This article features a panel discussion on insurance fraud organized by Richard Derrig for the 2005 World Risk and Insurance Economics Congress (WRIEC). The moderator is Richard Derrig. Richard is president of OPAL Consulting LLC, Providence, RI. Richard formed OPAL after retiring in 2004 from the Auto Insurers and Insurance Fraud Bureaus of Massachusetts. The presenters are Beth Sprinkel and Dan Johnston. Beth Sprinkel's presentation is based on the 2002 claim study by the Insurance Research Council. Beth is senior vice president of the American Institute for CPCU and the Insurance Institute of America (the Institutes). Dan Johnston, an actuary, is the executive director of the Insurance Fraud Bureau of Massachusetts (IFB) and president of the Automobile Insurers Bureau of Massachusetts (AIB). In his capacity as president of the AIB, Dan oversees all of the activities of both bureaus, including the Annual Massachusetts Auto Rate Filings. The IFB is a unique, semi-private organization that is funded by the insurance industry and works with the attorney general, local prosecutors, and local law enforcement. A third panelist, Hunsoo Kim, also participated in the discussion and covered developments in South Korea. The latter material is the subject of a separate article in this issue.
Richard Derrig (Moderator): In these presentations, new and exciting material about insurance fraud will be presented. The first speaker, Beth Sprinkel, will discuss the results of a study of 2002 closed auto injury insurance claims. Next, Dan Johnston will present the results of ongoing activity concerning insurance fraud in Massachusetts, including an interesting case that has important long-term implications.
To start things off, there are really three major questions:
1. What is fraud?
2. How much is there, and what do companies do about fraud?
3. How is criminal fraud prosecuted?
The definition of criminal fraud that I have been using for at least ten years contains four principles from the law: (1) it has to be a clear and willful act; (2) it has to be against the law; (3) there must be financial gain; and (4) material misrepresentation must occur. If all four principles are present, the person involved can be prosecuted for fraud. If one or more of these are missing, you cannot prosecute (or you cannot prosecute successfully). Without all four elements, we enter into a gray area, which is generally termed as abuse, buildup, or some lapse of ethics, but it is not criminal. Thus fraud can be broken down into two major parts. One is criminal, and the other is not criminal. The latter is much more of a problem for the insurers who pay claims than it is for the police or law enforcement in general. Concerning how much claim fraud exists, the correct answer is not the typical answer of 10 percent. It depends very much on whether "fraud" is restricted to the criminal type, probably less than 1 percent, or includes the gray area known widely as "soft fraud" that may be upward of 30-40 percent in some geographic areas.
Concerning the types of fraud, we could go on for days describing the many schemes that include claimants, medical providers, attorneys and their helpers, the runners. In this discussion, we narrow the subject matter, but not the principles, involved with auto insurance fraud. For bodily injury, the types of fraud can be categorized as staged accidents, actual accidents with faked injuries, buildup, and "jump-ins." Jump-ins refer to individuals who were not present at the accident but file a claim anyway and/or are involved in false billing. Buildup refers to artificially inflating the magnitude of the injury and/or the treatment. With respect to vehicle damage fraud, there are (1) staged thefts; (2) the operation of chop shops that break up (or chop up) the car into parts; (3) body shop fraud (e.g., inflating repair estimates); and (4) adjuster fraud (i.e., all of the inside/outside arrangements in which someone on the inside of the company cooperates with a culprit on the outside of the company so as to obtain money from the insurance company). …