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By Leslie Kim
Harold Anderson has been a JCIFR subscriber since our very first issue hit the streets. President and CEO of KI Tobey, Inc. headquartered in Seattle, Anderson operates insurance programs in six states and books the largest share of premium in long haul trucking policies. Anderson is also the owner of National Insurance Company, a large writer of personal lines auto insurance in the northwestern US – and soon expending into the Golden State. The business comes in through a wide-reaching network of independent agents.
Recently, in an effort to gain the best possible handle on Cascade’s exposure to fraud, Anderson brought 700 agents into two locations and practiced, for an entire day, JCIFR’s two very favorite words: Communication and Education. I was privileged to participate in these events. “If just one of these agents gains enough fraud recognition skills to alert us to a potentially fraudulent claim, we’ve paid for this meeting ten times over,” Anderson told me during one of the breaks. A refreshing observation from a wise, wise man.
What Anderson was accomplishing by spending the time and money to mass-educate 700 agents was equivalent to putting 700 front-line examiners out into the field. And the agents in attendance were glad to be a part of the event.
Fraud, unchecked, takes a heavy toll on agents. A bogus jewelry claim paid by a too-busy adjuster can severely affect an agent’s loss ratio. This, in turn, affects the occasional perks he might receive and his standing with company underwriters, etc. It even affects his ability to sign up with additional markets. “Hello, I’m Joe Agent. I have a 250 percent loss ratio with ABC Insurance Company, and now I’d like to do business with you.” Get the picture?
Cascade’s seminar was not a one way street either. As an instructor, I had the opportunity to meet and talk to a large number of agents. Many asked questions. A few were exceptionally tough to answer. A few more proved nearly impossible.
Question #1: “I’ve been an agent for 27 years. This is the first time I’ve ever been offered this kind of valuable information in this kind of a setting. Why is that?”
Answer #1: “Sad but true. Not enough company management executives see the forest through the trees on this issue. Education, while initially a cost factor, is the very best tool we possess in the fight against fraud. It is a wise company indeed that harnesses the collective agency force and teaches them the recognition skills necessary to become an integral part of the fraud-fighting equation. After all, these men and woman are on the front lines, and they often have access to information which could make a real difference in the processing of questionable claims files.
Question #2: “I’ve called my adjuster and TOLD him the claim is absolutely bogus. I’ve even sent in proof. A month later I learn that he’s paid it anyway. What can I do?”
Answer #2: There are multiple sides to this coin. First, we live in the most litigation conscious society in the world. A properly trained claims person is adept at recognizing certain no-win situations and is sometimes forced to act accordingly. Professional claimants, for instance, are well-studied and know our weaknesses. In fact, they often exploit those weaknesses. They play the system like a fine-tuned instrument. In such cases, the agent might not always understand the motivation behind the claims adjuster’s decision to pay … but pay he must. Such a case is excusable.
What is not excusable, however, is the company system that penalizes a claims representative for spending the extra time on a file that suspected fraud demands. An adjuster once told me, “I knew it was fraud when I paid it, but it was the last day of the month and if I didn’t close four more lines of coverage before 5:00 PM, I wasn’t going to qualify for my raise. So I paid those four claimants $9,000 each and got my pay increase.” Hey, Mr. Beancounter. Did you hear that? It cost you $36,000 so that your employee could qualify for an annual pay raise of $2,000. What a deal! Great system you’ve defined.
This is also where the need for strong underwriting comes in. I have seen what amounts to loose underwriting standards touted as advertising to gain market share. The crooks talk to each other. They know who the easy marks are. When you get in the habit of giving money to everyone that comes to your door, you soon find that you have a lot of people coming to your door. How many $300 few-questions asked policies on antique/collectible cars does it take to offset one bogus $35,000 loss? A company with loose underwriting had better have a strong SIU.
Next we have the unfortunate reality that too many companies subscribe to the right pocket/left pocket theory of claims payments. Indemnity payments (payments made to insureds/claimants for their losses) come from the right pocket. Loss Adjustment Expense (LAE – the cost of adjusters, SIU’s, experts, and attorneys) comes from the left pocket. Too often, Corporate Management would rather see an overall indemnity to LAE ratio of $11 million in indemnity payments to $1 million loss adjustment expense (LAE) (total outlay $12 million) than $8 million indemnity payments to $2 million LAE (total outlay $10 million). That’s because top management assumes that indemnity costs cannot be controlled, that there is a magical indemnity/LAE ratio and that the only way to favorably influence the bottom line is to cut LAE. Claims Vice Presidents are ruthlessly driven to cut LAE, and besides, indemnity dollars come out of a different pot of money. It takes a tough corporate leader to realize that a company’s reputation for resistance to fraud is built over time. It is difficult to quantify and even harder to sell top corporate leadership on the savings that are realized from the claims that are never presented because the company has earned a reputation for not being easy on fraud.
Question #3: “I suspect that my adjuster is in cahoots with a local contractor. Claims that start out as $20,000 mysteriously become $50,000 … and it’s happened three times. Same adjuster, same contractor. What can I do?”
Answer #3: Does dishonesty exist within the claims industry? Even within the SIU industry? Unfortunately, greed is a disease which knows no boundaries and provides no blanket immunity for any portion of our profession. While there’s no excuse for dishonesty of this type, some carriers contribute to the “culture dish of fraud” by inadequate compensation (in line with exhibited skill levels) of claims-related employees. Might this adjuster be playing footsie with the contractor? Sure. And the mere hint of suspicion demands that the matter be promptly presented to the appropriate security department.
Question #4: “The company paid a bogus liability claim just to get rid of it. Now my insured is being forced to pay an accident surcharge. What can we do?”
Answer #4: This one hurts. If Joe Insured rear-ends a 1973 Ford Pinto that slams on the brakes in a brazen and purposeful (notwithstanding dangerous!) attempt to cause an accident, and ABC Insurance Company chooses to pay nuisance dollars to the four under-paid sitting ducks just ahead of the potentially exploding gas tank, why should Joe’s premium be increased via an accident surcharge? Bottom line is that it shouldn’t. Surcharges are penalties for unfortunate victims of organized crime. If the agent yells and screams loud enough, he will either succeed in getting the company to reverse the surcharge – or in getting the company to rescind his agency contract. Based upon the suspected outcome, a few well-placed phone calls and/or letters from the insured (perhaps to the appropriate governing authority) would be in order. (It pained me to suggest such a thing, even in such a round-about way, but facts are facts and fair is fair.)
Question #5: “Last year the company said it would be more trouble to deny a suspected $2,000 fraudulent jewelry claim than to just go ahead and pay it – so they did. Now, ten months later, the same insured has just filed a $3,000 jewelry claim, and this one smells even fishier than the last one. What’s an agent to do?”
Answer #5: “Some companies have still not gotten the message that crooks have a better communication network than does the investigative community. Paying that initial knowingly fraudulent $2,000 jewelry claim was akin to hanging a sign upon the front door that said “We pay all claims … even fraudulent ones!” and trusting upon the honest nature of mankind to not plunge their hands into the insurance money-pot. Is it any wonder that a subsequent claim was filed? Of course not. And when might we rightfully expect Mr. Beancounter to figure out that his company’s pot of gold is now effectively open to all-comers? Make your displeasure known, Mr. Agent, and keep this jewelry claim in mind the next time you decide which company to give your future business to. Voting with premium dollars makes sense.”
Tough questions. Tough answers.
Fraud is not decreasing. Where there is money, there will always be fraud. It may be changing its face and occasionally its direction, but it is not decreasing. In good times, fraud is driven by greed. In tough times, fraud is driven by desperation.
First and foremost, once and for all, it’s time to define fraud. If the industry adopts a uniform definition, we will no longer turn on the television or open the pages of a national magazine to hear/read one executive say, “Fraud costs this nation $200 billion per year,” another hot-shot comment, “Fraud is a $500 million annual problem in this country,” and still another insist the collective cost is $350 billion per annum. Should Kentucky fraud be defined differently than California fraud? Is stealing money from Medicare different than stealing money from a corporation? There is a simple and crystal clear definition of fraud. It is “Gain Through Misrepresentation.”
Fraud Awareness Education is an effective weapon. It may, in fact, be the strongest weapon we possess. Teaching should not stop at the door of the SIU. It must be extended into the claims units, the underwriting units, the loss control units, and more. When it comes to fighting fraud, a fraud-educated vendor is more of an ally than an uneducated vendor. A fraud-educated police officer is more of an ally that an uneducated police officer. A fraud-educated policyholder is more of an ally than an uneducated policyholder. Most importantly, however, we need fraud-educated corporate leaders.
Legislation is an effective weapon. When a crook steals $147 million from senior citizens in a health care Ponzi scheme, and he is sentenced to 33 months in “Club Fed” (“Time for your tennis lesson, inmate Jones … and don’t forget the jacuzzi party at 9 PM.”), something is broken and needs to be fixed. But redefining legislation takes perseverance, energy and money. If it’s a choice between spending some of the company pot of gold to change and improve an inadequate system – or allowing organized fraudsters to simply continue stealing the gold, let’s vote for the former.
And since we’ve hit upon education, we’d best also mention communication. Look, read, talk, publish, attend, shake hands, exchange cards. Never miss an opportunity.
To those companies that abhor nuisance claims, educate their staffs (and more), communicate freely (within the limits of good faith dealings), and have a commitment to absolute fraud-fighting, I salute you. To those companies which may have a short suit in one or more of these areas, I challenge you.
© Copyright 1999 Alikim Media