a year. Numerous studies show that 10 percent of property and casualty claims and 36 percent of bodily injury claims involve fraud or inflation of otherwise legitimate claims. Workers' compensation fraud has been a particularly troublesome area for the industry, costing insurers and employers about $6 billion a year, according to the Coalition Against Insurance Fraud (CAIF).What Fraud Looks Like
Claimant fraud trends have been on the rise in recent years, reflecting current economic conditions. Claimant fraud occurs when false or exaggerated injury claims, such as those not received on the job, are filed. The National Insurance Crime Bureau (NICB) reports that as the economy has deteriorated over the last several years, the number of suspicious or questionable claims has increased. For instance, the NICB states that the number of questionable claims related to workers' compensation increased 71 percent between the first quarter of 2008 and the first quarter of 2009 alone.
Equally troublesome is the impact increased medical costs have had on workers' compensation. Traditionally, 60 percent of injury claim amounts covered the indemnity payment while the remaining 40 percent covered medical costs. Today, the relationship has reversed, illustrating how dramatically medical costs have risen, while frequency and indemnity payments have decreased.
Such a significant increase in medical costs can be partially attributed to a rise in provider fraud, when medical or treatment providers exaggerate treatments for minor injuries or bill for treatments not actually provided. The increased involvement of organized crime can drive up medical costs as well. Such crime can include storefront clinics where no treatment is rendered or durable medical equipment providers that do not supply equipment to patients.
Employer premium fraud is another aspect of workers' compensation fraud facing the property and casualty insurance industry. Employer fraud occurs when an employer underreports payroll, misrepresents job classifications or business type, or misclassifies employees as independent contractors in an effort to reduce workers' compensation insurance premiums.
Fighting Fraud on Two Fronts
The industry is currently fighting back hard against the problem of fraud, focusing on two major antifraud efforts: fraud awareness and investigation/enforcement. In regard to fraud awareness, insurers are placing greater emphasis on fraud training for claims adjusters and underwriters to help them identify signs of suspect behavior or claim patterns. Furthermore, support for public fraud awareness and education has been broad, involving not only insurers but the CAIF, consumer interest groups, and the NICB as well.
Industry efforts to fight against fraud have also been encouraged by regulators and legislators across the United States. In fact, 38 states have established insurance fraud bureaus, and several others have pending legislation designed to support the antifraud effort.
On the fraud investigations and enforcement front, the insurance industry, lawmakers, and law enforcement have invested significant resources in investigations and subsequent arrests and prosecutions for fraudulent activities. For example, in the 2008–2009 fiscal year, the California district attorney's workers' compensation fraud program prosecuted 1,090 cases involving 1,221 suspects— resulting in 555 convictions and orders for restitution totaling $23,767,448. In Florida, the Department of Financial Services Division of Insurance Fraud reported that in fiscal year 2009-2010 it received and reviewed 12,820 insurance fraud referrals that resulted in 1,234 cases presented for prosecution and 1,042 arrests. The 706 convictions resulted in court-ordered restitution totaling $63,061,289.
Of the total number of fraud referrals, 13 percent—or 1,676 referrals—were for suspect workers' compensation cases.
According to a 2007-2008 report from the CAIF, Florida's Division of Insurance Fraud leads the nation in the recovery of insurance fraud-related losses through court-ordered restitution. In fiscal year 2008-2009, cases presented for prosecution by the Division of Insurance Fraud resulted in more than $34 million in court-ordered restitution. According to the Coalition's 2007-2008 statistics, Florida ranks in the top four among all states' fraud divisions and bureaus in key measurements of success, including:
- Second in the number of arrests
- Third in the number of cases presented for prosecution
- Fourth in the number of referrals
During 2009 and 2010, the Florida Bureau of Workers' Compensation Fraud was restructured and now is a completely independent unit within the Division of Insurance Fraud. According to the division, the restructuring will enable a more focused approach to combating various types of workers' compensation insurance fraud. It will also make the bureau more responsive to changing trends, since all fraud referrals are channeled through one contact point within the division.
Technology as an Antifraud Weapon
Regardless of the type of fraud occurring in the workers' compensation sector, insurers, law enforcement, and employers, among others, have faced challenges in investigating and identifying fraudsters. However, effective technologies and analytic capabilities are rapidly changing the antifraud landscape.
Industrywide claims databases have been an invaluable tool in the fight against fraud for many years. Insurers and investigators can use claims histories to analyze activity and uncover suspicious patterns or pre-existing injuries. Additionally, claims handlers can use the database to more easily identify potential fraud indicators or red flags within a suspicious claim. For example, the database can help a claims handler identify multiple bodily injury claims filed under the same Social Security number that have suspiciously similar circumstances. Databases can also provide insight into medical provider billing activity or medical sanctions and may uncover questionable patterns.
Data analysis and visualization software can also graphically show relationships between data elements in claims, helping to reveal suspicious behavior. These tools can connect data elements, such as all claims associated with a particular medical provider or links between individuals that appear in several claims. The software can easily sift through millions of pieces of data and connect each element to every other data component with which it has a relationship. Advanced predictive analytics has also proven to be extremely helpful in flagging suspicious claims. Regression analysis, social network analysis, and text mining can examine vast numbers of claims and their attributes. Claims systems can then use the outcomes to score claim characteristics and identify red flags and patterns of claims.
Premium audit models are another effective tool insurers can use to combat the problem of employer fraud. When insurers routinely audit commercial accounts, the audits should include fraud detection to ensure the accuracy of the premium collected for workers' compensation. Insurers use predictive models to optimize audit resources and effectiveness in three key areas: deciding which accounts to audit; determining the most efficient allocation of mail, telephone, and physical audits; and optimizing the order of audits so any additional premium due the company can be identified early.
Conclusion
Fraud is an ongoing problem in the workers' compensation sector and it costs insurers and self-insureds millions of dollars each year. However, as advanced analytic technology evolves, the insurance industry will be well equipped with a full arsenal of tools to detect fraudulent activity.
Though the challenges from fraud rings and fraudulent activity will continue to be formidable, the leaders of the 21st century insurance industry will be those that use technology and analytics effectively to succeed and thrive.
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