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               Rajneesh Upreti
                              CPCU, ACII, FIII
Principal Business Analyst (P&C Insurance)

1. Introduction to insurance fraud - How Honest Are Your Customers?

2. Types of insurance frauds– Soft Vs Hard.

3. Legislation and Regulation – keep your eyes and ears open!

4. Key techniques for detecting and preventing frauds - If it appears too good to

   be true, it most likely is!

5. Results of the independent study conducted by us through survey of

   insurance professionals – some key findings.

6. Closing Thoughts

7. References

Insurance fraud is undoubtedly not a new crisis facing the insurance industry and has been as
aged as insurance is. Unfortunately, the costs of this cheating are passed on to consumers in the
form of increased premium payments. Thus, Insurance fraud impacts the public by causing us all
to pay higher insurance premiums and in addition, businesses may pass along their increased
insurance costs to their customers in the form of higher prices proving that all of this translates to
more money out of consumer’s pocket.

Insurance fraud is perceived as a victimless crime, but the estimated losses from this crime
exceed $100 Billion every year. Ten percent of all types of insurance claims property & casualty,
health, life, workers’ compensation) are suspected to be fraudulent. Fraud impacts insurance
enterprises in a number of areas including economic, operational, and psychological/emotional
areas. While the financial beating owing to fraud is considerable, the complete impact of fraud on
a business can be shocking. The losses to repute, goodwill, and consumer relations can be

Insurance fraud can happen in any line of insurance, including auto, homeowners, health, life,
workers compensation and medical malpractice. According to the Insurance Information
Institute, property and casualty insurance fraud strips an estimated $30 billion from the industry
each year – losses that must be made up in premiums. Since insurance fraud is hard to detect,
these figures can only hint at the magnitude of the problem. Fraud losses weaken an insurance
company’s financial position and undermine its ability to offer competitive rates and to
underwrite reputable and potentially profitable business. Fraud losses lead to higher premiums
for policyholders. In this “victimless” crime, everybody pays the price.

As far as United States is concerned many states have adopted laws that give prosecutors greater
ability to convict insurance fraud criminals. Penalties have also increased, including stiff prison
sentences and disallowing insurance companies who have committed fraud to return to the
insurance industry. Thus Governments have responded with new regulations and centralized
fraud bureaus. Insurance companies have responded by establishing special investigative units (S
armed with computer-based tools to detect and prevent fraud. Yet the problem continues to
grow, significantly in recent years and insurance fraud is a serious problem for the insurance
industry today. Although hard to measure because so much fraud goes undetected, reports from
insurance institutes around the world indicate that insurance fraud is widespread and that more
than 10-12% of all insurance claims involve fraud.
                               Type of Insurance Frauds
                     Commit insurance frauds enjoy luxury living

Broadly speaking we can divide fraudulent claims in two sections:

       Exaggerated or built up claims that are otherwise legitimate
       False Claims with an intent to defraud insurance company

Another classicization of insurance fraud can also be either hard fraud or soft fraud. Hard fraud
occurs when someone consciously devices a loss, such as a collision, auto theft, or fire that is
covered by their insurance policy in order to receive payment for damages. Criminal rings are
sometimes involved in hard fraud schemes that can steal millions of dollars. Soft fraud, which is
far more frequent than hard fraud, is sometimes also referred to as opportunistic fraud. This type
of fraud consists of insured’s exaggerating otherwise legitimate claims. For example, when
involved in a accident an insured person might claim more damage than was really done to his or
her car. Soft fraud can also occur when, while obtaining a new insurance policy, an individual
misreports previous or existing conditions in order to obtain a lower premium on their insurance

Exaggeration of claim amount

A built-up or exaggerated claim, which is basically misrepresentation of actual loss, is usually
easy to identify as compared to false claims. Insurance fraud occurs in all insurance areas and
includes claims padding, falsifying estimates, exaggerated injuries, fabricated accident claims,

Examples of exaggerated claims:

       Crooked auto body shop owners offer to inflate the extent of damage to your vehicle to
        cover your deductible. In doing so, the shop owner over-bills the insurance company.
       A property owner falsely reports items stolen or exaggerates the value of items taken in a
       Some individuals misrepresent information on an application to obtain lower premiums.
        However, insurance company can deny or adjust claims and cancel policies if there is
       A real injury is exaggerated, and the dishonest employee receives benefits while
        sometimes working a second job. Worker’s Compensation Fraud costs Americans $5
        billion a year.
       Misrepresent the true cost of medical services that a Medical service provider renders,
        this may or may not happen with the connivance of the insured/claimant.
       Small businesses and fast food restaurants are targets for slip and fall frauds, in which a
        person pretends to slip and fall to the floor, often in a washroom, usually with no
        witnesses. Injuries may be exaggerated or nonexistent.
       Customers may be billed by a glass company for a windshield replacement when only a
        chip repair was done. Or the bill to your insurance company could be for replacement
        rear windshield glass (which is more expensive) when the front windshield was
Among the challenges that insurance companies face here with regard to built up claims fraud
following are prominent ones which leads to far too many people submitting insurance claims
that are higher than their actual loss.

       Attitudes that a certain degree of fraud is acceptable, for example, inflating an insurance
        claim to cover the deductible or recoup premiums paid in previous years.
       The attitude that falsifying a claim does not constitute breaking the law.
       Negative attitudes toward insurance companies, for example, that they are unwilling to
        pay damages to their policyholders.

False Claims

Examples of false claims:

       A classic example of false claim can be an owner deliberately burns (or hires someone to
        burn) a business, home or vehicle for the purpose of collecting on an insurance policy.
       Causing automobile collisions to collect insurance payments for injuries that are either
        nonexistent or greatly exaggerated. The insured event here has been deliberately
        triggered to defraud the insurance company and benefit out of insurance contract.
       An individual reports his vehicle stolen when in fact; the owner and a co-conspirator
        have sold, dumped or burned the vehicle. The owner may collect twice: once on his
        insurance policy and then on the proceeds from the sale. In other owner give-ups, the
        vehicle is sold to a chop shop for its parts.
       An individual buys numerous policies insuring the same property and then reports an
        item stolen or destroyed collecting on all policies without disclosing the multiple
        coverages when the claim is filed.
       Unscrupulous insurance agents collect your premium payment and fail to forward it to
        the company responsible for paying your future claims — leaving you uninsured.
       Some employees falsely claim to be injured on the job when, in fact, the injury occurred
        outside the workplace.
       Medical provider billing the insurance company for the treatments not performed. This
        happens in connivance with the insured.
       Someone using your identity to seek medical attention and your health insurance
        company being billed for the treatments. Your identity being stolen out of medical clinics
        and fraudulent billings are then made to your health insurance company by non-existent
        medical centers and/or doctors.
       A person’s insurance information may be stolen out of the vehicle and false claims were
        made on their policies for glass repair. There have even been cases where prior work
        orders from glass companies were stolen or sold as leads to other glass companies so
        they could file false claims on your policy.

In each of these cases, fraud criminals often boast about cheating an insurance company. In truth,
they have fleeced innocent policyholders and other honest insurance consumers who will pay
higher premiums as result of the fraud.
        Legislation and Regulation – Keep your eyes and ears open

Proposed new rulings and policies in United States often threaten the industry’s fraud fighting
programs and the ability of fraud fighters to access information necessary to pursue insurance
fraud offenders. A fundamental shift is taking place in government’s approach to administration
and oversight of claims and investigative data. Traditionally, the business of insurance has been
regulated by state governments. Crime in the field of insurance, for the most part, has been state
crimes. Accordingly, privacy protections and other restrictions on access to and use of data have
been found in state laws and industry self-regulation.

Insurance Fraud is specifically classified as a crime in all states within United States, though a
minority of states only criminalizes certain types like Oregon only recognizing Workers
Compensation fraud. 19 states require mandatory insurer fraud plans. This requires companies to
form programs to combat fraud and in some cases to develop investigation units to detect fraud.
41 states have fraud bureaus. These are law enforcement agencies where “investigators review
fraud reports and begin the prosecution process. Section 1347 of Title 18 of the United States
Code states that whoever attempts or carries out a “scheme or artifice” to “defraud a health care
benefit program” will be “fined under this title or imprisoned not more than 10 years, or both.” If
this scheme results in bodily injury, the violator may be imprisoned up to 20 years, and if the
scheme results in death the violator may be imprisoned for life.

Though many states in United States are in the process of enacting strong laws against fraudsters
claiming under state health insurances programs like for example West Virginia has a bill
pending enactments that Creates a state false claims act allowing a citizen to bring action targeted
those that defraud state health programs. The need of the hour is a comprehensive insurance
fraud regulation.

What all we can do to combat insurance fraud?

       Watch out for windshield repair scams. Make sure that auto glass salesman at carwashes,
        door to door solicitations, or glass company phone solicitors are not giving you false
        information to make fraudulent insurance claims.
       In case of made-up vehicle accidents if you see traffic slowing, apply the brake and don’t
        follow closely. If your car is in collision, count up the number of passengers in the other
        vehicles, and if feasible get credentials of the passengers so that they can be contacted
        later. Often it happens that more people will file claims than were in reality in the
        automobile. Always give a call to the police get a report from them, even if the damage is
        small. Though not always doable but if possible, take snaps of the damage to the other
        vehicle to help your insurance company dispute heavy auto repair bills to low crash
       Make sure to check periodically with your insurance company or agent/broker on the
        claims history. This will ensure that you are not a prey of these types of stings.
       Make sure to check your clarification of benefit forms your heath insurance company
        sends you to make sure you are aware of those billings and they are not fraudulent. If
        you have questions about the billings possibly being fraudulent, check with your
        insurance company.
       Business owners should notify their insurance companies of all claims, identifying those
        they believe are suspicious. If you’re a customer who witnesses a slip-and-fall and are
        suspicious of its authenticity, notify a store employee.
       Review your medical bills. Make sure the treatments you were billed for were actually
        provided. If not, notify your insurance company. Be skeptical if your medical provider is
        prescribing excessive treatment for muscle sprains. Although the following practice is
        common and may be legitimate, be wary of medical providers who direct patients to a
        specific attorney and vice versa.
       Be a responsible employee and if you suspect a co-worker of faking an injury, notify your
        employer. In some instances, the high costs associated with this fraud have forced layoffs
        and resulted in companies going out of business.
       Make it a point to never draw a check payable solely to an agency. Also refrain from
        signing a blank check. If you are unknown with the insurance company name you can
        confirm with the Department of Insurance through their helpline to see if the insurance
        company or agent is accredited.
       If an insured accepts the offer from fraudsters, he would be committing insurance fraud
        as well, which is a criminal act. If one ever receives such request it is wise to politely
        decline the offer, and then alert the insurer or state insurance department about the same.
        It is noted that it is everyone’s duty to fight against fraud.

     Key techniques for detecting and preventing frauds - If it appears
                  too good to be true, it most likely is!

There is no one fail-safe fraud-discovery or avoidance mechanism. Several techniques, working
together, present the greatest chance for identifying fraud. As fraud designs become more classy
and sophistical, so must the techniques used by insurance companies to battle it. New detection
techniques and advancements in the field of Information Technology lay a key role in winning
the fight against insurance fraud.

We can classify various methods under two heads:

       Traditional Methods
       Modern Methods

A fraud detection model identifies the behavior and consumer characteristics that differentiate a
false claim from a rightful claim. We identify below the role that various stakeholders like
agents/broker, specialists (surveyors, loss assessors, doctors) and insurance companies have been
traditionally playing in the course of detection and avoidance of frauds.

Role of Agent/Broker:

Insurance fraud detection is first the responsibility of the insurance agent, and it’s a difficult job
to perform. Those filing fraudulent insurance applications are usually bright enough not to alert
the agent to their scheme, so the agent must be very conscientious of the possibility of fraud.
Insurance agents are paid by commission, though, which actually gives them a disincentive to try
to detect insurance fraud, because exposing an application as fraudulent means that not only will
they not earn a commission, but they also lost the time involved in making the sale.
Role of specialists:

Others involved in the claims process, such as doctors and auto body repair shops, are also
responsible for insurance fraud detection, and most of them can be counted on to report attempts
at insurance fraud by their patients or third parties.

Role of Insurance Company:

Insurance fraud detection is also the responsibility of the insurance companies, and they take that
responsibility very seriously, employing underwriters to screen applications, as well as claims
adjusters and investigators to double-check claims. The underwriting process — that is, the
process of investigating an insurance application before it’s approved and the policy issued —
has become far more sophisticated, relying on more different sources of information to verify
application information. Unsupervised methods of statistical detection, on the other hand,
involve detecting claims that are abnormal. Both claims adjusters and computers can also be
trained to identify “red flags,” or symptoms that in the past have often been associated with
fraudulent claims. Some examples of these flags are provided below:

       An accident occurs after a recent uninsured loss.
       There are no witnesses to the accident.
       There is no police investigation of the accident or event.
       An accident involves an unidentified third party.
       The claimant's witness is overly enthusiastic.
       Property was repaired or disposed of before final inspection.
       Claimant avoids use of telephone or mail.
       Claimant uses multiple addresses.
       Claimant uses post office box, hotel/motel room, or mail drop as an address.
       Claimant is eager to accept blame for an accident.
       Claimant is demanding of a quick, reduced settlement.
       Claimant threatens to go to an attorney or physician if claim is not settled quickly.
       Claimant is unusually familiar with insurance terms and procedure, medical
        terminology, vehicle repair terminology, or "legalese."
       Claimant has personal, financial or business problems or is unemployed.
       Claimant has an extensive claims loss history.
       The insurance agent is not familiar with the claimant.
       The insured or claimant represents unsolicited business to the agent.
       There is no record of prior insurance coverage or policy is soon due to expire.
       The policy has only been in effect a short time before the loss.
       There is a sharp increase in the amount of coverage shortly before the loss.

Modern Methods

Modern and sophisticated detection methods play an important role in fighting insurance fraud
and changing the attitude and mindset of insurance customers. Reducing fraud leads to
considerable savings for insurers. This money saved out of insurance frauds can be passed on to
insuring public, resulting in more positive outlook, smaller number inflated claims and an
increase in consumer loyalty.

Insurance companies are using investigative psychology techniques to assess the credibility of
home and motor insurance claims as they prepare to manage an expected rise in potential fraud
as a result of the recession.
Modern computer programs are designed to detect insurance fraud and can flag potential fraud
even much before claims are paid. . The keys to a successful fraud identification program are
early, swift detection and quick, comprehensive investigations. Modern IT solutions require
minimal adjuster intervention yet provides a consistent and systematic review of all claims; In the
event a claim is deemed suspicious, the workflow rules prioritize and organize claims so the
appropriate action can be taken. The software solutions start the process of fraud detection very
early in the business cycle of insurance. It is to be noted that fraudulent insured’s may start from
underwriting phase itself by furnishing false information or incomplete information to gain a
favorable underwriting decision or to the least get an insurance coverage; thus insurance systems
should incorporate proper risk assumption and underwriting rules for intentions of fraud.

Besides detecting frauds modern IT systems also measure program performance by defining and
monitoring key performance metrics via a dashboard environment to determine how effective
and efficient your programs are at deterring fraud and inappropriate payments.

Data analysis tools are also now being extensively used by auditors and fraud examiners to
investigate an organization’s business statistics to gain insight into how well internal control is
working and to recognize connections that indicate fraudulent action or the sharp threat of fraud.
Data analysis can be applied to just about everywhere in a business where electronic transactions
are recorded and stored. Data scrutiny also provides an efficient way to be more proactive in the
battle against insurance fraud.

Social network analysis can also be brought into play for going beyond individual views to
analyze all related activities and relationships at a network dimension. The technology of social
network analysis can provide insurers with an approach to identify the human networks and
relationships that may undergird fraudulent behavior. Insurers can then enhance their enterprise
fraud administration approach based on those insights. Insurers have started scouring social
media for evidence of fraud social-networking websites such as Facebook and MySpace. Armed
with the information, police have caught fugitives, lawyers have discredited witnesses and
corporations have exposed perfect-on-paper claimants engaged in unlawful or simply
embarrassing actions and now insurance companies are taking advantage of the free, easily
accessible websites. Such sites have become the latest tools in detecting fraud

                 Results of independent Study conduced by us

Over the period of past one month we conducted an independent survey through survey monkey
intended for analysis of fraud in the General Insurance Industry. The reason we decided to do a
survey was to help us comprehend better the understanding and thought patterns of
professionals who are working for the insurance industry. Those who responded range from
Senior underwriters, General Managers, Insurance Service Managers and Insurance subject
matter experts working in leading insurance and software companies in Unites States, U.K. and
India. We wanted to focus this survey on understanding the awareness about insurance frauds
that insurance professionals possess and how they are utilizing their skill and judgment in order
to better serve their profession.

For a question on the annual %age of claims leaking more than 35% of the respondents felt that it
is between 10-20%. The result indicated that most insurance professionals today are well aware
about insurance fraud. If we go through the statistics provided by various institutes conducting
study on insurance fraud, most of them range insurance fraud to around 10-20% of the claims.
Around 27% of the respondents felt that it in reality the %age is more than 20%.

In a question concerning who the respondents think is most adversely affected by fraud in
insurance industry, more than 60% of the professionals feel that insurance companies are the
ones who are most hit by insurance frauds. While no one responded that insurance fraud impact
insurance intermediaries and reinsurers, around 36.4% felt that policyholders or insuring public
is impacted by insurance frauds.

We tried to understand the most prevalent kind of insurance fraud that is resulting in claim
leakages and more than 80% of the respondents believed that most of the frauds in insurance
claims occur due to soft frauds like exaggerating the sum of loss.
When we asked the respondents as to the most effective way to combat insurance fraud and
more than 70% felt that active fraud prevention and detection measures employed by insurance
companies play a vital role in combating insurance frauds. This highlights the fact that if any
work in this area has to begin it has to start from the insurance companies and end to insurance
companies, other stakeholders can only lend a helping hand in this regard.

In a question related to the measure being employed by the organization in which the
respondents were working more than 35% believed that their organization is employing
proactive and innovative measures to prevent and detect insurance frauds. An equal number of
respondents felt that though the organization in which they are working is aware of the impact of
fraud in the insurance industry but felt that enough measures are not being taken to prevent and
detect it and so a lot still needs to be done. Around 10% of the people who replied felt that
insurance fraud is not too serious a problem.

In an answer related to the use and efficacy of Information Technology system to prevent and
detect frauds more than 50% of the respondents opined that IT has much potential in terms of
helping insurance industry with the menace of fraud but not much has been done in this area.
The response highlights the potential that IT has to help insurers with this problem; thus this
opens a growth avenue for software companies to devise systems that are capable of handling the
modern day frauds and prevent the outflow of insurance monies.
Thus we have found that the insurance business has its share of threats and opportunities. While
providing insurance coverage and various risks to individuals and business world, insurers are
striving hard to handle their own risks in the wake of natural catastrophes and various human-
made disasters, economic setbacks, and governance scandals. As margins are compressing in the
face of low underwriting profitability and the cushion of investment returns begins to contract,
insurers are looking to hone their marketing efforts, cut expenses, and reduce claims leakages.
They are also finding ways to optimize the use of technological advancements to cope with the
changing regulatory and competitive landscape, and profit from prospects opened by markets
that are emerging or have already emerged.

Regarding the independent survey that that we conducted, with this being our first survey effort
in this subject, we’re still figuring out what kinds of questions and subsequent responses will
lead to the valuable insights that will help bring deeper perceptive to the subject and perhaps
help take home some more answers and solutions. But we think there are some key pieces of
information in this first endeavor that has helped us get off to a solid start to understand the
incidence of fraud and how it is impacting us together with the key solution as to the use of IT.

Coalition Against Insurance Fraud -

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