Fraud Awareness and Prevention C39

Chapter 1 – The Cost of Insurance Fraud

The effects of fraud

·         Insurance is a business – insurers must deliver products at competitive rates and operate at a profit

·         Fraud has traditionally been a hidden crime

·         Fraud ranges from arson for profit and bogus claims to inflating the amount claimed

·         As insurance products and ways of doing business have evolved, so has insurance fraud

·         It has been estimated that 10%-15% (more than $1 billion/year) of insurance claims in Canada are fraudulent

·         Fraud as a victimless crime is an illusion

·         Effects of fraud include:

o    Causes economic loss to individuals and their families through direct physical damage

o    Causes direct economic loss to the community when resources of fire departments, police, and other public services are used

o    Indirect economic losses are felt by enterprises that lose business b/c their clients have suffered damages – opportunities to do business are lost

o    Can cause death/physical injury to the public at large and public employees.  The direct consequences of fraud can be grim for innocent victims, firefighters, police and their families

o    Indirect economic consequences eventually come to insurance consumers who must pay higher premiums

o    The emotional and psychological effects of fraud on victims of insurance fraud schemes leave its toll.  Lives of some innocent victims have been changed drastically after having been drawn into staged scams

Consumer attitudes

·         Not everyone views fraud problems the same way.  The 4 main types of people:

o    Realists – have a low tolerance for fraud but realize that it occurs.  They do not advocate strong punishment.  They may feel some behaviours are justified depending on the circumstances.

o    Conformists – are tolerant of insurance fraud b/c they believe many people do it.  They are advocates for moderate forms of punishment.

o    Moralists – have the least tolerance of insurance fraud.  They are willing to punish perpetrators severely b/c they feel there is no excuse for this type of behaviour.

o    Critics – have a very high tolerance for fraud.  They are ready to blame the insurance industry for the problem b/c they believe insurers do not conduct business fairly.  They want little or no punishment for perpetrators.

·         Campaigns to make consumers aware of fraud must acknowledge the divergent attitudes that exist.  Flexibility is required in the message in order to communicate to each group effectively

·         Age, gender, level of education, and cultural influences affect how people perceive things

·         Insurance is an intangible benefit of a promise to pay.  There is little recognition of the peace of mind insurance buys

·         There is a psychological justification for taking out some of the money that has been deposited over the years.  If they did not file a claim then their premium investment would be wasted

·         The cost of fraudulent claims is passed on to all insurance consumers as a component of premiums.

·         Consumers expect insurers to control and minimize the payment of fraudulent claims.  Insurers are motivated to minimize unnecessary or unwarranted payments in order to maintain competitive premium levels

Building knowledge about fraud

·         The insurance industry educates people w/in the industry and its consumers about fraud.  The challenge of reinforcing this message effectively, regularly, and often falls upon the insurance industry, certain public entities, and consumer groups

·         Condoning fraudulent activity is a form of encouraging it

·         Consumers who understand the cost-controlling reasons for anti-fraud measures are likely to support insurers in their efforts

·         Attempted fraud has not generally been ‘punished’ in the past but attitudes are changing

·         Insurance companies must not only maintain ethical standards but also project an image that they practice what they preach

·         Handling claims involves a certain amount of ambiguity.  The worth of a claim depends on many factors (where the insured goes to price the material, the level of expertise hired to do the job, how much the insured intends to do personally).  However when claimants purposefully claim amounts above an acceptable range it becomes clear that a fraud is being perpetrated

·         There are 2 categories for insurance fraud:

o    Opportunistic fraud – involves some form of dishonesty on a claim that has legitimately occurred.  Claimants grossly exaggerate the amount claimed or claim for things that do not exist.

o    Planned fraud – involves fabricating a claim for the purpose of defrauding an insurer.  It can involve inventing a claim, committing arson, or staging an auto accident.

·         People that may be involved in insurance fraud:

o    Third party claimants

o    Insureds

o    Agent/broker personnel

o    Insurance company staff

o    Any other professional or insurance professional

o    Service suppliers

Business – in good faith

·         Insurance policies represent a special kind of contract – subject to utmost good faith

·         Insurers rely on insureds to divulge full info on a risk

·         Presumably, utmost good faith carries with it a higher, stricter duty to act in good faith

·         Good faith – refers to a state of mind – honest belief, absence of malice, and absence of design to defraud or to seek an unconscionable advantage

·         The utmost faith doctrine has shifted its focus from primarily protecting an insurer’s position to be fully apprized of the details of a risk to protecting an insured against unfair treatment in the case of a claim

Strategies to restrict fraud

·         Coordinating efforts and sharing resources bring economies of scale and make efforts more effective

·         The Canadian Coalition Against Insurance Fraud was formed to reduce and control insurance fraud

·         To control the risk of fraud 2 techniques emerge: those that prevent such losses from occurring and those that reduce such losses once they do occur.  Some strategies do both

·         Strategies include:

o    Promoting fraud awareness

§  Enables consumers and members of the insurance industry to know what fraud is and how it can be prevented

§  Education must be ongoing and constantly reinforce the info

§  Fraud is must harder to rationalize when inappropriate behaviour has been clearly defined

§  All media can be sued to convey messages

o    Teamwork

§  Insurers, brokers, adjusters, experts, lawyers, police, fire authorities, the courts, the legislature, neighbourhood vigilance groups, educators and the general public can all work together or cooperate with one another to deter fraud

o    Communication skills

§  All people who work in insurance and deal w/ the public must communicate professionally.  These form the framework for proper and efficient exchanges

§  Claimants may become frustrated if they perceive stalling techniques are being used.  Any delay is the only justification they need to engage in a ‘revenge’ type of activity against the insurer

§  Fraudsters often exert pressure of insurers to pay a claim quickly

o    Consumer ‘hotlines’

§  Operated by organizations like Crime Stoppers, the government or insurers provide citizens w/ a means to report circumstances that they consider to be suspicious or fraudulent

o    Detection strategies

§  Must be adopted in claims and u/w

§  Many checklists of red flags have been developed identifying the factors that should alert insurance people to investigate further

o    Reward

§  Reward conscientious consumers when they do things that produce a better environment for insurance to operate effectively

§  Claims-free discount encourages consumers to consciously act to reduce the possibility of having a claim

o    Train

§  Training and education are key to professional conduct, optimum job performance and to effectively control the insurer’s exposure to fraud

§  Fraudulent claims need to have specially trained claims handlers and investigators due to the complex factors

o    Verify information

§  Ensure the correct info about an insured or a claim has been recorded

o    Data banks

§  Must be created and shared in accordance w/ privacy laws to record useful info and track claims history

§  It is essential to respect the right to privacy, dignity and the autonomy of each individual

o    Evaluate service providers and experts

§  Building contractors, auto repair shops, and those who provide medical services must be investigated to ensure that they are responsible and competent

§  Billing practices must also be evaluated and monitored

o    Analyze the scope and cost of repairs or treatments

§  Ensure that only repairs or treatment relevant to the claim are authorized for payment

o    Security systems and practices

§  Encouraging consumers to think about protecting their property is likely to make them more careful about security issues

o    Penalties for fraud

§  Consumers must be made aware that there are unpleasant consequences for fraud or any attempt to defraud

§  Fraudsters will flock to areas where they are not challenged

Sample Review Questions -  Fraud Awareness and Prevention

1.     Insurance is a business like any other business – the must deliver products at competitive rates and operate at a profit.

2.     It has been estimated that 10%-15% of insurance claims in Canada are fraudulent.

3.     Insurance fraud has attracted professional criminals and opportunists as it has brought higher returns for what they perceive as limited risk.

4.     Six possible effects of insurance fraud:

a.     Economic loss to individuals and their families through direct physical damage

b.     Direct economic loss to the community when resources of fire departments, police and other public services are used

c.     Indirect economic losses are felt by enterprises that lose business b/c their clients have suffered damages.  Opportunities to do business are lost

d.     Can cause death or physical injury to the public at large and public employees.  The direct consequences of fraud can be grim for innocent victims, firefighters, policy and their families

e.     Indirect economic consequences eventually come to insurance consumers who must pay higher premiums

f.      The emotional and psychological effects of fraud on victims of insurance fraud schemes leave its toll.  Lives of some innocent victims have been changed drastically after having been drawn into staged scams

5.     The four types of people identified by the American Coalition Against Insurance Fraud are:

a.     Realists – have a low tolerance for fraud but realize that it occurs.  They do not advocate strong punishment.  They may feel some behaviours are justified depending on the circumstances

b.     Conformists – tolerant of insurance fraud b/c they believe many people do it.  They are advocates for moderate forms of punishment

c.     Have the least tolerance of insurance fraud.  They are willing to punish perpetrators severely b/c they feel there is no excuse for this type of behaviour

d.     Critics – have a very high tolerance for fraud.  They are ready to blame the insurance industry for the problem b/c they believe insurers do not conduct business fairly.  They want little or no punishment for perpetrators

6.     Fraud awareness campaigns must possess a certain amount of flexibility in order to communicate to each group of attitudes effectively.

7.     The intangible benefit that insurance provides is peace of mind of a promise to pay a claim.

8.     Some insurance consumers justify insurance fraud by believing that their premium investment would be wasted if they did not file a claim during the life of their asset.  There is psychological justification for taking out some of the money that has been deposited over the years.

9.     The interests of insurers and consumers dovetail when it comes to restricting the cost of fraudulent insurance transactions.

10.   The key tool used to raise awareness education.

11.   Factors that contribute to the fluctuation in the value of a claim include: where an insured goes to price the material, the level of expertise hired to do the job, and how much an insured intends to do personally.

12.   The two general categories used to classify types of insurance fraud are:

a.     Opportunistic fraud – involves some form of dishonesty on a claim that has legitimately occurred.  Claimants may grossly exaggerate the amount claimed or claim for things that do not exist.

b.     Planned fraud – involves fabricating a claim for the purpose of defrauding an insurer.  It can involve inventing a claim, committing arson, or staging an auto accident.

13.   The following may be involved in insurance fraud:

a.     Third party claimants

b.     Insured

c.     Agent/broker personnel

d.     Insurance company staff

e.     Any other professional or insurance professional

f.      Service suppliers

14.   The difference b/w utmost good faith and good faith is that utmost good faith carries w/ it a higher, stricter duty to act in good faith.

15.   Behaviour commonly associated w/ the practice of good faith is fairness, fair conduct, reasonableness, and decent behaviour.  It includes being faithful to one’s duty or obligation.

16.   Over the years the utmost good faith doctrine has shifted its focus from primarily protecting an insurer’s position to be fully apprized of the details of a risk to protecting an insured against unfair treatment in the case of a claim.

17.   The Canadian Coalition Against Insurance Fraud was formed to to lead a unified approach against insurance fraud.

18.   The two techniques important to control the risk of fraud are:

a.     Those that prevent such losses from occurring

b.     Those that reduce such losses once they do occur

19.   The insurance industry can promote awareness of fraud by educating the insurance industry to know what fraud is and how it can be prevented.  Education must be ongoing to constantly reinforce the info.  All media can be used.

20.   The groups that can work together to control fraud are: insurers, brokers, adjusters, experts, lawyers, policy, fire authorities, the courts, the legislature, neighbourhood vigilance groups, educators and the general public.

21.   The basic approach towards consumers that can help insurance people communicate more effectively is being respectful and polite.

22.   A common fraud detection strategy is recognizing red flags.

23.   Red flags – are not proof that a fraud has been committed or will be committed but when they arise they should generate questions.

24.   Training is the strategy used to help insurance people perform their jobs well and conduct themselves professionally.

25.   Data banks are important b/c they record useful info and track claims history that may be shared in accordance with privacy laws.

26.   The right to privacy is the cherished freedom in our society that must be respected in relation to information.

27.   Service providers and experts must be responsible and competent.

28.   The scope and cost of repairs or treatments must be analyzed to ensure that only repairs or treatment relevant to the claim are authorized for payment.

29.   Security systems and practices are important b/c they help to prevent claims.

30.   Those who commit fraud or attempt to commit fraud should be penalized b/c otherwise more fraudulent claims will appear.  Fraudsters will flock to areas where they are not challenged.  Consumers must be made aware that there are unpleasant consequences for fraud or any attempt to defraud in order to deter fraud.