WELCOME TO TENNESSEE
THE Tennessee Department Of
Commerce And Insurance wishes to
provide a “Welcome To Tennessee” to
the Casualty Actuarial Society.
We trust you will have a pleasant stay
and hope you will enjoy the program
prepared for you today.
FRAUD & SPECIAL INVESTIGATIONS
DEPARTMENT OF COMMERCE &
STATE OF TENNESSEE
WHAT IS INSURANCE FRAUD?
In order to combat insurance fraud it is first
necessary to be able to define and identify it.
Insurance fraud is any deliberate
deception perpetrated against, or by,
an insurance company or agent for the
purpose of unwarranted financial gain.
Insurance fraud occurs during the
process of buying, using, selling and
Insurance fraud has been defined as
being the second largest economic
crime in America.
It is reported as being second only to
income tax evasion.
Whether committed by sophisticated
criminals, otherwise honest consumers
or by insurance company employees or
owners-is an increasingly expensive
burden on the U. S. economy.
Money is taken out of the pockets of all
This illegal activity diverts vital
resources away from businesses, law
enforcement, the civil justice system,
regulatory agencies and local
Are there any easy solutions to this
No, there are not.
We, consumers, legislators, regulators,
and insurers, must work together to
create an environment that either
prevents or detects insurance fraud
easily when it happens.
What Are The Types Of
“HARD” FRAUD “SOFT” FRAUD
Usually a deliberate Sometimes called
attempt either to “opportunity fraud”,
stage or invent an occurs when a
accident, injury, policyholder or
theft, arson, or claimant
other type of loss, exaggerates a
that would be legitimate claim.
covered under an
The following slides will provide
more information on these two
types of insurance fraud.
Extremely complex These schemes are
schemes, often one of the most
involving medical costly forms of
practitioners, insurance fraud and
lawyers and their are widespread.
patients or clients, Millions of dollars
are employed. may be lost to a
single crime ring.
This is also committed by executives
and employees within the insurance
An employee of an insurance company
accepting bribes or kickbacks.
An insurance agent who accepts
premium payments, and fails to remit
the funds to the insurance company.
Also included are phony insurance
companies set up by con men.
Premiums are collected from unsus-
pecting consumers and claims are rarely
or never paid.
When too many claims are filed the con
artist disappears with the company
One example is the inflation of an auto
claim to cover the deductible or the rise
in insurance premiums.
This also occurs during the underwriting
process when an applicant provides
false information to lower insurance
premiums or increase the likelihood of
acceptance for insurance.
1. Underreporting the number of miles
driven either to and from work or on an
2. Giving a false location where the car
3. Failing to report an accurate medical
history when applying for health
4. Exaggeration of the amount and
value of items stolen from a home or
5. Failing to report the correct number
of employees for workers’
compensation insurance coverage.
6. Providing a false report of income or
inventory to lower the insurance
premium for a business.
What is the scope of insurance
The true extent of insurance fraud is
difficult to determine as so much of it is
Comprehensive research to make an
accurate estimate of the extent of fraud
has not been done.
Studies focusing on specific aspects of
insurance fraud suggest the cost is
Coalition Against Insurance
This organization estimates the annual
cost to be more than $85 billion per
These estimates are the basis for the
statement that “Insurance Fraud is the
second largest economic crime in
America-exceeded only by tax evasion.”
EXTENT OF INSURANCE
Individual studies have provided
evidence as shown in the
A Study In Massachusetts
Some aspect of fraud or abuse
was found in 48 percent of injury
claims resulting from auto
An Audit In Florida
Of workers’ compensation insurance
policies, indicated 46 percent of
employers underreported the level of
their payroll or misclassified employee
At least 30 percent of 302
property/casualty insurance company
insolvencies between 1969-90 were due
to fraudulent activities.
A 1995 Rand Study
A Rand Institute study for Civil Justice
concluded more than 35 percent of
people hurt in auto accidents
exaggerate their injuries, adding $13-
$18 billion to the nation’s annual
1996 Tennessee Claims Fraud
L in e Am ount F a m ily C o s t
A u to $ 2 2 8 .4 m il. $ 1 3 6 .0 0
H o m e o w n e r s $ 3 4 .1 m il. $ 2 0 .3 3
C o m m e r c ia l $ 1 6 9 .2 m il. $ 1 0 0 .5 8
H e a lt h $ 9 3 6 .2 m il $ 5 5 7 .0 1
T o t a ls $ $ 1 .4 b il. $ 8 1 3 .9 2
1996 United States Claims
L in e Am ount Per Cap H ouse F a m ily
A u to $ 1 4 .3 b $ 5 3 .8 0 $ 1 4 1 .4 9 $ 1 7 0 .0 0
Hom e $ 2 .1 b $ 8 .0 4 $ 2 1 .1 5 $ 2 5 .4 1
Com m . $ 1 0 .6 b $ 3 9 .7 9 $ 1 0 4 .6 4 $ 1 2 5 .7 2
H e a lt h $ 5 8 .4 b $ 2 2 0 .3 4 $ 5 7 9 .4 8 $ 6 9 6 .2 6
T o t a ls $ 8 5 .4 b $ 3 2 1 .9 6 $ 8 4 6 .7 6 $ 1 0 1 7 .4 0
Why has insurance fraud
Public attitudes-many think it is a
Insurer claims practices-many
suspicious claims are paid rather than
High-risk insurance-many companies
are unwilling to provide this and the
market is open to “bogus” insurers.
Medical economics-large numbers of
uninsured and/or underinsured patients.
Insufficient penalties- insurance fraud is
perceived as high reward/low risk crime
Low law enforcement priority-top
priority is given to reducing drugs and
violence thus shifting manpower away
from white collar crimes.
What is Being Done About
How is this problem being
The following slides will show
some means being used at this
The NAIC has created model legislation
for states to enact that makes it harder
for con artists to set up insurance
companies. In many states, regulators
are increasing insurer oversight. There
is interest in making white collar crime
a federal crime. In 1994 the omnibus
crime bill set penalties for anyone
convicted of submitting false financial
data to state insurance regulators.
Special Investigation Units-created
within the companies to detect and
investigate suspicious claims.
National Insurance Crime Bureau-
created by insurance companies in
1992, dedicated to fighting insurance
Creation of insurance fraud database
networks accessible online.
Other Possible Solutions
Enactment of stiffer penalties and
extending current laws attacking
Medicare and Medicaid fraud.
Enact additional legislation to combat
the problem at the state level.
The States Can:
Make insurance fraud a specific crime,
with appropriate penalties, including
Require administrative action against
licensed individuals or businesses-body
shops, doctors, lawyers, etc.-upon
conviction of insurance fraud.
Require all insurers to establish, and
use, anti-fraud plans.
Require claims forms and insurance
applications to carry insurance fraud
Provide immunity to insurers, and
others, reporting insurance fraud and
Require inspection of automobiles
before granting insurance coverage.
Is There Any Progress?
Yes, the per family cost has dropped
from $1,032 to $1,017 in 1996.
Health insurance fraud dropped from
$710 per family to $696.
Workers’ Compensation has consistently
dropped for the past five years. It has
dropped from $2.9 billion to $2.1 in
The Department of Health and Human
Services has reported that, since 1996,
anti-fraud efforts have resulted in a
savings of $11 billion. The bad news?
Remaining improper payments are
More good news-many criminals have
gotten the message and have closed
their illicit Medicare operations.
Is Insurance Fraud Whipped?
No, it is not yet time to ease off our
efforts. It does appear that our years
of work is paying off. There has been,
for the first time, virtually no actual
increase in the amount of insurance
fraud annually while, with population
increase, there has been a lowering of
the average cost to consumers for the
Can We Ever Relax?
No, and the following example, which is
based upon a true story, will serve to
illustrate why we must always maintain
our vigilance against fraud.
In one of our western states a “swap
meet” was being conducted. There
were a number of dealers who were
engaged in selling merchandise.
A very lovely young woman appeared.
She was dressed in a macramé bikini.
Needless to say, she received a lot of
The young woman went around the
dealers trading $20 bills for change.
Apparently, no one thought to ask why
she needed so much change.
Finally, someone realized all the $20
bills were identical.
Now-they realized why she needed so
She was exchanging counterfeit $20
bills for $20 in good money.
The macramé bikini was a diversionary
tactic on her part.
She probably would have gotten
away with it if the bills had been
printed on both sides.
We must never let down our guard.
The fight against insurance fraud is a
permanent battle which will never be
won in its entirety.
One major part of the battle is public
education. We must show the
consumer that insurance fraud costs
them and they must aid in the battle.
Thanks are due to the National
Insurance Crime Bureau and to
The Coalition Against Insurance
Fraud for providing information
and for their assistance in the
preparation of this program.
BUT ONLY THE BEGINNING IN
THE FIGHT AGAINST