INSURANCE FRAUD

OBJECTIVE
To reduce the amount of economic loss to the insurance industry due to fraud. This will be accomplished by identifying, targeting, and dismantling those individuals, organized groups, and con artists committing fraud against the insurance industry. They will be targeted through national initiatives in specific insurance industry segments will bring the crime problem to the national consciousness.

The insurance industry in the United States consists of more than 5,000 companies with over $1.8 trillion in assets. It is broken down into two segments of equal importance: property/casualty and life/health. The insurance industry is one of the largest and most interdependent of the United States industries. It is therefore, by definition, a critical industry in the United States and, as such, falls within the definition of Tier One in the FBI's Strategic Plan. 

Insurance fraud has become one of the most prevalent and costly white collar crimes. Public concern about the price of insurance and the solvency of the insurance industry has prompted the insurance industry to conduct both internal and external reviews of the various insurance cost elements. According to a published study by the Coalition Against Insurance Fraud (CAIF), fraud is among the most prominent cost components escalating the costs of insurance. The CAIF has estimated the annual loss figures relative to insurance fraud (non health insurance) to be approximately $26 billion. Outside of the CAIF figure, the life/disability insurance segment of the industry opines that approximately $1.5 billion is lost each year through fraudulent schemes. The CAIF/life/disability segment loss estimates relative to insurance fraud are broken down as follows:

• Auto — $12.3 billion

• Homeowners — $1.8 billion

• Business/Commercial — $12.0 billion

• Life/Disability — $1.5 billion

• Total — $27.6 billion

As an example of the breadth of the problem, in Los Angeles County alone, it is estimated by both the Los Angeles District Attorney and representatives from the State Compensation Insurance Fund that insurance fraud perpetrated through just one type of fraudulent scheme, namely premium fraud, costs the county approximately $96 million annually.

A study conducted jointly by Auburn University and the University of Georgia published in the Journal of Insurance Regulation provided the results of an examination of annual statements for the year 1994 from companies representing 93 percent of the life insurance industry. That study, with results admittedly on the low end because of the inability to contest claims for material misstatement after two years of a policy's inception, estimated that approximately $143 million in life claims were fraudulent. 

The disability insurance sector of the industry paid out approximately $10 billion in disability claims during 1996, with fraudulent claims included in that total estimated at $1 billion. 

For definition purposes, insurance fraud is classified as either external or internal. External fraud includes any fraudulent activity committed by applicants for insurance, policyholders, third-party claimants, or professionals who provide insurance services to claimants. These fraudulent activities include inflating or "padding" actual claims and fraudulent inducements to issue fraudulent policies and/or establish a lower premium rate. By contrast, internal fraud refers to fraud within the insurance industry itself. This activity includes bribery of company officials, misrepresentation of facts by insurance company officers, directors, employees, agents and brokers for their personal enrichment or to prevent regulators from taking certain actions, etc. 

The most blatant type of internal insurance fraud is the creation of a company using overvalued and/or fictitious, and fraudulent rental assets to generate insurance premiums. Con artists who create these companies utilize sophisticated schemes for verification of fraudulent financial statements submitted to the state insurance regulatory body to hide the true nature of the fictitious assets. These schemes include:

• CPA/accountant payoffs leading to false opinion statements; 

• engagement of offshore accountants for the preparation of fraudulent financial statements; and

• establishment of an account with a securities brokerage firm with "deposited funds" from an offshore bank owned by the fraudsters — the funds are fictitious but are verified through correspondence with the offshore subject-owned bank.

Internal fraud also includes premium diversion schemes perpetrated by insurance company employees, officers, directors, and/or owners whereby the money collected from policyholders is diverted to their own personal benefit. This is usually done to the detriment of the policyholders because: 

• the policyholders are not actually insured (the premiums have been diverted and no insurance coverage is in effect); and/or 

• subsequent claims by policyholders are not paid because of a lack of assets due to various premium diversion schemes. 

Another type of internal fraud involves surety bond fraud. Private developers and governmental entities require contractors to post surety bonds before they award a construction contract. Large contractors with prior experience have little difficulty acquiring adequate bonding. The problem occurs with small or new contractors having little or no work history. Existing bonding companies are often reluctant to accept new customers which creates a demand for insurance companies willing to accept these unknown risks. The con artists form insurance companies for the sole purpose of writing hard-to-place surety bonds, demanding higher premiums, regardless of proper underwriting, until a major claim puts them out of business. 

The most blatant type of external fraud is committed by individuals and/or organized groups who defraud the insurance industry through a myriad of sophisticated fraudulent schemes. The most egregious of these schemes involve staged automobile accident rings and the filing of multiple fraudulent accident claims involving bogus or non-existent property damage. These schemes may also include the corruption of an insurance company employee, typically an insurance claims adjustor, to ensure the payment of the bogus claims. Upon payment, the parties involved split the resultant proceeds.

STRATEGY
With the cooperation of the insurance industry, through the receipt of criminal referrals and from industry intelligence, the FBI will target individuals and/or organizations committing internal/external insurance fraud. The FBI will then be able to initiate and conduct traditional investigations as well as utilize sophisticated investigative techniques to apprehend the perpetrators. As a future goal, the FBI will pursue the implementation of a mandatory criminal referral system of suspected fraudulent activity.

The FBI will ensure the successful prosecution of these individuals to the fullest extent of the law, often forcing their removal from the insurance industry and thus eliminating them from the crime problem. 

The FBI, in concert with the National Association of Insurance Commissioners (NAIC), is attempting to identify the top echelon con artists who are defrauding the insurance industry. Once identified, these con artists will be targeted in proactive investigations utilizing sophisticated investigative techniques in an effort to neutralize their efforts prior to their criminal activities becoming a larger, more egregious problem within the industry.