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:
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:
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.