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FRAUD in Personal Lines Insurance

Violeta CiurelCEO AXA Life Insurance

October, 24, 2013

Definition: Intentional deception, misrepresentation and/or concealment done to gain some benefit or advantage that will harm someone else, physically, financially, or in other ways.

FRAUD/ INSURANCE FRAUD DEFINITION

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Insurance fraud is basically an attempt to exploit an insurance contract.

INSURANCE FRAUD = CRIME

LIFE INSURANCE FRAUD DEFINITION

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Life and health insurance fraud is very specific, it refers to acts of intentional deception which may be committed at different stages in the insurance transaction by different parties: applicants for insurance, agents, policyholders, third-party claimants and professionals who provide services to claimants.

Eg: • fake death and forgery • false statements, reimbursements, benefits• Invoicing unperformed medical services• false representations• Billing for unnecessary medical tests etc

WHY DO PEOPLE MAKE FRAUDS? financial problems, being under pressure to meet unrealistic

business objectives fraudsters need to have the opportunity to commit fraud - act

when the likelihood of detection is small – need to have proper policies, procedures and controls to prevent fraud happening and to detect it.

are dissatisfied with an insurer as an employer perceive an entitlement to compensation because of premiums

paid take an “every one does it” attitude or copying the behaviour of

others in the insurer, such as the Board or Senior Management. public attitude regarding fraud in insurance does not deter fraud

as many people see such fraud as a victimless crime.

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INSURANCE FRAUD - INCRIMINATION

Insurance fraud from country to country is regulated by:- parts of penal code that define insurance fraud and the penalties - specific fraud laws defining and detailing insurance fraud- general fraud provisions under which insurance fraud falls

Romania - currently no specific incrimination for insurance fraud. (different forms of fraud constitute offenses that are expressly regulated by legislation)- starting 2014 deception on insurance will be regulated in the new Penal Code as distinct crime

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Regardless the ways of incrimination

Insurance fraud is considered as CRIME

FRAUD – ACTIVE SUBJECTS

POLICY HOLDER AND BENEFICIARY FRAUD: fraud against insurer by policyholder and/or other parties in the purchase and/or execution of an insurance product by one person or people in collusion by obtaining wrongful coverage or payment

INTERMEDIARY FRAUD: fraud by intermediaries against insurer and/or policyholders, customers or beneficiaries

INTERNAL FRAUD: fraud against insurer by a manager/ employee on his/her own volition or in collusion with parties that are internal or external to insurer

THIRD PARTY: medical clinics/ doctors; layers networks who provide services to claimants6

FRAUD – MOST COMMON MANIFESTS I

Deliberate misstatements - on applications for insurance, any type of health information on a policy must be accurate, including a person’s age;

Faked Death Schemes are cooked up to collect on the insurance of a person who's still aive or in some cases never even existed;

Health Insurance Billing Fraud- health care providers bill health insurance companies a high fee for a standard procedure, or bill for services that were never rendered;

Unnecessary Medical Procedures - doctors ordering patients to go for unnecessary testing;

Persons substitution - allowing someone else to use his or her identity and insurance information to obtain health care services

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FRAUD – MOST COMMON MANIFESTS II

Upgrade "churning." Agent s convinces policy holders to upgrade to a "better" (and more expensive) policy. It actually offers nothing more than the first one did, but the agent collects a nice commission.

Pocketed premiums. Agents cash the check for the new life insurance policy, and not the insurance company.

Viatical Settlement – turning a legitimate act to a fraud scheme

etc

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LEGITIMATE ACT – VIATICAL SETTLEMENT I

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Cashes in a life insurance policy to pay for the associated illness, medical expenses, and final wishes

pays % of the amount of the policypays the further premiums

buys the life insurance policy pays the further premiumsBecomes policy holder

Terminally ill person

Viatical settlement comp.

Investors

Owns a $100,000 policyDiagnosed with a terminally ill

Offers $50,000 to purchase the policy and be designated as its new owner (beneficiary).

Buys the policy for $68,000. Stands to gain by paying $68,000 for a policy worth $100,000.

FRAUD SCHEMES – VIATICAL SETTLEMENT II

recruiting applicants who already have a preexisting terminal illness, generally AIDS or cancer;

recruit applicants to apply for multiple "jet issued" policies

misrepresent the truth and answer "no" to all of the medical questions

a healthy person viaticates a life insurance policy by providing false medical information to indicate that he or she has a life-threatening illness (Dirty-sheeting)

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IMPACT OF INSURANCE FRAUD

HAS FRAUD A SYSTEMIC IMPACT - ???????\Detecting and reducing insurance

fraud needs to be a key priority for insurers

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THE IMPACT OF INSURANCE FRAUD I Overall financial cost - Nearly $80 billion in fraudulent claims are made annually in the U.S- Detected and undetected fraud is estimated to represent up to 10% of all claims expenditure in Europe - £1.9bn (€2.2bn) of fraud goes undetected each year in UK – increase the insurance premiums with more than 5%- Germany: insurance frauds: 4 bln Euro/year - France: 35 042 fraudulent insurance claims were recorded in 2011, leading to €168m not being paid - 1 mil Ron prejudice estimated in the last investigated fraud in Romania

Higher insurance premiums - insurance companies generally must pass the costs of bogus claims and of fighting fraud onto policyholders resulting a premium spiral.

Jeopardize health, lives and property - People’s health, lives and property are often endangered by insurance fraud schemes – lack of coverage

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THE IMPACT OF INSURANCE FRAUD II

Loss of personal income, savings - Many insurance fraud schemes steal money directly from policyholders, from a few dollars to their entire life savings

Rising cost of goods & services - Businesses must pass the cost of rising insurance premiums onto their customers by raising prices for goods and services.

Ruined credit - Many seriously ill people who purchased false health insurance found their credit ruined when they couldn’t pay large medical bills after their policy refused to pay, or heritors that couldn’t pay the debts that should be covered by the insured sum.

Job losses – Draining off the company’s assets into company’s controller own accounts. This sends the company into bankruptcy, costing employees their jobs. (i.e. Martin Frankel - Franklin American)

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THE IMPACT OF INSURANCE FRAUD III

Diverts government resources - Fighting insurance fraud is a major expense for stats governments. This dilutes the nation’s overall anti-crime efforts by diverting often-limited government resources needed to fight other crimes.

Personal costs - Victims lives and their families are disrupted for long periods of time. Many must recover from serious financial losses or fraud-related physical injuries.

Diverts from essential services - State government fraud-fighting efforts are financed from taxpayers, thus diverting scarce tax money from other essential public services.

~YES, FRAUD IS A SYSTEMIC THREAT ~14

MEASURES TO BE TAKEN

State/government/authorities: - Clear definition of fraud; fraud = crime- Regulators tackling frauds - Define and put in place specific

strategies to prevent and combat frauds- Maintaining market confidence, consumer protection and

public awareness- Supporting independent anti-fraud associations Romania - opportunity to act on the health insurance fraud prevention – currently health reform legislation is being drafted

Clients:- Insurance and financial education- Understand policy and what it covers

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POLICIES AND MEASURES AT COMPANY LEVEL I

Senior management and Board ultimately responsible

- Assess the vulnerability and implement the necessary and effective policies, procedures, prevention measures, proper checks and control to be applied in HO, agencies etc;

- Adopt a risk-based approach while addressing fraud on the basis of the fraud risk management

- Include fraud risk in the whole process of designing the mission, strategy and business objectives; policy to be consistently implemented in all the departments objectives (product development, UW and clients review, hiring, outsourcing, claims handling, distribution, partners)

- Know who you are dealing with – staff, suppliers, partners and agents16

POLICIES AND MEASURES AT COMPANY LEVEL II

- Permanently reassuring the integrity and personal conditions of the Board members, senior managers, other staff and distribution

- Fit and proper standards to be set for members of the Board, senior managers and other staff acc to their position and responsibilities; same for third parties hired by insurers to perform activities in high risk areas.

- Organize specialized anti fraud departments - Conduct regular fraud risk assessments and reporting- Proper UW, strong claims process and settlement- Provide ongoing training of all intermediaries, staff, on

detection and preventing fraud- Align IT, Internal Audit and the Board in the fight against

economic crime17

PROPOSAL FOR INDUSTRY I

Information exchange between insurers and other financial institutions

Fraudsters – target different insurers and other financial institutions simultaneously or consecutively; share information about fraudsters within the limits of the privacy and data protection law of the insurer’s jurisdiction; timely communication between them and setting up shared databases: done in Sweden, Croatia, Estonia, Finland, Germany, Ireland, Malta, the Netherlands, Norway, Portugal, Slovenia, Spain, Sweden, UK

Shared database - information about internal fraudsters, fraudulent policyholders, claimants, beneficiaries, intermediaries and other third parties;

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PROPOSAL FOR INDUSTRY II

share knowledge about fraud risk, trends, policy issues, prevention and detection. Cooperation with organizations involved in combating fraud in insurance enhancing consumer/policyholder awareness on insurance fraud and its effects through education and media campaigns

Increase role of the industry associations in the process. Cross-border cooperation: e.g. - Nordic countries meetings to

discuss trends, issues and common challenges, since trends in one country have been seen to spread to neighbouring countries.

Set up formalised groups to investigate insurance frauds – already in France, Sweden and the UK

Organize training for insurance staff use “cheat-lines” (helpline) - successful in several countries,

already functional in Ireland, Sweden and the UK. Members of the public can call a helpline to report suspected or known insurance frauds19

THANK YOU !

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Bibliography

Coalition Against Insurance Fraud - www.insurancefraud.org

Help Stop Fraud Organization - www.helpstopfraud.org

Insurance Europe - www.insuranceeurope.eu

Real Time” Insurance Sales: Jet Issue Life by David C. Florian

Viatical Fraud by Donald A Kohtz, JD

A survey on Statistical methods for health care fraud detection, by Jing Li, Kuei-Ying Huang,& al

Application paper on deterring, preventing, detecting, reporting and remedying fraud in insurance, IAIS September 2011

“The impact of insurance fraud, Insurance Europe, 2013”21