While insurance fraud schemes have evolved over time to fit within the circumstances of modern society, the foundation of them has been in place for centuries….
Insurance fraud is one of the real threats facing the industry. The growth of the claims culture, together with research shows consumers believe insurers are ‘fair-game’, making for a dangerous combination. The costs to manage these claims come with a risk factor; bad faith suits, medical expense, investigation expense to name but a few. The utilization of third party providers to assist in managing these claims has opened the door to the added risk of provider fraud. The cost to the industry is enormous and affects the way the public view insurance companies and their service offerings.
MetLife director of special investigations, John Sargent stated in an article “that eliminating fraud is an unachievable goal”. But that hasn’t stopped his company or other industry leaders from trying. “Our goal is to pay what we owe, and not a penny more or a penny less,” Sargent says. “The more efficient we are at identifying and preventing fraud, the better we can be at writing business at a more competitive rate.”
Insurance fraud costs Canadian policyholders over $1 billion each year. To the average Canadian citizen, that means at least 10 percent of their total insurance premiums are used to cover the cost of fraud.
There is nothing new about fraudulent insurance claims or in the way they are adjudicated. The high cost of insurance fraud is passed on to the consumer and therefore, creates a situation where the industry might fail to seek a better solution to combating it. We’ve seen insurance claims directors reduce the numbers of claim handlers in order to ‘contain costs’, frustration amongst investigators when insurers exhort them to reduce fee’s, and then make a “commercial decision” to pay unnecessary claims. These cost cutting solutions are not and haven’t been effective, instead insurers need to re-focus on reducing claims before they become costly and problematic.
The History of Insurance Fraud
While insurance fraud schemes have evolved over time to fit within the circumstances of modern society, the foundation of them has been in place for centuries. For example, one of the earliest fraud schemes involved the purposeful sinking of ships, otherwise known as “ship scuttling”. One of the first incidents of ship scuttling was recorded in ancient Greece. The problem became increasingly worse, and by the early 1700’s ship scuttling became so prevalent that England passed one of the strictest insurance fraud statutes ever, providing for death by hanging as a penalty for conviction.
The sinking of the ship Adventure is typical. The Adventure was purposely sunk off the coast of Brighton, England in 1902. The ship owners, Easterby and MacFarlane, purchased the Adventure at a salvage auction (which like vehicle’s in modern day schemes, was where the most scuttled ships were purchased). The ship was then repaired so that it could earn the lowest passing grade of seaworthiness. The ship owners then, over-insured the Adventure and told it’s Captain (Captain William J. Cotling)to sink it, so that they could collect the insurance. As with many schemes, the characters committing the fraud were careless.
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The Captain ordered an inexperienced mate to open the scuttle so that the ship would sink. The ship, however, was in shallow water and was sinking so slowly that the Captain had to refuse assistance from a nearby fishing vessel. In fact, the next morning the masts of the ship were still visible from the shoreline. In the end, the Captain was prosecuted for his actions and hanged. The shipowners however, were neither prosecuted nor fined.
The earliest recorded life insurance fraud a case of pretended death comes from England in the 1730’s. A father and daughter staged a succession of schemes in which the daughter appeared to convulse, with heart spasms then go limp in apparent death. While the father stood by in convincing grief. These schemes traveled from England to America and eventually with the advent of automobiles that we began to see related injury claims. Today the same schemes exist, though the mediums have changed. In a nutshell resourceful individuals have been quick to seize opportunities to steal money from insurers in just about every imaginable means.
Insurance fraud comes in many different flavors, ranging from isolated crimes of opportunity to sophisticated organized schemes. While it is unrealistic to expect insurers to eradicate fraud in its entirety, it is however, realistic for insurers to reduce their exposure to this multi billion dollar a year industry
Time for Change
Fraud Investigations are being scaled down, on the basis that it is reactive rather than proactive. Fraud has to be beaten by a more strategic approach, involving consumers, employers and claims handlers. The fraud problem in insurance relies heavily in the skills and effort of the insurer and their agents to uncover and manage fraud.
Lack-lustre investigations will not result in a dossier that is effective as evidence in a court. To discharge the burden of proof in a criminal trial, insurers need to provide evidence to convince a magistrate or jury beyond all reasonable doubt of any guilt. In civil cases, the usual standard of proof is on a balance of probabilities, in fraud cases there is a very high degree of probability. The costs associated with investigating fraud come with additional risks which could lead to reputational damage and loss of public confidence. This is an area of cost management that requires review and reconstruction.
To help reduce claims related costs and reserves, insurers need to become more proactive than reactive, to unjust claims and provider fraud. Being proactive requires a good understanding of the root cause. The root cause associated with fraudulent claims begins long before the claim is submitted and can be traced to human behavioral traits. The lack of understanding by employers or empathy by claims personnel coupled with a lack of good communication between, H.R, claims and investigators can a create a GAP in process and provide a green light for the claimant to fabricate, inflate or exaggerate their claims. With GAP’s, like these, there’s little wonder why insurers are seeing a rise in their claims portfolio. The answer is a lot simpler than it seems and corporate buy in is necessary. Proactive methodologies and practices will assist a company identify the motivations of individuals who are most likely to direct an act of fraud towards the insurer or their employer.
By being more proactive as apposed to reactive you have a better chance of reducing your claims exposure, reduce reserves and better manage your service providers while reducing the potential for litigation, bad publicity and poor public perception and at the same time ensuring compliance with your companies vision. In the war on insurance fraud, chasing the carrot will no longer yield the desired results. We need to stop looking at trying to remove the opportunity and focus more on the motive, thus understanding the root cause and effectively set about cost containment.
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