Because it is designed to be virtually tamper-proof, and cannot be removed without being defaced or visually altered in appearance, it is useful in determining if a vehicle has been in an accident or has been repainted. Counterfeit labels are frequently discovered after close examination of the photographs attached to the inspection report. The fraudulent label photo may display obvious physical or informational flaws such as the wrong type of sticker for the model year, or a background color shown through the data windows that does not match the vehicle's color. To the investigator's trained eye, the label can reveal a host of sins, the most flagrant being a VIN that does not match the specifications of the car. Other errors include label designs that do not match the model year or incorrect alignment of data in the upper window. re-insurance inspection is an effective, proven deterrent to vehicle insurance fraud. It is, in fact, the only deterrent that has shown significant results year after year. Embodied in the mix of traditional vehicle insurance frauds, and some of a more contemporary nature that can be deterred by pre-insurance inspection or in which investigators using unique tools provided by the process are able to effectively investigate frauds that have been perpetrated is the array of costly schemes shown below. re-insurance inspection deters a variety of costly schemes including: Cloned vehicle schemes (duplicate car frauds) involve copying VIN data from a legally owned and documented vehicle using the data as the basis to produce counterfeit labels or VIN tags for use on a similar model stolen vehicle. "aper Car" and counterfeit title frauds. Salvage schemes that involve titles and VIN plates from salvaged vehicles. Insuring a vehicle with a number of carriers. Duplicate title frauds to collect claims from the sale of a vehicle and false theft claims. Import-export frauds using documentation for vehicles residing in other countries. Theft of a nonexistent or "phantom" vehicle. Damage that existed when a vehicle was purchased. Theft of equipment and accessories not in the vehicle.... and others. age 5 of 8
The Inspection rocess The physical inspection process begins with an inspector examining the vehicle s condition and contents, and taking digital photos of key elements such as the vehicle s exterior and EA Label, which includes the Vehicle Identification Number, or VIN. The simple process provides the substance to assess the validity of future claims for the theft of nonexistent or phantom vehicles, or damage claims. The report data also helps policy holders obtain fair claim settlements. The alphanumeric sequence is copied from the VIN plate, which is visible through the windshield. The completed report and digital images are immediately transmitted to a central database facility where the computer checks the authenticity of the VIN to ensure that the vehicle and VIN match. In the event of an informational disparity the insurance carrier is alerted that further investigation may be needed. The make, model, year and odometer reading are recorded on the inspection report, along with notations related to expensive accessories, optional equipment and an evaluation of the vehicle s physical condition. A minimum of three digital color photos are taken including two oblique views showing the rear and side of the vehicle, and the front and opposite side, and a close-up of the Federal Motor Vehicle Safety Standard Label, located on the driver s side door or door post. Digital images are recorded with a sophisticated hand-held wireless scanning imaging transmission device, which allows inspectors to document and instantly transmit inspection reports, with photos of the car and EA Label, to the processing center and/or the insurance carrier. The high-tech system includes a bar code scanner, high-resolution autofocus color camera and Bluetooth connectivity. If required, additional photos of physical damage [interior or exterior] are taken. 3/4 Front View of Vehicle 3/4 Rear View of Vehicle The primary benefits of the inspection process are realized after the information is integrated into a central computer database. Once the data from the inspection report and the Standard label are entered, information can be retrieved quickly for routine claim checking or investigative purposes. After entry, a special computer software program, decides the validity of the VIN in seconds. If the calculations do not conform to the software's validation parameters, a "Bad VIN" warning, or Alert appears on the computer monitor, signaling an attempted fraud. age 6 of 8
NMVTIS an important shift from a statebased to a national program The NMVTIS rogram, administered by the American Association of Motor Vehicle Administrators (AAMVA), with oversight by the Department of Justice, is a national system that allows vehicle titling agencies to verify information included on a vehicle s paper title with corresponding electronic data from the state that issued the title: the process is near-instant and reliable. A key objective of the NMVTIS program is to reduce vehicle crime, and fraud, thereby saving insurance companies, premium payers and taxpayers a great deal of money. Among the program s objectives is an improvement in the state vehicle titling process, and getting essential data to law enforcement agencies and consumers. The rogram provides exceptional opportunities to investigate vehicle fraud cases throughout the country, facilitated through the availability of a network of valuable powerful, sophisticated, databases including the CARCO Groups inspection database. For many years the different laws covering vehicle registration and insurance in individual states have impeded the process of tracking fraudulent claims on a national level. Today, however, with the NMVTIS program (National Motor Vehicle Title Information System) making strides on a national level, exceptional opportunities exist to track a vehicle s ownership from the time it rolls off the assembly line to the time that it is legally scrapped. The rogram provides the mechanism for blocking clones, preventing the re-introduction of branded or flood vehicles from being sold to unsuspecting buyers, and preventing the use of exported VIN s. Stated objectives of the NMVTIS rogram: revent the introduction or reintroduction of stolen motor vehicles into interstate commerce; rotect states, consumers (both individual and commercial), and other entities from fraud; Reduce the use of stolen vehicles for illicit purposes including funding of criminal enterprises; rovide consumer protection from unsafe vehicles. Reporting to NMVTIS State motor vehicle titling agencies. Insurance carriers (and some selfinsuring entities) Junk and salvage yards, auto recyclers. The ability to quickly access electronic data that is instrumental in validating the authenticity of vehicles including titling and salvage data, and the vehicle s physical attributes and condition prior to the issuance of insurance coverage is a potent deterrent to insurance fraud. Coupled with the steady movement toward a nationwide program such as NMVTIS the potential of significantly reducing vehicle insurance fraud even further than current measures will result in major financial benefits to insurance carriers, policy owners and taxpayers. ##### age 7 of 8
About the author Bill Frink has played a key role in developing and implementing vehicle pre-insurance inspection systems since the inception of the first mandated program more than thirty years ago. Because of his direct involvement in the industry, in virtually every aspect of pre-insurance inspection systems and technology, from managing an inspection company to participating in investigations of insurance fraud cases, he has a unique, broadranging perspective on the most effective deterrents to vehicle-related insurance crime. An acknowledged pioneer in the industry, he is arguably one of the leading authorities on the regulations governing pre-insurance inspection. age 8 of 8