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JAI HIND COLLEGE

BASANTSINGH INSTITUTE OF SCIENCE &

J.T.LALVANI COLLEGE OF COMMERCE

23-24, Backbay Reclamation, “A‖Road, Churchgate, Mumbai – 400 020

B.Com In (banking & Insurance)

Frauds In Insurance

Name of the Student: Kejriwal Surbhi

Seat No: ____________

Date: ____________

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DECLARATION

I, Kejriwal Surbhi Gopal of Jai Hind College Of T.Y.BBI (Semester VI)

hereby declare that I have completed this project on Frauds In Insurance

in the Academic year 2005-2006 The information submitted is true and

original to the best of my knowledge.

Signature of the Student

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CERTIFICATE

I, Mrs. Suri hereby certify that Kejriwal Surbhi Gopal of Jai Hind College of

T.Y.BBI (Semester VI) has completed the project on Frauds In Insurance.

In the Academic year 2005-2006. The information submitted is true and

original to the best of my knowledge.

Signature of the Project Signature of the Principal

Coordinator of the college

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CONTENTS

TOPICS COVERED

PAGE

NUMBER

Acknowledgement

Introduction To Frauds

Insurance Fraud And Abuse

Schemes, Scams, Scammed

Real Eyes...Realize...Real Lies…

Itching To Know Who Can Help?

Division Of Insurance Fraud

Deceptive Life Insurance Sales Practices Continue

Viatical Settlements Investment Fraud

Case Study

Be Aware, Don’t Be A Victim

International Association Of Insurance Fraud Agencies(Iaifa)

Dealing With Fraud On The Net

Precaution Is Better Than Cure

Summary

Bibliography

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ACKNOWLEDGEMENTS

I Surbhi Kejriwal, the student of Jai Hind College pursuing my third year of

Bachelors of Banking & Insurance (T.Y.B.B.I), am very grateful to a lot of

people for guided and helping me in the right direction throughout my

project.

First of all, I would like to specially thank Mr. Iyer and Mr. Joshi, for

introducing me to such a wonderful and challenging topic because of

which I learnt about the world and especially about the various frauds that

take place in detail and for being my guide in the true sense of the word

and for guiding, correcting and motivating me at each and every moment

during my project.

I would also like to thank Mrs. Suri, our coordinator to whom we shall

forever remain indebt for setting the foundation for this course and for

assisting in the project whenever help was required.

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Introduction to frauds

What Are Frauds?

In a broad strokes definition, fraud is a deliberate misrepresentation which

causes another person to suffer damages, usually monetary losses. Most

people consider the act of lying to be fraud, but in a legal sense lying is

only one small element of actual fraud.

A salesman may lie about his name, eye color, place of birth and family,

but as long as he remains truthful about the product he sells, he will not

be found guilty of fraud. There must be a deliberate misrepresentation of

the product's condition and actual monetary damages must occur.

Many fraud cases involve complicated financial transactions conducted by

'white collar criminals', business professionals with specialized knowledge

and criminal intent. An unscrupulous investment broker may present

clients with an opportunity to purchase shares in precious metal

repositories.

For example, His status as a professional investor gives him credibility,

which can lead to a justified believability among potential clients. Those

who believe the opportunity to be legitimate contribute substantial

amounts of cash and receive authentic-looking bonds in return. If the

investment broker knew that no such repositories existed and still

received payments for worthless bonds, then victims may sue him for

fraud.

Fraud is not easily proven in a court of law. Laws concerning fraud may

vary from state to state, but in general several different conditions must

be met.

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One of the most important things to prove is a deliberate

misrepresentation of the facts. Did the seller know beforehand that the

product was defective or the investment was worthless? Some employees

of a large company may sell a product or offer a service without personal

knowledge of a deception.

The account representative who sold a fraudulent insurance policy on

behalf of an unscrupulous employer may not have known the policy was

bogus at the time of the sale. In order to prove fraud, the accuser must

demonstrate that the accused had prior knowledge and voluntarily

misrepresented the facts.

Another important element to prove in a fraud case is justifiable or actual

reliance on the expertise of the accused. If a stranger approached you

and asked for ten thousand dollars to invest in a vending machine

business, you would most likely walk away. But if a well-dressed man

held an investment seminar and mentioned his success in the vending

machine world, you might rely on his expertise and perceived success to

decide to invest in his proposal. After a few months have elapsed without

further contact or delivery of the vending machines, you might reasonably

assume fraud has occurred. In court, you would have to testify that your

investment decision was partially based on a reliance on his expertise

and experience.

The element of fraud which tends to stymie successful prosecution is the

obligation to investigate. It falls on potential investors or customers to fully

investigate a proposal before any money exchanges hands.

Failure to take appropriate measures at the time of the proposal can

seriously weaken a fraud case in court later. The accused can claim that

the alleged victim had every opportunity to discover the potential for fraud

and failed to investigate the matter thoroughly.

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Once a party enters into a legally binding contract, remorse over the

terms of the deal is not the same as fraud.

The dictionary defines fraud as the intentional perversion of truth to

induce another to part with something of value or to surrender a legal

right. Insurance fraud can be ―hard‖ or ―soft.‖ Hard fraud occurs when

someone deliberately fabricates claims or fakes an accident. Criminals

are using increasingly sophisticated electronic schemes to defraud

insurance companies.

Soft insurance fraud, also known as opportunistic fraud, occurs when

normally honest people pad legitimate claims or intentionally understate

the number of miles they drive each year or, in the case of business

owners, list fewer employees or misrepresent the work they do to get a

lower premium.

Those who commit insurance fraud range from organized criminals who

steal large sums through fraudulent business activities and insurance

claim mills to professionals and technicians who inflate the cost of

services or charge for services not rendered, to ordinary people who want

to cover their deductible or view filing a claim as an opportunity to make a

little money.

Some lines of insurance are more vulnerable to fraud than others. Health

care, workers compensation and auto insurance are believed to be the

sectors most affected.

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Insurance Fraud and Abuse:

A Very Serious Problem

Fraud and abuse are widespread and very costly to any country’s health-

care system. Fraud involves intentional deception or misrepresentation

intended to result in an unauthorized benefit. An example would be billing

for services that are not rendered.

Abuse involves charging for services that are not medically necessary, do

not conform to professionally recognized standards, or are unfairly priced.

An example would be performing a laboratory test on large numbers of

patients when only a few should have it. Abuse may be similar to fraud

except that it is not possible to establish that the abusive acts were done

with an intention to deceive the insurer.

Type of Fraud and Abuse

False claim schemes are the most common type of health insurance

fraud. The goal in these schemes is to obtain undeserved payment for a

claim or series of claims. Such schemes include any of the following when

done deliberately for financial gain:

Billing for services, procedures, and/or supplies that were not

provided.

Misrepresentation of what was provided; when it was provided; the

condition or diagnosis; the charges involved; and/or the identity of

the provider recipient.

Providing unnecessary services or ordering unnecessary tests.

Many insurance policies cover a percentage of the physician's "usual" fee.

Some physicians charge insured patients more than uninsured ones but

represent to the insurance companies that the higher fee is the usual one.

This practice is illegal. It is also illegal to routinely excuse patients from

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co-payments and deductibles. (A co-payment is a fixed amount paid

whenever an insured person receives specified health-care services. A

deductible is the amount that must be paid before the insurance company

starts paying. ) It is legal to waive a fee for people with a genuine financial

hardship, but it is not legal to provide completely free care or discounts to

all patients or to collect only from those who have insurance.

Studies have shown that if patients are required to pay for even a small

portion of their care they will be better consumers and select items or

services because they are medically needed rather than because they are

free. Routine waivers thus raise overall health costs. They are considered

fraudulent because averaging them with the doctor's full fees would make

the "usual" fees lower than the amounts actually billed for.

Other illegal procedures include:

Charging for a service that was not performed.

Unbundling of claims: Billing separately for procedures that normally

are covered by a single fee. An example would be a podiatrist who

operates on three toes and submits claims for three separate

operations.

Double billing: Charging more than once for the same service.

Up coding: Charging for a more complex service than was

performed. This usually involves billing for longer or more complex

office visits (for example, charging for a comprehensive visit when

the patient was seen only briefly), but it also can involve charging

for a more complex procedure than was performed or for more

expensive equipment than was delivered. Medicare documentation

guidelines describe what the various levels of service should

involve.

Miscoding: Using a code number that does not apply to the

procedure.

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Kickbacks: Receiving payment or other benefit for making a referral.

Indirect kickbacks can involve overpayment for something of value.

For example, a supplier whose business depends on physician

referrals may pay excessive rent to physicians who own the premises

and refer patients. Another example would be a mobile testing service

that performs diagnostic tests in a doctor's office. Kickbacks can distort

medical decision-making, cause over utilization, increase costs, and

result in unfair competition by freezing out competitors who are

unwilling to pay kickbacks.

Criminals sometimes obtain Medicare numbers for fraudulent billing by

conducting a health survey, offering a free "health screening" test, paying

beneficiaries for their number, obtaining beneficiary lists from nursing

homes or boarding facilities, or offering "free" services, food, or supplies

to beneficiaries.

Excessive or Inappropriate Testing

Many standard tests can be useful in some situations but not in others.

The key question in judging whether a diagnostic test is necessary is

whether the results will influence the management of the patient. Billing

for inappropriate tests—both standard and nonstandard—appears to be

much more common among chiropractors and joint chiropractic/medical

practices than among other health-care providers. The commonly abused

tests include:

Computerized inclinometers: Inclinometers is a procedure that

measures joint flexibility. Inclinometer testing may be useful if

precise range-of-motion measurements are needed for a disability

evaluation, but routine or repeated measurements "to gauge a

patient's progress" are not appropriate.

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Nerve conduction studies: These tests can provide valuable

information about the status of nerve function in various

degenerative diseases and in some cases of injury. However,

"personal injury mills" often use them inappropriately "to "follow the

progress" of their patients.

Thermographs: Thermo-graphic devices portray small temperature

differences between sides of the body as images. Chiropractors

who use thermographs typically claim that it can detect nerve

impingements or "nerve irritation" and is useful for monitoring the

effect of chiropractic adjustments on subluxations. These uses are

not appropriate.

Unnecessary x-rays: X-rays examinations can be important to look

for conditions that require medical referral. However, it is not

appropriate for chiropractors to routinely x-ray every patient to look

for "subluxations" or to "measure the progress" of patients who

undergo spinal manipulation.

Many insurance administrators are concerned about chiropractic claims

for "maintenance care" (periodic examination and "spinal adjustment" of

symptom-free patients), which is not a covered service. To detect such

care, many companies automatically review claims for more than 12

visits.

Personal Injury Mills

Many instances have been discovered in which corrupt attorneys and

health-care providers combine to bill insurance companies for nonexistent

or minor injuries. The typical scam includes "cappers" or "runners" who

are paid to recruit legitimate or fake auto accident victims or worker's

compensation claimants. Victims are commonly told they need multiple

visits. The providers fabricate diagnoses and reports and commonly

provide expensive but unnecessary services.

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The lawyers then initiate negotiations on settlements based upon these

fraudulent or exaggerated medical claims. The claimants may be

unwitting victims or knowing participants who receive payment for their

involvement. Mill activity can be suspected when claims are submitted for

many unrelated individuals who receive similar treatment from a small

number of providers.

Quackery-Related Miscoding

In processing claims, insurance companies rely mainly on diagnostic and

procedural codes recorded on the claim forms. Their computers are

programmed to detect services that are not covered. Most insurance

policies exclude nonstandard or experimental methods. To help boost

their income, many nonstandard practitioners misrepresent what they do.

They may also misrepresent their diagnosis. For example:

Brief or intermediate-length visits may be coded as lengthy or

comprehensive visits.

Patients receiving chelating therapy may be falsely diagnosed as

suffering from lead poisoning; and the chelating may be billed as

"infusion therapy" or simply an office visit.

The administration of quack cancer remedies may be billed as

"chemotherapy."

Nonstandard allergy tests may be represented as standard ones.

Viatical Fraud

In viatical settlement transactions, people with terminal illnesses assign

their life insurance policies to viatical settlement companies in exchange

for a percentage of the policy's face value. The company, in turn, may sell

the policy to a third-party investor. The company or the investor then

becomes the beneficiary to the policy, pays the premiums, and collects

the face value of the policy after the original policyholder dies.

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Fraud occurs when agents recruit terminally ill people to apply for multiple

policies. They misrepresent the truth and answer "no" to all of the medical

questions. Healthy impostors then undergo the medical evaluation. In

many cases, the insurance agent who issues the policy is a party to the

scheme. The agent or one applicant may even submit the same

application to many insurance companies.

Viatical settlement companies then purchase the policies and sell them to

unsuspecting third-party investors. The insurance industry is the biggest

victim of this fraud and could incur huge losses within the next few years.

Some investors receive nothing in return for their "guaranteed"

investment.

Bogus Health Insurance Companies

There have been two reports issued concerning the sale of health

insurance plans that lack legal authorization. These plans place the buyer

at risk for financial disaster if serious illness strikes. One report focuses

on consumer vulnerability. The other notes that from 2000 to 2002, 144

unauthorized entities enrolled at least 15,000 employers and more than

200,000 policyholders who got stuck for over $200 million in unpaid

claims.

The investigators found that many of the entitles bore names similar to

those of legitimate companies. In response to the report, the Health

Insurance Institute of America is again urging the National Association of

Insurance Commissioners to create an online database of licensed health

insurance companies so that anyone can easily check the legitimacy of

companies offering health insurance products. Meanwhile, the Coalition

against Insurance Fraud offers a few warning signs of a possible swindle:

The plan readily accepts people with serious illnesses and other

medical conditions that other plans normally reject.

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The insurance has few or no underwriting guidelines—the agent or

rep appears almost too eager to sign you up.

You're approached by an insurance agent, phone or direct mail.

Honest group plans normally are sponsored by your employer—and

aren't sold directly to individuals.

The plan isn't licensed in your state, and the agent (falsely) assures

you the federal ERISA law exempts the plan from state licensing.

The plan seems like insurance, but the agent or rep avoids calling

"insurance," and instead uses evasive terms such as "benefits."

The agent or rep doesn't have clear answers to your questions,

seems ill-informed, or avoids sharing information.

You've never heard of that health insurance company—and nobody

else has, either.

Your hospital keeps calling you to complain that your health plan

isn't paying your medical bills. Often the plan's reps keep making

flimsy excuses, or stop returning phone calls altogether.

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Schemes, scams, scammed

Property/casualty insurance fraud cost insurers about $30 billion in 2004.

Fraud may be committed at different points in the insurance transaction

by different parties: applicants for insurance, policyholders, third-party

claimants and professionals who provide services to claimants.

Common frauds include "padding," or inflating actual claims;

misrepresenting facts on an insurance application; submitting claims for

injuries or damage that never occurred; and "staging" accidents.

Prompted by the incidence of insurance fraud, about 40 states have set

up fraud bureaus. These agencies are reporting a record number of new

investigations, significant increases in referrals — tip about suspected

fraud — and cases brought to prosecution.

RECENT DEVELOPMENTS

The hurricanes of 2005, especially Hurricane Katrina, are likely to

result in a surge in insurance fraud. In addition to the usual

schemes, where homeowners or renters make claims for stereos,

televisions or other expensive items they never purchased, and

inflate claims for items actually destroyed, home arsons are on the

rise. Since many homeowners in the Gulf areas did not have flood

insurance, they may not be covered for some or all of the damage

caused by the hurricanes. Dozens of fires have broken out in many

affected communities, some of which may be the result of arson.

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The National Insurance Crime Bureau (NICB) says that by

November 2005, there were 160,000 vehicles in its flooded motor

vehicle and boat database, which was set up by catastrophes teams

to combat title fraud in the hurricane-affected states. The NICB

warns that flooded vehicles may be cleaned up, moved and sold in

other areas of the country by unscrupulous operators. Although the

vehicles were totaled by insurance companies and identified as

―salvage‖ on their titles, which means they are not fit for any use

except for scrap or parts, they could end up on the market in states

where it is relatively easy to apply for a regular title. A database was

created in which vehicle identification numbers (VINs) and boat hull

identification numbers (HINs) from flooded vehicles and boats could

be stored and made available to law enforcers, state fraud bureaus,

insurers and state departments of motor vehicles.

One in 10 paid bodily injury liability (BI) auto claims in California had

the appearance of fraud or misrepresented the facts of the claim,

according to the Insurance Research Council’s Fraud. More

common is the appearance of buildup, or the padding of claims,

which was found in one in five claims. The study, released in

January 2006, examined about 73,000 claims closed with payment

in 2002. It found that between $319 and $432 million in BI payments

were attributable to fraud and buildup.

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Real eyes...Realize...Real lies…

Short History of Antifraud Efforts

Fraud in insurance has undoubtedly existed since the industry's

beginnings in the seventeenth century, but it received little attention until

the 1980s because law enforcement agencies had other priorities and

were reluctant to provide the training needed to investigate and prosecute

cases of insurance fraud. And, given the fine line between investigating

suspicious claims and harassing legitimate claimants, some insurers were

afraid that a concerted effort to eradicate fraud might be perceived as an

anti-consumer move. In addition, the need to comply with the time

requirements for paying claims imposed by fair claim practice regulations

in many states made it difficult to adequately investigate suspicious

claims.

But by the mid-1980s the rising price of insurance, particularly auto and

health insurance, together with the growth in fraud committed by

organized criminals, prompted many insurers to reexamine the issue.

Gradually, insurers began to see the benefit of strengthening antifraud

laws and more stringent enforcement as a means of controlling escalating

costs — a pro-consumer move — and they found ready allies among

those who been adversely affected by fraud. These included consumers,

who were paying for fraud through their insurance premiums; the people

used by organized fraud groups to file false claims, often the poor, who

sometimes found themselves on the wrong side of the law; and

chiropractors and other medical professionals who were concerned that

their reputation as a group was being tarnished by organized fraud

ringleaders who had recruited their members to make fraudulent claims

for treatment.

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In their fight against fraud, insurers have also been hampered by public

attitudes. Ongoing studies by the Insurance Research Council show that

significant numbers of Americans think it is all right to inflate their

insurance claims to make up for all the insurance premiums they have

paid in previous years when they have had no claims, or to pad a claim to

make up for the deductible they would have to pay.

Antifraud activity on the part of state fraud bureaus and SIUs (special

investigative units within insurance companies) increased in the 1990s.

Heightened antifraud activity along with growth in funding for fraud-

fighting personnel resulted in increased prosecutions. Successful

prosecution not only blocks future fraudulent activities by individuals who

are repeat offenders, but news of prosecutions also acts as a deterrent to

others who may be contemplating committing fraudulent acts.

While the focus initially was on auto insurance fraud, antifraud efforts also

encompass workers compensation fraud, where investigations are

directed toward employers who, to obtain a lower premium, misrepresent

their payroll or the type of work carried out by their employees. These two

factors impact premiums. Payroll is important because workers

compensation insurance provides for lost wages and insurers need to

know the maximum they would have to pay if all employees were injured

in the same accident; the type of work carried out by the firm affects the

likelihood of injuries. Workers that use cutting tools, for example, are

more likely to get injured on the job than office workers. Some employers

also apply for coverage under different names to foil attempts to recover

monies owed on previous policies or to avoid detection of their poor claim

record, which would put them in a higher rating category.

Fraud and abuse take place at many points in the health care system.

Doctors, hospitals, nursing homes, diagnostic facilities and attorneys have

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been cited in scams to defraud the system. One huge area of fraud is the

Medicare and Medicaid systems. Health care is especially susceptible to

electronic data interchange (EDI) fraud. EDI is direct filing of claims —

computer to computer — and is widely used for Medicare claims.

In 1999, the Government Accounting Office released a study of the

Medicare, Medicaid and private health insurance sectors that confirmed

that organized crime is heavily involved in health care fraud. The

investigation found that in seven cases of health care fraud studied, about

160 health related groups — medical clinics, physician groups, labs or

medical suppliers — had submitted fraudulent claims. The criminals

identified in the report were not health care workers but criminals already

prosecuted for securities fraud, forgery and auto theft. Apparently, these

criminals had moved to health care because fraud was relatively easy to

accomplish.

Anti-Fraud Programs

Several large insurance companies have joined forces through the

National Health Care Anti-Fraud Association to develop sophisticated

computer systems to detect suspicious billing patterns. The Federal

Bureau of Investigation (FBI) and the Office of the Inspector General

(OIG) each have assigned hundreds of special agents to health-fraud

projects. The Coalition Against Insurance Fraud, a public advocacy and

educational organization founded in 1993, includes consumers as well as

government agencies and insurers.

The Omnibus Consolidated Appropriation Act of 1997 authorized a Health

Care Anti-Fraud, Waste, and Abuse Community Volunteer Demonstration

Program to further reduce fraud and abuse in the Medicare and Medicaid

programs. The program enrolled thousands of retired accountants, health

professionals, investigators, teachers, and other community volunteers to

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help Medicare beneficiaries and others to detect and report fraud, waste,

and abuse.

The Inspector General's office has recovered over a billion dollars through

fines and settlements. Its Operation Restore Trust, which began in 1995,

was a joint federal-state program aimed at fraud, waste, and abuse in

three high-growth areas of Medicare and Medicaid: home health

agencies, nursing homes, and durable medical equipment suppliers. The

questionable activities included:

Billing for advanced life support services when basic life support

was provided. Documentation may be falsified to indicate a patient

needed oxygen—which is a key indicator in establishing medical

necessity for advanced life support.

Billing for larger amounts of drugs than are dispensed; or billing for

brand-name drugs when less expensive generic versions are

dispensed.

Billing for more miles than traveled for transportation.

Falsification of documentation to substantiate the need for a

transport from a hospital back to the patient's home. Medicare will

only cover transport from hospital to home if the patient could not go

by any other means.

Insurers’ Antifraud Measures

Insurance companies are not law enforcement agencies. They can only

identify suspicious claims, withhold payment where fraud is suspected

and to justify their actions by collecting the necessary evidence to use in a

court. The success of the battle against insurance fraud therefore

depends on two elements: the resources devoted by the insurance

industry itself to detecting fraud and the level of priority assigned by

legislators, regulators, law enforcement agencies and society as a whole

to eradicating it.

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Many insurance companies have established special investigation units

(SIUs) to help identify and investigate suspicious claims; some insurance

companies outsource their units to other insurers.

These units range from a small team, whose primary role is to train claim

representatives to deal with the more routine kinds of fraud cases, to

teams of trained investigators, including former law enforcement officers,

attorneys, accountants and claim experts to thoroughly investigate

fraudulent activities. More complex cases, involving large scale criminal

operations or individuals that repeatedly stage accidents, may be turned

over to the National Insurance Crime Bureau (NICB). This insurance

industry-sponsored organization has special expertise in preparing fraud

cases for trial and serves as a liaison between the insurance industry and

law enforcement agencies. In addition, it publicizes the arrest and

conviction of the perpetrators of insurance fraud to help deter future

criminal activities. Insurance company surveys confirm that SIUs

dramatically impact the bottom line of many insurance companies.

In the mid-1990s insurers said that for every dollar they invested in

antifraud efforts, including SIUs, they got up to $27 back, but these

returns have become harder to achieve as the more apparent fraud

schemes have been uncovered and more effort is necessary to ferret out

the sophisticated fraud that remains. A 2000 study by Conning Research

& Consulting suggests that results vary widely. Using the ratio of ―claims

exposure reduction‖ to the expense of running SIUs, the study found

ratios ranging from a low of 3 to 1 to a high of 27 to 1, depending on the

year and line of insurance. Although some insurers are cutting back on

fraud investigation by outsourcing investigations and dissolving their fraud

units, advances in software technology, especially programs that sift

though the millions of claims that large health insurers process annually,

are proving effective in fighting fraud. These ―data mining‖ programs can

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uncover repetitions and anomalies and analyze links to fraudulent

activities or entities.

The consolidation of insurance industry claims databases has put a

valuable new tool in the hands of investigators. The Insurance Services

Office Inc.'s system, known as Claim Search, utilizes a data-mining

program. Claim Search is the world’s largest comprehensive database of

claims information. The NICB has developed a program called Predictive

Knowledge that collects and analyzes information which can be

disseminated to insurers and law enforcement agencies to detect,

investigate and prevent insurance fraud. In addition, the NICB, in

partnership with iMapData Inc., introduced CAT fraud, to identify

potentially fraudulent catastrophe/weather-related insurance claims.

A national fraud academy — a joint initiative of the Property Casualty

Association of America, the FBI, NICB and the International Association

of Special Investigating Units — was designed to fight insurance claims

fraud by educating and training fraud investigators. It offers online classes

under the leadership of the NICB.

An emerging issue for insurers using data sharing services is their impact

on privacy. Financial institutions, including insurers, must respect the

privacy of their customers and protect their personal information, a

practice that may deter efforts to combat fraud.

Insurers may also file civil lawsuits under the federal Racketeering

Influenced and Corrupt Organizations Act (RICO), which requires proving

a preponderance of evidence rather than the stricter rules of evidence

required in criminal actions and allows for triple damages. Since 1997,

some of the largest insurers in the country, especially auto insurers, have

been filing and winning lawsuits against individuals and organized rings

that perpetrate insurance fraud.

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Itching To Know Who Can Help?

Insurance Agent Fraud on the Rise

Two years ago, at the age of 90, Thomas Pickering was doing the twist.At

the behest of his trusted insurance agent, Pickering was buying and

selling one annuity after another in a deceitful industry practice called

"twisting." That's when dishonest agents persuade clients to cash in one

investment for another—against their clients' best interests and for the

agents' own financial gain.

In Pickering's case, he followed his agent's advice, sold investments

before they matured and lost 11,000/- in forfeited interest and penalties.

He was about to lose another 35,000/- cashing in one annuity to buy

another,netting his agent 20,000/- in commissions. When the company

holding the annuity intervened. It suspected Pickering was getting ripped

off and called the authorities.An investigation led Florida's Department of

Financial Services (DFS) to revoke agent Peter Waldon's license for

fraud.

Barry Lanier of Florida's DFS says he's fielding more complaints about

greedy agents earning whopping commissions upfront by pitching

unsuitable investments like annuities to older people. But Lanier and other

experts say some annuities are not considered to be wise investments for

most olders because they're based on life expectancy.Growing concern

over the sale of annuities to older people prompted the National

Association of Insurance Commissioners (NAIC) to adopt regulations that

assure that the annuities are suitable to the buyer's needs.

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Division of Insurance Fraud

The Division of Insurance Fraud was originally formed in 1976 to

investigate only fraudulent automobile tort claims. In the early years,

investigators had arrest powers but could not carry firearms. Today, the

division investigates all types of insurance fraud crimes.

Investigators are assigned to work general fraud cases, workers’

compensation fraud, medical and health-care fraud, and agent and

company fraud. Areas of assignment may include:

→Insolvency - Fraud committed by insurance companies that fail

financially due to internal fraud by owners and corporate officers.

→Unauthorized Entities - fraud, both criminal and civil, committed

by insurance companies operating illegally in the state.

→Health Care Fraud - focuses on organized medical and health

care scams.

→Workers’ Compensation - investigates employers for workers’

compensation premium fraud.

→Public Employee Fraud - investigates state and local government

employees for workers’ compensation claimant fraud.

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Deceptive Life Insurance Sales Practices

Continue

The life insurance industry has been hit with billion dollar verdicts and

multi-million dollar fines for deceptive sales practices.

The two largest companies, MetLife and Prudential, have each been hit

with billion-dollar-plus verdict.

Most major companies have also been sued for deceptive sales practices.

The list goes on and on, as successful lawsuits finally caught up with an

industry that has long bilked the public, misrepresented its product, and

ignored the urgent need for basic reforms to stop abuses.

With billion dollar judgments (and that is "billion" with a "b"), you'd think

the industry would learn its lesson. That's what you'd think but you'd be

wrong.

The life insurance industry did establish the Insurance Marketplace

Standards Association (IMSA). Of course, there are now ads announcing

that the life insurance industry is committed to the fair treatment of

policyholders. But early returns on the industry's efforts suggest it is just a

sham and a shell game designed to prevent real reform by legislation and

regulation.

Now a study by Professor Joseph Belth, publisher of the Insurance

Reform, a respected newsletter on the life insurance industry, finds the

reforms are a sham. I'd have to say as usual the life insurance industry

wants to improve its public relations, not its policy relations.

27

The Insurance Forum study correctly notes that much of the life insurance

deception comes about because the industry does not make full

disclosure on rates of return and prices necessary to sound decision

making by insurance buyers. By failing to disclose needed information,

consumers are easily duped by deceptive methods.

The Insurance Forum put the industry to a test by asking the chief

executive officers of 40 companies (31 of which are members of IMSA)

for the kind of information that should be freely and automatically

available to prospective policyholders.

Of the 41 companies surveyed, 27 did not participate. Only 13 companies

(10 of which are members of IMSA) participated in the study.

And some of the 13 participants provided deceptive information. Some

provided incomplete information. Some provided the kind of information

that would not be helpful to the typical consumer.

The Insurance Forum study concludes that IMSA will not bring about the

needed changes in the life insurance industry, but will simply delay their

enactment. Most industries prefer "voluntary" action, so the foxes can

continue to guard (and eat) the chickens, also known as policyholders.

What's more, after the great life insurance scandals of the 1980s and

1990s, the industry is determined to perpetuate a system in which life

insurance rip-offs by major and minor companies alike will continue to be

standard operating procedures.

The bottom line is that the life insurance industry has practices that are

precisely the opposite of its proclaimed ethical principles.

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Here are some examples:

IMSA has an ethical principle that says its company members will

"provide competent and customer-focused sales and services." The

Insurance Forum survey suggests that most companies will engage in

business as usual, giving the consumer no information, inadequate

information or deceptive information.

IMSA has another ethical principle that says it will "engage in active and

fair competition." But by not providing information or by providing

deceptive information, it is clear that major segments of the industry will

continue to engage in competition by confusion.

As Bob Hunter of the Consumer Federation put it, "The proof of the

pudding is in the eating. It's hard to trust the life insurance industry, given

its recent history. They're going to have to reprove themselves as

trustworthy."

Unfortunately, the life insurance industry is proving itself untrustworthy.

And as for the proof of its good intention being in the pudding, my advice

is don't eat its pudding. It's the same old stuff plus a phony sermon on

ethical principles.

29

Viatical Settlements Investment Fraud

Historically, some insurance companies have offered an accelerated

death benefits option which allows the insured an opportunity to receive

up to 80% of the death benefit at any time within the last year of their

projected life. The remaining 20% is then paid to the insured's estate.

On the other hand, the business of viatical settlements involves the selling

of a policy death benefit, at less than face value, by a terminally ill person

to a third party. This is accomplished, for a commission, with the

assistance of a broker who offers the policies to settlement provider

companies for bid, with the highest bidder obtaining the policy for resale

to investors. The broker receives a commission based on the sale price.

Size of the Industry

Fraud in the unregulated viatical settlement industry has become

rampant; as much as 40-50% of the life insurance policies viaticated may

have been procured by fraud.

Clean Sheeting

Unscrupulous individuals in the viatical industry procure policies by a

practice referred to as "clean sheeting" which is the act of applying for life

insurance while intentionally failing to disclose the applicant's status as

being terminally ill. They can get away with it initially because most

insurance companies avoid the added costs and invasiveness of medical

exams and blood tests by relying on an honor system below a certain

policy face value.

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Many insurance agents and brokers assist and often encourage aviators

in committing the fraud because it not only provides more policies than

would be available though legitimate means, but it also provides a much

higher rate of return due to the fact they can be bought from aviators so

cheaply.

In a legitimate transaction, the ill person usually receives 50%-70% of the

face value of the policy. However, a "clean sheeted" policy viaticated

during the contestable period may offer as little as 10% of the face value

because it carries the high risk of rescission, or cancellation by the

insurance company, due to fraud.

Wet Ink Policies

After the policy is issued, the insured person will sell his policy or multiple

policies from different insurance companies, sometimes within weeks, to

a settlement provider using a broker. This is referred to as a "wet ink

policy" because the ink on the contract is still "wet" when the policy is

sold.

The odds against an individual finding out that he is terminally ill within

weeks of buying a policy are exceedingly high. To see that happen

repeatedly within a short period of time with the same broker or provider

is strong evidence that they are both well aware that the policies have

been "clean sheeted".

To hide the fact that the policy has been viaticated shortly after issuance,

con artists will obscure viatication by simply changing the beneficiary to

someone at the settlement provider firm. A second way is to employ a

"collateral assignment" which is similar to where the insured seeks a loan

from a third party and secures the loan by pledging the death benefits of

the policy. In fraudulent transactions they pledge the death benefits but do

not receive a loan.

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Contestability Period

Finally, some settlement providers merely delay reporting that the policy

has been viaticated until the contestability period is over; falsely believing

that it is not a crime then. An indication of culpability is that virtually all

parties attempt to hide the viatication of fraudulently obtained policies

from the insurance company for as long as possible.

The contestability clause for life insurance lasts for two years after

issuance, during which time it may be rescinded by the insurer for fraud in

the application. After this period ends, the insurer is obligated to pay the

death benefit, regardless of any fraud in the application. Because policies

viaticated during the contestability period may be rescinded, they bring,

as mentioned, a much lower price in the market.

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A Case Study

As an investor, you are offered the opportunity to purchase an interest in

a life insurance policy in which the insured is terminally ill (i.e., viatical

settlement).

You are told:

that your investment will produce a 100% rate of return because you are

assigned a policy with a face value of twice your investment which you can

claim upon their death;

that you will have the option of reselling your policy once it becomes

incontestable (two years after the date the policy is issued) for 70% of the

face value;

and that if the policy is contested or canceled by the insurer, the

promoters will provide a replacement policy through a "replacement policy

trust" managed by them.

They say these are better investments than stocks, mutual funds,

annuities, and CD's because viatical investments have the following

attributes:

→"Full liquidity at maturity from rock solid 'A' rated insurance

companies!"

→"Tax advantaged & hassle free! 100% fixed rate of return which is

fully secured."

→"Zero risk to principal, a totally safe investment with no load & no

fees!"

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→"Short holding periods with early buyout options available as

well!"

→"No speculation, no interest rate risk, no market risk, no economic

risk!"

In addition they say you will be making a "humanitarian investment"

because the terminally ill person will be able to use the funds to receive

improved health care; pay off debts; take a vacation, reduce family stress,

and enhance their quality of life. In exchange for your money you receive

a Membership Certificate certifying that you are a member of Viatical

Funding LLC.

After deducting the fees paid to sales agents, viator agents, and other

intermediaries from your funds, you find that the ill person will actually be

left with very little. In this case only $5,400, which is only 12% of your

investment of $45,000, or 6% of the policy's face value of $90,000.

They fail to disclose to you that the insured was terminally ill prior to being

insured, that they concealed this fact on the application, and thus

subjected the policy to cancellation by the insurer.

Instead of being designated as the sole beneficiary you may find you

share it with creditors and family members, and that the option to resell

the ownership interests is not a guaranteed option, but rather an

"assurance" that they will "make an effort" to facilitate a resale.

In any event, you will not likely receive a promised 70% of the face value

but only the amount another investor would be willing to pay, less

commissions, which could be much less.

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They also fail to mention:

the risk of the insured living much longer than the estimated life

expectancy, thereby greatly reducing the annual yield;

the risk of their becoming insolvent and unable to replace a contested

or canceled policy;

the risk of the life insurance policy lapsing, or that you will often have to

pay the policy premiums for the duration of the policyholder's life;

the 15% commission the sales agent receives from your investment;

who is responsible for monitoring the health status and location of the

insured, obtaining a death certificate, and making a claim to the insurance

company.

Life Expectancy of the Insured

To determine their rate of return investors rely on a report which projects

the life expectancy of the insured, but there are no minimum requirements

as to who may generate these reports or projections. One company used

a nurse and a plastic surgeon but could have used the janitor.

Viatical investing is highly speculative and risky. Even when the

policyholder exists and is terminally ill, there is a high degree of

uncertainty in predicting when they will die. New AIDS drugs and cancer

treatments have compounded the risk for investors because they help

policyholders live longer.

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Viatical settlements are illegal under Canadian insurance legislation so

Canadian investors should not be involved in these schemes at all.

Not Enough Sick People

Financial Federated Title & Trust, and Asset Security Corporation pled

guilty after being charged with conspiring to recruit insurance agents to

defraud more than 3,000 investors while purchasing viaticated insurance

policy investments over a three year period.

Investors were told that their money would be used to purchase a

beneficial interest in viaticated insurance policies, and that medical

overviews were being performed on the insured persons whose policies

were being bought.

Although at least $115 million in investor monies was taken in, the

promoters used only $6 million of these funds to buy insurance policies

whose total face value was just over $7 million. They used the balance of

the money for purposes totally unrelated to the purchase of viaticated

insurance policies.

Industry Terminology

Cleansheeting: Refers to a fraudulent criminal act committed by a

proposed life insurance applicant, and by life insurance agents who

knowingly assist or conspire with the insurance applicants, by failing to

disclose a pre-existing medical condition in response to a question on a

life insurance application which would affect issuance of the policy.

Viator: A person who has a life threatening or terminal illness who sells or

assigns their life insurance policy.

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Viatical Settlement: The life insurance policy of a terminally ill person

sold or offered for sale, generally at less than face value, through a

viatical settlement company.

Contestability: Policies are generally contestable for two years from the

date of issue and are subject to being rescinded by the insurer for cause,

such as application fraud and suicide.

Viatical Settlement Provider: A person who enters into a viatical

settlement contract with a viator. Often referred to as a settlement

company or funder.

Viatical Settlement Broker: A person who, for profit, offers or attempts

to negotiate a settlement contract between a viator and one or more

viatical settlement providers.

Viatical Settlement Sales Agent: A person other than a licensed viatical

settlement provider who arranges for the purchase of a viatical settlement

or an interest in a viatical settlement from a viatical settlement provider.

Mortality Profile Report: A report based on a review of a viator's medical

history, which gives a prognosis of a viators life expectancy. Usually done

by a health-care professional and generally at the behest of the viatical

settlement provider to calculate the value of a viatical contract.

Viatical Investment Broker: Defines a person or entity other than a

licensed viatical settlement provider who solicits investors to purchase a

viatical settlement interest from a viatical settlement provider.

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We Chose to Keep Your Money

Personal Choice Opportunities mislead investors when they sold

viatical securities in the form of loan transactions. Investors lent money to

PCO in order for them to purchase the benefits of life insurance policies

from terminally ill individuals on the promise that they would receive a

return on their investment of 21-25% per annum.

The funds, however, were not used to purchase life insurance policies but

kept instead. Over 1100 investors nationwide are believed to have

invested $80-100 million in these transactions in just ten months. No

evidence of any valid life insurance policies being purchased has been

discovered.

Repercussions for the Industry

Life insurance premiums are based on actuarial tables which are

worthless in fraudulent applications. Insurance companies cannot afford

to pay out large death benefits after collecting small premiums for only a

few years. Even if they don't go bankrupt the added costs are eventually

passed on to other policyholders.

The viatical industry as a whole must take steps to better police itself. If it

does not, it risks ceasing to exist as an industry either by being legislated

out of existence or by being pushed out of the market after destroying

investor confidence in its product. If this fraud is to be stopped, it will

require the total commitment of the insurance industry. The first step is for

the industry to wake up to the existence and scope of the problem.

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Penalties

Currently a person charged with viaticating a fraudulently procured

insurance policy worth $100,000 face value, who stands to gain tens of

thousands of dollars, faces the same penalty as a shoplifter who takes a

pack of cigarettes. A mere sixty days in jail is an encouragement, not a

deterrent which may be why the industry watchdog has never received a

single referral from the industry itself reporting such fraud.

Life Settlements

Once thriving on those dying from a terminal illness, medical advances,

which are helping patients live longer, has caused the business to start

targeting new clients - usually seniors with high payoffs - who may be

willing to sell their life insurance policy to investors at a discount.

Life settlements, or the sale of a life insurance policy to a third party, are

sometimes referred to as "senior settlements" because most of the life

insurance policies purchased insure the life of a senior citizen.

The owner of the policy gets cash and the buyer becomes the new owner

and/or beneficiary of the life insurance policy, pays all future premiums

and collects the entire death benefit when the insured dies.

People decide to sell their life insurance policies for many reasons. Some

common ones are the changed needs of dependents, a desire to reduce

or eliminate premiums, and a need for additional cash to meet expenses.

State regulation of insurance generally does not extend to life

settlements. Certain aspects of these transactions may fall under the

various Securities Acts so there can be financial risks involved when

entering into such arrangements.

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You should consider contacting a professional tax advisor to find out the

tax implications as life settlement proceeds are generally not tax free.

Also know, if you are the seller that you will be required to provide certain

medical and personal information to third parties who will be paid the

proceeds from your policy upon your death. These third parties may sell

your policy and pass along your medical and personal information to other

individuals.

Typically, life settlements are offered to buyers, for resale to investors, at

a discount from the death benefit. The discount is for the entire life of the

policy, not an annual rate of return. An annual rate of return cannot be

guaranteed. Your rate of return depends on when the insured dies, and

no one can predict a person's life expectancy. Keep in mind that a life

settlement is not a liquid investment because the return on such an

investment does not occur until the insured dies.

Spreading the Risk

The Alabama Securities Commission issued a Cease and Desist Order

against Viatical & Elderly Settlement Providers, LLC (VESPERS)

Washington, D.C., to stop conducting business in a few states after they

received information that they were engaged in the illegal offer and sale of

investment contracts involving fractionalized viatical settlement contracts

there.

VESPERS, though not licensed to sell this type of security in the state,

have solicited independent insurance agents to sell interests in viaticals

issued by them with promises of low risk and high returns of 28-70

percent on two to five year investments for a 10% commission.

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Be Aware, Don’t Be a Victim

The Coalition Against Insurance Fraud (CAIF) is a national advocacy

organization of consumer groups, public interest organizations,

government agencies and insurers. Its website notes ―insurance fraud is

hard to measure because so much goes undetected, and complete

research has yet to be done. Still, we have enough evidence to know that

fraud is widespread — and expensive.‖14

National studies conducted by the Insurance Research Council (IRC)

show that auto insurance, workers’ compensation and health insurance

are the lines that are most vulnerable to fraud. The IRC estimates that

one-third of all bodily injury claims from auto accidents contain some

amount of fraud, usually in terms of padding or exaggerating a claim, but

only 3% are totally fraudulent such as staged accidents. Another form of

fraud, lying on applications in order to reduce premium, costs auto

insurers $13.7 billion annually (Insurance Information Institute, or III).

As to workers’ compensation fraud, one of the most common forms of

workers’ compensation fraud in Maine is a faked or exaggerated injury, an

area within the jurisdiction of the Maine Workers’ Compensation Board’s

Fraud and Abuse Unit to investigate. There are, however, other forms of

workers compensation fraud are employers who misrepresent payroll or

the type of business in order to reduce their insurance premiums and real

or bogus entities that purport to provide real or bogus workers

compensation coverage or ―alternatives‖ to coverage to employers.

In late 1999 the Governmental Accounting Office found that organized

crime is heavily involved in health insurance fraud and that the criminals

identified were not health care workers, per say, but individuals already

prosecuted for securities fraud, forgery and auto theft. With the enactment

of HIPAA (Health Insurance Portability and Accountability Act of 1996)

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detection and prosecution of health insurance fraud received a boost. The

Department of Justice calls health care fraud and abuse its number two

law enforcement priority, after violent crimes. In 1996, according to the

FBI, Congress provided an added $54 million over seven years for health

care fraud enforcement.

Property insurance, based upon the Bureau’s 2004 data, had the third

highest fraud and abuse count by line of business at 165 reported cases.

According to the National Fire Protection Association, arson or suspected

arson account for nearly 500,000 fires each year, or one in four fires in

the United States. Arson and suspected arson are the largest causes of

property damage in the U.S.

Despite what may appear to be a bleak picture, a number of tools exist for

combating fraud. In addition to those Maine Insurance and Criminal Code

provisions, previously discussed, several federal laws are used to

address fraud. These include: The Federal Mail Fraud Statute, the

Racketeer Influenced and Corrupt Organizations (RICO) and the Health

Insurance Portability and Accountability Act (HIPAA). Also, the Violent

Crime Control and Law Enforcement Act of 1994 makes insurance fraud a

federal crime when it affects interstate commerce.

Certain state agencies work with insurers to address fraud, as well. The

Workers’ Compensation Board’s Fraud and Abuse Unit tackles issues

such as fakes or exaggerated injuries, the Fire Marshal’s Office

investigates possible arson, and the Department of Human Services

takes on Medicare and Medicaid fraud. Recently, one DHS employee

received the Office of the Inspector General Integrity Award for her

investigative and logistical support in a Medicare and Medicaid fraud case

in Bangor Federal Court.

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Fraud has also gotten the attention of the National Association of

Insurance Commissioners (NAIC), which encourages the insurance

industry to take a proactive role in controlling fraud. The NAIC offers

states support through their Antifraud Task Force.

The mission of the Antifraud Task Force is to serve the public interest by

assisting state insurance supervisory officials, individually and collectively,

in the following fundamental antifraud activities:

Promotion of the public interest through the detection, monitoring

and appropriate referral for investigation of insurance crime, both by

and against consumers.

Provision of assistance to the insurance regulatory community

through the maintenance and improvement of electronic databases

regarding fraudulent insurance activities.

Disseminate the results of research and analysis of insurance fraud

trends as well as case-specific analysis to the insurance regulatory

community and state and federal law enforcement agencies.

Provision of the liaison function between insurance regulators, law

enforcement and other specific antifraud organizations.

Highlights of the 2004 charges of the Antifraud Task Force include:

compile and maintain detailed information on antifraud databases

maintained by antifraud organizations, financial regulators, and law

enforcement; consider developing further guidelines for use by the

industry in determining when suspicious claims should be reported;

review industry compliance with antifraud initiatives; develop methods to

enhance the investigation and prosecution of financial services fraud; and

establish guidelines on the investigation and prosecution of insider

insurance industry fraud.16

Additionally, in 2005 the NAIC created a ―Fraud Web line,‖ an online

insurance fraud reporting system located on the Web site of the National

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Association of Insurance Commissioners (NAIC). The system allows

consumers to provide information anonymously.

The new fraud reporting system was developed as part of the response

by insurance regulators to the national allegations about misconduct

involving compensation agreements between some insurance companies

and brokers. The allegations of improper activity spurred regulators to

improve their abilities to collect information from consumers, producers

and insurance company employees. Many places participates in the

online fraud reporting system, in conjunction with the NAIC.

The online fraud reporting system lets consumers anonymously supply

detailed information regarding suspected fraudulent activities to the NAIC

where the information is then forwarded to the appropriate state. Although

consumers may identify themselves, no personal identifying information is

required to report an allegation of suspected fraud. Consumers are

required to designate the state where the suspected fraud occurred and

the name and address of the business or individual. A text box is included

for the consumer to provide the details of the suspected fraud. Other

optional fields on the form include phone number, date of birth, date of

suspected fraud, and amount of loss.

Despite the anti-fraud activities of state and federal agencies discussed

above, the Bureau notes that an enforcement and prosecutorial gap

exists in current Maine government operations insofar as no entity exists

that is focused on investigation and prosecution of fraudulent insurance

acts and the crimes of insurance deception and deceptive insurance acts.

The American Insurance Association and the Property Casualty Insurers

Association and several of the individual fraud investigators who

commented as interested persons all noted the frustration when hard

work has been expended to develop a case and local prosecutors have

refused to prosecute or believe that it is not a serious crime meriting their

44

attention. The interested persons believe that a strong and effective

insurance fraud unit would be effective not only in punishing those

convicted of insurance fraud, but in deterring others.

Forty other states currently have insurance fraud units. The Director of the

Fraud Division of the New Hampshire Insurance Department shared his

concern with the Joint Standing Committee on Insurance and Financial

Services during his testimony on L.D. 1561 that organized insurance

fraud rings are gravitating toward those jurisdictions with the least

regulation, for the conduct of affairs. That concern has been echoed by

other interested persons as well.

OUR MISSION:

The mission of the NAIC is to assist state insurance regulators,

individually and collectively, in serving the public interest and achieving

the following fundamental insurance regulatory goals in a responsive,

efficient and cost effective manner, consistent with the wishes of its

members:

→Protect the public interest;

→Promote competitive markets;

→Facilitate the fair and equitable treatment of insurance consumers;

→Promote the reliability, solvency and financial solidity of insurance

institutions;

→and Support and improve state regulation of insurance.

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International association of insurance fraud

agencies(iaifa)

HOW do they operate?

The IAIFA and its members are continually working to improve the quality

of data available to members and break down the jurisdictional barriers by

working with regulators, companies and other law enforcement

agencies.Those who break the law are adept at using these jurisdictional

boundaries as a protective shield. IAIFA is trying to cut red tape involved

in the various (often necessary) jurisdictions' "privacy" laws in an attempt

to track down crime and encourage other enforcement agencies to share

information to the mutual benefit of all who are involved in assuring a high

level of integrity throughout the insurance industry.

WHAT are their Goals:

IAIFA's goal is "to co-ordinate the efforts, training and education of law

enforcement agencies, government bodies, and the insurance industry to

move more efficiently prevent and combat insurance fraud worldwide."

IAIFA has kept its focus on insurance fraud, which its members view as a

crime against all segments of society - not a victimless felony, as some

would define it.

WHEN do they meet?

IAIFA meets annually. The annual conference hosts eminent speakers

whose presentations update the members on critical developments. It

also enhances personal contacts and exchange of information between

members throughout the year.

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IAIFA cooperates in regional seminars which focuses on such topics as

how to effectively use the laws to prosecute and recover assets gained by

fraudulent means. Added to this, these meetings have widened the

network of contacts for members from Europe, Asia, Australia, the

Caribbean, Africa, and North America.

Between meetings, our newsletter keeps members informed of the

various projects undertaken by the Association and its members, as well

as presenting new trends in the field of insurance fraud, both from a

criminal and law enforcement perspective.

WHERE are they found?

International is the first word in IAIFA's name. That means what it says.

While IAIFA began in North America, the founders were not so insular to

believe that they had a unique place in insurance fraud. More than ever,

sharing intelligence and finding ways to successfully prevent and combat

crimes is essential for the members to do their job effectively.

This is why the IAIFA wants even more countries to join in this worldwide

effort. It is a classic case of the sum of the whole being greater than the

sum of its parts. The interchange of information is invaluable, and should

be available to everyone in their fight against sophisticated global fraud

WHO are the members?

It could be you and your organization. IAIFA's members include

government insurance departments and fraud bureaus, law enforcement

agencies, respected insurance companies, and related firms with a strong

interest in combating insurance frauds.

You may obtain the application by logging on the site or by contacting us

for a mailing of the application. Upon receipt, your application will be

considered by IAIFA's executive committee. If you are accepted, you and

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your organization will have made a major step forward in beating

insurance crime. This will be true not only for you in your own jurisdiction,

but for your colleagues elsewhere, who will welcome hearing how you

cope with escalating problems of insurance fraud.

WHY were they formed?

Insurance fraud is recognized internationally as a multi-billion dollar

problem. IAIFA was created after a group consisting of the Directors of

Insurance Fraud Agencies from the U.S.A. and Canada met to confront

this burgeoning problem which is not restricted by jurisdictional

boundaries.

It soon became apparent that if the agencies could share information they

would increase their degree of effectiveness. Rapid communication is of

the essence in catching fraud artists who know how to move money

literally at the speed of light. From those early beginnings in 1986, with

only a handful of members in North America, IAIFA now encompasses

the Globe.

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Dealing with fraud on the Net

As time goes on, the number of attacks will only increase and network

forensics will become a part of our lives, who could put you on the track

by helping record and analyse previous security threats.

In a perfect world, network security wouldn’t be required. Unfortunately

this isn’t a perfect world, and even if there are many who will throw up a

firewall and other such security measures as solutions, this doesn’t stop

the problem. No firewall is impenetrable and there’s no such thing as a

perfect security measure. There’s always a way to get around them, and

the number of people trying to do that keeps increasing.

According to the US General Accounting Office, approximately 250,000

break-ins were attempted into Federal computer systems alone in 1995

and this number gets bigger every year. Only one to four per cent of these

attacks ever get detected.

Network forensics is the capture, recording, and analysis of network

events in order to discover the source of security attacks or other problem

incidents. It attempts to prevent hackers from attacking a system, and

searches for evidence after an attack has occurred.

There are three parts to network forensics: intrusion detection; logging

(the best way to track down a hacker is to keep vast records of activity on

a network with the help of an intrusion detection system); correlating

intrusion detection and logging.

The ultimate goal of network forensics is to provide sufficient evidence to

allow the criminal perpetrator to be successfully prosecuted. The practical

applications could be in areas such as hacking, fraud, insurance

49

companies, data theft—industrial espionage, defamation, narcotics

trafficking, credit card cloning, software piracy, electoral law, obscene

publication, perjury, murder, sexual harassment, and discrimination.

Technical Challenges

IT managers, network consultants, auditors, software developers, and

analysts would all like to understand the data that is sent over their

corporate networks. Network monitoring is an essential tool for network

optimization and security. How much data was sent? When? What was

sent? Current tools only answer the first two questions, and have trouble

with the third. The tools base their analysis primarily on IP and TCP

headers, which can be misleading or intentionally falsified.

This leaves security consultants and network managers to manually sift

through raw network packet dumps, piece together data streams and

undo transfer encoding, and seek to understand the significance of a

single connection. This is tremendously time-consuming and since

networks deal with one packet at a time, this isn’t very useful or complete

to someone trying to get a big picture view of an employee’s suspected

network abuse, or a deep-level view of an intrusion attempt.

And yet the internet is critical, and we haven’t a choice but to connect

internal networks to the rest of the world — to link with customers,

suppliers, partners, and their own employees. Even if that connection

brings in threats of malicious hackers, criminals, and industrial spies.

These network predators regularly steal corporate assets and intellectual

property, cause service breaks and system failures, sully corporate

brands, and frighten customers. Unless companies can successfully

navigate around them, they will not be able to unlock the full business

potential of the internet.

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Even enterprises with exceptional security have their front doors open to

employees sending and receiving data. Is there a user abusing the

system for personal reasons, or accidentally or maliciously releasing

confidential information? Unfortunately, the variety of data formats and

sheer volume of traffic make detailed network monitoring a major

technical challenge. Traffic monitors focus on bandwidth. Although some

go so far as to keep basic statistics such as web page hits and average

visit length, they’re mostly useful for capacity planning and simple web

marketing. Port scans allow network security specialists to find some

vulnerability.

Intrusion detection systems scan traffic for known attack signatures.

However, because these tools base their analysis primarily on the IP and

TCP headers, which can be intentionally falsified or misleading, they are

subject to incorrect analysis and spoofing. Current tools can’t provide the

information that IT managers, network consultants, auditors, software

developers, and analysts need to know:

―Who is running an unauthorized web server on a non-standard port?‖

―How long is it taking our e-commerce system to process a customer

order from start to finish?‖

―What generated that huge spike of traffic between 5:35am and 5:40am

this morning?‖

―Exactly what happened during – and before – last night’s attempted

break-in?‖

The fleeting nature of any kind of electronic data is such that its

preservation, is required especially for legal proceedings — the

methodology can be broken down into two key elements: acquiring

evidence and analyzing evidence.

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This information is required for dealing with a law enforcement

investigation. It involves capturing and storing every packet passing

through wires and then regenerating the sequence flow for analysis. If we

are able to regenerate the attack it can now be treated as evidence.

Full-content network monitoring is no longer the province of spooks and

spies — it’s increasingly a practice that is an integral part of a

multilayered defense system that serves a variety of goals for both

computer security and overall network policy.

The solution is to follow a multi-layered security approach and a system

that can perform the following tasks: integrated network IDS/ anomaly

detection /forensic analysis; capture data at high speeds; run invisibly and

capture packets from the monitored network; assemble the collected

packets into connection streams; read the actual data in packets and

categorizes it by type, rather than make assumptions based on packet

headers and port numbers; automatically determine key connection

attributes; operates at the level of complete, assembled data streams,

rather than arbitrarily mixed-together packets; search capability through

network traffic by keyword; protocol recognition capability and correlation

functionality.

As time goes on, the number of attacks will only increase and network

forensics will become a part of our lives. It has an ability to strengthen our

securities, check compliance against policies, and punish those that

attempt to disrupt our IT infrastructure. The future of information security

lies in an organisation ability

to not only prevent malicious activity, but also investigate and prosecute

the perpetrators whether internal or external.

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Precaution is better than cure

Insurance fraud is not typically a violent crime, just a lucrative one. As

consumers, there are several common-sense steps you can take to help

reduce fraud and minimize its impact.

Be an Informed Consumer.

Insurance premiums are a significant expense for most of us. The

premiums you pay are based on your individual claims history and the

degree of risk involved. Generally speaking, the greater the risk, the

higher the premium. For example, the theft premium for a Honda Accord

will be far higher than that of a Yugo quite simply because more Honda

Accords are stolen. Similarly, a tightrope walker will pay more for life

insurance than a librarian, all else being equal.

Comparison Shop.

Premiums can vary significantly from insurer to insurer so it pays to shop

around. To make comparison shopping a little easier, the Insurance

Department publishes consumer guides for auto, homeowners, long-term

care and HMO/health insurance that provide sample premiums for

insurers that offer these coverage. In addition, the Insurance

Department's Web site is also the home of an Interactive Guide to HMOs,

which allows consumers to find information about HMOs operating within

their home county.

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Know Your Agent or Broker.

Consumers can often be victimized by unscrupulous agents or brokers

and discover only after they file a claim that they are without coverage for

their home or their car. If an uninsured home is damaged by fire, the

owner is solely responsible for restoring it and paying back any mortgage

holders. If a driver is involved in an accident while driving an uninsured

vehicle, any personal assets are subject to forfeiture if that driver is sued

for damages. Deal only with licensed agents and brokers. Agents and

brokers must carry proof of licensure.

Where's the Proof?

Never pay for a premium in cash. Pay by check or a money order made

out to the insurance company directly or to the agency—not to the

individual agent or broker. In addition, always request a receipt.

Where's the Policy?

You should receive a copy of any type of insurance policy complete with

endorsements and declarations specifically outlining your coverage and

its limitations within a reasonable period after your purchase. If you do not

receive it, question your agent or broker. If there is no satisfactory

explanation for the delay, contact the New York Insurance Department

immediately. You may not have the insurance coverage you paid for.

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Are You Being Billed for Services You Have Not Received?

If you have received medical or dental treatment that is covered by an

HMO or an insurance company, you will receive an "Explanation of

Benefits" statement listing the services for which benefits have been paid.

Review it carefully to ensure that your health care provider has not

"bumped up" your claim (i.e., overstated services provided in order to

receive a higher payment), or charged for services you did not receive.

Contact your insurer immediately if you feel there are discrepancies.

Fraudulent claims payments translate into higher insurance premiums for

all of us.

What If You’re Involved in an Automobile Accident?

Call the police to the scene and make sure that the details of the accident

are documented and the identities of the occupants of the other vehicle

are verified. Be suspicious if the driver of the other vehicle insists there is

no need to call the police. That driver’s insurance card may be fraudulent

and his car uninsured.

Auto Insurance Fraud is a multi-billion-dollar problem nationwide. Watch

out for these common scams:

The staged accident – A vehicle filled with people will stop suddenly in

front of you, setting you up as the cause of a rear-end collision. The

"victims" will then file costly multiple medical and damage claims using

doctors and lawyers who are part of the scam.

Steerers – These individuals will solicit the injured or allegedly injured

parties and direct them, for a "referral fee," to lawyers, doctors and/or

medical facilities that are part of the scheme. Be on the lookout for

steerers at accident scenes and don’t become their victim.

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Inflated claims – If you are in an automobile accident, be sure you know

the extent of the damages to your own car and the other vehicle and

carefully review claims. Vehicle owners and body shops frequently inflate

estimates for damages and then either perform other repairs not related

to the accident or simply keep the extra money.

BE ALERT! IT’S YOUR MONEY.

Think twice before replacing an existing life insurance policy with a new

one. The new policy may have exclusions or waiting periods for pre-

existing conditions that are covered by your current policy. And premiums

are likely to be higher because you are older. The Insurance Department

protects consumers by requiring agents to provide prospective

purchasers with pertinent facts when that purchase will cause the buyer to

surrender, lapse, or in any way change the status of an existing life

insurance policy. Department Regulation 60 requires this full disclosure

so that prospective life insurance purchasers can make decisions in their

own best interest.

Don’t allow high-pressure salesmanship to persuade you to sign up for a

type of policy or certain coverage that you are not sure you need. Take

time to decide what’s right for you.

Read your policy carefully before you sign. If you have questions, ask

your agent or broker, or your insurer. An additional source of information

and help is the Insurance Department’s Consumer Services Bureau.

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Summary

Insurance, a very well known concept today and many people could relate

to in more than one ways. This is the influence of the changing times that

have changed the concept of insurance in the minds of the young and the

old. People have changed their attitude towards insurance and accepted

its new look from being an entry of luxury to an investment and a

necessity. The number of people taking insurance has increased

considerably in the past few decades due to the entry of private players in

the market.

One knows that every coin has two sides. Similarly, insurance also has

two faces. One of which is investments and getting regular returns from

financial institutions for oneself and for loved ones. The other, awfully, is

of which people deceive insurance companies for their undue advantage

and cause intimidation to many others.

Though, there have been many laws and agencies all over the world to

impede such criminal activity, it is not a full proof solution to all insurance

frauds.

In a world today where every person seeks their right to information and

demands the same, it is very difficult to scam them. One must know all

the loop-holes of their business to scheme some one. This could be the

act of some one who is carrying on criminal bustle on the vigor of his

acute knowledge about their business. Lack of knowledge and not

knowing ones basic rights on behalf of the prey could land them in

scrambled scam bisque.

There have been many institutions and agencies formed all over the world

to detect fraud and penalize the one conscientious for such mishaps.

There is Division of Insurance Fraud, International Association Of

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Insurance Fraud Agencies (Iaifa), etc. through the enduring and

conscious endeavor of these institutions insurance fraud tempo has

declined by an enormous amount. Several have studied preceding and

enduring market conditions to identify with the diverse frauds that take

place and the reasons behind committing these frauds.

One cannot diminish frauds, schemes, swindles, scams but can positively

be alert of them so as not to be a victim of it themselves. Tumbling

fraudulent situations is a unremitting and collective effort of countless.

One must be sensitive and offer their helping as much as they can.

One can either grumble about how things are all going wide of the mark

and swallow the consequences. Or put their foot down and make an

attempt to change the immoral to the right. The wrong will change and

everyone will see the bright light of truth and right with the revolution of

knowledge, awareness, an attitude for change amongst the humanity.

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Bibliography

BlueCross & BlueShield United of Wisconsin: What is health care

fraud?

Stern RA, Montana R.: Identify patterns of medical provider fraud

through data base graphic pattern. FDN Fraud Report

Barrett S.: Chelation therapy and insurance fraud

Private health insurance: Employers and individuals are vulnerable

to unauthorized or bogus entities selling coverage

Scam alert.: Coalition Against Insurance Fraud Web site

www.naic.org

www.google.com

www.yahoo.com