When SIUs and States Team Up, Results Follow
Pennsylvania became interested in helping companies fight insurance fraud when complaints of high auto insurance losses for insurers and premiums paid by consumers reached the ears of state legislators. Here's how we achieved success.
Ever wonder why your company finds it necessary to have fraud investigators in special investigation units (SIUs) dealing with fraudulent, inflated, and abusive claims? The short answer is anti-fraud mandates. But, as claims professionals, isn’t it your job to take care of claims that merit payment in a timely manner and deny those that do not? Here’s the scoop from Pennsylvania: SIUs are the key to understanding insurance fraud and doing what is necessary to help keep fraud cheats and their bogus claims away from your desks.
Pennsylvania’s Fraud Problem
Pennsylvania became interested in helping companies fight insurance fraud when complaints of high auto insurance losses for insurers and premiums paid by consumers reached the ears of state legislators. Prior to 1990, Pennsylvania’s high auto insurance costs, especially in the city of Philadelphia, where the ratio of personal injury claims per 100 auto physical damage claims was 78.5 as compared to the statewide average of 23.3, were attributed to insurance losses caused by the fraudulent, inflated, and abusive claims by opportunists who saw auto accidents and auto insurance policies as payday opportunities.
When legislators have a problem that affects their constituents, they get to work. Pennsylvania’s auto insurance reform law—Act 6 of 1990—included both cost containment and anti-fraud measures that were intended to reduce insurance losses and make auto insurance more affordable. A fraudulent auto insurance claim was defined as a felony crime, and auto insurers were required to report suspected fraudulent claims and applications to law enforcement. Auto insurers also had to file anti-fraud plans with state insurance regulators that detailed the procedures insurers would follow to detect, investigate, and report suspect claims to law enforcement. (Later, the definition of insurance fraud was broadened to apply to all lines of insurance and self-insurance, though mandatory fraud reporting continued to apply only to auto insurers.)
The end game of those anti-fraud mandates was to expose the fraud problem so that police could see it and investigate the bad guys. Criminal prosecutions would restore fraud-related losses to auto insurers, and punishments imposed on offenders would act to keep others from going down the wrong road to insurance fraud. However, it soon was evident that police were busy chasing violent crimes and lacked insurance expertise. Out of more than 3,600 suspected insurance fraud cases that auto insurers churned out from 1991 through 1994, relatively few resulted in prosecutions.
Pennsylvania legislators went back to work. They crafted Pennsylvania’s Insurance Fraud Prevention Act, which created a partnership between the government and insurers. Needed funding to drive criminal prosecutions was provided by insurers writing fire, casualty, and accident and health insurance, with insurers paying $8 million annually into the Insurance Fraud Prevention Trust Fund. An Insurance Fraud Prevention Authority (IFPA), governed by a seven-member board led by insurer representatives with law enforcement and consumer representation, was created to advise Pennsylvania on the state’s insurance fraud problem and to ensure that entrusted funds were used only for criminal prosecution and fraud prevention programs. Prosecution units began operations in 1995.
Over the next four years, $7.2 million in prosecution grants were given annually by the IFPA to 13 state and local law enforcement agencies (IFPA grantees) to support the work of 46 detectives and agents, 20 prosecutors, and 18 support staff. IFPA grantees handled 6,600 reports of suspected fraud, 3,900 of which came from auto insurers. They made more than 1,400 arrests and concluded 1,100 prosecutions.
By the end of 2011, IFPA grantees handled 29,932 reports of suspected fraud, 18,581 coming from insurers, and made 5,825 arrests from which 5,372 prosecutions were concluded yielding $53.3 million in court-ordered restitution and $4.8 million in fines and penalties.
Pennsylvania’s battle against insurance fraud persists. Auto insurance fraud continues to be a large part of our visible problem; it is seen in half of reported fraud cases and two-thirds of those prosecuted. Reported insurance fraud for 2011 was 70 percent higher than in previous years. Criminal prosecutions and IFPA-sponsored statewide public fraud awareness programs are working to deter fraud. Pennsylvania’s own research tells us that consumers are aware of fraud and have an understanding that it causes them to pay more than is necessary for their insurance. More importantly, evidence suggests that the number of probable offenders in Pennsylvania continues to decline, with respondents indicating a two percent decline in the potential to offend—or 160,000 people less likely to commit fraud.
Bridging the Gap
We see claims professionals as very busy, with limited time available for digging into all of the questions that might arise in a claim file, preparing written reports to send to law enforcement, or answering criminal investigators’ questions and requests for additional documents as cases move to criminal prosecutions. That’s a fraud communication gap. The support that SIUs give claims professionals, the fraud-related training they offer, and the removal of the time demands for mandated fraud reporting and cooperation with law enforcement all help bridge that gap.
SIUs also have expertise in both insurance and criminal matters, so when reporting suspected fraud to law enforcement, they are able to make the “claims-speak” of files understandable for criminal investigators and prosecutors. As increased numbers of suspected fraud cases and successful criminal investigations and prosecutions flow, Pennsylvania’s knowledge of insurance fraud is increased. That knowledge dictates where the IFPA will direct the money entrusted to Pennsylvania by companies for the prevention of insurance fraud.
Key to Anti-Fraud Success
Discussing all that Pennsylvania has done to combat insurance fraud requires considerably more space than has been taken here, but more can be found on the IFPA’s website at www.HelpStopFraud.org. Suffice it to say that a state must know its insurance fraud problem to pursue an effective anti-fraud strategy. That knowledge comes to Pennsylvania, and the IFPA, through the work of claims professionals and skilled investigators and prosecutors in law enforcement agencies. With SIUs as the keystone in the bridge between claims adjusters and law enforcement, the IFPA acknowledges them as Pennsylvania’s key to fraud-fighting success.
Ralph W. Burnham is executive director of the Pennsylvania Insurance Fraud Prevention Authority. He has been a CLM Fellow since 2012 and can be reached at (717) 975-9074, firstname.lastname@example.org.