FBI Targets Insurers in Widening Fraud Probe; Industry Responds

May 5, 2005

The insurance industry, already under scrutiny by state and federal authorities for various practices, now faces another questioner. The Federal Bureau of Investigation has launched a probe of the insurance industry that targets some of the accounting mistakes found at American International Group to see how widespread the problems might be.

The FBI review is not confined to insurer accounting but is also looking into agents and brokers who may be diverting premiums for their own use and into the operations of workers’ compensation plans sold by professional employer organizations (PEO).

The FBI said its agents are talking to industry executives and regulators as well as looking for patterns in existing complaints and civil records.

“We do not want to be caught napping on this,” Chris Swecker, an assistant director at the FBI who oversees the financial crimes unit, told The New York Times. “We are taking a very, very hard look at this to see if it represents a pervasive problem.”

The FBI said it would conduct traditional investigations as well as “utilize sophisticated techniques, to include covert undercover investigations, to apprehend the fraudsters.”

In a report on corporate fraud, the FBI said insurance fraud involving insurance industry players and not just policyholders is a growing concern.

“Insurance fraud continues to maintain a top investigative priority due in large part to the insurance industry’s significant status as one of the largest U.S. industries (more than doubling the Gross Domestic Product contributions of the securities industry),” said the report, which points out that the insurance industry consists of more than 7,000 companies with over $1 trillion in premiums each year.

Among the FBI’s concerns is that the “insurance industry is in the midst of technological and regulatory change which will result in foreign insurance entities playing a larger role.” The report maintains that regulation of the industry is becoming more difficult as more foreign players enter the market.

The FBI said it is working with the National Association of Insurance Commissioners to identify “the top echelon fraudsters defrauding the insurance industry and most prevalent schemes within the insurance industry.”

Alan Haskins, the antifraud coordinator for the NAIC, told the New York Times that his organization did not know the FBI was investigating but said the NAIC would cooperate.

While apparently unaware of the particular investigations by the FBI, the NAIC and the FBI do have a cooperative relationship. The NAIC said it routinely provides technical assistance to state and federal law enforcement agencies, as well as state and federal regulators in insurance-related investigations.

In this case, the NAIC has been educating the FBI on insurance accounting.

“State insurance regulators, working through the NAIC, have been tapped by the FBI to provide guidance in understanding the technical requirements for accounting and reporting of reinsurance transactions, including arrangements that limit a reinsurer’s risk of loss,” said Diane Koken, NAIC President and Pennsylvania Insurance Commissioner.

Koken noted that several states are currently pursuing a number of investigations in this area and that existing financial reporting standards have been under review since last December.

The Times said that the FBI official suggested this could be “the next big one,” apparently referring to the 1980’s savings and loan crisis and the more recent headlining corporate fraud cases at Enron and other big firms.

Insurance industry groups, however, reject any comparison to those scandals.

“We do not believe there is widespread corruption in the insurance industry or that any comparison to the savings and loans crisis is appropriate,” Dennis Kelly, federal media relations director for the American Insurance Association, told Insurance Journal.

Robert Zeman, senior vice president and chief regulatory and legislative counsel for the Property Casualty Insurers of America, also downplayed the savings and loan comparison. “We respectfully disagree. We believe and hope it won’t reach that scope or magnitude,” he said.

Zeman suggested that the insurance and reinsurance issues raised in the American International Group and other cases represent “a fairly limited number of transactions” and are not necessarily representative of what goes on in the industry on a wide scale.

“It does seem that a number of transactions have been lumped into this,” said Zeman. “A limited number of potentially improper transactions have been used to paint the entire industry with a broad brush, just as with the producer compensation issue.”

Zeman cautioned against overreaction by regulators. Noting that the NAIC, several state insurance departments, the Securities and Exchange Commission, state attorneys general and even national accounting officials are looking into accounting matter, he urged regulators to deal with these issues in a uniform and coordinated manner.

“We want a uniform response but recognize the need for investigators to pursue any criminal activity,” he said.

While calling for a more coordinated regulatory approach, PCI’s Zeman defended regulators against the suggestion in the FBI report that regulators might not be able to keep tabs on an industry that is seeing increasing involvement of foreign companies.

“We’re not prepared to say that the insurance regulatory system can’t handle it,” he said.

Currently, the FBI said it is focusing a majority of its resources relating to insurance fraud on these specific schemes:

Insurance-Related Corporate Fraud – Noting that corporate fraud is “not unique to any particular industry,” the report maintains that there has been a recent trend involving insurance companies. “By their nature, insurance companies hold customer premiums which are forbidden from operational use by the company. However, when funding is needed, unscrupulous executives invade the premium accounts in order to pay corporate expenses. This, in turn, leads to financial statement fraud because the company is required to ‘cover its tracks’ to conceal the improper utilization of customer premium funds” according to the report.

Premium Diversion/Unauthorized Entities – The FBI said the “most common type of fraud” involves insurance agents and brokers diverting policyholder premiums for their own benefit. The report claims that there is also a growing number of unauthorized and unregistered entities engaged in the sale of insurance-related products. “As the insurance industry becomes open to foreign players, regulation becomes more difficult. Additionally, exponentially rising insurance costs in certain areas (i.e., terrorism insurance, directors/officers’ insurance, and corporations) increases the possibility for this type of fraud. The schemes typically involve entities which utilize a myriad of sophisticated schemes for verification of submitted fraudulent financial statements to the state insurance regulatory body in order to hide the true nature of the fictitious assets listed in the statements. This generates large insurance premiums solely to be diverted.”

Workers’ Compensation Fraud – The FBI is also looking into the professional employer organization industry that provides workers’ comp insurance coverage to small businesses by pooling businesses together. Because workers’ comp is a big cost for small businesses, owners are likely to shop around for the lowest price, the report contends. “This has made it ripe for entities who purport to provide workers’ comp insurance to enter the marketplace, offer reduced premium rates, and misappropriate funds without providing insurance. The focus of these investigations is on allegations that numerous entities within the PEO industry are selling unauthorized and non-admitted workers’ comp coverage to businesses across the United States. This insurance fraud scheme has left injured and deceased victims without workers’ comp coverage to pay their medical bills.”

The FBI has also recently joined the International Association of Insurance Fraud Agencies, an international non-profit organization, which addresses insurance and insurance-related financial crimes on a global basis.

Topics Carriers Agencies Legislation Workers' Compensation Fraud Market NonProfits

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