Reports Says, Despite Insurer Efforts, Fraud is Still a Serious Problem

January 11, 2002

An Insurance Research Council (IRC) and Insurance Services Office Inc. survey shows that insurers of all sizes consider fraud “a serious problem.”

According to a PRNewswire report, more than one-third of insurers feel that the amount of fraud has grown over the past three years, in contrast to 6 percent of insurers who believe the amount of fraud has decreased.

The survey reported that more than 40 percent of insurers claim spending more to fight fraud during the past three years, in contrast to 3 percent that report spending less. However, insurers rate their efforts in the war on fraud as only somewhat effective.

Designed to ascertain the scope and nature of insurance fraud, what insurance companies are doing to combat it, and the support they receive from federal, state and local authorities, the study analyzes survey responses from 353 large, medium, and small insurance companies that represent 73 percent of the property-casualty market. Findings show how insurers perceive the problem of fraud and the corporate resources and strategies their companies are implementing to fight it.

Survey respondents noted private passenger auto and workers compensation as the two lines of insurance subject to the most fraud. Respondents indicated that medical malpractice, earthquake, and products liability are subject to relatively small amounts of fraud. Respondents also indicated that “soft fraud” — exaggeration of otherwise legitimate claims, often committed by individuals acting alone — is far more frequent than “hard fraud” — deliberate attempts to stage losses, often committed by organized rings. Because of the frequency of soft fraud, it adds more to overall claim costs than hard fraud does.

All companies in the study actively fight fraud, with 82 percent of survey respondents stating their companies have formal fraud-fighting programs. While more than two-thirds (68 percent) say their companies’ programs address claims fraud “thoroughly,” only 25 percent say they address application fraud “thoroughly,” and 19 percent say they address premium fraud “thoroughly.”

To detect fraudulent claims, at least four out of five companies use internal fraud recognition training, manual red flags or indicator cards, and external databases. At least two-thirds of companies use internal audits, video or audio tape surveillance, information from agents, and internal database searches. No more than one in four use some of the newer mathematical or analytical techniques, but higher percentages use external databases, with the most popular, ISO ClaimSearch®, used by 74 percent.

Insurers agree on the importance of mobilizing public opinion to fight fraud, but only 48 percent of survey respondents report that their companies have tried to educate their policyholders or the general public about how fraud affects them. Insurers also overwhelmingly agree on the need for tough enforcement of existing laws at the federal, state and local levels.

On a list of 30 items that insurers rated in terms of their importance to anti-fraud efforts, 8 of the top 15 relate to the critical nature of support from law enforcement, prosecutors and judges; tough civil and criminal penalties for committing insurance fraud; and statutes that support insurers in the war on fraud.

On a scale from 1 (not important) to 5 (very important), 95 percent of respondents rated enforcement of existing penalties either 4 or 5, with 94 percent rating support of prosecutors and judges similarly.

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