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What if Auto Claims Just Keep Dropping?

This week’s announcement by the National Insurance Crime Bureau (NICB) that vehicle theft is down by more than 50% compared with 1991, despite an increase in population and registrations of more than 60 million cars, caused me to consider the much bigger implications of shrinking frequency in the entire category of auto claims and what it means to the $200 billion-plus U.S. auto insurance industry.

In an impressive achievement, auto claims frequency has been creeping down slowly but surely since the 1986 new vehicle model year, when high-mounted brake lights became standard equipment by federal mandate. While fluctuations did occur in some years, caused by a variety of macroeconomic factors, the trend is assuredly downward. Factors include an aging driver population, reductions in miles driven because of a protracted recession and increasing gas prices, increased migration to more urban areas and the emergence of alternative transportation models.

Without becoming distracted by the nuances of frequency variations between various lines of auto insurance coverage (physical damage; collision and comprehensive and liability; bodily injury and property damage), the fact is that the net overall accident frequency trend continues downward. Indeed, adjusted loss ratios for auto insurance carriers fell to an industry average 65.8 in 2013, and some carriers posted even better results. Lower auto claim frequency was clearly a factor.

Add to this: the increasing introduction by almost all automakers of driver-assist and crash-avoidance technologies; the rapid penetration of telematics that enable real-time driving hazard and safety alerts; and the specter of fully autonomous (self-driving) vehicles coming faster than anyone might imagine. Further dramatic auto claim frequency reduction can be considered a certainty.

The auto insurance premium pie is set to get smaller. Younger consumers, increasingly urban dwellers, are shunning vehicle ownership for improved public transportation systems, municipal-sponsored bicycle-sharing programs and vehicle and ride sharing. And, over the recent prolonged recession, those who did purchase auto insurance become comfortable with higher deductibles as a means of reducing premium costs. That behavior is not likely to change. Usage-based insurance (UBI) programs, at least so far, have attracted mainly drivers with safer records, as well as low-mileage drivers. So, UBI has further eroded auto premium. The claim and loss-cost improvements from these programs anticipated by carriers may or may not materialize in time, but that will depend on carriers learning to leverage data and create custom products much more effectively.

Ironically, the auto claim was known as “the moment of truth” for auto insurers – their chance to reinforce the loyalty of policyholders by making good on their service promises at a challenging time for the customer. As the number of opportunities for carriers to provide claim service excellence diminishes, they will have to find alternative customer engagement strategies. Risk reduction and accident avoidance could just be that opportunity.

Regardless, the bottom line is this: Auto insurance carriers (as well as their key trading and supply chain partners) should start today to position themselves to survive in a market that is slowly but surely shrinking and changing.

The Key to Success: a Workers’ Comp Audit

Third-party administrators (TPAs) promise to manage workers’ comp costs for employers through vigilant review and through discounts on medical care that they can provide because of their access to preferred provider organizations (PPOs), but consider the experience of a Fortune 25 client of mine. My analysis found that, despite the discounts, after all the TPA charges for medical bill review the company was paying $1.10 for every $1.00 in workers comp medical bills submitted for payment.My report showed my client could get a 10% savings on its workers’ comp program by not having a bill review program with its TPA and just paying all bills at 100%!

To avoid similar problems and to find maximum savings, employers should, at minimum, conduct an annual review of their claims handling. TPAs and insurers do their own reviews, but when is the last time such a report concluded, “We need to do a better job”? Although long-term relationships with TPAs or insurers are generally a good thing, employers should adopt the President Reagan admonition to “trust, but verify.”

The need for claims audits is especially great in times like the present, because a weak economy has historically correlated with increased potential for fraud and abuse. In a report released last year by the National Insurance Crime Bureau, the number of questionable claims was up 28% in 2012. The three major reasons were: workers filing claims based on prior injuries not related to the workplace; malingering; and just plain old fraud.

The annual reviews should employ four standards. The first should be verification that the TPAs/insurers performance measurements and contractual obligations are being met. An outside independent claim audit should identify all the things that the claims administrator is doing well, along with identifying areas for improvement.

The audit should actually help TPAs and insurers that have performance bonuses built into their contracts. I have also found that an independent analysis often discovers that the employer causes many of the problems by reporting claims late, by communicating poorly or by lacking a return-to-work program. Such barriers are difficult for even the best claim administrators to overcome. Claim administrators often find it difficult to tell the employer that the emperor has no clothes. A good consultant can, through an independent audit.

The second standard of review should be to determine if the claim administrator is meeting its own internal standards, policies and procedures, such as caseloads per adjuster, quality controls, activity checks and timeliness of benefit payments.

The third level of review should be to compare the claim administrator’s standards, policies and procedures to widely accepted industry best practices, such as: initial claim investigation, three-point contact, return-to-work action plans, referral to medical case management and use of independent medical examiners.

The fourth level of review should be comparison to an ideal vision of a workers’ comp program. If you could play Santa Claus and had an unlimited budget, what changes, resources and areas of improvement would you like to see? You would be surprised what great ideas spring from that question, that actually don’t cost a lot of money to implement.

My experience in the workers’ compensation industry began with learning the business from the treating provider’s viewpoint. To this day, that occupational medical practice’s 24-hour medical triage program to local employers is the best model I have ever seen: Get the injured worker to the best provider and facility from the moment of injury based on the nature and severity of the injury. All claimants by definition are patients who have a work-related injury or illness before they become claimants, or at least say they do. (Excuse me for being cynical, but I grew up in tough industrial town in New Jersey where committing workers’ comp fraud was apparently easy and was considered a badge of honor at the neighborhood tavern.)

Virtually every expert agrees that the most effective cost-containment activities should take place within the first 24 hours of a worker’s seeking medical treatment, yet this is rarely the focus of the multibillion-dollar managed care industry. Instead, that focus has been on generating huge profits by selling “percentage of saving” arrangements based on PPO “discounts.” Audits can help return the focus to where it should be.

Audits can also provide the setting for spotting lots of other problems. For instance, a large, self-insured and self-administered trucking company went through every group health medical claim with a fine tooth comb, but all workers’ comp medical bills were stamped to be paid at 100%. When I asked why, the risk manager replied, “Because workers’ comp requires us to pay 100% of medical.” I pointed out the golden rule, that his statement only applied for reasonable and necessary care related to the injury or illness up to the point of maximum medical improvement (MMI). I felt like Thomas Edison when I saw the light bulb go on above his head. That was the beginning of the end of the policy to pay all workers’ comp medical bills at 100% of billed charges.

One of my favorite career moments stems from an interview with a senior executive at a TPA, on behalf of its largest client. I asked him about his quality-assurance program. His answer was, “As you know, we are historically weak in this area.” Weeks later, the client asked why I gave their quality-assurance program such a poor grade. My written response was: “Because they are historically weak in this area.”

I begin consulting engagements with corporate clients by asking, “It is 9:00 a.m.; what will happen if you have a work-related injury at 10 a.m.?” Two of my favorite responses were: “That’s a good question. I have no idea”; and, “We send everyone to the emergency room.” I replied to the second answer with, “And then what?” The silence was deafening. That type of response is always dynamite for my claim-audit/cost-containment reports.

First three things I want to know are: Who is the treating provider? Where are the medical reports and documentation? What was done with them?

I have always told my clients that the first time they see a doctor and a lawyer on the same claim file, it is a coincidence. The second time, it is a conspiracy.

Why conduct a workers’ comp claim audit? Because it is where the rubber meets the road.

Speed To Detection: A Progressive And Strategic Concept Using Advanced Anti-Fraud Analytics

The recent natural disasters in Oklahoma and New Jersey, and the wildfire season in the western United States, have a lot in common when one thinks both of insurance risk — plus the intended and unintended consequences of these events.

The insurance industry knows natural disasters will happen. The industry thus creates and follows protocols and response plans. For the most part, the industry and public-safety officials handle the crisis, and restore calm and order in our communities.

The insurance industry knows these events will occur, and planning is generally pretty solid per the axiom, “If it’s predictable, it’s preventable.”

But in the world of insurance fraud, many sectors of the insurance industry seem to lack the same energy to mitigate this crime. Using the same acumen gained from restoring order after disasters, the key is to apply the same proven strategies of history, response, performance and mitigation of future risks. This approach will better help combat insurance fraud with equal success.

The modern strategy of “speed to detection” is a uniting principal and operating strategy for mitigating the epidemic of fraudulent claims.

Optimizing speed to detection involves synchronizing all layers of insurer personnel into informed, enterprise-wide fraud fighters. They are well-trained to spot warning signs of this crime, personally motivated, and encouraged to follow internal processes that allow open lines of communication about fraud leads, needed process improvements and action solutions.

Bogus claims thus can be discovered and mitigated faster. Quick detection also is an intimidating deterrent that can convince more fraudsters to avoid trying to breach that insurer. The risk of arrest and conviction is too high, and odds of financial reward are too low.

Speed to detection is a timely precept: Insurers today are confronting a persistent crime that is morphing, in many respects, to higher levels of sophistication and ability to steal insurance money.

Insurance fraud harms law-abiding consumers (higher premiums), aids the underground economy, facilitates other illegal enterprises such as trade-based money-laundering, and poses a public-safety threat (e.g., staged automobile collisions, arson, murder for life insurance, needless medical procedures).

Conservatively, fraud steals $80 billion a year across all lines of insurance.1 Some estimates rate the annual losses much higher.

And the problem is growing. Questionable property-casualty claims in the U.S. have increased 27 percent in 2012 over 2010, the National Insurance Crime Bureau (NICB) says in an analysis of its database of claims released in May.

That reflects 91,652 questionable claims in 2010 compared to 116,171 claims in 2012.2 Similarly, most consumer research reveals a disturbing public cynicism about this crime, and even a backslide toward higher consumer tolerance of fraud.3

Confronting this epidemic is a large network of organizations dedicated to minimizing fraud as a virulent national threat.

Insurance companies have teams of experts (the Special Investigation Unit, or SIU) trained to deal with suspicious claims.

State law-enforcement agencies have created specialized departments and bureaus dedicated to thwarting this crime.

State insurance departments have strengthened their processes for identifying, investigating and reporting suspicious claims for potential prosecution.

States also have enacted numerous fraud laws and regulations that further strengthen enforcement. More are being added or bolstered every year.

At first glance, these processes appear sound, prudent and presumably effective. A lot of money, personnel and effort have been thrown at insurance fraud. Shouldn’t schemes be going down instead of up? Or at minimum, leveling off?

Many of the following observations are guided by my 32 years of combating insurance fraud, including several years as a Bureau Chief, and one year as the Division Chief with the nation’s largest anti-fraud unit, the California Department of Insurance, Fraud Division. Some academic backup also is cited for added information.

Despite the large defense shield, growing numbers of insurance executives at the decisionmaking levels — inside and outside the anti-fraud ranks — are frustrated about how fraud persists as a costly national epidemic.

To illustrate: In recent years, I have provided consulting and analysis and review of first-party bad-faith cases involving fraud, the actions of SIUs in a claim or series of claims, and expertise for qui tam civil actions by insurance companies.

In these many interactions with insurance executives, anti-fraud directors and other colleagues throughout the industry, the frustrated question they ask most often about fraud is: “Why do we keep throwing money at a crime that never seems to go away?”

Typically they offer two reasons why fraud remains so vexing and persistent:

“The insurance system invites fraud.” Indeed, our insurance system is one of the best in the world. But the most skillful fraudsters effectively exploit weaknesses when the system is not synchronized and calibrated among partners to create a hardened shield.

“We need the best team to investigate these crimes.” Insurance companies and government entities are constantly working to create an elusive Dream Team for investigations. Key ingredients of team members are passion, creativity, and ability to wade through a series of complex conspiracies either to deny a claim, or have an offender arrested and prosecuted.

Many insurers are frustrated because qualified people with the acumen to investigate fraud are hard to come by. Time after time, when insurance carriers lose bad-faith lawsuits involving the SIU and fraud, some of the common denominators are training, unqualified people and bad leadership decisions.

An important reason fraud appears to keep rising is that insurance companies and regulators are slow to recognize the value and impact of anti-fraud technology leveraged with best business practices.

The anti-fraud community needs to rethink its strategies, and examine ways to identify problems and risks before they become crimes.

Resources should be synchronized to optimize speed to detection.

This requires insurers to have their anti-fraud operations well-aligned with their internal corporate structure, strategies and practices — and with external partners such as state fraud bureaus, law enforcement and NICB.

Reaching this goal must start with an honest discussion about technology and other best practices. A major problem is that too many insurers use outmoded methods of fraud detection. These methods have little impact on modern, sophisticated fraud rings that are a significant source of money outflow.

Meanwhile, insurance fraud is evolving and organized crime increasingly is infiltrating fraud. Such rings have been around for years, but their sheer number and growing sophistication are changing the criminal landscape. Many insurers aren’t equipped to counter this new breed of criminal, especially using indicators.

Recently, I gave a presentation at the Insurance Fraud Management Symposium (IFM). This is the largest annual conference of insurer anti-fraud directors, executives and other personnel.4 The presentation covered a major criminal investigation and prosecution involving a staged accident ring in Southern California.

This case illustrates two frequent insurer vulnerabilities: a) over-reliance on weak fraud indicators that allowed fraudsters to penetrate the insurer’s anti-fraud defenses relatively easily; and b) how vulnerable insurers become when they compromise their business processes by speeding up claims payouts by compromising vigilance.

The leader of this criminal enterprise joined me in the presentation. He was under court order to assist the California Division of Insurance in public education after his conviction.

He related how he ran the operation, who he involved, and how and why he targeted specific insurance companies with bogus injury claims from the setup collisions.

He made a chilling point:

“You will never win the war on fraud.”

He urged insurers to avoid over-reliance on the so-called “indicators” they use to identify fraudulent claims. Indicators are a relatively basic investigative tool. Insurers look for specific actions or behaviors that are red flags of possible fraud during the claims process. With staged accidents, for example, indicators might include flags such as multiple people in both vehicles, expensive treatment at the same clinic, and similar last names to suggest a possible family fraud ring.

This ringleader knew the indicators well, probably better than some claims staff. Thus he could rig his crashes and phony claims to easily avoid being detected by common flags. Just as important, he also relied on inexperienced and untrained claims representatives to give in and pay claims with little scrutiny.

“It is a game of poker: Who is going to bluff the best, and who will stay in the game with a winning hand?” he warned.

In a similarly illustrative case, Greg Foshee was educated, articulate and knew the insurance claims system well. He should have. Foshee was a claims representative for one of the nation’s largest property-casualty insurers. He saw large profit potential when his supervisor ordered him to “just process the claims.”

So Foshee went to the “dark side.” He started staging vehicle accidents and then helped process the ensuing bogus injury claims without insurer scrutiny.

He staged more than 82 vehicle collisions that stole $1 million worth of insurance money. During questioning after his arrest, Foshee said his supervisors told him: “Don’t ask too many questions, just get the claims off your desk.”

Foshee used multiple individuals with multiple valid drivers licenses from several states. He kept the operation simple to avoid detection. He had only 13 ring members, with just three cohorts working full time and controlling the group.

Nor did Foshee involve attorneys and physicians. They would have slowed the claims, and he would have had to split the ill-gotten insurance money with them.

He made smaller claims just for vehicle damage and minor medical treatments in order to stay under insurer radars. The treatments usually consisted of an emergency-room visit for subjective injuries such as whiplash that are typically associated with minor traffic accidents.

Foshee also knew that if his ring members went to emergency rooms too often in a given city, someone might notice and start asking questions. So instead he created false medical bills and treatment reports using letterhead and forms stolen from the hospital.

If the targeted insurance companies had simply called the hospitals to verify patient information, they would have discovered that the so-called patients were never treated there. This would have confirmed that the treatment reports and bills were false.

Foshee averaged $10,000-12,000 income per staged accident, and went undetected for several years. He knew how the claims process worked, and how to avoid scrutiny and detection. The California Highway Patrol’s Investigations Unit completed the investigation in 1988. Foshee was convicted of insurance fraud, conspiracy, grand theft, and was sentenced to several years in state prison.

Let’s think about this for a minute … These aren’t isolated cases. Over the last 30 years, large segments of the insurance industry, law enforcement and other government agencies have relied heavily on old-fashioned indicators of false claims, and similar basic tools. These indicators have been identified, written, promulgated, and used in the daily business of receiving and closing insurance claims.

Reality check, please?

The crime rings knew the insurers’ fraud indicators, and avoided them. The insurers also compromised their internal anti-fraud processes to turn around claims quickly. Many other organized fraud groups and bold criminal entrepreneurs like these are operating daily, skillfully compromising the insurer claims systems. Collectively, they likely steal millions of dollars everyday. Whether detected or undetected, usually it is too late to recoup the stolen money.

Rethinking The Fraud Fight
If speed to detection is to move from an energizing concept to transformative anti-fraud practice, fraud fighters must step out of the indicator box and rethink their entire approach to combating modern, emerging threats such as complex and organized crime rings.

Some insurers just seem to be going through the motions of fighting fraud, indicators and all. But the more progressive insurers are transforming their internal cultures and business practices to create a coordinated, enterprise-wide response to this crime.

They are taking the fight more directly to the criminal underworld instead of waiting for the underworld to come to them. As a result, these insurers are also far more resistant to schemers of all kinds.

Insurance companies and government agencies need the ability to change direction quickly to address emerging fraud schemes, trends and problems. Nimbleness is a key attribute of sophisticated fraudsters. It also should be a core trait of every insurer’s speed-to-detection process.

The goal is not to eliminate fraud indicators or other basic tools. These tools may play a role in the overall mix of anti-fraud business processes and strategies each insurer custom fits for its own anti-fraud challenges.

Several strategic best practices can help optimize speed to detection.

Advanced Analytics
Advanced analytics rank among today’s most transformative best practices for increasing speed to detection and allowing better-informed decision making.5

Analytics involves the discovery and practical use of meaningful patterns of anti-fraud data. Properly marshaled, advanced analytics can quickly move insurers miles beyond indicators. Analytics can reduce the ineffective pay-and-chase mindset of many insurer detection processes. Analytics also can put insurers quickly on the offensive, and thus dramatically increasing speed to detection.

Advanced analytics tools come in many flavors. Each organization must customize an analytics strategy to its unique challenges. Rarely is there one off-the-shelf software solution. Analytics solutions increasingly are being adopted by some insurers. Among the solutions that are gaining momentum:

Predictive analytics. Allows insurers to uncover suspicious activity in close to real time, and even to forecast the likelihood of potentially fraudulent behaviors.

Text analysis. Insurers can ferret out previously inaccessible data such as an adjuster’s field notes — even handwritten notes.

Social network (link) analysis. Helps an insurer examine relationships among organizations, people and transactions to discover suspiciously related claims that appear unrelated on the surface.

Social media analysis. More insurers recently have begun mining social media for clues. A workers compensation insurer, for example, might uncover a supposedly disabled worker posting photos of his Hawaiian surfing vacation on his Facebook page.

But analytics alone — whether advanced or more basic — cannot reverse the tide of fraud. Analytics must be supported by other best practices and processes.

Some insurers and smaller regulatory agencies believe the cost of advanced analytics platforms is too high, or that they do not have the data to support such robust systems.

But analytics can be affordable by starting small (don’t try to boil the ocean), and strategically planning to gradually layer in advanced analytics into the business process and technology platform. Start small, and build upon the new platform incrementally, first addressing immediate business needs and problems.

Marshall Big Data
Mobilizing big data is gaining wider attention in anti-fraud circles. Insurers are sitting on troves of data, hard and soft. Much is never accessed for fraud-fighting. Insurers can dramatically increase their anti-fraud assertiveness by insightfully accessing, analyzing and mobilizing their large volumes of untapped data.

But the terabytes and even petabytes can overwhelm an insurer’s analytical capabilities.

Insurers must invest in analytic expertise to retrieve, filter and use big data properly. Insurers also must know what questions to ask when mining for big data. This information will be more focused and useful, and avoid the confusion and fuzzy results that too much data can impose.

Limit Pay And Chase
Insurers must re-evaluate their reliance on the ineffective “pay-and-chase” model that drives the anti-fraud-strategies of so many insurers. Using this model, insurers routinely pay claims and then investigate afterward.

But the money is gone by then, and the trail is growing cold. It is rare for an insurance company, self-insured or government program to recover much or any stolen money. In fact, usually no money is recovered.

This is especially true of the larger, complex fraud rings that often operate internationally. They are adept at trade-based laundering of stolen insurance money through shell corporations.

Some insurance rings are learning from criminal brethren such as drug cartels in Mexico and South America. They are effectively laundering stolen money (e.g., proceeds from human trafficking, firearms and narcotics). They wash the money through sophisticated shell companies and corporations involved in global commerce. The money is difficult, if not impossible, to trace and recover.

In the public sector, Medicare once was the poster child for ineffective pay-and-chase practices. But the federal health program for seniors is replacing that approach in part by installing predictive analytics to uncover more false claims before payment.

Take On Difficult Cases
Simply going after safe, low-level frauds (i.e., low-hanging fruit such as an inflated claim from a home burglary) might look good on the anti-fraud unit’s statistics reports.

But this also may ignore the largest fraud problems and sources of claims-money outflow such as modern rings that steal safely and efficiently.

They often are organized like a classic cell network. Ring members do not know each other, nor do they know all activities in the enterprise. But advanced analytics can expose these complex groups and their crimes much faster and more efficiently.

Insurers must commit to taking on the difficult higher-dollar cases such as those perpetrated by organized crime rings, even if it entails considerable cost and personnel. This is essential to diminishing what for many insurers is a significant source of false claims payouts.

Collaboration
Better collaboration is essential to turning the corner on America’s fraud epidemic. This collaboration must include all stakeholder organizations and personnel.

Internal. Collaboration within an organization should be an enterprise-wide endeavor and operational commitment. For example, a) agents and brokers must speak with the claims staff; b) claims staff must communicate with the SIU team about suspicious claims; and c) employees at all levels must be encouraged to speak up and identify vulnerabilities, process breakdowns and needed solutions.

To underscore this point, visit another statement the fraud-ring member said at the IFM conference:

“We know when the insurance company will pay based on the actions and interaction with an inexperienced, and not properly trained, claims representative. And we also know which companies pay claims easily.”

External. Insurers must retain open lines of communication with state fraud bureaus, local law enforcement, state attorneys general, the FBI and other stakeholders.

Insurers in different lines of insurance also must collaborate. Auto, workers compensation and health insurers, for example, may find synergy by comparing best practices and exchanging case leads that may uncover hidden crimes.

Insurers in the public and private sectors also must better collaborate for the same reasons. Many organized crime rings, for example, defraud numerous insurance programs. A large Armenian crime ring in California, for instance, staged car crashes against auto insurers and also bilked Medicare. If public and private insurance programs share case leads, they can dramatically increase the joint knowledge base needed to more speedily break down that ring.

One promising collaborative effort is the new Fraud Prevention Partnership. It was formally announced last July by HHS Secretary Kathleen Sebelius and U.S. Attorney General Eric Holder.6

Medicare, private health insurers, automobile insurers and others are formalizing closer lines of cooperation. The partnership is building up its operating structure, and partnership members are beginning to share fruitful case leads. It could become a model for collaborative techniques.

The Payoff
Marshaling analytics and big data with current rules and indicators into a seamless and unified anti-fraud effort creates an expansive world of possibilities.

Imagine the ability to search a billion rows of data and derive incisive answers to complex questions in seconds.

Imagine being able to comb through huge numbers of claim files quickly.

Imagine more-quickly linking numerous ring members and entities acting in well-disguised concert. These suspects likely could not be detected with sole or even primary reliance on basic methods such as fraud indicators.

Ultimately, imagine analyzing entire caseloads faster and more completely, thus addressing the largest fraud problems and cost drivers in any of an insurer’s coverage territories.

Conclusion
Insurance companies are not in the anti-fraud business. They are in the business of managing a risk pool, mitigating those risks and returning a fair profit. Government law-enforcement agencies are specifically charged with preventing crime and disorder.

To prevent fraud, all involved organizations must scrutinize their systems with a fresh view and openness to evaluating how to better combat this crime.

Advanced analytics, coupled with sound business practices and preventive measures, will yield better anti-fraud results. For insurance swindlers, speed to detection should mean speed to jail.

1 Coalition Against Insurance Fraud, estimate of annual fraud losses.

2 U.S. Questionable Claims Report, National Insurance Crime Bureau, May 16, 2013.

3 Four Faces of Insurance Fraud, Coalition Against Fraud, 2007; Poor Service Leads to Fraudulent Claims, Accenture consumer survey, 2010.

4 An Insider’s Perspective on Automobile Insurance Fraud — Why It Is So Easy to Steal From Insurance Companies, and What To Do About It. White Paper by SAS, 2013.

5 Competing on Analytics, The New Science of Winning. Thomas H. Davenport and Jeanne Harris,
Harvard Business School Press. 2007.

6 New Anti-Fraud Partnership is a Force Multiplier, news release, Coalition Against Insurance Fraud, July 25, 2012.

An Inside Perspective On Automobile Insurance Fraud, Part 2

This is Part 2 in a two-part series on automobile insurance fraud. Part 1 in the series appears here.

Who Participates In This Type Of Insurance Fraud?

Just about anyone. You'd be surprised. Even people who consider themselves upstanding citizens will get drawn into the business, because they see it as a victimless crime. One of the first cases I investigated involved a college-educated, former Farmers Insurance adjuster from Ohio. One day, he just decided to go to the dark side of the earth and started staging collisions from Ohio to California. He got away with $11 million before we caught him and put him in prison. He had so much activity going on that he carried a briefcase with him, and in that briefcase were 13 valid licenses from Colorado, Ohio and Texas — all valid — along with lots of crib notes from all of his activity. In an unlucky turn of events for the fraudster, he was stopped for speeding one night. As he opened his briefcase to get out a driver's license, that sheaf of crib notes was visible to the highway patrol officer, who reached right over his head and grabbed it. Lesson learned. Keep your crib notes to yourself.

People don't necessarily set out to go into insurance fraud as a career, but it's easy to see the attraction, said Borloff. “When you're first introduced to the people in this business, they say, 'This guy, he's in the insurance business,' and everybody understands he doesn't have an insurance company, he's in a different side of the business. But he's a well-to-do guy, with a house in Beverly Hills, with a car, with everything. And you ask yourself, 'Why can he do it and I can't?' And then you start to learn.”

It starts easily enough. The newcomer becomes the defendant in one staged accident, and voilà, $1,000 just falls into his lap. “It's a big deal for this guy,” said Borloff. “He just calls the insurance company, and that's it, he's a rich man. He wants to do it again. Trust me, he wants to do it again and again.” However, a savvy criminal enterprise will not use this guy again. They will use another guy, then another. So now our newcomer is intrigued to work it from the other side of the fence, to run his own business.

First he needs to recruit lawyers and doctors — and that's surprisingly easy, said Borloff. Where would you find an attorney willing to take such a risk? “Word of mouth or the Yellow Pages,” Borloff quipped. “Any attorney wants more business.” The business is so attractive that it is relatively easy to find professionals who want to be a part of it.

“Think about it. Who is this lawyer guy? He spent three years in law school, and he spent a lot of money. He is out of school now, and he has a lot of debt. What can he get? He can get a job for about $40,000 to $50,000 a year at the most, if he is lucky. So he opens his own office. He has just one secretary, and he's waiting for clients. But there are no clients, because there are a lot of lawyers around with the big names, big firms and so on. He is desperate.

“If you come to this guy and say, 'You know, I can give some business to you,' what will he say? As a lawyer, he is like an innocent girl — he wants seduction. You should not say to him, 'It's a staged accident.' No, you say, 'I can give you some business, but you will have to follow my instructions and pay me 50 percent.' He says, 'Of course,' and he agrees. If you teach him properly, he will properly do his business for you.”

Is it really that easy? Are there attorneys willing to look the other way at the likelihood that their cases are fraudulent? Yes. In a separate case, when I had an attorney in an investigation room and got him to confess, I asked him, “What were you thinking?” This was an aha moment. He said, “It's quite simple — there aren't enough real accidents to go around.” It's that simple.

Besides, real accident cases get complicated and messy, Borloff said. “Attorneys don't like real accidents because there are so many problems. There isn't a cooperative defendant — he says, 'No it didn't happen.' There are too many problems. It's easy for me to work with defendants who say, 'Yes, I hit him, I was not paying attention,' and with attorneys who want money.”

Many of the people involved in these schemes don't quite see it as wrong but rather as a rightful Robin Hood redistribution of monies. “I had one good, white-bread American guy. He was the perfect defendant,” said Borloff. “He did the accident, and then on the way home, he sees somebody not driving the proper way. He gets on the phone, calls the police, and gives them the license plate number. I said, 'You turned him in? You broke the law too.' He said, 'No, that was the insurance company.' Sometimes the insurance company is not seen as the good guys.”

Fraud Ring Leader: “This Is A War That Will Never End”

“If you want to win this war, you can't do it,” said Borloff. “It's like the Cold War between the USA and Soviet Union. There was intelligence and counterintelligence, and it went on for a long, long time.” Insurance companies develop more sophisticated fraud detection and prevention tactics, but the criminal enterprises adapt and become more sophisticated too. An insurance company known to have strong defenses may repel fraudsters, but only for awhile. Pitted against the fraud rings, insurance companies are at a disadvantage, said Borloff.

They lack depth in claims adjusters. “A good, educated adjuster knows how to work — he has some police experience, maybe some counterintelligence experience,” said Borloff. “I ask you, how many adjusters do you have with these credentials? I can tell you 1 percent is a generous calculation.”

Even if you can recognize staged collisions, there's still generally a payout. “You can try to fight it, but it's probably just to reduce the amount you have to pay,” said Borloff. Adjusters can try to bluff — say that the examination of the car indicates there weren't four passengers, or that damages are inconsistent with the accident description — but that doesn't work. The stager knows a lie when he hears it.

The legal system doesn't offer much redress. When a claim looks suspicious, a smart adjuster asks for a deposition and asks smart questions of the plaintiff in front of him. He may do his best, probing for details, hoping to ferret out inconsistencies. “But it's worthless,” said Borloff. “It doesn't matter what the answers are. If the people said back pain the first time, and neck pain the second time, what does it prove? It proves nothing. You can't go to court with this stuff. After the deposition, the adjuster doesn't have a lot of choices. He has to negotiate the price.”

The adjuster can make a lowball offer, but a good defender will push back, knowing the adjuster's supervisor will approve more, and the insurance company doesn't want to go to court. In court, the insurance company can only argue on the facts, but the facts are that the incident did happen, and the plaintiffs do report that they suffered pain and injury from it. Can you prove they didn't? You can't pressure defendants to recant, because they're in bed with the criminal enterprise. They've got the money and face jail time if they confess.

“In small claims court, insurance companies have no chance,” said Borloff. “A claims adjuster can come and represent the company, but if it happened, it happened. If you say you have pain, I have pain, we have a medical bill, and you have to pay toward this. I have a limit of $5,000, and each defendant can ask about this amount of money. And what does this situation get insurance companies? Nothing but a lot of trouble, and more trouble. The adjuster doesn't want this problem. His supervisor doesn't want this problem.” The fraud enterprise wins.

Let's have a reality check here. The insurance industry will never stop this. People are going to try to scheme our insurance system as long as the system we have in place today exists, and ours is one of the best in the world. It takes care of consumers when they get in trouble. But with that, you will always have people thinking of ways to scam the money. Change the system, and they come up with a new scheme. This is just what people do.

How One Investigative Team Won

The fight against insurance fraud may be a never-ending war, but there are still skirmishes to be won. I led a five-year undercover investigation of a large and sophisticated organized crime ring in Southern California — Borloff's, in fact — and won.

We started with 63 suspected fraudulent claims that were on file in the San Diego office of the Department of Insurance. There were quite a few interesting outliers in those claims. For one, everybody was of Russian descent. These were all rear-end collisions, sudden stops. Now, we all know that sudden stop rear-end collision is a quick pay. It's pretty easy to determine at-fault in these collisions — a couple hundred of them happen every day in Southern California. It's not that big a deal.

Then an individual in custody for an unrelated matter came forward and offered information that made these claims look particularly interesting — even named two primary players. A formal task force was established with the equivalent of a joint powers authority between federal, state and municipal law enforcement. An undercover officer was introduced into the San Diego community to try to identify the ring leaders and learn how they were recruiting others into the organization and conducting business.

I didn't want to chase stuffed passengers or street offenders at the lower level. I wanted to go deeper into the organization — to identify the stagers, attorneys and physicians who facilitated those claims. And it worked.

A Collaborative Effort
The undercover operation was a joint effort of the California Department of Insurance's Fraud Division, the FBI, the San Diego Police Department, the Immigration and Naturalization Service (INS), and the National Insurance Crime Bureau (NICB). Undercover agents came from the California Department of Insurance, the San Diego Police Department, the California Department of Health Services, and the Bureau of Narcotics Enforcement.

Seven major insurance companies cooperated by providing pretext policies set up solely for the purposes of the investigation. Only the companies' regional vice presidents of claims and Special Investigations Unit directors knew about the investigation. They agreed to have the claims legitimately paid, so the money could be tracked and there would be no suspicion of law enforcement involvement.

A lot of thought and effort went into this to backstop the identities of the undercover people. If a private investigator or lawyer ran these people, they would show up as true legitimate people with valid Social Security numbers, credit histories, houses, vehicles — it was backstopped to the hilt. You'd have no idea that it was law enforcement.

Working From The Inside
We successfully infiltrated this ring for more than 18 months and were staging collisions in San Diego, Los Angeles and San Francisco. Borloff was identified in the very first staged collision, and then the lead undercover detective partnered with Borloff to stage more collisions and car thefts. Borloff gave instructions to his new business partner about how to get involved in this game. For every car and policy he provided, the undercover officer received $2,500 – a total of $75,000 over the course of the investigation.

Little did Borloff know these cars were coming from the NICB salvage pool, and every move was being recorded. During the five-year period, Borloff was responsible for staging more than 100 automobile collisions, exposing the insurance industry to an estimated $2 million in fraud losses.

Five Years To Success
It was kind of dicey. The [cooperating] insurance companies paid out more than $230,000 in claims into this. However, everybody had the bigger picture in mind — the potential economic loss prevented (PELP), an FBI metric that forecasts the money that would have been lost if the criminals continued their activities unabated.

When it was time to strike, the United States Attorney's office in San Diego handled federal prosecution and the Los Angeles County District Attorney's office handled the state prosecution. This was a seminal case that eliminated the issue of double jeopardy. In the State of California, you can arrest and convict someone in federal court for mail and wire fraud with a scheme of insurance fraud, and then charge them at the state level with insurance fraud, and it's not double jeopardy.

I brought the investigation from cradle to grave. I started as the supervising agent in the San Diego Fraud Division of!ce, and by the time the investigation was over, I was captain of that office. The investigation netted attorneys, physicians and chiropractors along with their office staff, eight cappers and 44 claimants — and effectively shut down one of the largest such rings in Southern California.

The Information Imperative

“The main problem for insurance companies is they don't have enough information,” said Borloff. “When the adjuster discusses the case, he knows nothing. He knows just this is the car, this is the car damage, these are the people. He can check the records — see these people didn't have an accident for two years, three years and think they sound like nice people. But he's still suspicious, he pursues it all the way, and still he gets nothing, because it's still trouble, still problems.”

In order to detect suspicious claim activity, insurance companies need access to transaction information and supporting detail that typically resides in different systems. Transactions viewed in isolation could appear normal, but they might look quite different if you could correlate those transactions across related entities. However, a unified view based on multiple internal data sources is rare. Rarer still is the organization that has augmented that view with external data as well.

As part of an 18-month Command College program of graduate study, I designed a virtual office environment for a law enforcement environment. After graduation, that work led to an assignment to design a fusion center to promote information-sharing among federal, state and local entities. The fusion center I designed was the first in the nation to incorporate law enforcement data and financial data, which led to new discoveries. For example, we threw the system up for a test run, and investigators in the San Francisco Bay Area were playing with it. From working with the data and social networking analysis, we found two chop shops in Dallas that the local police department didn't know about.

Smarter integration and analysis of data will be a strong defense to the growing fraud problem, as well as a way to meet the pressures to achieve more with less. The data being gathered through the claims process is growing bigger and bigger, so you need to start looking at things differently and working smarter, and that means leveraging your data together. A number of statistical approaches can be created to build a solid predictive solution. For instance, when you combine business rules, anomaly detection (finding outliers), and social media analysis, you can identify suspicious claims even if there is no prior claim history.

Getting a handle on the fraud problem is not about processing more cases. It is all about working the right cases to make an impact to reduce fraud. If you do not identify the true cost drivers in fraud — the licensed professionals, administrators, cappers, stagers and other individuals controlling the criminal enterprises — you will never truly reduce the amount of insurance fraud in our communities. But when you apply best practices and analytics together, you create a powerful tool and business model to reduce fraud and provide great ROI for anti-fraud programs.

This series of articles is taken from the SAS white paper of the same name. © 2013, SAS Institute Inc. Used by permission.

Video Verified Alarms And Priority Response – How Does It Work?

Traditional burglar alarms have lost much of their value as a tool for loss control, but video alarms are taking their place. Police response to burglar alarms is degrading and in many cases police departments have stopped responding to traditional alarms unless they are verified.

Millions of traditional alarm systems have created an enormous problem, wasting shrinking police resources on millions of false alarms. It is a big concern that has the attention of national law enforcement leadership.

International Association of Chiefs of Police (IACP) president, Chief Craig Steckler specifically addressed false alarms as a key issue in his inaugural address of October, 2012, “According to studies, last year there were more than 38 million false alarm calls in the United States. In many agencies alarm calls were the number one call for service, and statistically, these calls often account for nearly ten percent of all the calls for service the agency handles on an annual basis. Additionally, every study of the issue continually finds that 95 to 99 per cent of all alarms are false.” Chief Steckler bluntly states, “We must take a critical look and unbiased look at false burglar alarms, and determine whether in the new norm, this type of call (police responding to alarms) is truly a prudent use of severely limited resources.”

Chief Steckler is not exaggerating. Police consider traditional burglar alarms an enormous waste of resources. Officers no longer make arrests, and alarm companies focus on selling deterrence instead of apprehensions. From the police perspective, many simply no longer care.

The situation has degraded to the point that many major cities like Las Vegas, Salt Lake City, San Jose, and Milwaukee stopped responding to traditional burglar alarms altogether. This trend is gathering momentum. The public/private partnership of the police/alarm company/insurance industry has atrophied, and neither the police nor underwriters find effective loss control in traditional burglar alarms.

In contrast, this video underscores the value that law enforcement places on video verified alarms to combat property crime. The president of the National Sheriffs Association describes Priority Response and how effective they are at delivering arrests. There are many actual video clips of real burglaries in the video itself.

Response Differentials
Video verified alarms are an increasingly important evolution to combat property crime. They continue to deliver priority police response and lead to arrests. The reason is the video verified alarms mean that police respond faster to the alarm, making arrests and reducing claims.

The “response differential” between a traditional alarm and a video verified alarm is significant. The following chart illustrates the differences in different sample cities across the USA: large and small, east and west, north and south. The key issue is that video verified alarms deliver police response faster, around 15 minutes faster in many jurisdictions. Those 15 minutes makes a big difference in reducing claims for property crime.

Jurisdiction Video Alarm Traditional Differential
Boston, MA 7:38 21:00 13:22
Charlotte, NC 5:10 13:30 8:20
Chula Vista, CA 5:05 19:18 14:13
Watertown, MA 4:00 23:00 19:00
Fairfax County, VA 6:00 18:02 12:02
Salinas, CA 2:54 39:25 36:19
Amarillo, TX 10:06 19:24 9:18

Real Examples Of Alarm/Police Interaction
Perhaps the most effective way to illustrate the value of video verified alarms is to show 4 actual examples of real events with different outcomes based upon the alarm and jurisdiction. This is what the alarm business really looks like from the police side of things. Two of these examples lead to arrests. Insurers must realize the importance of central station dispatchers using video to become virtual eyewitnesses to a crime in progress.

All of the examples are not positive. In the final alarm, the 911 call taker says to the central station operator: “This doesn't meet our criteria for response,” meaning that the municipality won't respond to the alarm without the video verification. The central station operator sounds a bit stunned on the phone. But this is the scenario that is happening increasingly around the country. This last example is what insurers are trying to avoid by promoting video verified alarms to their policy holders.

Now What?
We need a strong public/private partnership to combat property crime. Underwriters must answer the question, “How can we encourage policyholders to use video alarms and police response to reduce losses?”

One answer would be to join the Partnership for Priority Video Alarm Response (PPVAR), a nonprofit public/private partnership based in St. Paul, Minnesota. The organization brings together alarms companies, insurers, and law enforcement to promote Priority Response and Video Alarms to reduce property crime and insurance losses. The PPVAR board of directors includes law enforcement, alarm companies and the National Insurance Crime Bureau (NICB) that is supported by 1,100 property/casualty insurance companies.

To further strengthen leadership from the insurance industry, the PPVAR recently added Verisk Crime Analytics Vice President Anthony Canale to its board of directors. There are now two strong insurance organizations to help build the partnership with law enforcement and the alarm companies. Verisk owns and operates national crime databases that provide services to the construction, retail, transportation, manufacturing and insurance industries.

“Our involvement with the PPVAR fits with the mission of Verisk Crime Analytics to use data and analytical tools to support public safety operations and to help our clients reduce the impact of crime,” said Canale.

As the successes grow, the PPVAR is expanding its membership in the insurance industry — individual insurance companies joining the partnership and embracing the message. The PPVAR welcomes additional insurance companies and associations to work with us to help use video alarms to reduce claims and losses.