Insurance Fraud The Lecture
Richard A. Derrig, Ph.D. OPAL Consulting LLC Visiting Scholar, The Wharton School University of Pennsylvania
richard@derrig.com
University of Illinois December 2, 2005
Agenda
Is Fraud? How Much Fraud Is There? Who Are The Fraud Fighters? What do Companies do about Fraud? What is the “Lawrence” story?
What
Fraud Definition
PRINCIPLES
Clear and willful act Proscribed by law Obtaining money or value Under false pretenses
Abusive/Unethical: Fails one or more Principles
Fraud Types
Insurer Fraud – Fraudulent Company – Fraudulent Management Agent Fraud – No Policy – False Premium Company Fraud – Embezzlement – Inside/Outside Arrangements Claim Fraud – Claimant/Insured – Providers/Rings
FRAUD AND ABUSE THE TOP TEN DEFENSES
1. Adjusters 2. Computer Technology 3. Criminal Investigators 4. Data and Information 5. Experts 6. Judges 7. Lawyers 8. Legislators 9. Prosecutors 10. Special Investigators
10%
Fraud
Target Claims
DM
Easy Paid
Routine Adjusting Investigation Investigative Paid Build-up Negotiation Civil Proceeding Not Guilty Suspected Fraud SIU Criminal Referral Prosecuted Guilty
DATA
DM
Databases
Scoring Functions Graded Output
Non-Suspicious Claims Routine Claims
Suspicious Claims Complicated Claims
Data Mining
“Misplaced faith in black boxes: Data Mining is sometimes perceived as a black box, where you feed the data in and interesting results and patterns emerge. Such an approach is particularly misleading when no prior knowledge or experience is used to validate the results of the mining exercise”
– Exploratory Data Mining and Data Cleaning, by Dasu and Johnson
Patterns, The New Data To Manage
Red Loveseat by
Mae West by
DCD
The Detail Claim Database
Seminar on Insurance Fraud Boxborough, MA November 19, 2003
Seminar on Insurance Fraud
DCD
Auto Injury Claims Closed Since 1/1/94 Over 1,646,000 Claims Data: Claimant, Insured, Injury, Medical & Legal Providers, Claim Payment, Bills, Claim Handling IME, Med Audit, Special Investigation On-Line Access for Company Adjusters and SIU Personnel through Internet Company Oversight: Claim Committee, Operations Subcommittee
Special Investigation (SI) Yes/No
Special Investigations (SI) are performed on claims
suspected of fraud. Special Investigations may be performed by SIU personnel or other personnel trained to handle suspicious claims using activity checks, surveillance, accident reconstruction, statements or examinations under oath. Special Investigations also includes third party expert analysis of documents associated with suspicious claims. Liability investigations are not considered to be special investigations.
SI Results
Report a valid SI Result Code:
Code SI Result
1 – No Change Recommended 6 – Claim Denied 7 – Claim Compromised 9 - Unknown or Pending
SIU Result by Attorney Representation
Attorney 60.0 50.0 No Attorney
Percent
40.0 30.0 20.0 10.0 0.0 No Change Recommended Claim Denied Claim Compromised Unknown or Pending
Result
Source: AIB/DCD 1995/1997 Accident Year
Injury Type Changes
Inj Fracture Inpatient Serious Visible Prior Inj. 89 14% 7% 14% 6% 96 5% 4% 2% 27%
Source: AIB Final Report (2003)
The Lawrence Fraud Problem
A Crisis Needing a Special Solution
Lawrence Auto Insurance Rates
Why
are rates so high? Causes Solutions
WHY ARE RATES SO HIGH?
Statewide
$1,176 $2,145
average rate average rate
Lawrence
Commissioner’s rates, 2002 (BI, PIP, PD, U-1, U-2, COMP, COLL)
WHY ARE RATES SO HIGH?
Claims Paid Per Car Statewide Lawrence 2002 $714 $2,061
2002 Reported Pure Premiums (BI, PIP, PD, COMP, COLL)
WHY ARE RATES SO HIGH?
Statewide
# of claims as a percentage of policyholders 28% # of claims as a percentage of policyholders 66%
2002 Reported Claims (BI, PIP, PD, COMP, COLL)
Lawrence
WHY ARE RATES SO HIGH?
In 2002, Lawrence rates are 1.82 times the statewide average
– accident rate is 1.5 X state avg.
but...
– PIP (no-fault) claims are4.9 X state avg. – BI Liability claims are 4.9 X state avg.
2002 Reported Frequency Indices (PD, PIP, BI)
WHY ARE RATES SO HIGH?
In 2002, Lawrence rates are 1.82 times the statewide average
– accident rate is 1.5 X state avg. 1.9 X state 10.3 X state avg.
but...
– Collision claims are avg. – Theft claims are
2002 Reported Frequency Indices (PD, COLL, COMP-theft)
WHY ARE RATES SO HIGH?
1 out of 260 cars insured for theft in Mass. were stolen in 2002 1 out of 25 cars insured for theft in Lawrence were stolen in 2002
2002 Reported Frequency (COMP-theft)
WHY ARE RATES SO HIGH?
For every 100 accidents in the state 43 injuries are reported! For every 100 accidents in Lawrence 141 injuries are reported!
2002 Number of Claims Per 100 Accidents (PIP)
Similar Population Size
# Cars Insured
Salem Lawrence 0 10,000
20,053 23,666 19,771 26,689
1993 2002
20,000 30,000
Insured population relatively similar in size for both towns
Claims Very Different
Dollar Amount of BI Claims
Salem Lawrence
$0
$3,800,000 $5,400,000 $7,300,000 $16,900,000
1993 2002
$9,000,000
$18,000,000
Claims have soared in Lawrence while only increasing slightly in Salem
ROOT CAUSES OF HIGH RATES
Auto theft out of control Disproportionate # of Injuries to Accidents Network of high volume medical and legal professionals aggressively ready to assist in filing your insurance claim!
PIP Average Amount Billed
$4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0
Statewide All Providers
$2,112
PIP Average Amount Billed
$4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0
Statewide All Providers Statewide Chiropractors
$2,846 $2,112
PIP Average Amount Billed
$4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0
Statewide All Providers Statewide Chiropractors
$3,625 $2,846 $2,112
Lawrence Chiropractors
PIP Average Amount Billed
$4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0
Statewide All Providers
$4,123 $3,625 $2,846 $2,112
Statewide Chiropractors Lawrence Chiropractors Lawrence Back & Neck
Spring promotion 2001
…each time you refer a patient injured in an auto accident…”WE WILL PRESENT YOU WITH A VOUCHER WORTH $200”... ...Free transportation
...Treated 10,000 people injured in auto accidents
But Lawrence only had 7 auto accidents per day!!!
The Anatomy of an Investigation
9/4/03
Altagracia Arias a 65-year-old grandmother, dies in a staged car accident in Lawrence. Lawrence and State Police arrest Hairo L. Gomez, 26, of Lawrence, charging him with manslaughter in connection with the fatal crash. An arrest warrant for the same charge is also issued for Jacinto Maldonado, 22, of Lawrence, who is the driver of the car in which his grandmother was killed. Eagle Tribune publishes front page story titled ”Police: Scam crash killed grandmother. Police arrest Jason Pimentel, 22, of Lawrence, a front seat passenger in the car that Altagracia Arias was killed in. He is charged with insurance fraud, under a new felony law that carries up to five years in prison and a $10,000 fine. Two other passengers in the two-car crash are later charged with insurance fraud.
9/11/03
9/12/03
9/17/03
September 25, 2003
The Lawrence Task Force, working with several major insurance companies, launch an investigation into staged accidents in Lawrence. They hope the probe will lead to dozens of arrests and deal a body blow to a cottage industry of fraudulent personal injury claims that cost honest drivers hundreds of dollars a year in added insurance premiums.
Lawrence Insurance Fraud Task Force
Lawrence Police Department Attorney General Essex County District Attorney Insurance Fraud Bureau Insurance Industry
Partnerships
Continuous involvement with a designated prosecutor Partnership with the local newspaper to “keep the story in the news”
February 26, 2004
6 people charged with staging an accident. 5 people apprehended. 5 people confess to the staged accident in another city (Methuen). Cooperative effort with another police agency.
Leads investigators to Chiropractor Sean Nisivoccia.
March 2, 2004
Chiropractor Sean Nisivoccia from Health Group of New England arrested at his place of employment for taking part in staging accidents.
March 15, 2004
First conviction sends a clear message.
Doel Miranda, one of 52 people charged in a sweeping investigation that began in September 2003, pleaded guilty to three charges stemming from a fake hit & run accident in January 2003.
Sentence: One year in jail and probation for a year and a half.
September 22, 2004 Grand Jury Indictments
4 Chiropractors 3 Lawyers Others working in their offices 1 insurance agency manager Runners
16
in all!
To Date in Lawrence
Task Force Totals: 130 people charged in connection with 42 cases of insurance fraud. Charges include:
Manslaughter Motor Vehicle Insurance Fraud Conspiracy to Commit Insurance Fraud Perjury Larceny False Report to Police
To Date in Lawrence
Task Force Totals: Seven individuals pleaded or found guilty. 18 individuals continued without a finding.
EFFECTS OF PROGRAM
Claims Paid Per Car Statewide Lawrence 2002 2004 $714 $614 $2,061 $951
2004 Reported Pure Premiums (BI, PIP, PD, COMP, COLL)
EFFECTS OF PROGRAM
In 2002, for every 100 accidents in Lawrence 141 injuries are reported! In 2004, for every 100 accidents in Lawrence 60 injuries are reported!
2004 Number of Claims Per 100 Accidents (PIP)
EFFECTS OF PROGRAM
2002 insurance claims in Lawrence $48.6 million 2004 insurance claims in Lawrence $19.8 million
Savings $28.7 million!
2004 Total Loss Amount (BI, PIP, PD, COMP, COLL)