JAI HIND COLLEGE

BASANTSINGH INSTITUTE OF SCIENCE &

J.T.LALVANI COLLEGE OF COMMERCE

23-24, Backbay Reclamation, ARoad,

Churchgate, Mumbai 400 020

B.Com In (banking & Insurance)

Frauds In Insurance

Name of the Student: Kejriwal Surbhi

Seat No: ____________
Date: ____________

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

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

Principal
Coordinator
college

Signature of the
of the

NTENTS
CO

TOPICS COVERED PAGE

NUMBER
Acknowledgement

Introduction To Frauds

Insurance Fraud And Abuse

Schemes, Scams, Scammed

16

Real Eyes...Realize...Real Lies

18

Itching To Know Who Can Help?

24

Division Of Insurance Fraud

25

Deceptive Life Insurance Sales Practices Continue

26

Viatical Settlements Investment Fraud

29

Case Study

32

Be Aware, Dont Be A Victim

40

International Association Of Insurance Fraud Agencies(Iaifa)

45

Dealing With Fraud On The Net

48

Precaution Is Better Than Cure

52

Summary

56

Bibliography

58

ACKNOWLEDGEME
NTS
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.

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
received
Fraud
vary
from
is not
payments
state
easily
broker
to state,
proven
for
knew
but
worthless
inin
that
a general
court
nobonds,
ofseveral
such
law.then
Laws
repositories
different
victims
concerning
may
existed
sue
fraud.
fraud
conditions
be
met.
him
mayand
formust
still

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 welldressed 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
topotential
stymie
successful
obligation
Failure
seriously
the
alleged
toweaken
totake
victim
investigate.
appropriate
ahad
fraud
every
It
case
falls
opportunity
measures
inon
court
later.
attothe
discover
The
investors
time
accused
the
ofor the
can
prosecution
the
customers
investigate
proposal
claim
potential
and
failed
thatfor
can
toaisfraud
investigate
proposal
fully
before
the matter
any money
thoroughly.
exchanges hands.

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.

Insurance Fraud and Abuse:

A Very Serious Problem
Fraud and abuse are widespread and very costly to any
countrys healthcare 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.

represent
Many
Some
physicians
insurance
Misrepresentation
condition
to the insurance
policies
or
charge
diagnosis;
insured
cover
of
companies
what
the
a patients
percentage
was
charges
that
provided;
more
the
involved;
ofhigher
than
the
when
physician's
uninsured
and/or
feeit is
was
the
the
provided;
identity

"usual"
ones
usual
one.
the
of
Providing
fee.provider
unnecessary
recipient. services or ordering unnecessary tests. 9
but

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

patients from
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
office
the
for
expensive
guidelines
patient
a visits
moreequipment
was
describe
(for
complex
seen
example,
only
than
what
procedure
briefly),
charging
was
thedelivered.
various
but
than
foritaalso
was
comprehensive
Medicare
levels
can
performed
involve
of
service
visit
or for
complex
when
charging
more
documentation
involve.
should
10

Miscoding: Using a code number that does not apply

to the
procedure.
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 testsboth standard and nonstandard
much
practices
more
Computerized
measures
precise
among
range-of-motion
jointamong
other
inclinometers
flexibility.
health-care
chiropractors
measurements
Inclinometer
providers.
and are
joint
The
needed
testing for
may
a be
appears
tothan
becommon
chiropractic/medical
commonly
tests
: Inclinometers
useful
disability
abused
if
is a procedure that
include:

11

evaluation, but routine or repeated measurements "to

gauge a
patient's progress" are not appropriate.

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.
Many
health-care
or
are
compensation
minor
paidinstances
to
injuries.
providers
recruit
claimants.
have
The
legitimate
combine
typical
been
Victims
scam
discovered
or
to fake
bill
are
includes
insurance
commonly
autoin accident
"cappers"
which
companies
toldcorrupt
victims
they
or for
Personal
attorneys
nonexistent
"runners"
or
need
worker's
multiple
Injury
who
and Mills

12

visits. The providers fabricate diagnoses and reports

and commonly
provide expensive but unnecessary services.
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

In viatical
their
for
a life
percentage
Nonstandard
insurance
settlement
the
allergy
transactions,
policy's
to
tests
viatical
facepeople
value.
settlement
with
The company,
terminal
companies
in in
billed
as of policies
"chemotherapy."
Viatical
illnesses
exchange
turn,
may
Fraud
assign
sell
be represented as standard ones.
may

13

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.
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
The
those
Insurance
insurance
investigators
of incompanies
Institute
Commissioners
legitimate
found
of so
America
companies.
that
to anyone
many
create
is again
of
In
an
can
the
online
response
urging
easily
entitles
database
the
check
bore
to
National
the
the
names
of
million
unpaid
claims.
similar tothe
report,
Association
licensed
legitimacy
health
ofofHealth

14

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.
The insurance has few or no underwriting guidelinesthe
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 companyand
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.

15

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
affected
communities,
the hurricanes.
some
Dozens
of which
of fires
mayhave
be the
broken
resultout
of in
many
arson.
16

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 Councils 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.

17

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
paying
for
fraud
through
their
insurance
premiums;
used were
sometimes
chiropractors
their
ringleaders
by
reputation
organized
who
found
andhad
other
as
fraud
themselves
recruited
a medical
groups
group
their
to
professionals
was
onfile
members
being
the
false
wrong
claims,
tarnished
towho
make
side
were
oftenby
of
the the
the
people
poor,
law;
concerned
organized
fraudulent
for
treatment.
who
and claims
that
fraud

18

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 fraudfighting 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
cutting
tools,
for
moreapply
also
monies
Fraud
Doctors,
likely
and
owed
hospitals,
abuse
for
toon
coverage
get
take
previous
injured
nursing
place
under
on
policies
homes,
atthe
many
different
job
or
diagnostic
points
than
touse
names
avoid
office
in
the
facilities
detection
toworkers.
foil
health
attempts
and
of
care
Some
their
example,
are would put them in a higher rating category.
employers
to
poor
record,
system.
attorneys
recover
claim
which
have

19

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 Frauda public
, advocacy and
educational organization founded in 1993, includes consumers
The
Care
Program
programs.
professionals,
Omnibus
Anti-Fraud,
further
Consolidated
investigators,
program
Waste,
reduce
enrolled
and
fraud
Appropriation
teachers,
Abuse
and
thousands
Community
abuse
and other
Act
inofthe
retired
ofcommunity
Volunteer
Medicare
1997
and
as well
astoThe
government
agencies
and
insurers.
authorized to
Demonstration
Medicaid
accountants,
volunteers
a Health
health

20

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 oxygenwhich 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

legislators,
Insurance
identify
and
court.
depends
industry
to justify
The
suspicious
itself
on
companies
regulators,
success
their
two
to actions
elements:
detecting
claims,
are
of
lawnot
the
by
enforcement
withhold
law
collecting
fraud
the
battle
enforcement
resources
and
payment
against
agencies
thethe
necessary
devoted
agencies.
level
where
insurance
andof
society
evidence
fraud
by
They
the
as
is
can
suspected
fraud
insurance
apriority
to
whole
use
eradicating
only
in
therefore
assigned
a
it. by

21

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
ratio
exposure
ratios
year
fraud
units,
though
are
proving
and
investigation
ranging
advances
the
line
reduction
millions
effective
of
from
insurance.
inby
aofin
software
low
to
outsourcing
claims
fighting
the
ofAlthough
3expense
that
totechnology,
fraud.
1large
investigations
tosome
a of
These
high
health
running
insurers
ofespecially
data
insurers
27
and
toSIUs,
are
mining
1,the
cutting
process
the
of
claims
study
depending
back
dissolving
annually,
programs
onfound
can
their
on
thatthefraud
sift

22

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 worlds 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
aInfluenced
required
some
been
preponderance
filing
of the
in and
criminal
largest
Corrupt
winning
of insurers
evidence
actions
Organizations
lawsuits
inand
rather
theallows
against
country,
than
Act
for
the
individuals
(RICO),
especially
triple
stricterdamages.
which
rules
and
auto of
requires
evidence
Since
insurers,
organized
that
perpetrate
1997,
proving
have
ringsinsurance fraud.

23

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 anotheragainst 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
forInsurance
most
over
Association
olders
the sale
because
of
of they're
annuities
Commissioners
based
to onolder
life expectancy.Growing
(NAIC)
people toprompted
adopt
concern
the
regulations
assure
National
that the
thatannuities are suitable to the buyer's needs.

24

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.

25

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
Now
Reform,
reforms
a are
astudy
arespected
shell
a sham.
bygame
Professor
I'd
newsletter
designed
have to say
Joseph
on
tothe
prevent
as usual
life
Belth,
insurance
real
the life
reform
publisher
insurance
industry,
by of
legislation
regulation.
the
finds
wants
industry
Insurance
the
to improve
and its public relations, not its policy relations.

26

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.
The bottom
What's
1990s,
insurance
more,
therip-offs
industry
line
after
isby
that
the
ismajor
the
determined
great
life
andlife
insurance
minor
insurance
to perpetuate
companies
industry
scandals
ahas
alike
system
practices
of
will
thein
1980s
which
continue
standard
that
precisely
areand
life
operating
to
thebeopposite
procedures.
of its proclaimed ethical principles.

27

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.

28

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
being terminally
insurance
exams
andcompanies
blood tests
ill. avoid
by
They
relying
the
can
added
on
getancosts
away
honor
andsystem
with
invasiveness
itbelow
initially
aof
status as
becausefacemost
medical
policy
certain
value.

29

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
To
con
someone
"collateral
from
hide
artists
a third
the
atwill
assignment"
fact
the
party
obscure
settlement
that
and
thesecures
viatication
which
policy
provider
the
ishas
similar
loan
by
been
firm.
simply
byto
viaticated
Apledging
where
second
changing
the
shortly
way
the
insured
the
death
is to
after
been
"clean
sheeted".
issuance,
beneficiary
employ
seeks
benefits
a loan
aof to

30

the policy. In fraudulent transactions they pledge the death

benefits but do
not receive a loan.
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.

31

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 advantaged
"Tax
liquidity at
& hassle
maturity
free! from
100% rock
fixed rate
solidof 'A'
return
ratedsecured."
companies!"
which
fully
isinsurance

32

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

load & no
fees!"
"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
share
the
In
but
any
ownership
only
itevent,
withthe
creditors
youamount
interests
will and
notanother
likely
family
is not
receive
members,
investor
a guaranteed
a promised
and
would
thatoption,
70%
the
be option
of the
but
may find you
to resell
rather
"assurance"
face
willing
commissions,
value
anto that
pay,
which
they
less
could
will "make
be much
an effort"
less. to facilitate a resale.

33

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
policyholder
uncertainty
treatments
have
in predicting
exists
compounded
isand
highly
when
is the
terminally
they
speculative
risk
will
fordie.
investors
ill,and
New
there
AIDS
risky.
because
is drugs
aEven
whencancer
high
and
they
policyholders
help
degree
the
live
of longer.

34

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
disclose
life
insurance
A
a pre-existing
person
application
who medical
haswhich
a lifecondition
would
threatening
affect
in response
orissuance
terminal
toofaillness
the who
failing to
questiontheir
Viator:
policy.
assigns
sells
on alife
or insurance policy.

35

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
licensed
settlement
settlement
interest
provider
from
awho
solicitssettlement
investors
Viatical viatical
Investment
Broker:
Defines
aviatical
person
or entity toother than a
purchase a
provider.
36

We Chose to Keep Your Money

Personal Choice Opportunitiesmislead 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
investor
require
the
industry
the
confidence
total
to wake
commitment
in
up its
to the
product.
of
existence
the insurance
If this
and fraud
scope
industry.
of
is the
toThe
be
destroying
stopped,
first
problem.
step is
it for
will

37

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
or
State
settlements.
various
eliminate
regulation
Securities
ones
premiums,
Certain
are the
of
Acts
aspects
changed
insurance
and
so athere
need
of
needs
these
generally
can
forofadditional
be
transactions
dependents,
financial
doescash
not
amay
risks
desire
to extend
meet
fallto
reduce
expenses.
to
under
involved
entering
lifetheinto
when
such arrangements.

38

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.
issuedsolicited
VESPERS,
have
by them
though
independent
with
not licensed
promises
insurance
toof
selllow
agents
thisrisk
type
toand
of
sellsecurity
high
interests
in in
the state,on
viaticals
returns
percent
of two
28-70
to five year investments for a 10% commission.

39

Be Aware, Dont 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
14
fraud is widespread and expensive.
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 Boards
Fraud and Abuse Unit to investigate. There are, however, other
forms of
workers compensation fraud are employers who misrepresent
payroll or
the
type
ofwere
business
in
order
to workers,
reduce
insurance
or late
compensation
In
crime
identified
prosecuted
bogus
is 1999
heavily
for
entities
the
coverage
securities
not
involved
Governmental
health
that
orfraud,
in
care
purport
alternatives
health
forgery
Accounting
insurance
to their
and
provide
per
to auto
coverage
say,
fraud
Office
but
theft.
real
and
individuals
found
toWith
orthat that
the
premiums
and real
bogus workers
employers.
organized
criminals
already
enactment

40

of HIPAA (Health Insurance Portability and Accountability

Act of 1996)
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 Bureaus 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
Boards
Fraud
and
UnitDHS
such on
investigates
takes
received
investigative
as Medicare
the
fakes
possible
and
Office
or
logistical
and
exaggerated
arson,
of Medicaid
the and
support
Inspector
injuries,
infraud.
the
a Medicare
Department
General
Recently,
theAbuse
and
Fire
Integrity
one
Medicaid
of
tackles
issues
Marshals
Human
employee
Award
fraud
in
Bangor
case
for
Services
Federal
Office
her Court.

41

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
byindustry
the
industry
review
enhance
establish
Additionally,
insurance
the
in
fraud
guidelines
investigation
determining
inreporting
compliance
2005 on
thesystem
and
the
when
NAIC
with
prosecution
investigation
located
antifraud
suspicious
created
onof
initiatives;
athe
financial
Fraud
and
claims
Webprosecution
site
develop
services
Web
should
of the
be insider
methods
fraud;
of
insurance
line,
National
reported;
and
antoindustry
online fraud. 16

42

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
that is
acts
The
Association
commented
work
refused
American
and
has
focused
tothe
been
prosecute
crimes
as
and
Insurance
on
expended
interested
investigation
several
oforinsurance
believe
Association
topersons
develop
of that
and
the
deception
all
itprosecution
aindividual
and
iscase
noted
not
the
and
a Property
serious
the
deceptive
local
of
fraud
frustration
fraudulent
crime
Casualty
entity
exists
insurance
Insurers
investigators
when
prosecutors
meriting
hard
their
acts.
have
who

43

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
and
Support
institutions;
and improve state regulation of insurance.

44

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.
IAIFA
whose
also
enhances
meets
presentations
personal
annually.
update
contacts
The the
annual
andmembers
exchange
conference
onofcritical
information
hosts
WHEN do
eminent
developments.
members
between
speakers
throughout
theyItmeet?
the year.

45

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?
considered
It
government
agencies,
You
for
could
amay
mailing
obtain
respected
be
by
insurance
IAIFA's
you
ofthethe
insurance
application
and
departments
application.
executive
yourcompanies,
by
organization.
committee.
logging
and
Upon
fraud
and
receipt,
onIfbureaus,
related
the
you
IAIFA's
site
your
arefirms
or
law
by
members
enforcement
with
interest
contacting
application
accepted,
a strong
in you
combating
us
include
will
andbe insurance frauds.

46

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.

47

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 wouldnt be required.

Unfortunately
this isnt a perfect world, and even if there are many who will
throw up a
firewall and other such security measures as solutions, this
doesnt stop
the problem. No firewall is impenetrable and theres no such
thing as a
perfect security measure. Theres 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
a(the
The
allow
applications
network
best
ultimate
theway
criminal
with
goal
to
could
track
of
the
perpetrator
network
be
down
help
in aareas
forensics
of
hacker
to be
ansuccessfully
such
is
intrusion
is
to to
keep
asprovide
hacking,
vast
detection
prosecuted.
records
sufficient
fraud,
of
detection;
logging
activity
system);
intrusion
evidence
The
insurance
practical
onto
detection
correlatingand logging.

48

companies, data theftindustrial 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 isnt very useful
or complete
to someone trying to get a big picture view of an employees
suspected
network abuse, or a deep-level view of an intrusion attempt.

And yet the internet is critical, and we havent a choice but to

connect
internalnetwork
suppliers,
brings
These
property,
brands,
navigate
innetworks
around
and
threats
cause
partners,
frighten
predators
them,
service
of
toand
malicious
they
the
customers.
regularly
their
breaks
will
restown
not
hackers,
ofand
steal
be
Unless
employees.
the
able
corporate
system
world
criminals,
tocompanies
unlock
failures,
Even

assets
to
and
the
ifand
link
full
can
that
with customers,
connection
industrial
intellectual
sully
successfully
potential
business
corporate
ofspies.
the internet.

49

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, theyre 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 cant
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
The
preservation,
methodology
fleeting
what is
can
nature
happened
required
be ofbroken
during
any
especially
kind
down
and
offor
into
before
electronic
legal
two key
last
data is
nightsthat
break-in?
such
proceedings
elements:
evidence
attempted
and
acquiring
itsanalyzing
the evidence.

50

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 its 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,
attempt
to
not only
to disrupt
prevent
check our
malicious
compliance
IT infrastructure.
activity,
against
but
The
policies,
also
future
investigate
ofand and
punish
information
lies
the
prosecute
perpetrators
in anthose
organisation
security
that
whether
ability
internal or external.

51

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 frominsurer 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
insurers
Department's
which
allows
that
Web
consumers
offersitethese
is to
also
find
coverage.
theinformation
home
of
Inan
addition,
about
Interactive
HMOs
the
Guide
premiums
for
Insurance
to
operating
their
HMOs,
homewithin
county.

52

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
agencynot 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
after
your
receive
explanation
immediately.
it, for
question
You
themay
delay,
not
your
contact
have
agent
theperiod
the
insurance
orNew
broker.
York
coverage
Insurance
If purchase.
there
you isIf
you
do
no satisfactory
Department
paid
for.not

53

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 ( overstated
i.e.,
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 Youre 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 drivers 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:
parties
front
"victims"
ofand
you,
will
direct
setting
then them,
fileyou
costly
for
up multiple
aas
"referral
the cause
medical
fee,"people
oftoand
alawyers,
rear-end
damage
The staged
accident
A vehicle
filled
with
will
stop suddenly in
collision.
claims
Steerers
doctors
using
and
and/or
The
These
lawyers
individuals
who are part
willof
solicit
the scam.
the injured or allegedly injured
54

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

lookout for
steerers at accident scenes and dont become their victim.
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! ITS 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 preexisting 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.

Dont allow high-pressure salesmanship to persuade you to sign

up for a
type
of
policy
or
certain
coverage
that
you
are
sure
youof
Readhelp
your
and
agent
your
is policy
or
thebroker,
Insurance
carefully
or your
Departments
before
insurer.
youAn
sign.
Consumer
additional
If not
youServices
source
have
need.
time toTake
questions,
information
Bureau.
decide
ask whats right for you.

55

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
act
acute
knowing
to
There
detect
of some
have
knowledge
is ones
fraud
Division
been
one basic
who
and
many
about
is
of
penalize
rights
institutions
carrying
Insurance
their
onthe
on
behalf
business.
and
one
criminal
Fraud,
agencies
conscientious
of bustle
Lack
International
theformed
prey
on
of the
for
could
allvigor
such
over
be the
of his
knowledge
land
scrambled
the
mishaps.
Association
world
themscam
and
in
Of bisque.
not

56

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.

57

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

58