In practice, this approach is equally logical, methodical, and timeless. With an insured using today's best practices to deter fraud coupled with a claim professional's process that is consistent if not prodding, fraud will be detected. The “Three A's” approach allows a professional to utilize his time-tested skills acquired over years of experience. In addition, the approach requires an individual to understand and improve his skills to match the current practice of today while looking toward upgrading his skills for tomorrow.

As a claim adjuster can attest, the type of claim can have great impact on determining the level of information available to determine its fate. Although differing levels of information can change the game in many cases, the professional with an aggressive approach to his trade can uncover fraud.

Be Aggressive

There is no one “look” to an individual who commits fraud. Several years ago, I examined a large claim involving specialty equipment. The insured was a company formed by someone who at first glance was a sincere and professional individual willing to settle the claim reasonably. He was helpful and wanted to do the right thing for both his company and my client. Meeting an individual with this approach to resolving claims is always good, but it is not always the start of a story with a happy ending. As is the case in many situations, numerous facts of the case made me think that there was more than what initially met the eye.

It is in these times that an aggressive approach to adjudicating claims makes good sense. Facts of this particular claim that stood out as red flags included the company being run by an owner who had significant control. In addition, the aggressive approach to the claim resulted in the identification of several other red flags, including the appearance of a conflict of interest by employees. This red flag eventually led us to significant fraudulent activities.

The specialty equipment mentioned earlier was utilized, maintained, and disposed of by the insured in the normal course of business by the principal at the insured. In addition, records were maintained by one individual at the insured's place of business who reported directly to the principal and who was heavily influenced by the principal. Through inspection of the files provided at a summary level, all information appeared to be in order, but several cross checks of the data showed that the provided information did not seem quite right. We pressed ahead, asking for additional detailed information and requested access to perform additional procedures, including an audit of the insured's offices. With each recalculation and procedure performed, inconsistencies resulted in fraud being found.

Altered and erroneous changes to documents in vehicle files detailed a trail of unsupportable and questionable charges. Transactions with no serial numbers showed hurried and suspicious record keeping and possible fraudulent activities. The lack of documented and justified maintenance and disposal of the equipment led to additional questions about the credibility of the claim.

Without an aggressive approach to this claim, millions may have been paid to an insured without justification. Passive action rarely produces results that uncover fraud. Be aggressive with your observations, requests for data, and questions regarding the facts of a claim.

An Active Mind

Every claim tells a story that can be interpreted differently by the individual who reviews the file. Approaching each claim and new file as a challenge with new facts and potentially a new wrinkle or two is an important step in achieving the goal of identifying fraud. An open and active mind with a creative thought process is as important as industry knowledge when uncovering potential improprieties.

One way to keep creative, where appropriate, is to work through an active fraud assessment process on each file. An active fraud assessment process for claim adjudication will consider the vulnerability of the claim to fraudulent activity (fraudulent reporting, misappropriation of assets, and corruption) and if any of those exposures could result in a material misstatement of the claim or material loss to the insurance company. The assessment should consider the various ways that fraud and misconduct can occur by the insured.

Fraud risk assessment also should consider vulnerability to override and potential schemes to circumvent existing control activities at an insured, which may require additional compensating control activities. To be effective, a claim professional should perform fraud risk assessments on a comprehensive and recurring basis on individual files. The essential elements of an effective fraud risk assessment include:

• A systematic assessment process.
• Consideration of potential fraud schemes and scenarios.
• Assessment of risk agency-wide, business unit, and significant account levels.
• Evaluation of the likelihood and significance of each risk to the insured.
• Assessment of exposure arising from each of the categories of fraud risk.
• Testing of the effectiveness of the risk assessment process by internal audit.
• Documented oversight by the audit committee, including consideration of the risk of override of controls by management.

These elements are meant to be as open ended and broad as they sound. An open and active mind lends itself to creativity. Working within the elements listed above, adjusters leave room for creativity in their investigations but have barriers to keep them from running too far in a direction that will not reap reward or benefit.

Several years ago I was engaged to perform an audit, in connection with several other ongoing investigations, to understand what our ceding company was doing with certain risks. During the audit, a number of claim files were selected, and interviews were conducted to determine and document process and controls.

From interview to process documentation to claim file, we were able to piece together and demonstrate an act of collusion and fraud that we would not have been able through the review of claim files independent of one another. The evaluation of the likelihood and significance of each risk to the insured and the assessment of the exposure arising from each of the categories of fraud risk as a whole significantly outweighed any individual analysis.

In the end, an active mind and approach will lead the way toward uncovering significant findings regarding the reporting of claims to clients.

.300 Isn't Accurate Enough

In baseball, success in one out of three attempts can bring an individual untold wealth and fortune. Within the claim and accounting professions, however, the standard is measured differently. The fields require an accurate account for balances closer to 100 percent. We need high batting averages when it comes to the accuracy of our record keeping and payments.

Accurate accounting for claims and the accurate archiving of recorded data, along with the use of new technologies, can go a long way toward uncovering repeat fraud offenders. Companies, and in many cases their claim professionals, have begun to take advantage of new artificial intelligence systems designed to make better use of computerized databases. These systems improve the ability to identify, track, and deter fraud and abuse.

Other software can track relationships within a loss database to help investigate potential fraud or abuse. Software also is available that analyzes relationships between elements in a loss database. When investigating large insurance pools, this software can, for instance, look for relationships between accounts and persons, which would take significant investigative time and may be difficult or impossible to identify by manual review.

In addition, many private companies successfully use applications such as matching software to generate useful data across large databases. For example, comparisons of customer, client, or eligibility information across similar databases can be used to identify duplication and errors, or to allocate resources to higher priority efforts. Moreover, investigative analysis software continues to improve and serve as a powerful tool in the detection of fraud by linking multiple databases with each other.

A Methodical Approach

Using an aggressive, active, and accurate approach to adjudicating claims is a time-tested and successful method for identifying fraud. New and advanced technologies help us sort through data, which helps prevent fraud. This special tool coupled with awareness and implementation of best practices will help us achieve our goals to detect and deter the fraudster.

Frederick J. Kohm, Jr., CPA, is a senior managing director with SMART Business Advisory and Consulting. He also acts as an expert in a number of industries, including insurance and reinsurance. He may be reached at www.smartgrp.com.