CRACKING the CASE: INVESTIGATING INSURANCE FRAUD

With the rise of high-tech crime fighting equipment and the experts to match the tools, insurers are discovering new ways to crack down on fraud. Far from a victimless crime, fraud accounts for higher premiums and higher taxes as fake claims drain precious emergency resources as well as funds. The recent “Project Slip” initiative by Toronto Police, which resulted in 32 arrests, is an encouraging sign that law enforcement is making headway against fraudsters.

In the pre-dawn hours of July 7, 2000, Metro Toronto Police executed a series of arrests, more than 30 in total, including 3 doctors, 2 chiropractors and a paralegal. Called “Project Slip”, the investigation was based on public phone tips regarding alleged insurance and public healthcare fraud that police now estimate cost in the millions of dollars. The investigation was also an example of the cooperation between authorities and the insurance industry to crack down on fraud. The Insurance Crime Prevention Bureau (ICPB), Canadian Coalition Against Insurance Fraud (CCAIF), and insurers assisted police in tracking the suspect claims through their records.

The Toronto Transit Commission was a leading target of the suspected fraudsters, because of its no-fault payout policy for accident claims made against the authority. Police say the scheme involved recruiters convincing someone to stage a fake fall on TTC property, or file a false accident claim, often involving soft tissue damage which does not show up under x-ray and is largely subjective to diagnose. Each case, which involved insurance claims and claims to the Ontario Hospital Insurance Plan (OHIP), netted between $5,000 and $25,000, police say. This is not just an issue of money, as fraudulent claims involve tying up emergency and police services as well.

TTC lawyer Brian Leck is publicly critical of no-fault insurance legislation that requires the commission to pay out claims in 14 days, leaving little time to investigate their veracity. As a result of Project Slip, the TTC will investigate more than $4 million in no-fault claims paid last year.

The investigative end of the insurance industry is under more pressure than ever before to respond to the rise in insurance fraud. And professionals from all branches – claims investigators, private investigators, forensic accountants and others, including the police – gathered recently at the “Fraudulent Times” professional development forum on current fraud topics, jointly sponsored by the Canadian Association of Special Investigation Units, the Council of Private Investigators (Ontario), and the Association of Certified Fraud Examiners (Toronto Chapter). Their aim was to discuss the latest in fraud schemes, investigation techniques and legislation affecting how these crimes can be investigated.

A victimless crime?

Should the allegations involved in Project Slip bear out, it will be but one example of the prevalence of insurance fraud, which property and casualty insurers estimate occurs in about 10% to 15% of insurance claims, according to the ICPB. Mary Lou O-Reilly, executive director of CCAIF, points out that fraud adds 10% to 15% to insurance premiums for policyholders. “And when you add up the social costs, including the burden on out justice and health care systems, you get another bill over $1 billion that’s being handed to taxpayers every year.”

“To the insurance industry, insurance fraud has cost consequences that compare with the [1998] ice storm in eastern Ontario and Quebec, the costliest natural disaster in Canadian history,” says the ICPB. While damage from the ice storm was pegged at $1.4 billion, the Bureau estimates that p&c fraud adds $1.3 billion annually to premiums.

Making a case

Why is fraud so difficult to stop? One answer, says Dan Little, coordinator of claims for the Economical Insurance Group, is that fraud cases are being judged very strictly by the courts. Many of the cases being heard today originated as far back as three years ago, but are being judged based on the tools and tests available to investigators today. Investigators today have to be extra diligent, knowing that their work will be put to the test years down the road. “You must compile cases at the highest level to get results.”

Little also points out that insurers may be their own worst enemy in terms of claims investigation. In the name of customer service, companies want to “get it fixed and get the claims settled” as quickly as possible. Fraudsters know this, and are aware that most claims do not get thoroughly investigated, and use this attitude to their advantage.

Thorough claims investigation is a game of speed and patience, getting to the scene of the claim quickly before evidence is tampered with but working methodically to analyze all possible indicators of fraud. One key for investigators who suspect a fraudulent claim is being made is to bear in mind how the case will play out in court, says Little. This means bringing in the necessary experts to bolster the company’s case, including security systems experts, locksmiths, and forensic accountants, etc.

Mazan Habash, principal and founder of Origin and Cause Inc. and a security system expert, says calling in professional help is often a good policy. “Regardless of the incident or event, when an alarm system is involved in a loss, an adjuster or claims examiner should seriously consider having an alarm system expert carry out an examination. Just like using any other tool at their disposal, this type of examination could provide the adjusters and/or claims examiner with information that might otherwise not be available.” He uses the example of an alarm system being shut down just prior to a fire or break-in as one indicator of possible fraud. Even systems destroyed by the loss event often contain memory, or information stored at a remote location (i.e. the security company’s own system) which can indicate suspicious use or misuse of the system.

In this sense, the security system acts like an airplane’s ‘black box’ in terms of its value as post-loss evidence. The use of experts is not only valuable in cases where fraud is suspected, notes Tom Eby, principal in Silverberg & Eby Investigative Accountants Inc. Whether intentionally, or unintentionally, many people give incorrect information to adjusters. This is particularly true with accounting information, a puzzle to many policyholders who don’t know the difference between terms such as “net” and “gross” income. Telephone adjusters often want to deal with claims quickly, to get payments out to claimants. However, adjusters need to look for “red flags” to know when to bring experts, such as loss accountants in. Whether fraud is suspected or not, it is often a good policy to call experts in, in order to get things right and avoid having to ask for claim money back from clients. Eby makes the point that if misinformation leads to a higher payment than is correct, asking for the money back can be a customer service nightmare.

Perhaps the biggest barrier to use of expert help is the cost involved. Companies trying to shave expense ratios, particularly in the claims piece, which involves about 70 of every premium dollar, may balk at the idea of paying the fees demanded by experts. However, using the real-life example of a staged break-in, Little points out that an investigation costing the insurer about $12,000 put the brakes on a $100,000 claim.

High-tech help

One way to tackle the cost of claim investigation is to narrow the field of claims which have to be dealt with this way. And new high-tech help is available to help companies flag suspicious cases. Data mining is being put to use to analyze claims history and find common elements among fraudulent cases. These common elements, or “statistical anomalies”, involve factors that go beyond the intuitive suspicions of investigators, says Vladislav Gorlov, senior data mining consultant with ANGOSS Software Corp. “Everything is evolving and so is fraud,” notes Gorlov, meaning the schemes of the past that investigators are familiar with may be quite different today. Data mining can be used to narrow the focus of investigation, to put it where human intuition might not have thought.

Data mining works by establishing “red flag” indicators by assessing new cases against known factors, or “anomalies”, in past frauds. “From your previous fraudulent claims you learn what a fraudulent case looks like,” Gorlov explains. He uses the example of fraudulent accident claims for slow-speed collisions, where investigators had thought only that the speed of the accident was an indication of fraud. Through statistical analysis, the high proportion of claimants who had legal representation for these relatively minor accidents was revealed as a trend among the fraudulent claims.

Use in the telecom and credit card industries, the first to put data mining to widespread use against fraud, has resulted in a 20% to 50% reduction, he says. Gorlov also predicts that through the use of data mining as opposed to random investigation, it is possible to narrow the field of investigation such that by looking into just 5% of a companies’ claims, 50% of its frauds can be caught [see chart]. Not only does data mining allow a company to narrow its focus by flagging suspicious cases, but the publicized use of high-tech fraud detection may well act as a deterrent itself, he says.

Legal maneuvers

With the introduction of new federal privacy legislation and the impending creation of provincial privacy legislation in Ontario, there have been fears that fraud-fighting efforts by insurers may be curtailed by the new regulations. Data mining in particular was expected to be affected by the new legislation.

Concerns with regard to the federal Personal Information Protection and Electronic Documents Act, which will not apply to private organizations until January, 2004, do not apply to fraud investigations and law enforcement, Elaine Hood, director of privacy policy for the Ecommerce Branch of Industry Canada told the fraud forum. The federal rules may also be preceded by provincial legislation if this is in line with federal law.

Earlier this year, Bernard Webber of the Insurance Information Centre of Canada said the IICC would be working with the Ontario government to try to ensure its regulations, particularly those regarding consent to use a client’s information, would be in line with the new federal act.