Fraud at the Front End

It may seem like just a white lie: an auto insurance customer decides to list his address at a friend’s house in rural Ontario, instead of at his actual residence in the Greater Toronto area. The immediate payback is good for the customer. Instead of insurance premiums of $5,000, he’s looking at just under $2,500. But this isn’t just a white lie. It’s rate evasion fraud, and it’s part of a larger, growing trend of underwriting fraud.

What is underwriting fraud? It is not merely an occasional error on a policy application or forgetfulness about a certain item. It is a deliberate misrepresentation of a situation or circumstance in order to gain financial advantage. If someone intentionally conceals or misrepresents information when obtaining insurance coverage at any stage in the policy life cycle—inception or renewal—that is underwriting fraud.

And it is different, and much more difficult to detect, than traditional claim fraud. Instead of picking insurance companies’ pockets, underwriting fraudsters actually reduce the size of the pocket for the entire industry. For some time now, the insurance industry has focused its energy on claim fraud, such as staged accidents and inflated medical rehabilitation expenses. While steady progress has been made in combating these crimes, underwriting fraud presents a new threat that the industry must pay attention to. Brokers and insurers need to be aware of the emergence of rate evasion, pink slip counterfeits and misrepresentation, and how to identify and stop them.

What’s Trending

One thing we know for certain: there is a strong link between claim fraud on the back end and underwriting fraud on the front end. Based on Aviva Canada’s analysis, a substantial proportion of claim fraud originates from a fraudulent application. Insurers that can reduce underwriting fraud can significantly decrease their exposure to certain types of claim fraud.

But this is not just a problem for insurers. Improper rating of potentially higher-risk drivers and/or territories leads to increased premiums for all consumers. Unwittingly, underwriters are actually taking on risks that they cannot properly assess.

There have been some disturbing trends in underwriting fraud in the last three years. Rate evasion is becoming a more common practice, particularly in urban areas characterized by higher premiums. From 2012 to 2013, Aviva Canada saw a five-fold increase in cases of rate evasion; over the next year, Aviva expects to see this increase by another 150%.

Rate evasion can be as simple as someone using a relative’s address in a different rating territory. However, we have also seen greater use of P.O. boxes, falsified residential information, and even nonexistent addresses (i.e., the street only goes to 100 and there is an address at 150). In some cases, drivers will file change of address forms at various government agencies and then apply for insurance—without actually moving. After waiting for a period of time, they will “move” back to their existing address without informing the insurance company.

Underwriting fraud extends into several different areas. For example, the falsification of motor vehicle liability insurance cards, or pink slips, has become more prevalent in recent years. Through classified websites, such as Craigslist or Kijiji, scam artists will sell phony pink slips, often altered and photocopied, to consumers. The “policies” that these unsuspecting victims purchase are essentially worthless. In the event of an accident, they will not be covered. Consumers who fall for this scam may even face other penalties for having false insurance. The falsification of insurance or driver records also creates a dangerous situation for uninsured drivers, their families and innocent third parties, by creating the potential for an accident without any existing coverage. The best way for consumers to protect themselves, therefore, is by using a licensed and registered insurance broker.

Other types of underwriting fraud may involve the deliberate omission of information. For example, if a policyholder is declined for auto insurance because they made a modification to their vehicle, and if they then omit this information on an application to another insurer, that is a form of underwriting fraud. Intentional omission can happen in many places on policy documents. Consumers can change rating factors, such as the main driver on a policy (listing an older driver instead of a younger driver), an extensive claims history, age, and even education, to reduce the premium.

Fighting Fraud

It is difficult to estimate the statistical extent of underwriting fraud, but insurance companies regularly feel the pinch of this “premium leakage.” According to a study by the Quality Planning Corporation, insurance companies in the US lose about $16 billion each year due to rate evasion and underwriting fraud, or roughly 10% of the total personal auto insurance premiums paid in the US. Given the increased activity we have seen in Canada, it is not unreasonable to estimate a significant loss could also be seen here.

There are several potential ways to combat underwriting fraud. One is to create a close partnership between insurers and brokers, who are the first line of underwriting defence. Brokers have several stakes in this game, including putting unlicensed fraudsters out of business, protecting the integrity of the insurance application process, and gathering and verifying correct customer information at the point of sale (and throughout the policy life cycle).

Today, brokers have new responsibilities to inspect their books of business for fraudulent activity, especially in this era of online and call centre applications. They need to be aware of the impact of sales and commission incentives that may lead to unintended consequences. These duties extend to brand and reputation. As rate evasion becomes more common, the potential for Errors and Omissions increases exponentially. As we become aware of both individual cases of fraud and fraud trends, we need to keep our broker partners informed so they can help identify future behaviour and risks. Brokers can play an active role in fraud prevention through educating their front-line agents on how to identify potential fraud, and through co-operation with insurers in furthering investigations.

Regulators also have a role. One positive initial step would be to clarify and tighten up wording in auto insurance applications. In Ontario, for example, the form requires a mailing address for the applicant, not a direct statement of where the car is housed or garaged. This allows too much room for ambiguity at policy inception. Other possible reforms include better coordination and verification of proof of insurance for police at roadside stops, more sophisticated motor vehicle liability insurance cards (which are harder to copy) and improved tracking of address changes at the Ministry of Transportation.

In the US, regulators in certain states have made important strides in addressing underwriting fraud. In New Jersey, a bill classifying rate evasion as insurance fraud was recently passed into law. Those charged could face civil or criminal fraud penalties. Other states have also stepped up their rate evasion prosecution. In June 2013, the Attorney General’s Office in Pennsylvania charged a New Jersey man and 11 co-conspirators with illegally providing Pennsylvania vehicle registration and insurance to people who lived in other states.

Updated legislation and tighter regulations to close the door on underwriting fraud are needed to ensure a more affordable and sustainable product for all Canadians.

There are signs that collaboration between insurers and law enforcement agencies can work in Canada. In September 2013, Toronto Police Service detectives arrested Serafattin (George) Solak outside of his Edmonton home. The arrest was possible after Aviva Canada worked with the Toronto Police Service and the Ontario Crown Attorney’s office to uncover sufficient evidence for a Canada-wide warrant. Solak was charged with various offences related to an insurance scam that sold fraudulent motor vehicle insurance liability cards to Ontario consumers. This “pink slip” case is currently before the courts.

Ultimately, underwriting fraud is a key responsibility of the individual insurance company writing the policy. More than ever, insurers must carefully assess and evaluate policy-related information at the front end to validate data. This can only be done with appropriate staffing, resources and data analysis capabilities.

Unlike claim fraud, there are few obvious clues that point to underwriting fraud. It is akin to someone shrinking your wallet without your realizing. The best solutions are found in co-operation among insurers, brokers and regulators, data verification in the policy life cycle, and the closing of administrative and other loopholes.

But as always, an ounce of prevention is worth a pound of cure.

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Copyright 2014 Rogers Publishing Ltd. This article first appeared in the April 2014 edition of Canadian Insurance Top Broker magazine

This story was originally published by Canadian Insurance Top Broker.