Target Fraud

Fraud has been a persistent problem in the property and casualty industry, but there are clear signs that the scope of insurance crime is more extensive than previously thought. This is particularly true in Ontario and more specifically the Greater Toronto Area (GTA), where organized fraud rings have devised elaborate, sometimes dangerous schemes to bilk insurers – and policyholders.

“Industry data suggests that the primary increase in insurance fraud over the last five years has been in the Ontario auto accident benefit claim area, largely due to the increase involvement of organized crime,” notes Jim Eso, senior vice president, property & casualty, Crawford and Company (Canada) Inc. “The most recent changes in benefits under AB may have an impact in reduction of fraud; however, this area remains the primary focus for the insurance industry.”

Independent adjusters have a front line view of insurance fraud and are well positioned to play a key role in detection and prevention.

“Being in the field, the independent adjuster is often the first one to observe some of the initial signs of a potential fraud as we are conducting the in-person interview,” says Paul Mercer, Toronto branch manager for Granite Claims Solutions, who has taken on a coordinated fraud role with the adjusting firm. “We then work with the in-house special investigation unit (SIU) or in cases where there is no insurer investigation team, coordinate inquiries with private investigators and our internal SIU specialists.”

Two recent developments – the formation of an Ontario Auto Insurance Anti-Fraud Task Force and an audit of the Financial Services Commission of Ontario (FSCO) by the Auditor General – have yielded greater insight into the nature of fraud.

“To us, the most important aspect about the scope and nature of fraud is its impact on Ontarians,” the task force noted in its December 2011 interim report. “Fraud can have a financial impact, through increased costs and premiums, a public safety impact, through staged accidents endangering drivers, and a health status impact, through inappropriate or excessive treatment.”

General industry estimates peg the cost of auto insurance fraud in Ontario at between 10-15% of the value of 2010 premiums, or as much as $1.3 billion. However, the task force questions just how accurate that figure truly is.

“We have attempted to understand the basis for that calculation and have concluded that the $1.3 billion figure cannot be considered a verifiable measure of the extent of fraud at this time,” it said.

The Insurance Bureau of Canada (IBC) commissioned KPMG to study the extent of insurance fraud in Ontario. In a report released in June, the consulting firm indicated that: “Based upon our review of the available information, we estimate that auto insurance fraud in Ontario ranges between $770 million and $1.6 billion per year. This amounts to between 9% and 18% of total auto insurance premiums.”

The task force on fraud issued another report in July, which stated that Ernst & Young is reviewing the KPMG figures. Ernst & Young has indicated that KPMG may be underestimating the extent of overall auto insurance fraud in Ontario “because it does not specifically address premeditated fraud, which, as Ernst & Young noted, could range between $130 to $260 million per year.” 

Alarmingly fast rate

While the specific numbers are in doubt, there is no question as to whether fraud exists in Ontario auto insurance. Accident benefits costs more than doubled from 2006 to 2010, increasing by 118%, according to the Task Force. Of the $3 billion increase in total claims costs, $2.4 billion or 80% came from AB. Of the $2.4 billion increase in AB costs in Ontario through this period, $2 billion occurred in the GTA.

“Something is causing accident benefits costs (and therefore overall auto insurance claims costs) to grow at an alarmingly fast rate while many of the normal factors that influence these costs either decrease or increase only slightly,” the task force noted.

The Auditor General’s Report made similar findings. It noted that from 2005 to 2010, total claims costs in Ontario increased by 61%, from $5.4 billion to $8.7 billion. The primary cause for this escalating trend was increased Statutory Accident Benefits Schedule (SABS) costs, not the increase in the number of accident claims. Indeed, the injuries claim costs rose 150%, even though the number of injury claims increased by only 30% over the same period.

It’s clear that fraud – especially organized crime – is a primary component of that significant spiral in claims costs. IBC estimates that there are as many as 50 active fraud rings operating in the GTA. Some recent high-profile examples include:

• In February, Toronto Police laid charges in connection with Project Whiplash, where it is alleged that a complicated insurance fraud ring has staged auto collisions, made false claims at several rehab providers across the GTA, and falsely used the identities of several medical practitioners. The alleged scam targeted numerous insurers and resulted in estimated fraudulent payouts of $4 million.

• In May, Uthayakanthan Thirunavukkarasu, also known as Max or Mano, received a three and a half-year jail sentence and a free-standing restitution order for $375,000 for instructing the commission of offences for a criminal organization, proceeds of crime, criminal negligence causing bodily harm and fraud charges in connection with a staged collision ring, known as Project 92, across the GTA. He was personally associated with more than a dozen staged collisions. IBC estimates the impact to the industry from Project 92 could be as high as $25 million.

• Also in May, FSCO announced charges against five rehabilitation clinics and 10 individuals affiliated with these clinics with offences under Ontario’s Insurance Act. The cases involved filing false claims.

The Auditor General’s report observed that insurance companies are increasingly dealing with fraud in civil rather than criminal court. In 2010, several insurers sued select health clinics over alleged fraud related to auto insurance claims. One insurance company alleged it paid out at least $1.2 million to three clinics owned by the same individual for medical services that were never provided. Other legal action alleged that invoices were submitted from health-care clinics totalling over $1 million for treatment allegedly provided by persons who did not work at the clinic or who had left prior to the treatment being billed.

Organized, premeditated and opportunistic fraud

Insurance fraud falls into three broad categories-organized, premeditated and opportunistic. Organized fraud is undertaken by a group of individuals working in concert. By working together, the group takes advantage of the insurance system in multiple ways, such as staged accidents and claims under various insurance coverages. This often involves a network that can extend to health care providers, tow truck operators, repair shops, paralegal firms, etc.

Premeditated insurance fraud involves the purposeful claiming of improper insurance benefits by an individual (rather than a group). For example, a service provider may submit claims for damage or treatment that did not occur and/or was not provided.

Opportunistic fraud occurs when an individual increases or “pads” a legitimate claim. For example, a policyholder may claim for the repair of damage not caused by the accident, which is the subject of the claim or may overstate the true value of some aspect of the claim (e.g., property lost).

“When you look at opportunistic fraud, this exists across Canada,” says Eso. “Adjusters are well trained to uncover this type of fraud right from the first notice of loss. We can work closely with our insurance partners on investigating suspicious losses and take a proactive approach to verifying the claim. This involves a significant amount of work, but I do not think op
portunistic fraud has increased significantly in recent years.”

Padded claims are examples of crimes of opportunity; it is, however, becoming increasingly evident that organized and premeditated fraud is a growing contributor to escalating claims costs.

“The fastest-growing parts of auto insurance fraud are premeditated and organized fraud rather than opportunistic fraud,” noted the fraud task force’s interim report. “This conclusion is based on the shape of the growth curve in the unexplained gaps from 2006 to 2010. There is little reason to believe that opportunistic fraud would have grown so quickly in such a short period of time. And there is much anecdotal evidence that premeditated and organized fraud have grown rapidly in recent years.”

With insurance fraud on the radar screen as a highly visible industry issue, insurance companies, associations and adjusters are targeting organized crime and pursuing specific strategies to break up rings. There is a growing consensus that a concerted effort is required from regulators, various facets of the insurance industry and consumers. The Ontario task force is issuing its final report in fall 2012, which will contain a number of recommendations on tackling organized fraud.

Early indications from the task force show that it will likely focus on several key areas, including regulation of health care clinics, oversight of the towing industry, increased powers for FSCO in terms of administrative penalties, broader civil immunity protection and privacy sharing provisions for insurance companies. Technology, in the form of predictive analytics and advanced link analysis, and consumer awareness are also critical factors in the detection of fraud.

The Role of Regulation

“We have made it very clear that the big problem is the medical-rehabilitation clinics,” says Ralph Palumbo, vice president, Ontario region for IBC. “The fact is that anyone can start up a clinic right now. There are over 8,900 health care facilities using the Health Claims for Auto Insurance (HCAI) system, yet on average we are seeing about 62,000 accidents over the course of a year. So, the question is where are they making their money? We think a big part of it is in fraud.”

There are several potential avenues to more closely monitor health care clinics, some of which have been floated by both IBC and the task force. These include placing restrictions on ownership of clinics, designating a regulated health practitioner to be responsible for the integrity of the clinic and its business practices and imposing appropriate sanctions for unethical or fraudulent behaviour. The task force cited the example of Hillsborough County, Florida, which passed in September 2011 an ordinance requiring the licensing of any medical clinic that provides treatment or therapy to patients claiming injury due to an automobile accident.

“I think the most effective route to deal with fraud is to cut off the money,” says Willie Handler, a consultant and former senior manager of auto insurance policy for FSCO, who is participating in developing the task force report. “If you properly license and regulate health care facilities, you will screen out those who are not fit to be working in this sector and take away their ability to bill insurers.”

Regulation of the towing industry may pose a more daunting challenge. The task force noted in its preliminary report that allegations of paid referrals and improper billing practices have surfaced regarding tow truck operators. However, it is unclear which agency of the provincial government would regulate practices in the towing industry or if municipalities, who often license operators, would be involved.

Palumbo notes that granting insurers broader civil immunity protection is a relatively easy measure that could be done by the government. Insurers are pursuing civil actions and trying to hit fraud rings where it hurts the most: their wallets. However, they are vulnerable to counter lawsuits and allegations of bad faith if an investigation goes wrong.

“We think there is a ‘whistle-blower’ risk that can hinder the success of an investigation,” Palumbo says. “But with these broader immunity measures, insurers and others would be protected as long as the reporting is done in good faith to law enforcement officials or designated industry bodies.”

A related topic for the insurance industry is information sharing in the context of federal privacy legislation. While insurers are subject to PIPEDA, there are concerns that this may restrict information gathering, data sharing and investigative techniques involved in fraud detection. Bill C-12 was introduced in Parliament last year as legislation designed to update PIPEDA, but it has not moved to the order paper.

The Ontario task force on fraud is looking at other options, such as “whether the consent provisions embedded in applications for auto insurance and applications for benefits in the event of a collision might be amended in a way that would be consistent with privacy legislation, but provide greater certainty about the ability to share information for the purpose of detecting and preventing fraud.” Palumbo says insurers would welcome a clarification of information sharing practices.

IBC is also recommending a dedicated insurance fraud unit or dedicated prosecutor, with the potential for a pilot project in the GTA. “Given the complicated nature of some of these fraud rings, it makes sense to have someone with expertise in auto insurance fraud handling these cases,” Palumbo says.

The main obstacle with fraud fighting efforts on the regulatory side is finding the resources – where will the money come from? It’s an issue the task force acknowledges in its interim report.

“It is necessary that FSCO be provided with the requisite staff and expertise to assume these new regulatory activities,” it noted. “In this regard we suggest that the government consider allowing FSCO to hire new staff as necessary, particularly since the insurance sector would be absorbing the additional costs associated with new resources.”

Palumbo concurs that FSCO has a “lot on its plate. That is a concern and some of these measures would require more resources. As insurers, we don’t want to have to end up paying for things like a licensing regulatory system for health clinics.”

Handler says that the approach to fraud prevention in Ontario may not involve concrete measures, such as a dedicated insurance fraud unit or prosecutor. “I think there is a philosophical difference between Canada and some U.S. states, ” he notes. “There is reluctance here to earmark resources for a specific program, such as insurance fraud. If down the road the (fraud) problem is curtailed, the funding is still pre-allocated for that purpose.”

When the task force releases its final report on insurance fraud, the ball will be in the government’s court. “I think the government is engaged on auto insurance fraud,” Palumbo notes. “But politics, as usual, is in play with a minority government.” 

Technology and communication tools

While regulation is not directly in the hands of insurers, other factors such as technology are starting to make an impact on fraud detection. In particular, data analytics and predictive modeling are allowing insurers to uncover complex or organized fraud activities using both structured and unstructured data.

Mercer says that advanced data analytics represents a significant enhancement to previous “red flag” fraud indicators, which tended to produce a “large percentage” of false positives. “Just recently, insurers have turned to predictive analytics data,” he observes. “Predictive modeling allows fraud likelihood now to be ranked and, in conjunction with the red flags, will make the best use of time and resources. This resource is directed toward organized fraud groups.”

“I think the insurance industry has the tools it needs to investigate, analyze and attack fraud,” adds Eso. “However, we need insurance companies to support o
ne version of a data solution. In this way, adjusters can access this data and tie in their own files to detect fraud patterns. I think data analytics is critical now and for the future – it’s all about the data. More insurance companies are making the investment in these types of data collection and analysis tools and that is encouraging.”

Palumbo notes that IBC did a pilot project using advanced data analytics with IBM on a sample of claims. “While this was only a relatively small number of claims, we wanted to see if it could identify suspicious patterns and potential fraud,” he says. “It worked.” Palumbo adds that the next step is to encourage more sharing of data across insurance companies to identify large fraud rings and multiple claimants/incidents.

According to the task force’s interim report, this is already beginning to take shape. “Tests this year using three different software programs have led insurers for the majority of Ontario drivers to agree to form a new company,” it stated. “This company would charge its owners for the cost of operation and employ state-of-the-art software to do a rapid analysis of new claims that would highlight the most suspicious among them. This would trigger further research by insurance adjusters and investigators, while allowing efficient processing of claims that are not suspicious. The most suspicious claims could be handed over to regulators or other investigative authorities.”

Mercer notes that technology will have to go hand in hand with human resources. “Analytics have been shown to provide considerable data that was not previously available,” he says. “The next big step is to use this information we have been presented with and this will require qualified personnel to make the project worthwhile.”

Eso says that adjusting firms are well positioned to integrate technology with expertise. “If you have access to the data and the right analytic tools, you have a much better chance of spotting some of these rings and breaking them up,” he observes. “At Crawford, we handle thousand of claims that involve a significant amount of data. We are looking to work closely with insurance companies to access their data and compare it to ours.”

Technology may also help in another anti-fraud initiative: increased consumer awareness. Palumbo explains that IBC is focusing resources on educating consumers about the impact of fraud on insurance rates and public safety. “Our message is that fraud is out there and it directly affects all of our premiums,” he says. “More than that, organized crime and staged accidents are a serious danger and a threat to innocent drivers.”

Through web sites, social media and road shows, Palumbo says that IBC will be raising awareness amongst consumers regarding what to look for in terms of fraudulent activity at a claim scene (such as the amount of damage in an accident and the number of passengers in other vehicles), treatment procedures at a health care clinic and how to report suspicious activity through its confidential 1-877 IBC TIPS line. “This is all information we have to get out to the public,” he notes.

The fraud task force observed there are “learning moments” for consumers when it comes to insurance fraud that may aid in detection.

“Insurers, regulators and law enforcement agencies could all benefit from consumers being better informed and more alert to the potential for fraud within the auto insurance system,” it noted. “To that end, our working group on consumer education and engagement has identified a number of timely occasions for providing consumers with key messages. We are proposing that an entire website be devoted to informing those injured in vehicle collisions about the benefits available for different types of injuries, how to claim benefits and how to detect and report suspicious or inappropriate behaviour at collision scenes, clinics and offices of legal representatives.”

Bringing in consumers to help in the fight against fraud is another example of how detection and prevention efforts have to include more than just the usual sources, according to Palumbo.

“In the end, it is not just up to insurers, adjusters or government agencies to address this threat,” he concludes. “All of us have a role to play in combating fraud.”