In 2002, buildup accounted for 47 percent of the excess payments attributable to fraud and buildup among BI claims, and for 57 percent among PIP claims. Although news headlines frequently publicize organized fraud rings, planned fraud (that is, staged or caused accidents) accounts for only 3 percent of excess payments from fraud and buildup.

Defining Fraud

Discussing fraud is easy, and we all think that we know it when we see it. It helps, however, to define our terms. One way to approach the topic is to classify insurance fraud into three major areas: false claims for bodily injury, arson for profit, and false or intentional auto theft and physical damage.

Insurance fraud assumes many forms. These include staged accidents and faked injuries. It also can surface as more subtle variants, such as exaggerating minor injuries to maximize compensation. Some fraud results from accidents that actually occurred, but from which the claimant is exaggerating symptoms and disability for so-called secondary gain factors. Inflating repair bills or intentional destruction of property to evade debt obligations or alleviate financial distress are other examples. Moonlighting by supposedly disabled workers' compensation claimants is another type. Arson, faked accidents, and padded medical bills are variations of fraud that have as a common denominator the quest to recover insurance money using false pretenses.

Risk managers sense that fraud is more rampant in some lines of claims and coverage than others. At the top of the list may be workers' compensation. Fleet auto accidents may enter in. General liability claims against commercial entities may be staged or built up. Other lines of claims, such as director and officer liability and product liability, are less associated with fraud.

My company insures medical devices for product liability. We roll our eyes as each state demands a written copy of our anti-fraud plan. I have yet to see someone insert a defective pacemaker into his chest or secretly switch the tubing on the OR's anesthesia machine so that he could collect insurance money. On the other hand, some soft drink companies have fought mouse-in-the-soda-bottle claims by x-raying the dead rodents to show that they were forced inside the bottle after untimely demises – claims denied. So, even in product liability, fraud lurks.

Why should risk managers care about fraud? There are at least three reasons.

First, fraud raises the cost of insurance coverage, which, ultimately, the risk manager pays through higher premiums. Fraud represents an added tax on settlements. The less paid out in such expenses, the better the loss ratio and the lower the cost of coverage.

Risk managers cannot and should not take the view that, “Fraud fighting is the insurance company's problem and headache, not mine,” or, “That's why I buy coverage, so that the insurance company can handle problems like this.” Indirectly, insurance buyers pay the tab for fraud and its added costs.

Second, the risk manager's company may be self insured or have a self-insured retention. In such cases, fraud increases the direct expenses to the company. There is no insurance cushion to negate the financial impact. An increasing number of companies are absorbing deductibles and self-insured retentions in order to moderate insurance costs. Fraud that affects the “burning layer” of such retentions is felt directly by the risk manager's company.

Another reason risk managers should combat fraud is simply because it is the right thing to do. It helps that there may be financial payoffs from fraud fighting. The notion, however, that someone recovers from a loss that was intentionally caused or from exaggerated or fabricated damages offends our sense of fairness.

Combating Fraud

One example of fraud fighting applies to managing corporate vehicles. Astute risk managers stock these with glove-box kits that include disposable cameras, accident report forms, etc. Cameras capture the moment and let drivers establish tangible evidence of the circumstances after accidents. The kits can include easy-to-follow instructions suggesting the photos to take to crystallize relevant facts. Comprehensive forms can list the key questions to ask, serving as invaluable claim-form supplements.

Such kits help deter insurance fraud. Standardized investigation checklists lower the odds of coming away with only partial recollections of vital accident-related information. Using the kits to compile accurate information, complete with photographs, deters others from toying with the facts and filing fraudulent claims.

According to one risk management trade publication, up to 30 percent of workers' compensation claims involve exaggeration or fraud. Accordingly, risk managers can and should use aggressive surveillance. Even if, 90 percent of the time, surveillance proves either nothing or validates the disability, in the other 10 percent of cases, risk managers can hit pay dirt and reap some financial rewards through savings on claims.

According to a former insurance company executive, “When surveillance is used correctly, it can yield significant savings. … Studies generally report payback ratios of about eight-to-one.”

Fraud-Fighting Scorecards

One way risk managers can gauge the commitment of their insurers to fighting fraud is by developing a result scorecard to track anti-fraud outcomes. Recall the old management maxim, “That which gets measured gets done.” Fraud scorecards can provide a baseline for future comparisons, in addition to helping motivate an insurer's claim staff to set goals and providing objective assessments of fraud-fighting activities.

Among the items that might be included on a fraud-fighting scorecard are the number of cases referred to prosecutors, criminal arrests and civil complaints, cases referred to law enforcement, claims denied or reduced due to fraud, and claims referred to a special investigation unit. You never know how good a job your insurers are doing unless you have some way to track and measure.

One new high-tech tool for fighting fraud is data mining. Risk managers can insist that their selected insurers invest in this technology, which involves semi-automatically extracting patterns, changes, associations, anomalies, and other statistically significant details from large groups of data. By searching for common phone numbers, similar or nearby addresses, and related patterns, risk managers or insurers can spotlight suspicious accounts or claims for further investigation.

Comparing the number of claims of various types processed by doctors, clinics, and body shops also flags suspect files for additional probing. In collaboration with police authorities, phone calls may be analyzed. For example, accident “victims” may have called fraud ring leaders prior to the accidents, and the fraud ring leaders may have called clinics and automobile body shops before accidents.

Fighting and detecting fraud is a team effort. Risk managers are a vital part of that team, along with insurers, surveillance firms, and informational technology resources to help spot disturbing trends. Form partnerships with these constituents to detect, fight, and deter bogus and exaggerated claims.

Kevin Quinley, CPCU, is senior vice president for Medmarc Insurance Group in Chantilly, Va. He can be reached at [email protected].