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By Bill Lundy
Something is happening in the insurance fraud world. I hunch it is not necessarily by design that it is happening, but by the economics of the situation. No matter, it will eventually cause the world of insurance as we know it to make some radical changes in the way insurers handle fraud.
In 1998 and 1999 we were seeing articles in the news about State Farm and Allstate creating giant waves by going after organized rings. They went after the criminals through RICO statutes and other civil suits. They asked for hundreds of millions of dollars in damages. They may not ever see the dollars, but they will almost certainly send the perpetrators off to visit other companies rather than themselves.
Thus, the price of insurance will eventually decline at the companies that go after the fraud artists in court, and the cost of insurance will go up at the companies that don’t go after the crooks.
Looking at the price of insurance in the P/C market, it is determined mostly by the cost of catastrophes and the average cost of losses such as automobile accidents, fires, thefts and other covered perils. The really big players determine what they are going to charge for coverage and the rest of the players kind of settle into the same dollar range. Now, if the big guys drop their prices, the smaller companies will squeal and squeak but they will need to drop their own prices or they won’t be selling much insurance. People just kind of gravitate to the lower priced insurance, if things like service and availability are about equal. Look at what is happening on the Internet with insurers selling to consumers on the basis of dollar cost and not even paying attention to the agents. If service is there, then the cost of the product drives sales.
In 1997, Allstate, State Farm, Camden Fire and Accident, and Maryland insurance companies filed hundreds of civil suits alleging false auto claims. In late 1997, a federal court in Los Angeles awarded almost $11 million to Allstate and State Farm, companies that brought a suit against 16 people, including lawyers and chiropractors.
In 1998, Allstate stepped up its fraud fight by filing a suit for $107 million against 45 people, including attorneys, chiropractors and other health care providers. The suit followed an Allstate investigation of California staged auto accidents begun in October,1996, and to date it is the largest fraud lawsuit brought by an insurer.
Earlier in the year, Allstate initiated a $30 million lawsuit against 1,040 people in New Jersey This is a quote from Insurance Fraud http://www. iii.org/media/issues/insurancefraud.html)
If you look at the world of insurance, like someone a few months ago said, the price keeps going up and a major factor is the cost of fraud. As long as all the insurers are doing the same thing and paying for fraud as a general cost of doing business, then all the companies are on the same level playing field. No one company has an advantage over any one else.
Now if one or more big companies actually start to go after the fraud artists, then their prices will fall in proportion to the number of crooks that they can send away from their door. Those crooks will not easily give up the fight. They have found a good way of making money without a lot of hard work or much investment in buildings or equipment. They have a pretty good life. Ask yourself if they are about to give it up. Would you give up a job in which you are trained and with which you are making good money? The answer of course is no. So it is with the fraud artists. They will stay in it until the last dog is hung. (a euphemism to be sure)
So the fraud artists will stay the course but they will need to find another patsy. Who will that be? Why the easier insurance companies naturally. The ones who do not fight or who just put on a good show.
Take heed of and remember the words of David Ballog. . Youse thinks youse knows a lot about us, he said with a smirk, But lemme tell youse we know way more about youse that youse knows about us. What he told me is that the crooks DO THEIR HOMEWORK. They know an amazing amount of information about each company they hit. They know who the adjusters are, what their authority levels are and what their weaknesses are. Leslie Kim, Editor, JCFR in a personal conversation with me.
Those companies that don’t fight fraud will now get to deal with the fraud artists and their prices will go UP while the prices of the fraud fighters go DOWN. It would be bad enough if the prices at Allstate went down and other companies had to stay the same. Allstate would win over a lot of customers. Now imagine what happens if Allstate lowers their price and other insurers have to RAISE theirs. It is in effect a double whammie to the non-fraud fighters.
The bottom line is that the companies who do nothing about fraud will find themselves on the really bad end of the business in a few short years. The crooks will have identified them. They share information much more easily than the insurers do. They don’t worry much about the laws regarding sharing information any more than they pay attention to the laws against insurance fraud. The SIU’s in the country have known forever that there is a great underground information transfer system among the crooks. The ex-cops among them used to take advantage of the system and catch bad guys.
So who are the easy ones? For example, some of the easy ones are those companies that have SIU’s but don’t use them to catch the crooks. They are there to satisfy the laws that various states are passing to make sure the companies do something about fraud. Those laws mandate a certain number of fraud investigators in each company. The companies that create positions and fill them with people and then don’t use them to go after fraud are doing little more than putting frosting on a cake.
Other companies that are too small to do anything like hire their own SIU investigators will suffer as well. Without a genuine fraud program that includes training in fraud identification and fraud handling, those small companies will be the recipient of the fraud artists’ attention and they will definitely fall prey to it. The crooks are smarter than the insurers have ever given them credit for being. They are not the slope headed Neanderthals that the smart insurers credit them as being. Organized criminals own big buildings. They have the names of firms emblazoned atop the walls. They drive fancy cars and eat at establishments that the insurance company brass wishes they could afford. They are smart. They have degrees. They have insurance company money in their bank accounts!!
Those companies that depend on NICB to solve all their fraud problems are in for a sad awakening too. NICB has a new leader, and a sharp one at that. They have declared their intent to go after the rings. They have also said they are not going to act as the little companies’ SIU operations any longer. They are going to concentrate their efforts on rings, data mining, education of real fraud fighters. They only have so many people. They cannot do it all. The companies have to step up to the plate and take responsibility for fighting fraud on their own.
Those companies that do not take an active role in fighting insurance fraud will soon end up selling buildings instead of policies. It will be the economics of free market America that will be the driving force. The free market will not wait for the law to force insurers to get off the bubble. Goodness knows the insurers who only want to obey the letter of the law can do just that and not effectively fight fraud at all. Those companies that want to fight it need to make the investment.
Way to go Allstate, State Farm, Camden and Maryland. Fight On!!!
Bill Lundy is the former manager of a Special Investigations Unit for a major insurer, current president of Midstates Investigations and Technical Services, and can be reaced on the web at: midstatesinv.com.
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