Chapter 1: insurance introduction

1.1 Introduction:

The Insurance sector in India governed by Insurance Act, 1938, the Life
Insurance Corporation Act, 1956 and General Insurance Business (Nationalisation)
Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999
and other related Acts. With such a large population and the untapped market area
of this population Insurance happens to be a very big opportunity in India. Today it
stands as a business growing at the rate of 15-20 per cent annually. Together with
banking services, it adds about 7 per cent to the country’s GDP .In spite of all this
growth the statistics of the penetration of the insurance in the country is very poor.
Nearly 80% of Indian populations are without Life insurance cover and the Health
insurance. This is an indicator that growth potential for the insurance sector is
immense in India. It was due to this immense growth that the regulations were
introduced in the insurance sector and in continuation “Malhotra Committee”
was constituted by the government in 1993 to examine the various aspects of the
industry. The key element of the reform process was Participation of overseas
insurance companies with 26% capital. Creating a more efficient and competitive
financial system suitable for the requirements of the economy was the main idea
behind this reform.
1.2 Definition

“Insurance is a contract in which sum of money is paid to the assured in

consideration of insurer’s incurring risk of paying a large sum upon a given
contingency.”

--- Justice Tindall

“Insurance is a contract by which one party for a compensation called in the

premium assumes particular risks of the other party and promises to pay to him or
his nominee a certain sum of money on a specified contingency.”
- -- E.W.Fitterson

“Insurance may be described as social device whereby a large group of

Individuals, through a system of equitable contribution, may reduce certain
Measurable risk of economic loss common to all members of the group.”
--- Encyclopedia
Britannica

The above definitions clearly shows that insurance is a cooperative device to

spread the loss caused by a particular risk over a member of persons who are
exposed to it and who agree to insure themselves against risk. Insurance does not
eliminate risk but only reduces the financial burden, which may be very heavy.
1.3 INDIAN INSURANCE MARKET – HISTORY

Insurance in India has its history dating back till 1818, when Oriental Life
Insurance Company was started by Europeans in Kolkata to cater to the needs of
European community. Pre-independent era in India saw discrimination among the
life of foreigners and Indians with higher premiums being charged for the latter. It
was only in the year 1870, Bombay Mutual Life Assurance Society, the first Indian
insurance company covered Indian lives at normal rates.

At the dawn of the twentieth century, insurance companies started mushrooming

up. In the year 1912, the Life Insurance Companies Act, and the Provident Fund
Act were passed to regulate the insurance business. The Life Insurance Companies
Act, 1912 made it necessary that the premium rate tables and periodical valuations
of companies should be certified by an actuary. However, the disparage still
existed as discrimination between Indian and foreign companies. The oldest
existing insurance company in India is National Insurance Company Ltd, which
was founded in 1906 and is doing business even today. The Insurance industry
earlier consisted of only two state insurers: Life Insurers i.e. Life Insurance
Corporation of India and General Insurers i.e. General Insurance Corporation of
India.

Important milestones in the life insurance business in India are:

 1912 – The Indian Life Assurance Companies Act enacted as the first statute
to regulate the life insurance business.
 1928 – The Indian Insurance Companies Act enacted to enable the
government to collect statistical information about both life and non-life
insurance businesses.
 1938 – Earlier legislation consolidated and amended to by the Insurance
Act with the objective of protecting the interests of the insuring public.
 1956 – 245 Indian and foreign insurers and provident societies taken over
by the central government and nationalized. LIC formed by an Act of
 Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crores
from the Government of India.

The General insurance business in India, on the other hand, can trace its roots to
the Triton Insurance Company Ltd., the first general insurance company
established in the year 1850 in Calcutta by the British.

Some of the important milestones in the general insurance business in India are:

 1907 – The Indian Mercantile Insurance Ltd. set up, the first company to
transact all classes of general insurance business.
 1957 – General Insurance Council, a wing of the Insurance Association of
India, frames a code of conduct for ensuring fair conduct and sound
business practices.
 1968 – The Insurance Act amended to regulate investments and set
minimum solvency margins and the Tariff Advisory Committee set up.
 1972 – The General Insurance Business (Nationalization) Act, 1972
nationalized the general insurance business in India with effect from 1st
January 1973.

Till 1999, there were no private insurance companies in Indian insurance sector. 
The Government of India then introduced the Insurance Regulatory and
Development Authority Act in 1999, thereby de-regulating the insurance sector
and allowing private companies into the industry.  Foreign investment was also
allowed and capped at 26% holding in the Indian insurance companies.  In recent
years many private players entered in the Insurance sector of India.
1.4 function of insurance
Basic functions of Insurance

1. 1.Primary Functions
2. 2.Secondary Functions
3. 3.Other Functions

Primary functions of insurance

 Providing protection – The elementary purpose of insurance is to allow

security against future risk, accidents and uncertainty. Insurance cannot
arrest the risk from taking place, but can for sure allow for the losses arising
with the risk. Insurance is in reality a protective cover against economic loss,
by apportioning the risk with others.
 Collective risk bearing – Insurance is an instrument to share the financial
loss. It is a medium through which few losses are divided among larger
number of people. All the insured add the premiums towards a fund and out
of which the persons facing a specific risk is paid.
 Evaluating risk – Insurance fixes the likely volume of risk by assessing
diverse factors that give rise to risk. Risk is the basis for ascertaining the
premium rate as well.
 Provide Certainty – Insurance is a device, which assists in changing
uncertainty to certainty.

Secondary functions of insurance

 Preventing losses – Insurance warns individuals and businessmen to

embrace appropriate device to prevent unfortunate aftermaths of risk by
observing safety instructions; installation of automatic sparkler or alarm
systems, etc.
 Covering larger risks with small capital – Insurance assuages the
businessmen from security investments. This is done by paying small
amount of premium against larger risks and dubiety.
  Helps in the development of larger industries – Insurance provides an
opportunity to develop to those larger industries which have more risks in
their setting up.

Other functions of insurance

 Is a savings and investment tool – Insurance is the best savings and

investment option, restricting unnecessary expenses by the insured. Also to
take the benefit of income tax exemptions, people take up insurance as a
good investment option.
 Medium of earning foreign exchange – Being an international business,
any country can earn foreign exchange by way of issue of marine insurance
policies and a different other ways.
 Risk Free trade – Insurance boosts exports insurance, making foreign trade
risk free with the help of different types of policies under marine insurance
cover.

Insurance provides indemnity, or reimbursement, in the event of an unanticipated

loss or disaster. There are different types of insurance policies under the sun cover
almost anything that one might think of. There are loads of companies who are
providing such customized insurance policies.
Chapter: 2 Introduction of frauds in insurance

2.1 Introduction
Fraud may be committed at different stages in the insurance transaction
by different parties: applicants for insurance, policyholders, third-party claimants
and professionals who provide services to claimants. Common frauds include
"padding," or inflating actual claims; misrepresenting facts on an insurance
application; submitting claims for injuries or damage that never occurred; and
"staging" accidents. The majority of states have set up fraud bureaus, some funded
by the insurance industry. Those who commit insurance fraud range from
organized criminals who steal large sums through fraudulent business activities
and insurance claim mills to professionals and technicians who inflate the cost of
services or charge for services not rendered, to ordinary people who want to cover
their deductible or view filing a claim as an opportunity to make a little money.
Health care, workers compensation and auto insurance are believed to be the
sectors most affected by insurance fraud.

Insurance fraud, like other types of fraud, is illegal in all states. Some
state laws specifically identify insurance fraud in the penal code, which defines
what constitutes insurance fraud, along with the penalties that can be imposed.
Where insurance fraud is not specifically mentioned, it falls under general fraud
provisions such as fraud by deception. The level of seriousness attached to the
crime also varies by state. Some states classify insurance fraud or certain types of
insurance fraud as a felony, others as a misdemeanor, a lower level of crime. Some
classify insurance fraud as a felony when more than a certain dollar amount is
involved.
 The Health Insurance Portability and Accountability Act, signed by
President Clinton in 1996, contain significant antifraud provisions focused on the
health care system. The Act targets fraud in federal programs such as Medicare but
also covers private health care, especially in defining the crime of health care
fraud. The Act makes "knowingly and willfully" defrauding any health care benefit
program a federal crime. It also includes making false statements "in any matter
involving a health care benefit program," theft or embezzlement, obstruction of
investigations and money laundering.

The Violent Crime Control and Law Enforcement Act (1994)

make insurance fraud a federal crime when it affects interstate commerce. It
provides, among other things, that people engaged in insurance on an interstate
basis who knowingly make false statements or intentionally overvalue any aspect
of their business with the intent to deceive can be fined or imprisoned for up to 15
years. Insurance company employees, including agents, who embezzle or
misappropriate any company funds, can be punished as well. The Act also expands
the charge of federal mail fraud to cover any illegal actions that use private
overnight delivery services (such as Federal Express) that have been used in an
attempt to circumvent the federal mail fraud statutes.
2.2 The Definition of Insurance Fraud:

Insurance Fraud occurs when people deceive an insurance company or agent

to collect money to which they aren’t entitled. It is a criminal act requiring a
material and intentional misrepresentation in order to obtain a benefit, or cause a
benefit due someone to be denied. Similarly, insurers and agents also can defraud
consumers, or even each other.

For the purposes of this questionnaire, fraud in insurance is defined as

follows: an act or omission intended to gain dishonest advantage for the fraudster
or for the purposes of other parties. This may for example be achieved by:
• miss appropriation of assets and/or insider trading; and/or
• Deliberate misrepresentation, suppression or non-disclosure of one or more
material facts relevant to a financial decision or transaction; and/or
• Abuse of responsibility, a position of trust or a fiduciary relationship.
The following three categories of fraud are defined:
• Internal fraud – Fraud against the insurer by an employee, a manager or a board
member on his/her own or in collusion with others who are either internal or
external to the insurer.
• Policyholder fraud and claims fraud – Fraud against the insurer in the purchase
and/or execution of an insurance product by obtaining wrongful coverage or
payment.
• Intermediary fraud – Fraud by intermediaries against the insurer or
policyholders. For the purpose of this questionnaire, “intermediary” should be
understood to mean “independent broker/agent”.
2.3 Overview of Insurance Fraud

Insurance fraud is a false claim made for financial gain. Consumers may
misrepresent information to collect money that they would otherwise not be
entitled to from their insurer. But, insurers can also defraud consumers by denying
benefits rightly entitled to their consumers.

Everyone knows that the health insurance industry is continually raising

monthly premiums, and many feel this is unjust to you as the consumer. However,
the health insurance industry has had to fight increasing health insurance fraud.
The amount of money spent on investigating and prosecuting fraud is then passed
on to policyholders. Many people do not understand what health insurance fraud
entails, though. With reports estimating health insurance fraud is a $30 billion to
over $100 billion industry per year; the topic should not be taken lightly. Every
health insurance policyholder should understand what health insurance fraud is and
its consequences. By doing so, you are more able to recognize and fight fraud.

Health insurance fraud is typically defined as intentionally deceiving,

misrepresenting, or concealing information to receive benefits from the insurance
company. Essentially this means that you assert that you paid for certain medical
procedures or expenses out-of-pocket which you have not actually received, and
you are submitting claims to the insurance company to receive reimbursement.
Another example of member fraud is to conceal pre-existing conditions or to alter
medical documents so that non-policyholders or ineligible members receive
medical benefits under your policy. Perhaps your sister does not have insurance
and needs medical attention. Having her use your name and policy to cover the
expenses is health insurance fraud. While you may think that this is a small issue in
comparison to your sister receiving treatment, it is actually very serious to your
health insurance company and industry, and will result in fines and possible
imprisonment if your are caught.

Not only policyholders commit fraud, but providers (physicians, hospitals,

etc.) do as well. Since physicians and hospitals bill the insurance company for
services they provide for you, they are also receiving reimbursement from the
insurance company. When providers commit fraud, they may be billing the
insurance company at higher rates for services rendered or they may bill for
services you never received. In these cases, you will probably be asked to
cooperate in the insurance company's investigation.

Another type of health insurance fraud that has developed recently targets
the policyholder more than the insurance company. Schemes have developed
where fake insurance companies or agents sign unsuspecting customers for
coverage at surprisingly low premium rates. They often act much like a regular
insurance company for the first few months, paying for smaller medical claims like
physicians visits. But once you have a more serious medical condition that needs
treatment, the insurance company will disappear - along with the money you have
been paying in premiums.

The rule with health insurance fraud is much like that of any other scam:
if a deal seems too good to be true, just remember - it probably is. Remember to be
honest in your dealings with health insurance companies and expect the same in
the return from these companies, as well as your health care providers. Stay legal
to avoid fines and prison and to continue receiving health insurance coverage.
2.4 Insurance Fraud and Abuse:
A Very Serious Problem

Stephen Barrett, M.D.

Fraud and abuse are widespread and very costly to America's health-care
system. Fraud involves intentional deception or misrepresentation intended to
result in an unauthorized benefit. An example would be billing for services that are
not rendered. Abuse involves charging for services that are not medically
necessary, do not conform to professionally recognized standards, or are unfairly
priced. An example would be performing a laboratory test on large numbers of
patients when only a few should have it. Abuse may be similar to fraud except that
it is not possible to establish that the abusive acts were done with intent to deceive
the insurer.

Although no precise dollar amount can be determined, some authorities contend

that insurance fraud constitutes a $100-billion-a-year problem. The United States
Government Accountability Office (GAO) estimates that $1 out of every $7 spent
on Medicare is lost to fraud and abuse and that in 1998 alone, Medicare lost nearly
$12 billion to fraudulent or unnecessary claims.

2.4.1 Type of Fraud and Abuse

False claim schemes are the most common type of health insurance fraud. The goal
in these schemes is to obtain undeserved payment for a claim or series of claims.
Such schemes include any of the following when done deliberately for financial
gain:

 Billing for services, procedures, and/or supplies that were not provided.
  Misrepresentation of what was provided; when it was provided; the
condition or diagnosis; the charges involved; and/or the identity of the
provider recipient.
 Providing unnecessary services or ordering unnecessary tests.

Many insurance policies cover a percentage of the physician's "usual" fee. Some
physicians charge insured patients more than uninsured ones but represent to the
insurance companies that the higher fee is the usual one. Other illegal procedures
include:

 Charging for a service that was not performed.

 Unbundling of claims: Billing separately for procedures that normally are

covered by a single fee. An example would be a podiatrist who operates on
three toes and submits claims for three separate operations.

 Double billing: Charging more than once for the same service.

 Upcoming: Charging for a more complex service than was performed.

Miscoding: Using a code number that does not apply to the procedure.

 Kickbacks: Receiving payment or other benefit for making a referral.

Indirect kickbacks can involve overpayment for something of value.

2.4.2 Excessive or Inappropriate Testing

Many standard tests can be useful in some situations but not in others. The
key question in judging whether a diagnostic test is necessary is whether the results
will influence the management of the patient. Billing for inappropriate tests—both
standard and nonstandard—appears to be much more common among
chiropractors and joint chiropractic/medical practices than among other health-care
providers. The commonly abused tests include:

 Computerized inclinometry: Inclinometry is a procedure that measures joint

flexibility.
 Nerve conduction studies: These tests can provide valuable information
about the status of nerve function in various degenerative diseases and in
some cases of injury.
 Surface electromyography: This test, which measures the electrical activity
of muscles, can be useful for analyzing certain types of performance in the
workplace
 Thermograph: Thermo graphic devices portray small temperature
differences between sides of the body as images.
 Ultrasound screening: Diagnostic ultrasound procedures have many
legitimate uses
 Unnecessary x-rays: X-rays examinations can be important to look for
conditions that require medical referral.

Many insurance administrators are concerned about chiropractic claims for

"maintenance care" (periodic examination and "spinal adjustment" of symptom-
free patients), which is not a covered service. To detect such care, many
companies automatically review claims for more than 12 visits. In 1999, the U.S.
Inspector General recommended automatic review after no more than 12 visits
for Medicare recipients. Some chiropractors attempt to avoid review by issuing a
new diagnosis after the 12th visit.
2.4.3 Personal Injury Mills

Many instances have been discovered in which corrupt attorneys and health-care
providers (usually chiropractors or chiropractic/medical clinics) combine to bill
insurance companies for nonexistent or minor injuries. The typical scam includes
"cappers" or "runners" who are paid to recruit legitimate or fake auto accident
victims or worker's compensation claimants. Victims are commonly told they need
multiple visits. The providers fabricate diagnoses and reports and commonly
provide expensive but unnecessary services. The lawyers then initiate negotiations
on settlements based upon these fraudulent or exaggerated medical claims. The
claimants may be unwitting victims or knowing participants who receive payment
for their involvement [9]. Mill activity can be suspected when claims are submitted
for many unrelated individuals who receive similar treatment from a small number
of providers.

2.4.4 Quackery-Related Miscoding

In processing claims, insurance companies rely mainly on diagnostic and

procedural codes recorded on the claim forms. Their computers are programmed to
detect services that are not covered. Most insurance policies exclude nonstandard
or experimental methods. To help boost their income, many nonstandard
practitioners misrepresent what they do. They may also misrepresent their
diagnosis. For example:

 Brief or intermediate-length visits may be coded as lengthy or

comprehensive visits.
  Patients receiving chelation therapy may be falsely diagnosed as suffering
from lead poisoning; and the chelation may be billed as "infusion therapy"
or simply an office visit.
 The administration of quack cancer remedies may be billed as
"chemotherapy."
 Live-cell analysis may be billed as one or more tests for vitamin deficiency.
 Nonstandard allergy tests may be represented as standard ones.
 Services not covered because they were performed outside of the United
States may be billed as though they were performed within the United
States.

2.4.5 Viatical Fraud

In a viatical settlement transaction, people with terminal illnesses assign their life
insurance policies to viatical settlement companies in exchange for a percentage of
the policy's face value. The company, in turn, may sell the policy to a third-party
investor. The company or the investor then becomes the beneficiary to the policy,
pays the premiums, and collects the face value of the policy after the original
policyholder dies. Fraud occurs when agents recruit terminally ill people to apply
for multiple policies. They misrepresent the truth and answer "no" to all of the
medical questions. Healthy impostors then undergo the medical evaluation. In
many cases, the insurance agent who issues the policy is a party to the scheme. The
agent or one applicant may even submit the same application to many insurance
companies. Viatical settlement companies then purchase the policies and sell them
to unsuspecting third-party investors.
2.4.6 Bogus Health Insurance Companies

The General Accounting Office has issued two reports concerning the sale of
health insurance plans that lack legal authorization. These plans place the buyer at
risk for financial disaster if serious illness strikes. One report focuses on consumer
vulnerability. The other notes that from 2000 to 2002, 144 unauthorized entities
enrolled at least 15,000 employers and more than 200,000 policyholders who got
stuck for over $200 million in unpaid claims. The investigators found that many of
the entitles bore names similar to those of legitimate companies. In response to the
report, the Health Insurance Institute of America is again urging the National
Association of Insurance Commissioners to create an online database of licensed
health insurance companies so that anyone can easily check the legitimacy of
companies offering health insurance products. Meanwhile, the Coalition Against
Insurance Fraud offers ten warning signs of a possible swindle:

 The coverage costs 25 percent or more below the norm yet promises
generous benefits and a large provider network.
 The plan readily accepts people with serious illnesses and other medical
conditions that other plans normally reject.
 The insurance has few or no underwriting guidelines—the agent or rep
appears almost too eager to sign you up.
 You're approached by an insurance agent, phone or direct mail. Honest
group plans normally are sponsored by your employer—and aren't sold
directly to individuals.
 The plan isn't licensed in your state, and the agent (falsely) assures you the
federal ERISA law exempts the plan from state licensing.
  The plan seems like insurance, but the agent or rep avoids calling
"insurance," and instead uses evasive terms such as "benefits."
 The agent or rep doesn't have clear answers to your questions, seems ill-
informed, or avoids sharing information.

2.4.7 Anti-Fraud Programs

Several large insurance companies have joined forces through the National Health
Care Anti-Fraud Association to develop sophisticated computer systems to detect
suspicious billing patterns. The Federal Bureau of Investigation (FBI) and the
Office of the Inspector General (OIG) each have assigned hundreds of special
agents to health-fraud projects. The Coalition against Insurance Fraud, a public
advocacy and educational organization founded in 1993, includes consumers as
well as government agencies and insurers.

The questionable activities included:

 Billing for advanced life support services when basic life support was
provided. Documentation may be falsified to indicate a patient needed
oxygen—which a key indicator in establishing medical necessity for is
advanced life support.
 Billing for larger amounts of drugs than are dispensed; or billing for brand-
name drugs when less expensive generic versions are dispensed.
 Billing for more miles than traveled for transportation.
 Falsification of documentation to substantiate the need for a transport from a
hospital back to the patient's home. Medicare will only cover transport from
hospital to home if the patient could not go by any other means.
Allstate Insurance Company has announced that during 2004, judges and juries
around the country awarded the company more than $30 million in damages
resulting from insurance fraud schemes against the company—the result of a
campaign Allstate began in 2001 to go after the pocketbooks of fraud perpetrators
in court. Since that time, the company has gotten more than $55 million in
judgments against criminals that range from individuals to sophisticated organized
crime syndicates. Unfortunately, bankruptcies and money laundering make it
difficult to collect such awards. In February 2005, Allstate reported that only $5.24
million out of the $30.81 million awarded in 2004 had been recovered.

2.5 Schemes, scams, scammed

Property/casualty insurance fraud cost insurers about $30 billion in 2004.
Fraud may be committed at different points in the insurance transaction by
different parties: applicants for insurance, policyholders, third-party claimants and
professionals who provide services to claimants. Common frauds include
"padding," or inflating actual claims; misrepresenting facts on an insurance
application; submitting claims for injuries or damage that never occurred; and
"staging" accidents. Prompted by the incidence of insurance fraud, about 40 states
have set up fraud bureaus. These agencies are reporting a record number of new
Investigations, significant increases in referrals tip about suspected fraud and
cases brought to prosecution.
RECENT DEVELOPMENTS
The hurricanes of 2005, especially Hurricane Katrina, are likely to result in a
surge in insurance fraud. In addition to the usual schemes, where homeowners or
renters make claims for stereos, televisions or other expensive items they never
purchased, and inflate claims for items actually destroyed, home arsons are on the
Rise. Since many homeowners in the Gulf areas did not have flood insurance, they
may not be covered for some or all of the damage caused by the hurricanes.
Dozens of fires have broken out in many affected communities, some of which
may be the result of arson. The National Insurance Crime Bureau (NICB) says that
by November 2005, there were 160,000 vehicles in its flooded motor vehicle and
boat database, which was set up by catastrophes teams to combat title fraud in the
hurricane-affected states. The NICB warns that flooded vehicles may be cleaned
up, moved and sold in other areas of the country by unscrupulous operators.
Although the vehicles were totaled by insurance companies and identified as
“salvage” on their titles, which means they are not fit for any use except for scrap
or parts, they could end up on the market in states where it is relatively easy to
apply for a regular title. A database was created in which vehicle identification
numbers (VINs) and boat hull identification numbers (HINs) from flooded
vehicles and boats could be stored and made available to law enforcers, state fraud
bureaus, insurers and state departments of motor vehicles. One in 10 paid bodily
injury liability (BI) auto claims in California had the appearance of fraud or
misrepresented the facts of the claim, according to the Insurance Research
Council’s Fraud. More common is the appearance of buildup, or the padding of
claims, which was found in one in five claims. The study, released in January
2006, examined about 73,000 claims closed with payment In 2002. It found that
between $319 and $432 million in BI payments. Were attributable to fraud and
buildup.
2.6 Methods of dealing with Insurance Frauds
2.6.1 Legal Enquiry

a legal route is initiated to deal with frauds being committed in Insurance sector. A
fraud committed in Insurance sector is treated as both – a civil and a criminal
offence under law and the guilty individual can be punished under both the
aforesaid offences. Such a fraud is also treated as a white-collar crime. Examples
of white collar crime in insurance sector include insider trading, insurance fraud,
tax fraud, securities and investment fraud, and identity theft.

2.6.2 Electronic Transactions

Electronic Transactions are currently being devised to overcome fraudulent Health

Insurance Claims. E-transactions are in the process of coming up with the
authorization approval process until the revenue accrual process becomes
electronic in nature.

Already IBM India has commenced online claim management solutions. In turn,
this would lead to a maturing of the Revenue Cycle Management Business.  On
account of this development process, the speed of online processing operations will
introduce a greater transparency with regards to the management of claims and
their speedy settlement.

2.6.3 SAS software

Also called SAS (Statistical Analysis System); this specialized software is being
implemented in the market to deal with frauds in Insurance sector.

Benefits of SAS software include:

• Fraud Detection and Alert Management

• Systematic detection of any sort of suspicious activity

• Generation of alerts from multiple monitoring systems

• Alert Prioritization

• Fraud scoring engine

2.6.4 Implications of Fraudulent claims

• It is treated as an offence – under both civil and criminal laws.

• The person is stripped of the benefits of insurance policy cover.

• The person is sentenced to rigorous imprisonment. The duration of imprisonment

varies from nation to nation.

• A heavy financial fine is levied on the guilty individual.

• It has definite implications on the economy of the country.

• Increase in the number of fraudulent claims leaves the insurance sector bleeding
and this in turn has an impact on the financial institutions of the country and
subsequently impacts the economy.

• Instead of an upward graph, there is a downward slide observed in case of

increase in number of fraudulent cases during a particular period.

• Instead of a blooming and a rosy economy, the economy becomes dark and
gloomy on account of selfish motives by certain citizens of the country.
Chapter:-3 Insurance frauds risk

The International Association of Insurance Supervisors (IAIS)

Recognizes the importance for insurers to address the potential implications of
insurance fraud on their operations. In this regard, one of the IAISInsurance Core
Principles recommends that supervisors require insurers to take necessary
measures to prevent, detect and remedy insurance fraud. The IAIS also issued a
guidance paper in October 2006 setting out guidelines for mitigating insurance
fraud risk.

This chapter provides guidance on sound risk management Practices to identify

and mitigate direct insurers’ exposure to the risk of Insurance fraud. It articulates
broad principles that should be embedded in Risk management framework
covering strategy, organizational structure, Policies and procedures for managing
insurance fraud risk. It incorporates the guidelines from the IAIS Guidance Paper
on Preventing, Detecting and Remedying Fraud in Insurance.
This chapter should be read in conjunction with other relevant Guidelines issued
or to be issued by the MAS, in particular “Guidelines on Outsourcing” (updated in
July 2005), “Guidelines on Corporate Governance For Banks, Financial Holding
Companies and Direct Insurers which are Incorporated in Singapore” (issued in
September 2005), and “Guidelines on Risk Management Practices” (issued in
February 2006).

3.1 FUNDAMENTALS

 Fraud can be defined as an act or omission intended to gain Dishonest or

unlawful advantage for the party committing fraud or for other Related
parties. In the case of insurance fraud, this would usually involve an
Exaggeration of an otherwise legitimate claim, premeditated fabrication of a
Claim and/or fraudulent misrepresentation of material information.
 Insurers rely greatly on the accuracy and completeness of Information
provided by policyholders, claimants and intermediaries when Underwriting
risks and processing claims. However, they face various Constraints in
verifying the legitimacy of the information provided due to Factors such as
high volume of transactions (for some insurance products), Complexity of
circumstances leading to a claim and asymmetric information.
 Insurance fraud can pose serious risk to insurers and may result
inSignificant costs to its stakeholders. If prevalent and not mitigated,
insurance fraud can potentially affect the financial soundness of individual
insurers and erode both consumers’ and shareholders’ confidence in these
insurers as well as the insurance sector at large.
The broad categories of fraud would include:

 policyholder and claims fraud - fraud against

the insurer by the policyholder and/or other parties in the purchase and/or
execution of an insurance product;
 intermediary fraud - fraud by intermediaries1
against theInsurer and/or policyholders; and
 internal fraud – fraud against the insurer by its
director orEmployee on his/her own or in collusion with parties internalOr
external to the insurer.

 The scope of this chapter is limited to policyholder and claims fraud As well
as intermediary fraud. For guidance on risk management practices to
mitigate risk of internal fraud, insurers should refer to the “Guidelines on
Risk Management Practices – Internal Controls” issued by the MAS in
February2006.
 Although certain categories of insurance intermediaries are licensed by
MAS, an insurer should still assess each and every intermediary based on
the intermediary’s track record and the insurer’s past experience in its
Dealings with the intermediary. Based on that assessment, the insurer
should apply the appropriate risk management measures in respect of
transactions involving an intermediary, regardless of whether it is licensed
by MAS.
 As fraud can be perpetrated by collusion involving a few parties, an Insurer
should adopt a holistic approach to adequately identify, measure, Control
and monitor fraud risk and embed appropriate risk management Policies and
procedures into its processes across the organization.
3.2 RISK MANAGEMENT FRAMEWORK
3.2.1STRATEGY
1. An insurer should have a sound strategy to manage fraud risk
Arising from its operations. The fraud management strategy should form part of an
insurer’s business strategy and be consistent with its overall mission, business
strategy and objectives. It should:
 include a clear mission statement to indicate the insurer’s
Level of tolerance to fraud;
 facilitate the development of quantitative risk tolerance limits
On fraud; and
 provide direction to the overall fraud management plan.

2. A sound and prudent fraud management strategy must be

Compatible with the risk profile of the insurer. In determining its risk profile as
well as its vulnerability to fraud, insurers should consider the following factors:
 size, composition and volatility of its business;
 organizational structure;
 complexity of its operations;products and services offered;
 remuneration and promotion policies;
 distribution modes; and
 Market conditions.

3. To ensure its relevance and adequacy, the strategy should be

Reviewed regularly to ensure that it continues to be effective, especially when
there are material changes to the insurer’s risk profile. The strategy should also be
properly documented and effectively communicated to all relevant staff. There
should be a process to approve proposed deviations from the approved strategy,
and systems and controls to detect unauthorized deviations.

3.2.2 STRUCTURE
1 An insurer should adopt a risk management structure that is
Commensurate with the size and nature of its activities. The organizational
Structure should facilitate effective management oversight and execution of its
fraud risk management and control processes. The structure should facilitate
communication between departments and to senior management and/or the Board
of Directors to ensure prompt responses to instances or suspicions of fraud.

2 The Board is ultimately responsible for the sound and prudent

Management of fraud risk. It should recognize and understand the risk of
Fraud and its potential impact on the institution.

3 The Board should approve the fraud management strategy and

Ensure that adequate resources, expertise and support are provided for the
Effective implementation of the insurer’s fraud management strategy, policies and
procedures. Any deviation from the approved strategy and policies
Should be subject to the Board’s review and approval.

4 An insurer should consider establishing a fraud management

Function if warranted by its risk assessment. This function would be primarily
responsible for the compliance with the insurer’s fraud management policies and
procedures covering fraud identification, reporting and investigations. In order to
be effective, this function should have the requisite authority, sufficient resources
and be able to raise issues directly to the Board or relevant Board Committee.
3.2.3 POLICIES AND PROCEDURES
1 An insurer should establish clear policies and procedures for the
Management of fraud risk. These policies should be well-defined and
Consistent with the insurer’s fraud management strategy, as well as adequate for
the nature and complexity of its activities. These include:
 the roles and responsibilities of the fraud management
Function or staff assigned to execute the insurer’s fraud
Management strategy, policies and procedures;
 measures to identify and mitigate the risk of fraud;
 measures to monitor and detect instances or suspicion of
 fraud;reporting of suspicions of fraud to designated person(s) for
 review and investigation;record keeping of suspicions of fraud and fraud
cases; and
 relevant initial and ongoing training on fraud matters for its directors,
management and staff.

2 The insurer should retain records of all reported cases of

Suspicion/incident of fraud together with internal findings and analysis done in
Relation to them. It should establish standards relating to the turnaround time
For the assessment of fraud, documentation of analysis, and keeping of
Records on suspicions/incidents of fraud. The insurer should specify in its
Policies and procedures in respect of record keeping the following:
 information and analysis to be recorded;
 retention period; and
 staff access to records based on their confidentiality
Classification.

3 The insurer’s anti-fraud policies should be communicated

Throughout the organization. An insurer should also review the effectiveness
Of its policies, taking into account changing internal and external
Circumstances as well as identification of lessons from incidents of fraud or
Suspicions of fraud to enhance its management of fraud risk. Policies and
Procedures should be documented and set out in sufficient detail to provide
Operational guidance to staff.

4 The insurer should have in place proper and effective reporting

Systems to satisfy the requirements of the Board with respect to reporting
Frequency, level of detail, usefulness of information and recommendations to
Address issues of concern. There should be clear guidelines on the type of
Information to be reported to the Board on a regular basis as well as when
Certain information or development ought to be communicated immediately to
The Board.

3.3 RISK IDENTIFICATION, CONTROL AND MONITORING

3.3.1 RISK IDENTIFICATION AND MEASUREMENT

1 An insurer should assess its activities and processes for any
Vulnerability to fraud and determine the consequential impact of any potential
Fraud. In determining the potential sources of fraud risk, the insurer should
Consider the following:
 adequacy of measures to verify customer information before
Accepting a customer’s proposal taking into consideration the
Risk factors posed by different distribution channels such as
Internet policy application without face-to-face contact; and
 Fit and proper standards for its intermediaries.

2 The insurer should also recognize that certain products or lines of

Business may be more susceptible to particular types of fraud. For instance,
For workman compensation insurance, employers may misrepresent their
Employees’ payroll and job scope in order to pay lower premiums. Similarly,
Motor insurance is susceptible to inflated claims as well as staging of
Accidents so that policyholders and/or workshops can obtain more
Compensation from insurers. The insurer should also identify fraud risk
Factors in product design during the early stages of product development.

3 The insurer should establish appropriate indicators that when

Triggered, suggests a higher risk of fraud. In the event that one or more
Indicators are triggered; the insurer should ascertain the facts to determine
Whether a more in-depth investigation and follow up actions are warranted.
There should be adequate documentation of the verification actions taken.
The indicators should be reviewed regularly for their continued relevance and
Effectiveness in detecting fraud.

4 Common indicators that could be used in the identification of fraud

Risk may include:
Policyholder and Claims Fraud
 policyholder has been declined coverage by other insurers
Due to reasons such as non-disclosure of material
Information;
  claimant is willing to settle claims for an inexplicably low
Settlement amount in exchange for a quick resolution;
 claimant provides inconsistent statements or information to
Relevant parties such as the insurer or police; and
 claimant made several claims of similar nature within a
Relatively short period of time;
Intermediary Fraud
 evidence of churning of policies either within the organization
Or across several product providers;
 large number of policies in the intermediary’s portfolio that
Have arrears in premium payments, unusual product-client
Combinations such as instances where the policyholder’s
Income is not likely to be able to support the premium he/she
Has to pay for the product purchased and/or previous
Instances of fraud;
 customer complaints against the intermediary, including
Allegation of mishandling of monies and non-receipt of policy
Documents from the intermediary when the documents have
Been issued by the insurer;
 customers’ records are not in the insurer’s customer
Database even though proposal documents and/or payment
Have been provided to the intermediary some time ago; and
 indications that suggest that the intermediary is in financial
Distress.
3.3.2 RISK CONTROL AND MITIGATION
Policyholder and Claims Fraud
1 An insurer should also establish an adequate client acceptance
Policy, which should include the categorization of usual product-client
Combinations. For example, insurers could categories the customers based
On expected earning and other factors for certain products in order to identify
Any unusual product-client combinations. For each combination, the insurer
Should set out clear conditions for the acceptance of the client’s proposal and
The appropriate measures to mitigate or detect fraud. A typical client
Acceptance policy would also include one or more of the following:
 Customer Due Diligence (“CDD”) measures to be taken before business
relationship is established for various product types; and
 measures to be taken for unusual product-client combinations including
the request for additional supporting documents. For instance, the insurer
may request for additional information to verify whether the policyholder
has other sources of wealth such as inheritance, when the latter's normal
earning does not commensurate with the proposed product purchased.

2 These measures should be designed in order to detect incorrect

And/or incomplete information provided by policyholders in their application for
Insurance cover as well as incompatibility of the policyholder characteristics
With the insured event and give due consideration to policyholder fraud
Indicators.

3 The insurer should also incorporate in its claims assessment

Procedures, clear requirements on what claims assessors should do to
Mitigate the risk of claims fraud, for example:
 checks against indicators for claims fraud;
 checks against internal database or other sources for
Confirmed or potential fraudsters; and
 interviewing claimants and conducting special investigations
For suspicious cases.

4 The insurer should ensure that it possesses the relevant expertise,

For example, by enlisting the services of fraud experts, when assessing claims.
In addition, the authority limits assigned to claims assessors should
Commensurate with their experience and competency. The insurer should
Also consider the quality and reputation of any other third parties when placing
Reliance on material information provided by these parties. For this purpose,
Consideration should be given only to trusted or accredited third parties whose
Performance and practices have been or could be verified by the insurer.

5 To deter fraud, an insurer should inform policyholders that certain

Actions, such as knowingly providing false or misleading information to the
Insurer, submitting inflated or fictitious claims, etc could tantamount to
Committing fraud against the insurer and this could result in the loss of
Benefits or other consequences to the policyholders. It should also highlight
To policyholders their contractual duties to the insurer when a policy is
Purchased or a claim is made. Intermediary Fraud

6 An insurer should adopt adequate measures to ensure that the

Intermediaries it deals with meet fit and proper standards. It should establish
An internal assessment framework for the appointment of its intermediaries,
Taking into account the principles encompassed in the “Guidelines on Fit and
Proper Criteria (MCG-G01)”2.

7. In assessing the fit and proper standards of its agents, the insurer
Should conduct adequate background checks on the agents including a
Search for any adverse records in reliable databases, such as the Agents
Registration and Continuous Professional Development Management (“ARCM”)
database for general agents.
8. An insurer which accepts business from financial advisory firms and
Insurance brokers should also ensure that the appointed firms’ performances
Are reviewed periodically to ensure compliance with the insurer’s fraud
management controls. 2 Issued by the Monetary Authority of Singapore in July
2005.

9 To minimize the risk of intermediary fraud, insurers should adopt

The following measures where appropriate:
 ensure that policyholders’ information such as mailing addresses are not
altered without proper authorization from or verification with the
policyholders;
 Send policies and documents as well as payments directly to policyholders
rather than through intermediaries. If this is not possible, insurers should, at
a minimum, send a separate notification to the policyholders if policies and
documents as well as payments are dispatched via the intermediaries;
 prohibit intermediaries from accepting premium payments in cash (if this
is unavoidable, receipts should be issued by the intermediary);
 strongly encourage policyholders to make all cheques payable to the
insurer only and take additional precautionary measures such as indicating
 the policy number (for renewal policies) or the proposed policyholder’s
name and NRIC number (for new policies) on the back of the cheques;

3.3.3 RISK MONITORING AND REVIEW

1 An insurer should establish and maintain an incident database,

Which contains the names of staff or their immediate family members?
Policyholders, claimants or other relevant parties who have been convicted of
Fraud or have attempted to defraud the insurer.

2. It should also monitor the performance and trend of business

Brought in by the intermediaries in relation to the insurer’s products with a
View to detecting any indication of intermediary fraud. For example, should
The actual level and pattern of business accepted by the intermediary differ
Significantly from the intermediary’s track record and projections, this may
Warrant verifying whether there are legitimate reasons for the disparity.

3 The insurer should also conduct regular checks to ensure compliance with its
policies and procedures in respect of its management of insurance fraud risk. For
example, the checks should include verification that whenever fraud risk indicators
are triggered, they are properly and consistently dealt with and adequately
documented.

4. Senior management should ensure that proper and effective

Reporting systems are in place to satisfy all requirements of the Board with
Respect to reporting frequency, level of detail, usefulness of information and
Recommendations to address fraud risk. It is also the responsibility of the
Senior management to alert the Board promptly in the event that they become
Aware of or suspect that a fraud that may have a significant adverse impact
On the insurer has occurred.
3.4 Model language: Model Insurance Fraud Act

The legislature finds that insurance fraud is pervasive and

expensive, costing consumers and the business community of this state
millions of dollars each year. Each family spends in excess of several
hundreds of dollars each year in direct and indirect costs attributable to
insurance fraud. Insurance fraud increases premiums, places businesses
at risk and is a leading cause of insurance company insolvencies.
Insurance fraud reduces consumer’s ability to raise their standard of
living and decreases the economic vitality of this state.

Therefore, the legislature believes that the state of must aggressively confront the
problem of insurance fraud by facilitating the detection, reducing the occurrence
through stricter enforcement and deterrence, requiring restitution and increasing
the partnership among consumers, the insurance industry and the state in
coordinating efforts to combat insurance fraud by enacting the following Act.

Section 1. Definitions

As used in this act, unless the context requires otherwise, the following terms have
the meaning ascribed to them in this section.
Actual Malice. “Actual Malice” means knowledge that information is false, or
reckless disregard of whether it is false.

Conceal. “Conceal” means to take affirmative action to prevent others from

discovering information. Mere failure to disclose information does not constitute
concealment. Action by the holder of a legal privilege, or one who has a reasonable
belief that a privilege exists, to prevent discovery of privileged information does
not constitute concealment.

Insurance Policy. “Insurance Policy” means the written instrument in which are set
forth the terms of any certificate of insurance, binder of coverage or contract of
insurance (including a certificate, binder or contract issued by a state-assigned risk
plan); benefit plan; nonprofit hospital service plan; motor club service plan; or
surety bond, cash bond or any other alternative to insurance authorized by a state’s
financial responsibility act. Insurance Policy also is any other instruments
authorized or regulated by the department of insurance.

Insurer. “Insurer” means any Person purporting to engage in the business of

insurance or authorized to do business in the state or subject to regulation by the
state, who undertakes to indemnify another against loss, damage or liability arising
from a contingent or unknown event. “Insurer” includes, but is not limited to, an
insurance company; self-insurer; reinsurer; reciprocal exchange; interinsurer; risk
retention group.

Person. “Person” means a natural person, company, corporation, unincorporated

association, partnership, Professional Corporation, agency of government and any
other entity.
Premium. “Premium” means consideration paid or payable for coverage under an
Insurance Policy. “Premium” includes any payments, whether due within the
Insurance Policy term or otherwise, and deductible payments whether advanced by
the Insurer or Insurance Professional and subject to reimbursement by the insured
or otherwise, any self insured retention or payments, whether advanced by the
Insurer or Insurance Professional and subject to reimbursement by the insured or
otherwise, and any collateral or security to be provided to collateralize obligations
to pay any of the above.

Section 2. Fraudulent Insurance Act

Any Person who, knowingly and with intent to defraud, and for the purpose of
depriving another of property or for pecuniary gain, commits, participates in or
aids, abets, or conspires to commit or solicits another Person to commit, or permits
its employees or its agents to commit any of the following acts, has committed a
Fraudulent Insurance Act:

(a) Presents, causes to be presented, or prepares with knowledge or belief that it

will be presented, by or on behalf of an insured, claimant or applicant to an Insurer,
Insurance Professional or Premium Finance Company in connection with an
Insurance Transaction or Premium Finance Transaction, any information which
contains false representations as to any material fact, or which Withholds or
Conceals a material fact concerning any of the following:

(1) The application for, rating of, or renewal of, any Insurance Policy;

(2) A claim for payment or benefit pursuant to any Insurance Policy;

(3) Payments made in accordance with the terms of any Insurance Policy;
(4) The application used in any Premium Finance Transaction;

(b) Presents, causes to be presented, or prepares with knowledge or belief that it

will be presented, to or by an Insurer, Insurance Professional or a Premium Finance
Company in connection with an Insurance Transaction or Premium Finance
Transaction, any information which contains false representations as to any
material fact, or which Withholds or Conceals a material fact, concerning any of
the following:

(1) The solicitation for sale of any Insurance Policy or purported Insurance Policy;

(2) An application for certificate of authority;

(3) The financial condition of any Insurer;

(4) The acquisition, formation, merger, affiliation or dissolution of any Insurer;

(c) Solicits or accepts new or renewal insurance risks by or for an insolvent

Insurer.

(d) Removes the assets or records of assets, transactions and affairs or such
material part thereof, from the home office or other place of business of the
Insurer, or from the place of safekeeping of the Insurer, or destroys or sequesters
the same from the Department of Insurance.

Section 3. Unlawful Insurance Act

Any Person who commits, participates in, or aids, abets, or conspires to commit, or
solicits another Person to commit, or permits its employees or its agents to commit
any of the following acts with intent to induce reliance, has committed an
Unlawful Insurance Act:

(a) Presents, causes to be presented, or prepares with knowledge or belief that it

will be presented, or which Withholds or Conceals a material fact, concerning any
of the following:

(1) The application for, rating of, or renewal of, any Insurance Policy;

(2) A claim for payment or benefit pursuant to any Insurance Policy;

(b) Presents, causes to be presented, or prepares with knowledge or belief that it

will be presented, or which Withholds or Conceals a material fact, concerning any
of the following:

(1) The solicitation for sale of any Insurance Policy or purported Insurance Policy;

(2) An application for certificate of authority;

Section 4. Criminal Penalties

A Person who violates Section 2 of this Act is guilty of:

(a) A Class A misdemeanor if the greater of (I) the value of property, services or
other benefit he wrongfully obtained, or attempted to obtain, or (ii) the segregate or
aggregate economic loss suffered by any Person or Persons as a result of his
violation of Section 2, is less than,

(b) A Class B misdemeanor if:

(1) the greater of (I) the value of property, services or other benefit he wrongfully
obtained, or attempted to obtain, or (ii) the segregate or aggregate economic loss
suffered by any Person or Persons as a result of his violation of Section 2, is or
more but less than ; or

3) Is less than, and the defendant has been previously convicted of any class or
degree of insurance fraud in any jurisdiction;

(c) A Class C misdemeanor if the greater of (I) the value of property, services or
other benefit he wrongfully obtained, or attempted to obtain, or (ii) the segregate or
aggregate economic loss suffered by any Person or Persons as a result of his
violation of Section 2, is or more but less than;

(d) A felony in the third degree if:

the greater of (I) the value of property, services or other benefit he wrongfully
obtained, or attempted to obtain, or (ii) the segregate or aggregate economic loss
suffered by any Person or Persons as a result of his violation of Section 2, is less
than, and the defendant has been previously convicted two or more times of any
class or degree of insurance fraud in any jurisdiction;

(e) A felony in the second degree if the greater of (I) the value of property, services
or other benefit he wrongfully obtained, or attempted to obtain, or (ii) the segregate
or aggregate economic loss suffered by any Person or Persons as a result of his
violation of Section 2.
Section 5. Restitution

A Person convicted of a violation of Section 2 of this Act shall be ordered to make

monetary restitution for any financial loss or damages sustained by any other
Person as a result of the violation. Financial loss or damage shall include, but is not
necessarily limited to, loss of earnings, out-of-pocket and other expenses, paid
deductible amounts under an Insurance Policy, Insurer claim payments, cost
reasonably attributed to investigations and recovery efforts by owners, Insurers,
Insurance Professionals, law enforcement and other public authorities, and cost of
prosecution.

When restitution is ordered, the court shall determine its extent and methods.
Restitution may be imposed in addition to a fine and, if ordered, any other penalty,
but not in lieu thereof. The court shall determine whether restitution, if ordered,
shall be paid in a single payment or installments and shall fix a period of time, not
in excess of, within which payment of restitution is to be made in full.

Section 6. Administrative Penalties

(1) (A) Any Practitioner determined by the Court to have violated Section 2 shall
be deemed to have committed an act involving moral turpitude that is inimical to
the public well being. The court or prosecutor shall notify the appropriate licensing
authority in this state of the judgment for appropriate disciplinary action, including
revocation of any such professional license(s), and may notify appropriate
licensing authorities in any other jurisdictions where the Practitioner is licensed.
Any victim may notify the appropriate licensing authorities in this State and any
other jurisdiction where the Practitioner is licensed, of the conviction.
(B) Upon notification of a conviction of the crimes enumerated in Section 2 of this
Act or a substantially similar crime under the laws of another state or the United
States, this State’s appropriate licensing authority shall hold an administrative
hearing, or take other appropriate administrative action authorized by state law, to
consider the imposition of the administrative sanctions as provided by law against
the Practitioner

(C) All such referrals to the appropriate licensing or other agencies, and all
dispositive actions thereof, shall be a matter of public record.

(2) (A) A Person convicted of a felony involving dishonesty or breach of trust shall
not participate in the business of insurance.

(B) A Person in the business of insurance shall not knowingly or intentionally

permit a Person convicted of a felony involving dishonesty or breach of trust to
participate in the business of insurance.

Section 7. Civil Remedies

(a) Any Person injured in his business or property by reason of a violation of

Section 3 may recover there for from the Person(s) violating Section 3, in any
appropriate Court the following:

(1) Return of any profit, benefit, compensation or payment received by the Person
violating Section 3 directly resulting from said violation;

(2) Reasonable attorney’s fees, related legal expenses, including internal legal
expenses and court costs, not to exceed $5,000;
(b) Any Person injured in his business or property by reason of a violation of
Section 2 may recover there for from the Person(s) violating Section 2, in any
appropriate Court the following:

(1) Return of any profit, benefit, compensation or payment received by the Person
violating Section 2 directly resulting from said violation;

(2) Reasonable attorney’s fees, related legal expenses, including internal legal
expenses and court costs;

(3) All other economic damages directly resulting from the violation of Section 2;

(c) Any Person injured in his or her business or property by a Person violating
Section 2, upon a showing of clear and convincing evidence that such violation
was part of a Pattern or Practice of such violations, shall be entitled to recover
threefold the injured Person’s economic damages. Err Section 4.

(d) The State Attorney General, District Attorney or prosecutorial agency shall
have authority to maintain civil proceedings on behalf of the State Insurance
Department and any victims of violations of Section 2.

Section 8. Exclusivity of Remedies

The remedies expressly provided in Section 7 shall be the only private remedies for
violations of this Act and no additional remedies shall be implied. The remedies
available under Section 7 shall not be used in conjunction with or in addition to
any other remedies available at law or in equity to duplicate recovery for the same
element of economic damage. Further, in any civil action pleading both exemplary
damages and the treble damages available in Section 7(c), plaintiff shall elect one
or the other remedy, but not both, at the conclusion of the evidentiary phase of the
trial.

However, nothing in this Act shall limit or abrogate any right of action which
would have existed in the absence of this Act, but no action based on such a right
shall rely on this Act to establish a standard of conduct or for any other purpose.

Section 9. Cooperation

(a) When any law enforcement official or authority, any insurance department,
state division of insurance fraud, or state or federal regulatory or licensing
authority requests information from an Insurer or Insurance Professional for the
purpose of detecting, prosecuting or preventing insurance fraud, the Insurer or
Insurance Professional shall take all reasonable actions to provide the information
requested, subject to any legal privilege protecting such information.

(b) Any Insurer or Insurance Professional that has reasonable belief that an act
violating Sections 2 or 3 will be, is being, or has been committed shall furnish.

(c) An Insurer or Insurance Professional providing information to any law

enforcement, regulatory, licensing or other governmental agency.

Section 10. Immunity

In the absence of Actual Malice, no Person furnishing, disclosing or requesting

information pursuant to Section 9 shall be subject to civil liability for libel, slander,
or any other cause of action arising from the furnishing, disclosing or requesting of
such information. No Person providing information pursuant to Section 9(a) shall
be subject to civil liability for any cause of action arising from the Person’s
provision of requested information. Any Person against whom any action is
brought who is found to be immune from liability under this section, shall be
entitled to recover reasonable attorney’s fees and costs from the Person or party
who brought the action. This section does not abrogate or modify in any way any
common law or statutory privilege or immunity heretofore enjoyed by any Person.

Section 11. Regulatory Requirements

(A) Anti-Fraud Plans

Within six months of the effective date of this legislation, every Insurer with direct
written premiums shall prepare, implement, maintain and submit to the department
of insurance an insurance anti-fraud plan.

(b) Fraud Warnings

(1) (A) No later than six months after the effective date of this Act, all applications
for insurance, and all claim forms regardless of the form of transmission provided
and required by an Insurer or required by law as a condition of payment of a claim,
shall contain a statement, permanently affixed to the application or claim form, that
clearly states in substance the following:

“It is a crime to knowingly provide false, incomplete or misleading information to

an insurance company for the purpose of defrauding the company. Penalties
include imprisonment, fines and denial of insurance benefits.”

(B) The lack of a statement required in this subparagraph does not constitute a
defense in any criminal prosecution under Section 2 nor in any civil action under
Sections 2 or 3.
(2) The warning required by this subsection shall not be required on forms relating
to reinsurance.

(c) Enforcement

Notwithstanding any other provision of the Insurance Code, the following are the
exclusive monetary penalties for violation of this Section. Insurers that fail to
prepare, implement, maintain and submit to the department of insurance an
insurance anti-fraud plan are subject to a penalty of $500 per day, not to exceed
$25,000.
Chapter 4 types of insurance frauds

4.1 life insurance frauds

Life insurance fraud is a black eye on both life insurance companies and
life insurance customers. Both parties have been guilty of life insurance fraud and
will be again--especially since, sadly, fraud seems to be on the rise according to
most statistical measures.

Research by the non-profit The Coalition against Insurance Fraud concludes that
life insurance fraud committed by all parties costs an average household $1650 per
year and increases life insurance premiums by 25%.

Life insurers are most often guilty of insurance fraud in the form of their agents
doing "churning". This is where the agent seeks to cancel your existing life
insurance policy and replace it with a new policy that is paid for by the "juice", or
cash value, in your existing policy. Agents do this to earn more commissions for
them without having to seek new prospects for business. Churning can result in
increased premiums for a customer and clearly costs them out of their cash value.

Another insurance fraud practiced by agents, however, is called "windowing". This

is where, being unable to attain a client's or applicant's signature on a necessary
document but already having that signature elsewhere, the agent holds up a signed
document behind the unsigned document, presses it against a window to make the
light shine through, and traces over the signature with a pen in order to forge the
signature of the client or applicant.

When big name insurance companies have their agents do bad things it makes big
headlines, but the fact is that the public is far guiltier of insurance fraud than
companies are. And of course making false claims is the thing they do the most,
which is why all claims on life insurance death benefit payouts are subject to
investigation.
But falsely stating background or financial income information is another form of
insurance fraud often engaged in by consumers. They might be embarrassed by
their medical history or income, or they may realize that if they tell the truth they
will have their coverage diminished or their premiums will be very high. If a life
insurance company finds out someone laid on their application they have the right
not to pay the claim or not pay the full death benefit depending on the
circumstances and the policy.

But there are things that buyers of life insurance can do to protect themselves
against insurance fraud, since they don't have the great investigative resources that
life insurance companies do. Remember, when it comes to life insurance, if it
sounds too good to be true, it probably is. There's no free lunch. Save all of your
life insurance paperwork, including getting receipts for every penny you give your
agent, and never ignore any notifications from your life insurance company.

Life insurance is never free and it's not a pension plan, although certain policies
can indeed become self-funding--but they never start off that way. Never buy any
coverage that you feel strongly is unnecessary, never let yourself be pressured, and
never borrow to finance life insurance. Although it can be part of an investment
portfolio, life insurance's number one role is protection against the unforeseen--and
most people don't need life insurance in their later years. It is intended to be
temporary.

4.1.1 How to Report Life Insurance Fraud

Life insurance fraud covers a range of activities from providing false information
to perpetrating a death those results in an insurance payout. This range of activities
makes it difficult for a conscientious citizen to report fraud without any doubts.
You need to have plentiful evidence to support your claims of life insurance fraud.

Difficulty: Moderate
Instructions

1. Examine the health and legal standing of a life insurance signatory to

determine whether insurance fraud has taken place. You should report
instances where individuals sign the name of an elderly, disabled or
comatose relative in order to gain benefits upon death.
2. Assess the amount of money paid out by a life insurance policy to determine
the likelihood of fraud. Your report should feature a breakdown of ongoing
benefits as well as funeral benefits to provide an overview of the severity of
insurance fraud.
3. Speak with friends, family and co-workers to learn about past attempts at
ethically questionable uses of life insurance. You should follow leads for
life, auto, health and other insurance fraud to show the character of the party
in question.
4. Hunt down contact information on witnesses to acts of life insurance fraud
for your report. You should ask witnesses to schedule time with your
attorney for an official report on the acts they witnessed to add legitimacy to
your case.
5. Speed up the reporting process by utilizing online forms that allow the
attachment of scanned documents. You should send the same documents by
mail as a security measure, though your online query will likely receive
attention within days.
6. Outline the type of life insurance featured in fraudulent activities to help
investigators determine the likelihood of fraud. Specific policies, like an
accidental death policy, provide a narrow definition for payouts, which leads
to a specific type of fraud.
4.2Hard frauds vs. soft frauds

Insurance fraud can be “hard” or “soft.” Hard fraud occurs when someone
deliberately fabricates claims or fakes an accident. Soft insurance fraud, also
known as opportunistic fraud, occurs when people pad legitimate claims, for
example, or, in the case of business owners, lists fewer employees or misrepresents
the work they do to pay lower premium workers compensation.

People who commit insurance fraud range from organized criminals, who steal
large sums through fraudulent business activities and insurance claim mills, to
professionals and technicians, who inflate the cost of services or charge for
services not rendered, to ordinary people who want to cover their deductible or
view filing a claim as an opportunity to make a little money.

Some lines of insurance are more vulnerable to fraud than others. Healthcare,
workers compensation and auto insurance are believed to be the sectors most
affected.

Insurance fraud received little attention until the 1980s when the rising price of
insurance and the growth in organized crime fraud spurred efforts to pass stronger
antifraud laws. Allied with insurers were parties affected by fraud—consumers
who pay higher insurance premiums to compensate for losses from fraud; direct
victims of organized fraud groups; and chiropractors and other medical
professionals who are concerned that their reputations will be tarnished.

In their fight against fraud, insurers have been hampered by public attitudes. Four
out of five Americans think that a variety of insurance crimes are unethical, and
one out of five thinks it is acceptable to defraud insurance companies under certain
conditions, according to the Coalition against Insurance Fraud (CAIF). The
organization released the findings in a 2008 study, “The Four Faces of Insurance
Fraud.” It found that the public is consistently more tolerant of specific insurance
frauds today than it was 10 years ago. For example, 82 percent of respondents
think it is unethical to misrepresent facts on an insurance application in order to
lower their premiums, down from 91 percent in 1997. The study also found that
more Americans believe insurance fraud to be widespread. For instance, four out
of five people say inflating claims to cover deductibles is prevalent.

In addition, studies by the Insurance Research Council show that significant

numbers of Americans think it is all right to inflate their insurance claims to make
up for insurance premiums they have paid in previous years when they have had no
claims or to pad a claim to make up for the deductible they would have to pay.

Insurers must preserve the fine line between investigating suspicious claims and
harassing legitimate claimants and the need to comply with the time requirements
for paying claims imposed by fair claim practice regulations. All states have unfair
claim settlement practice laws on their books to ensure that the parties involved are
informed of the progress of investigations and the investigators settle the claim
promptly or within a specified amount of time. By late 2008 about 19 states had
provisions that provide guidance and protection for investigators by allowing time
limit extensions or waivers and detailing what evidence is required and to whom
the evidence should be made available.
4.3Auto insurance frauds

Automobile insurance fraud is a fairly widespread occurrence, and there are a wide
variety of ways someone can commit it, most of them knowingly. There are two
classifications in which auto insurance fraud is categorized: hard and soft car
insurance fraud. Auto insurance fraud is committed in order to save the offender
money on their auto insurance bills, and in doing these scamming insurance
companies out of money. It is estimated that about one out of every five insurance
claims is fraudulent in some way.

The more minor type of automobile insurance fraud is labeled as soft. This type
includes filing multiple claims for a single injury or accident, attributing injuries to
automobile accidents that did not occur in a car, and intentionally over-estimating
money lost from missing work as a result of an accident. One of the few types of
automobile fraud that may not be the fault of the insured person is reporting a
higher repair price for an accident than it really cost. This is because it is
sometimes fraudulent actions by the repair shop that results in this price inflation.
However, this is also one of the most common types of soft automobile insurance
fraud, since it might just be the easiest to commit.

Hard auto insurance fraud is the major type of fraud, which includes full-fledged
crime rings designed to make tons of money off of insurance companies. Examples
of this kind of car insurance fraud contain set-up automobile accidents, making up
injuries that weren't actually obtained, and filing for money for medical treatment
that was never administered. In addition to those is illegal registration. An example
of illegal registration is when a driver that lives in a major city goes and registers
his vehicle in a rural area and sends that information to the insurance company.
Since insurance rates are usually higher in cities than in the country, the perpetrator
saves money, albeit fraudulently.
Since automobile insurance fraud is such a problem in today's world, an auto
insurance fraud penalty will generally be fairly severe. This fraud is considered
criminal activity, and will go on one's criminal record if found guilty, harming their
chance of finding a job along with other complications in the future. Also, a prison
sentence is guaranteed in every state for insurance fraud. The minimum and
maximum time in jail varies depending on the severity of the crime and what state
the crime was committed in. The most obvious penalties to getting caught making
a fraudulent claim are higher insurance rates and very hefty fines.

So one might ask, how do I avoid automobile insurance fraud? Since some fraud is
unintentional, it may seem hard to avoid, and the severe punishments might scare
some people out of filing a claim with an insurance company at all. But the key is
to be as honest and un-biased as possible as far as reporting damages go. As long
as a person does that, they will stay clear of the penalties.

Overall, car insurance fraud is a growing problem in society today. There are
different types of fraud (hard and soft), and penalties are increasingly more severe
as the intensity of the crime escalates.

4.3.1 Auto bodily injury claims:

Staged-accident rings fleece auto insurers out of billions of dollars a year by

billing for unnecessary treatment of phantom injuries. Usually these are bogus soft-
tissue injuries such as sore backs or whiplash, which are difficult to medically
dispute.

Fraudulent and abusive auto-injury claims are a

costly problem. Fraud and “buildup” added $4.8
billion to $6.8 billion in excess payments to auto injury claims in 2007. That means
13-percent to 18-percent increases in payments under private-passenger auto
policies from 2002. (Insurance Research Council, Nov. 2008)

Bogus and abusive claims also are rising. They ranged between $4.3 billion and
5.8 billion in 2002, or between 11 percent and 15 percent of total payments. (ibid)

Claims with apparent fraud or buildup were more likely than other claims to
involve sprain and strain injuries, and periods of disability. These claimants also
were more likely to receive treatment from physical therapists, chiropractors and
other alternative medical providers. (ibid)

Buildup involves treatment that’s excessive but isn’t deliberately or criminally

fraudulent.

4.3.2 Underwriting fraud:

Dishonest drivers try to lower auto premiums by dishonestly lying on their

insurance application or renewal. Among the ruses: registering their vehicles in
locales where premiums are lower; low-balling their stated mileage; and saying a
commercial vehicle is used mainly for personal use.

1. Auto insurers lost $15.9 billion due to premium rating errors in

private-passenger premiums in 2009. Premium rating errors account
for nearly 10 percent of the $161.7 billion in personal auto premiums
written. Fraud accounts for a portion of these losses. This trend was
most striking in large urban areas, where vehicle-garaging rating
errors cause honest policyholders to subsidize dishonest ones...these
polices account for more than $2 billion in annual premium leakage.”
 And for auto insurers, every one percent of rating error left
uncorrected also causes a 20-percent profit loss. (Quality Planning
Corporation, 2010)

4.3.3 Staged Accidents:

An effective strategy against staged-accident rings involves creating multi-agency

task forces to apply highly focused pressure in targeted locales where the fraud
rings operate. The goal is to thwart often-massive fake injury claims by bogus
crash victims. Massachusetts, for example, has experienced considerable success
with task forces in recent years...

Nearly 1,200 people in 13 communities have been arrested for suspected

involvement in staged crashes since Massachusetts began clamping down on
widespread accident rings in late 2003. Many have been convicted. Fraud fighters
phased in multi-agency task forces in 13 communities amid public outcry after 65-
year-old grandmother Altagracia Arias died in a setup crash in September 2003.
(Community Fraud Initiative, A Five-Year Retrospective; Automobile Insurers
Bureau of Massachusetts and Insurance Fraud Bureau of Massachusetts, 2009)

The number of injuries per 100 accidents has dropped in those communities, from
38 injuries per 100 accidents in 2003 to 26 in 2008. The statewide average dropped
from 38 injuries per 100 accidents to 26 over the last five years. (ibid)

Drivers in the 13 targeted communities have saved nearly $252 million in lower
premiums total over the four years between 2005 and 2008. Statewide, the savings
was $514 million. (ibid)

 
4.4 heath insurance frauds
Health insurance fraud is described as an intentional act of deceiving, concealing,
or misrepresenting information that results in health care benefits being paid to an
individual or group.

Fraud can be committed by both a member and a provider. Member fraud consists
of ineligible members and/or dependents, alterations on enrollment forms,
concealing pre-existing conditions, failure to report other coverage, prescription
drug fraud, and failure to disclose claims that were a result of a work related injury.
Provider fraud consists of claims submitted by bogus physicians, billing for
services not rendered, billing for higher level of services, diagnosis or treatments
that are outside the scope of practice, alterations on claims submissions, and
providing services while under suspension or when license have been revoked.
Independent medical examinations are used to debunk false insurance claims and
allow the insurance company or claimant to seek a non-partial medical view for
injury related cases.

In response to the increased amount of health care fraud in the United States,
Congress, through the Health Insurance Portability and Accountability Act of 1996
(HIPAA), has specifically established health care fraud as a federal criminal
offense with punishment of up to ten years of prison in addition to significant
financial penalties.

4.4.1 Fraudulent Health Insurance Claims

An insurance claim prepared with the intention to deceive, conceal or distort
relevant information that eventually accounts for health care benefits for an
individual or a particular group is defined as fraudulent health insurance claim.

Frauds can be committed by anybody – either by a policyholder, a healthcare

provider or even its employees. Frauds committed by a policyholder could consist
of members that are not eligible, concealment of age, concealment of pre-existing
diseases, failure to report any vital information, providing false information
regarding self or any other family member, failure in disclosing previously settled
or rejected claims, frauds in physician’s prescriptions, false documents, false bills,
exaggerated claims etc

Frauds by Healthcare Provider or its employees include preparation of bogus

claims by fake physicians, billing for products or services not rendered,
exaggerated claims submission, billing prepared for higher level of services,
modifications or alterations made in submission of claims, change in diagnosis of
the patient, fake documentation, and fraud committed by the employees of a
hospital or any other healthcare product/service provider in order to make a quick
buck.

Fraudulent and dishonest claims are a major morale and a moral hazard not only
for the insurance industry but even for the entire nation’s economy. Concrete proof
as evidence including documentation, statements made by the policyholder and his
family members and even neighbors are taken into consideration.

4.4.2 Essential Components of Fraud

the essential components of fraud include intention to deceive derive benefits from
Insurance industry, preparation of exaggerated or inflated claims or medical bills
and malaise intention to induce the firm to pay more than it otherwise would.
Devising innovative methods and tactics including pressure tactics, favoritism,
nepotism etc form a part of fraud which is a hazard growing by leaps and bounds
since the last decade.

To establish that a fraud has been committed requires furnishing of relevant proof.
An in-depth analysis of the policyholder’s intention may also be taken into
consideration.
4.4.3 Statistics in India

According to a recent survey it is estimated that the number of false claims in the
industry is approximately 15 per cent of total claims. The report suggests that the
healthcare industry in India is losing approximately Rs 600-Rs 800 crores incurred
on fraudulent claims annually. Health insurance is a bleeding sector with very high
claims ratio. Hence, in order to make health insurance a viable sector, it is essential
to concentrate on elimination or minimization of fake claims.

Insurance companies in USA incur losses over 30 billion USD annually to

healthcare insurance frauds.

4.4.4 Enactment of HIPAA by USA to deal with Health Insurance

Fraud

Due to fraudulent cases especially health claims on the rise in USA, a special
legislation was enacted by Congress with the introduction of HIPAA (Health
Insurance Portability and Accountability Act) in 1996. This act especially deals
with healthcare fraud which is treated as a Criminal Offence accompanied with
rigorous imprisonment up to 10 years with additional financial penalties depending
on the fraud intensity.
CH
\

Insurance Fraud

THE TOPIC

FEBRUARY 2011

The Insurance Information Institute estimates that fraud accounts for about 10
percent of the property/casualty insurance industry’s incurred losses and loss
adjustment expenses*. This fraud results in higher premiums.

Fraud may be committed at different points in the insurance transaction by

different parties: applicants for insurance, policyholders, third-party claimants and
professionals who provide services to claimants. Common frauds include
"padding," or inflating actual claims; misrepresenting facts on an insurance
application; submitting claims for injuries or damage the

T never occurred; and "staging" accidents.

Prompted by the incidence of insurance fraud, 42 states and the District of
Columbia have set up fraud bureaus (some bureaus have limited powers, and some
states have more than one bureau to address fraud in different lines of insurance).
These agencies have reported increases in referrals (tips about suspected fraud),
cases opened, convictions and court-ordered restitution.

The exact amount of fraud committed is difficult to determine. The proportion of

fraud varies among the different lines of insurance, with healthcare, workers
compensation and auto insurance believed to be the lines most vulnerable. The
nature of fraud is constantly evolving. Shortly after the enactment of the 2010
healthcare reform law, the Health and Human Services secretary issued warnings
about a proliferation of phony health insurance policies.

*Estimate based on research conducted by the Battelle Seattle Research Center for
the Insurance Information Institute in 1992 (Fighting the Hidden Crime: a
National Agenda to Combat Insurance Fraud. Insurance Information Institute,
March 1992) and other industry reports (including Insurance Fraud, Renewing the
Crusade, Conning, 2001).

RECENT DEVELOPMENTS

 The National Insurance Crime Bureau (NICB) said that 70,295 questionable
claims were referred to it in the first three quarters of 2010, about 7,400
more than in the first three quarters of 2009, or an increase of 12 percent.
The largest number of suspicious claims in the first three quarters of 2010
was in the faked or exaggerated injury category, up 17 percent from a year
ago to 11,048. Questionable claims for auto glass fraud were up 511 percent
 in the first three quarters of 2010, compared with the previous year. (See
following chart.)

TOP 15 QUESTIONABLE CLAIMS, BY PERCENT CHANGE, 2009-2010 (1)

      First three quarters    

Type of  Percent
Rank   2009 2010 Difference
insurance change
Auto glass
1 Vehicle 333 2,036 1,703 511%
fraud 
2 Vendor fraud Miscellaneous 296 616 320 108
3 Inflated tow Vehicle 230 466 236 103
4 Hail damage Property 487 897 410 84
5 Cargo theft Commercial 31 45 14 45
6 Malingering Miscellaneous 759 1,078 319 42
Attorney
7 Miscellaneous 1,297 1,817 520 40
activities
Organized
8 group/ring Miscellaneous 1,966 2,670 704 36
activity
Medical
9 Miscellaneous 3,445 4,625 1,180 34
provider
Excessive
10 Casualty 3,887 5,177 1,290 33
treatment
Staged/caused
11 Casualty 3,450 4,511 1,061 31
accident
Auto
12 repair/body Vehicle 1,129 1,477 348 31
shop
       First three quarters    
Type of  Percent
Rank   2009 2010 Difference
insurance change
Inflated
Workers
13 medical 65 85 20 31
compensation
billing
Inflated
14 Casualty 1,957 2,530 573 29
billing
Billing for
15 services not Casualty 2,635 3,329 694 26
rendered
Total
  questionable   62,929 70,295 7,366 12%
claims

(1) Includes property, casualty, commercial, workers compensation, vehicle and

miscellaneous claims.

Source:  National Insurance Crime Bureau.

View Archived Tables:

TOP 15 QUESTIONABLE CLAIMS, BY PERCENT CHANGE, 2008-2009
TOP 15 QUESTIONABLE CLAIMS, BY PERCENT CHANGE, 2008-2009 (1)

 No-Fault Insurance Fraud: The Insurance Information Institute estimates

that in New York, fraud and abuse in the state’s no-fault auto system cost
New York drivers $229 million in 2009 as a result of dishonest medical
service providers who file inflated and often bogus medical claims,
unscrupulous lawyers who sue insurers that challenge these claims and
 others who help defraud insurers by staging accidents and recruiting
supposedly injured claimants to fraudulent medical clinics. The average cost
of a no-fault insurance claim in New York soared to $8,690 by the third
quarter of 2009 and was the third-highest in the U.S. after Michigan and
New Jersey. The average cost of a no-fault insurance claim in New York
was up 55 percent from $5,615 at the end of 2004.  See also Insurance Issues
Update paper on No-Fault Auto Insurance
(http://www.iii.org/media/hottopics/insurance/nofault/) and Insurance
Industry Fraud reports (http://www.iii.org/InsuranceIndustry/Fraud/).
 The NICB says that in 2009 it received more than 5,500 tips from the public
concerning insurance fraud, more than double the 2,500 it received in 2008.
These tips were in addition to its claims referrals from member insurance
companies.
 The Coalition against Insurance Fraud conducted a mid-year study of state
insurance fraud bureaus in October 2009 to examine trends in the frequency
and severity of insurance fraud resulting from the economic downturn and
growing pressure on state governments as their revenues fall. The 37 fraud
bureaus that participated in the survey reported increases in the number of
referrals received and cases opened. Of the 15 categories of fraud listed in
the survey, agent fraud had the largest increase, as seven out of 10 fraud
bureaus reported increased referrals in these cases and 39 percent of the
bureaus said their caseload was “much higher.” The largest average
increases were reported in the health insurance sector, specifically where
unauthorized entities sold fake coverage combined with discount medical
plans. Thirty-eight percent of respondents reported much higher caseloads.
The coalition said that referrals of auto owner give-ups, where vehicle
owners abandon or set fire to a vehicle, were up 26 percent. The survey also
 showed that 21 percent of fraud bureaus reported much higher incidents of
home arsons.  However, there was no evidence of a widespread national
trend in home arsons, as the same proportion of respondents reported lower
caseloads.
 The coalition also said that 63 percent of the fraud bureaus in the study have
reported budget cuts in 2009 although the majority of fraud bureaus were
created using dedicated funding such as assessments on insurers.
 Towers Watson (formerly Towers Perrins), a global consulting firm, said
that the unsettled economy resulted in higher rates of fraudulent claims. The
firm’s October 2009 survey of property/casualty insurance claims officers
found that more than half reported an increase in exaggerated or potentially
fraudulent claims, especially in personal lines. Sixty-two percent of auto and
56 percent of homeowners’ lines officers reported increases, while one-third
of workers compensation and one-fifth of commercial lines officers reported
upticks. (http://www.towerswatson.com/)

KEY STATE LAWS AGAINST INSURANCE FRAUD

Insurance
Mandatory Mandatory
fraud Immunity Fraud
State insurer auto photo
classified statutes bureau
fraud plan inspection
as a crime
Alabama X (1), (2) X (3)      
Alaska X X X    
Arizona X X X    
Arkansas X X X X  
California X X X X  
 Insurance
Mandatory Mandatory
fraud Immunity Fraud
State insurer auto photo
classified statutes bureau
fraud plan inspection
as a crime
Colorado X X X (4) X  
Connecticut X X X    
Delaware X X X    
D.C. X X X X  
Florida X X X X X
Georgia X X X    
Hawaii X (1), (2) X X    
Idaho X X X    
Illinois X X      
Indiana X X X    
Iowa X X X    
Kansas X X X X  
Kentucky X X X X  
Louisiana X X X X  
Maine X X  X (1) X  
Maryland X X X X  
Massachusetts X X X   X
Michigan X X      
Minnesota X X X X  
Mississippi X X (3) X (4)     
Missouri X X X    
Montana X X X    
Nebraska X X X    
Nevada X X X (4)    
New
X X X X  
Hampshire
New Jersey X X X (4) X X
New Mexico X X X X  
 Insurance
Mandatory Mandatory
fraud Immunity Fraud
State insurer auto photo
classified statutes bureau
fraud plan inspection
as a crime
New York X X X X X
North
X X X    
Carolina
North Dakota X X X    
Ohio X X X X  
Oklahoma X X X    
Oregon X (1) X      
Pennsylvania X X X (4) X  
X (1),
X (1), (3),
Rhode Island X (4), (5),   X
(5)
(6)
South
X X X (4)    
Carolina
South Dakota X X X    
Tennessee X X X X  
Texas X X X X  
Utah X X X    
Vermont X X   X  
Virginia X X X (6)    
Washington X X X   X  
West Virginia X X X    
Wisconsin X X X (4)    
Wyoming X X (3)      

(1) Workers compensation insurance only.

(2) Healthcare insurance only.
(3) Arson only.
(4) Fraud bureau set up in the State Attorney General's office.
(5) Auto insurance only.
(6) Fraud bureau set up in the state police office.

Source: Property Casualty Insurers Association of America; Coalition against

Insurance Fraud.

Chart Notes: This chart defines laws that can effectively deter fraud. Also see
Background: State Legislation. 1. Insurance Fraud Defined: Insurance fraud is
specifically declared unlawful in the state's laws. A fraudulent act is committed if
information in insurance applications is falsified in an attempt to obtain lower
premium rates or to inflate the amount of loss in a claim. Defining the crime
specifically helps educate law enforcers about insurance fraud and provides
prosecutors with clear-cut cases. Raising the level of the crime from a
misdemeanor to a felony not only increases the penalties but also acts as a
deterrent to future crimes. Includes claims, underwriting and insurer fraud. (All
jurisdictions but not all lines of insurance.) 2. Immunity Statutes: These laws
provide protection for good faith exchange of information between insurers or
others and state insurance departments or law enforcement officials. Individuals or
organizations are exempt from libel or unfair trade practices lawsuits, which could
be brought against them for releasing information on prior claims. (All
jurisdictions but not all lines of insurance.) 3. Fraud Bureaus: Special units have
been set up, generally, in state insurance departments to identify fraudulent acts,
collect information on repetitive offenders and investigate cases. The main purpose
of the bureau is to set up documented criminal cases that can be readily prosecuted.
Some bureaus have law enforcement powers. (42 states and D.C. but not all lines
of insurance.) 4. Mandatory Insurer Fraud Plan: Insurers are required by law to set
up a specific program that identifies insurance fraud and outlines actions taken to
reduce insurance fraud. (21 states and D.C.) 5. Mandatory Photo Inspection:
Photos must be taken of used cars before collision or comprehensive insurance is
issued. This is designed to eliminate claims for damage sustained prior to the
issuance of a policy and the purchase of insurance for nonexistent vehicles. (Five
states.)