fraud & the p/c insurance industry focus on no-fault auto insurance new york insurance fraud...
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Fraud & the P/C Insurance Industry
Focus on No-Fault Auto InsuranceNew York Insurance Fraud Summit
New York, NYApril 21, 2010
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
3
Survey of No-Fault Claim Costs Across the U.S.
Skyrocketing No-Fault (PIP) Claim Costs Are a Major Concern in
Several States
4
Average No-Fault Claim Severity, 2009:Q4
$1
7,7
27
$8
,86
2
$8
,67
0
$5
,51
7
$5
,19
8
$4
,88
7
$4
,32
7
$4
,12
1
$4
,03
1
$2
,99
8
$2
,89
5
$2
,99
1
$2
,55
1
$2
,21
9
$1
,74
9
$37,489
$8
,18
6
$7
,53
8
$6
,94
4
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
MI NJ NY DC DE FL MN KY ND HI WA PA OR TX MD KS SC UT MA
Several States Have Severe and Growing Problems With Rampant Fraud and Abuse in their No-Fault Systems. Claim Severities Are Up Sharply.
Source: ISO/PCI Fast Track data; Insurance Information Institute.
MI, NJ, NY and FL currently are the largest states that have the most severe
problems in their no-fault system
5
Increase in No-Fault Claim Severity: 2004-2009*
*2009 figure is for the 4 quarters ending 2009:Q4.**Since 2006 the increase in Florida was 17.3% (average severity that year was $6,344). Sources: Insurance Information Institute research from ISO/PCI Fast Track data.
$32,778
$17,198
$8,716 $7,524$6,674$5,871
$12,136
$24,385
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
Michigan New Jersey New York Florida
2004 2009
The no-fault systems in MI, NJ, NY and FL are under stress due to rising fraud and abuse which will ultimately lead to higher premiums for drivers
+34.4%
+41.7%
+48.5% +18.6%**
6
NY State No-Fault Costs & Evidence of Fraud
Skyrocketing No-Fault (PIP) Claim Costs Are a Major Concern in
Several States
7
New York State No-Fault Claim Severity, 1997–2009:Q4
Sources: ISO/PCI Fast Track data; Insurance Information Institute.
$5,6
75 $6,0
63$6
,699
$8,3
47$8
,327
$7,8
88$7
,507
$8,2
34$9
,235
$8,7
27$8
,577
$7,7
73$7
,311
$6,9
58$6
,870
$6,1
56$6
,052
$5,8
20$5
,991
$5,6
15$6
,094
$5,9
14 $6,2
50$6
,269 $6
,530
$6,6
06$7
,063 $7
,323
$7,3
78$7
,297 $7
,670
$7,7
40$8
,443
$8,1
77 $8,5
07$8
,025
$8,5
62$8
,748
$8,6
90$8
,862
$5,000
$5,500
$6,000
$6,500
$7,000
$7,500
$8,000
$8,500
$9,000
$9,500
1997
1999
1:01
1:03
2:01
2:03
3:01
3:03
4:01
4:03
5:01
5:03
6:01
6:03
7:01
7:03
8:01
8:03
9:01
9:03
No
-Fa
ult
Cla
im S
ev
eri
ty
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
2.4%
No
-Fa
ult C
laim
Fre
qu
en
cy
Avg. Claim Severity
Frequency
About 20% of No-Fault Claim Costs Are Attributable to Fraud and Abuse
No-Fault Claim Severity
Avg. Claim Severity is at its 2nd Highest Level
in History = $8,862
Avg. Claim Severity Rose 63% in 5 years
after 1997 Presbyterian
Decision
Avg. Claim Severity is up 58% since 2004:Q4
8
13,287
10,11711,242
12,339 13,433
24,92023,05422,07922,884
25,945
0
5,000
10,000
15,000
20,000
25,000
30,000
05 06 07 08 09
Suspected Fraud Reports ReceivedSuspected No-Fault Reports Received
Suspected No-Fault Fraud Reports vs. All Insurance Fraud Reports, 2005-2009
Source: New York State Insurance Department, Insurance Frauds Bureau 2009 Annual Report; Insurance Information Institute.
The Total Number of Insurance Fraud Reports in NY State Would Have Plunged Nearly 15% Since 2006 Were It Not for the
Return of No-Fault Fraud
No-fault fraud reports are up 32.8% since 2006 compared to
8.9% for all types of fraud in NY state
9
New York Auto Insurance Fraud Reports, 1995 – 2008
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Auto Collision Damage
Auto Theft
No-Fault Auto
Source: New York State Insurance Department, Insurance Frauds Bureau 2009 Annual Report; Insurance Information Institute.
No-fault fraud reports fell 35% between 2003 and 2006, but are rising once again
—up 33% since 2006. Other types of auto insurance fraud are flat.
10
The Cost of No-Fault Fraud in NY State
No-Fault (PIP) Fraud is Costing Insurers and Drivers Billions
11
$1.7
$70.5
$120.4
$195.3
$229.1$241.2
$0
$50
$100
$150
$200
$250
$300
2005 2006 2007 2008 2009** 2010F
Estimated Cost of No-Fault Fraud in New York State, 2005-2009*
($ Millions)
The cost of no-fault fraud could rise to $241 million in
2010 if no reforms are enacted
*No-fault severity reached a post-reform low in 2004 before, hence selection of 2005 as the first year of analysis. Actual no-fault losses in 2005 and beyond are higher than estimates indicate due to baselevel of fraud imbedded in 2004 data.**2009 figure is estimated based on 4 quarters ending 2009:Q3 (latest available).Source: Insurance Information Institute analysis and research.
No-fault fraud cost NY drivers and their insurers an
estimated $229 million in 2009, up 17.3% from 2008 and 90.3%
from 2007
12
$2$72
$193
$388
$617
$858
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
2005 2006 2007 2008 2009** 2010F
Estimated Cumulative Cost of No-Fault Fraud in New York State, 2005-2010F*
($ Millions)
*No-fault severity reached a post-reform low in 2004 before, hence selection of 2005 as the first year of analysis. Actual no-fault losses in 2005 and beyond are higher than estimates indicate due to baselevel of fraud imbedded in 2004 data.**2009 figure is estimated based on 4 quarters ending 2009:Q3 (latest available).Source: Insurance Information Institute analysis and research.
No-fault fraud cost NY drivers and their insurers totaled an estimated $617 million from
2005 through 2009
The cumulative cost of no-fault fraud in NY state could rise to $858 in 2010
and more than $1 billion by early 2011 if no reforms are enacted
13
$12
$504
$875
$1,390
$1,561$1,644
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
2005 2006 2007 2008 2009** 2010F
Estimated Per-Claim Cost of No-Fault Fraud in New York State, 2005-2010F*
*No-fault severity reached a post-reform low in 2004 before, hence selection of 2005 as the first year of analysis. Actual no-fault losses in 2005 and beyond are higher than estimates indicate due to baselevel of fraud imbedded in 2004 data.**2009 figure is estimated based on 4 quarters ending 2009:Q3 (latest available).Source: Insurance Information Institute analysis and research.
No-fault fraud costs per claim could rise
to $1,644 in 2010 without reform
The estimated per claim cost of no-fault fraud (a.k.a. Fraud Tax) in NY state was $1,561 in 2009, up 12.3% from 2008 and
78.4% from 2007
14
Benefits of Reducing Fraud and Abuse
NY’s Drivers Will Save a Great Deal of Money if the Battle Against
Fraud and Abuse is Won
16
$1
0.3
$1
0.0
$9
.8
$9
.8
$9
.9
$1
0.7
$1
0.6
$9
.9
$9
.0
$8
.2
$8
.2
$5
$6
$7
$8
$9
$10
$11
99 00 01 02 03 04 05 06 07 08 09
($ Billions)
NY State Direct Pvt. Passenger Auto Premiums Written, 1999-2009
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (3/10); Insurance Information Institute.
Resurgent No-Fault Fraud in NY State Could Ultimately Cost Drivers Billions of Dollars
The last no-fault crisis pushed the cost of auto insurance up sharply
in the early 2000s
Auto insurance premiums paid by NY drivers dropped by nearly 7% or $762 million from the end of the last no-fault crisis in 2004 to 2008, but the system is once
again under siege from fraud and abuse
17
Today’s PIP Problem in New York State is Not Its First
18
No-Fault FraudWas Front-Page News in 2001-2002
19
The Publicity SparkedCalls for Action
20
More EditorialsUrging Albany to Act
$5
,78
2
$5
,99
0
$6
,00
9
$6
,13
2
$6
,29
9
$6
,37
7
$6
,52
6
$6
,50
9
$6
,54
8
$6
,59
9
$6
,70
5
$8
,27
1
$8
,36
0
$8
,07
6
$7
,71
2
$7
,88
3
$8
,09
7
$8
,30
8
$8
,59
7
$8
,48
9
$8
,03
3
$7
,60
0
$7
,18
8
$6
,811
$7
,06
0
$6
,97
1
$6
,83
8
$6
,72
9
$5
,92
9 $6
,59
3
$5
,61
5
$5
,99
1
$5
,82
0
$6
,05
2
5,000
5,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
00
:4
01
:1
01
:2
01
:3
01
:4
02
:1
02
:2
02
:3
02
:4
03
:1
03
:2
03
:3
03
:4
04
:1
04
:2
04
:3
04
:4
US excl. NY NY
The Campaign Was a Success: PIP Average Claim Severity Plunged
*ISO Fast Track PIP data as of 2004:Q4 include the following states: FL, HI, KY, KS, MA, MI, MN, NY, ND, SC and UT.Source: Insurance Information Institute calculations based on ISO/PCI Fast Track Data.
NY PIP claim severity, once the 2nd highest in the US, fell well below the
US average by Q1 2004 after a crackdown on fraud, abuse.
But No-Fault Autoin New York Is
Out of Control—Again!
$8
,27
1$
8,3
60
$8
,07
6$
7,7
12
$7
,88
3$
8,0
97
$8
,30
8$
8,5
97
$8
,48
9$
8,0
33
$7
,60
0$
7,1
88
$6
,811
$6
,09
4$
5,9
14
$6
,25
0$
6,2
89
$6
,53
0$
6,6
06 $7
,06
3$
7,3
23
$7
,37
8$
7,2
97
$7
,67
0$
7,7
40
$8
,44
3$
8,1
77
$8
,50
7$
8,0
25
$8
,56
2$
8,7
48
$5
,61
5$
5,9
91
$5
,82
0$
6,0
52
$4,500
$5,000
$5,500
$6,000
$6,500
$7,000
$7,500
$8,000
$8,500
$9,000
00
:40
1:1
01
:20
1:3
01
:40
2:1
02
:20
2:3
02
:40
3:1
03
:20
3:3
03
:40
4:1
04
:20
4:3
04
:40
5:1
05
:20
5:3
05
:40
6:1
06
:20
6:3
06
:40
7:1
07
:20
7:3
07
:40
8:1
08
:20
8:3
08
:40
9:1
09
:2
NY’s No-Fault Fraud ProblemHas Returned
Sources: Insurance Information Institute calculations based on ISO/PCI Fast Track Data
Average PIP Claim Severity
315
340
365
390
415
440
465
490
515
540
04:4 05:1 05:2 05:3 05:4 06:1 06:2 06:3 06:4 07:1 07:2 07:3 07:4 08:1 08:2 08:3 08:4 09:1 09:2
$5,600
$6,600
$7,600
$8,600
$9,600
Medical care index NY
NY’s No-Fault Fraud ProblemHas Returned
Sources: Insurance Information Institute calculations based on ISO/PCI Fast Track Data
Medical Care Cost Index
Medical Care Cost Index
Average NY PIP Claim Severity
Fra
ud
Ga
p?
25
New York State’s ResurgentNo-Fault Auto Insurance Problem
• The average no-fault (PIP) claim in New York soared 56% from $5,615 at the end of 2004 to $8,748 in the second quarter of 2009• This is a 48% growth rate
• In that time span, the cost of medical care rose by 21%
• At the start of 2004, NY’s average PIP claim was about equal to that of the rest of the U.S. Now, 5½ years later, the average cost per no-fault claim in New York is more than double (111%) that of the US median ($4,152)
Sources: PCI Fast Track Monitoring data; I.I.I.
First-Party “Bad Faith” Liability Laws:How to Make
a Tough Environment Tougher
26
27
The Courts & States Have Adopted3 Procedures for Alleging “Bad Faith”
Tort Action Based Solely on Bad Faith (a majority of states) Can recover costs beyond policy benefits including
punitive damages 10 states use “negligence” standard; 15 states have
“intentional tort” standard
Contract Action (9 states) Broad definition of damages, but not punitive
damages
Private Cause of Action Statute Can recover costs beyond policy benefits including
punitive damages
Source: Tennyson and Warfel, “First-Party Insurance Bad Faith Liability: Law, Theory, and Economic Consequences,” National Association of Mutual Insurance Companies, September 2008.
28
Objective & Costs of “Bad Faith” Laws
Objective: to deter insurers from denying or delaying payment on a valid claim
Costs
Can deter insurers from screening claims for fraud and from challenging questionable claims, to avoid possibly greater costs under “bad faith” allegations
Can raise total claims payments (including LAE) and, ultimately, premiums—in effect, taxing honest policyholders to pay dishonest ones
Source: Tennyson and Warfel, “First-Party Insurance Bad Faith Liability: Law, Theory, and Economic Consequences,” National Association of Mutual Insurance Companies, September 2008.
Use of IMEs* in Stateswith Different “Bad Faith” Laws
4.1%3.5%
14.8%13.8%
0%
5%
10%
15%
IME requested IME performed
any tort action no tort action
*Independent Medical ExamSource: Tennyson and Warfel, “First-Party Insurance Bad Faith Liability: Law, Theory, and Economic Consequences,” National Association of Mutual Insurance Companies, September 2008.
% of Claims“Because an IME
requires the notification and
cooperation of the insured, insurers
may be particularly reluctant to
undertake this type of
investigation when bad faith
suits are decided under tort law.”
Use of Medical Audits In Stateswith Different “Bad Faith” Laws
33.2%
6.2%
22.9%
7.0%
0%
5%
10%
15%
20%
25%
30%
35%
internal medical audit external medical audit
any tort action
no tort action
Source: Tennyson and Warfel, “First-Party Insurance Bad Faith Liability: Law, Theory, and Economic Consequences,” National Association of Mutual Insurance Companies, September 2008.
% of Claims
“All else being equal, claim payments are
12.4% higher in states that allow
tort-based actions.”
In states in which a Bad Faith tort is allowed, insurers were significantly more likely to use internal medical
audits in claims evaluation. This adds to LAE in those states.
Not a statistically significant difference.
Fraud “Suspicion Indicators”at Scene of Auto Accidents
70.0%
79.2%
62.4%
84.8%
55%
60%
65%
70%
75%
80%
85%
No visible injury at scene Police report at scene
any tort action
no tort action
Source: Tennyson and Warfel, “First-Party Insurance Bad Faith Liability: Law, Theory, and Economic Consequences,” National Association of Mutual Insurance Companies, September 2008.
% of Paid Claims
In states in which a Bad Faith tort is allowed, insurers paid
claims significantly more often when there was no visible injury (NVI) at the
scene. Were some NVI claims fraudulent?
In states in which a Bad Faith tort is allowed, insurers paid claims
significantly less often when there was no police report at the scene. Were
some of these claims fraudulent?
In “Bad Faith” States, InsurersFace/Pay More Questionable Claims
24.7%
69.1%
20.0%
60.7%
0%
10%
20%
30%
40%
50%
60%
70%
Chiropractor % of claims Worst injury is sprain
any tort action
no tort action
Source: Tennyson and Warfel, “First-Party Insurance Bad Faith Liability: Law, Theory, and Economic Consequences,” National Association of Mutual Insurance Companies, September 2008.
% of Claims
In states in which a Bad Faith tort is allowed, insurers paid claims
significantly more often when the injury was harder to challenge
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