Do Insurers Get Their Money’s Worth from Fighting Fraud?

The simple answer is “yes” and “no.” The more difficult question to answer is how to quantify the savings, if any.

A report from the Insurance Services Office (ISO) commented:

1. Insurers consider fraud a serious problem but their companies’ Anti-fraud efforts are only moderately effective;

2. Sixty-eight percent say their companies’ anti-fraud programs address claims fraud thoroughly;”

3. 19 percent say they address premium fraud “thoroughly”;

4. 25 percent say they address application fraud “thoroughly;”

5. Slightly more than one-third (37 percent) think the amount of fraud their companies have experienced has increased over the past three years;

6. Forty-two percent think that 21 percent or more of total claims contain “soft” fraud, but only 6 percent think that 21 percent or more of claims contain “hard” fraud. They agree that fraud is most prevalent in the private passenger auto and workers compensation lines of business;

7. Eighty-two percent of the 353 insurers responding to the survey say they have an anti-fraud program at their companies;

8. One hundred percent of the large insurers, 91 percent of the medium insurers, and 64 percent of the small insurers have an anti-fraud program;

9. Sixty-three percent of the companies say that the state or states in which their companies do business require an anti-fraud plan; and

10. Only 13 percent of insurers doing business in these states consider state requirements and guidelines very useful.

Because less than one-third of respondents answered questions about their companies’ expenditures, estimates of industry-wide spending on anti-fraud efforts are not reliable. The response rate suggests that insurers are unable to isolate anti-fraud expenditures in their budgets or unwilling to share what figures they have with other insurers and the general public.

The Coalition Against Insurance Fraud reported that attempts to measure insurance fraud have either been broad estimates, one-time snapshots, or narrowly focused on a single area, such as bodily injury fraud. The most-notable efforts include:

Coalition Against Insurance Fraud: Publishes annual estimates for claims fraud in four areas of insurance (auto, homeowners, health and business). Estimates are based on extrapolations of previous industry and government estimates of fraud.

· Latest national estimate for claims fraud in the U.S. is $79 billion from the National Insurance Crime Bureau.

Estimates that insurance fraud totals $18 billion to $20 billion.

Estimate focuses on property-casualty insurance, but news media and others often misinterpret this figure to include fraud across all lines.

Conning & Company.

Published a landmark study on insurance fraud in 1996 that estimated claims fraud at $120 billion, mostly based on other estimates.

U.S. Government Accounting Office (GAO).

Published a 1992 study that estimated fraud and abuse in Medicare and Medicaid reached as much as $100 billion annually.

Insurance Research Council.

Conducted a closed-claim study in 1995 of automobile bodily injury claims that concluded about 36 percent of those claims had signs of fraud or buildup. While 18 percent of the claims were suspected of being fraudulent, only one in five were thought to be planned as a staged or caused accident

Automobile Insurers Bureau of Massachusetts.

Conducted the original closed claim study in 1991 that found 11 percent of auto bodily injury liability claims were suspected of fraud, with an additional 21 percent judged to be buildup claims.

Rand Corporation.

Conducted a study of the Insurance Research Council data of bodily injury liability and no-fault claims that concluded that about 28 percent of all claims submitted by auto accident victims are exaggerated for the purpose of collecting insurance payments.

U.S. Chamber of Commerce.

Reported that 25 percent of all workers compensation claims are fraudulent.

· The varying estimates are confusing and often contradictory, and the statistical methods do not always hold up to rigorous analysis. When examined by the public, media and legislators, these figures fail to definitively measure how large the fraud problem really is.

A common belief in the insurance industry is that most SIUs systematically measure their return on investment to their companies. This is an inaccurate belief. For example, one large personal lines insurer refuses to measure its SIU operation, contending that whatever the savings, an aggressive anti-fraud program is in the best interest of policyholders and is “the right thing to do.” Other insurers downplay measurement for fear that such a system could be used against them in civil litigation that the company unfairly denies claims, perhaps even legitimate ones.

It is impossible to measure the intangible benefits of SIUs. The mere creation of a fraud-fighting entity should help deter crime, yet actually measuring that deterrence is nearly impossible. SIUs also review claims files that are quickly determined to be legitimate claims and allow insurers to pay claimants promptly and close files quickly. In most large organizations the SIU recommends payment of claims more often than they recommend denial for fraud.

State Fraud bureaus or Fraud Divisions should use consistent and continual measurements. Perhaps because of the culture and requirements of state government, developing a uniform system would be easier and less-demanding, especially since many of the current units already capture data necessary to file annual reports to their legislatures, governors and state insurance commissioners.

The structure of fraud bureaus varies from state to state, as does their focus, funding and capabilities. Some deal with all types of insurance and insurance fraud, while others narrowly focus on workers’ compensation or auto insurance.

Capabilities vary even more. A few state units have more than 100 investigators, full police powers and the ability to prosecute, while others employ just a handful (as few as four or five) investigators with few or no special powers.

Previous attempts to measure the effectiveness of fraud bureaus and fraud divisions have included the following data points:

· Number of employees

· Number of investigators

· Years of existence

·  Where in state government is the agency housed

· Total budget, budget as a fraction of insurance lines covered premium

· Number of pending cases, arrests, cases referred to prosecution, cases prosecuted and convictions — criminal and civil.

Adapted from the book “Insurance Fraud – Volume I