Insurance Fraud

Should commercial insurance buyers be concerned about insurance fraud? The answer has to be "yes." It is costing them money.

Insurance fraud is becoming rampant with estimates of the cost of such fraud in the billions of dollars. New York State alone reports that the automobile injury fraud racket costs $1 billion a year. Workers' Compensation (WC) fraud is big and growing, and the New York State Insurance Department has made WC fraud one of its priorities this year. Its Fraud Bureau is comprised of the following specialized units.

• Auto Unit for stolen automobile fraud.
• Fraudulent Cards Unit pursues those issuing phony auto insurance identification cards.
• General Unit investigates arson, burglary, lost property, homeowners, life insurance and surety bond fraud.
• Medical Unit investigates fraudulent and inflated health insurance claims.
• No Fault/Organized Fraud Unit focuses on fraudulent no-fault medical claims.
• Workers' Compensation Unit focuses on fraudulent workplace injuries and claims of those who defraud the WC system.

Insurance departments and law enforcement agencies throughout the country are working hard to find and reduce every kind of insurance fraud. Automobile theft is big business in New York. In 2002, the number of auto thefts ranged from 51 in Elmira to 30,576 in New York City. Buffalo/Niagara Falls and the Rochester regions both exceeded 3,000. California's 2002 automobile thefts ranged from 361 in the San Luis Obispo area to 71,079 in the Los Angeles/Long Beach area. "Chop shops" that dismantle stolen cars to sell their parts are a big part of the problem.

Automobile injury fraud is even bigger. A recent two-month crackdown on no-fault injury fraud in New York resulted in over 700 arrests and indictments, and there are 22 investigations underway in and around New York City. Organized crime, using staged accidents and complicit medical providers, has increased the cost of Automobile no-fault insurance. With better fraud detection and enforcement, the rate of increase of no-fault loss costs may be stabilizing, according to New York's insurance superintendent.

Surveillance and other tools (including "dumpster diving") are being used to reduce fraud. A new tool that has been used for over a year by some insurers in the United Kingdom, and is now being tried by New Mexico's insurance superintendent, is a voice stress analyzer. It is tied into call centers and the voices of persons reporting or making statements about their claims are analyzed for truthfulness. This setup analyzes a person's voice patterns for emotional stress by examining sound frequencies. At the beginning of a conversation a person is asked for neutral information to establish a baseline for stress level comparison. The equipment then provides feedback as to truthfulness, stress, level of anticipation, uncertainty and cognitive effort. The UK insurers using this technology say their fraud detection has risen from 5% before its use to 18% since they have been using it. We wonder when someone will invent a scanner to determine the truthfulness of the written word.

The costs of fraud are, of course, included in the insurance rates being paid by individuals and businesses. In an effort to reduce the cost of fraud, many insurers have established their own fraud units and are playing "hard ball" with claims they think may be fraudulent. We hear there have been cases where insurers do not pay some arson claims requiring the insured to take legal action if they want their money and can withstand the scrutiny of the courts.

So, the answer to the initial question is that everyone who buys insurance should be concerned about fraud. At a time when we are all trying to keep insurance costs down, it is an unnecessary part of the premium we should not have to pay for.

-- Ernest A. Holfoth, CPCU

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