Insurance Fraud The Lecture

1. Insurance Fraud The Lecture Richard A. Derrig, Ph.D. OPAL Consulting LLC Visiting Scholar, The Wharton School University of Pennsylvania richard@derrig.com University of Illinois December 2, 2005

3. Agenda • What Is Fraud? • How Much Fraud Is There? • Who Are The Fraud Fighters? • What do Companies do about Fraud? • What is the “Lawrence” story?

4. Fraud Definition PRINCIPLES • Clear and willful act • Proscribed by law • Obtaining money or value • Under false pretenses Abusive/Unethical: Fails one or more Principles

5. Fraud Types • Insurer Fraud • Fraudulent Company • Fraudulent Management • Agent Fraud • No Policy • False Premium • Company Fraud • Embezzlement • Inside/Outside Arrangements • Claim Fraud • Claimant/Insured • Providers/Rings

7. FRAUD AND ABUSE THE TOP TEN DEFENSES • 1. Adjusters • 2. Computer Technology • 3. Criminal Investigators • 4. Data and Information • 5. Experts • 6. Judges • 7. Lawyers • 8. Legislators • 9. Prosecutors • 10. Special Investigators

8. 10% Fraud

11. DATA

13. Data Mining • “Misplaced faith in black boxes: Data Mining is sometimes perceived as a black box, where you feed the data in and interesting results and patterns emerge. Such an approach is particularly misleading when no prior knowledge or experience is used to validate the results of the mining exercise” • Exploratory Data Mining and Data Cleaning, by Dasu and Johnson

14. Patterns, The New Data To Manage Red Loveseat by

15. Mae West by

16. DCD The Detail Claim Database Seminar on Insurance FraudBoxborough, MANovember 19, 2003

17. DCD Seminar on Insurance Fraud • Auto Injury Claims Closed Since 1/1/94 • Over 1,646,000 Claims • Data: Claimant, Insured, Injury, Medical & Legal Providers, Claim Payment, Bills, Claim Handling IME, Med Audit, Special Investigation • On-Line Access for Company Adjusters and SIU Personnel through Internet • Company Oversight: Claim Committee, Operations Subcommittee

18. Special Investigation (SI) Yes/No Special Investigations (SI) are performed on claims suspected of fraud. Special Investigations may be performed by SIU personnel or other personnel trained to handle suspicious claims using activity checks, surveillance, accident reconstruction, statements or examinations under oath. Special Investigations also includes third party expert analysis of documents associated with suspicious claims. Liability investigations are not considered to be special investigations.

19. SI Results Report a valid SI Result Code: Code SI Result • 1 – No Change Recommended • 6 – Claim Denied • 7 – Claim Compromised • 9 - Unknown or Pending

20. Source: AIB/DCD 1995/1997 Accident Year

21. Injury Type Changes

22. The Lawrence Fraud ProblemA Crisis Needing a Special Solution

23. Lawrence Auto Insurance Rates • Why are rates so high? • Causes • Solutions

24. WHY ARE RATES SO HIGH? • Statewide average rate $1,176 • Lawrence average rate $2,145 Commissioner’s rates, 2002 (BI, PIP, PD, U-1, U-2, COMP, COLL)

25. WHY ARE RATES SO HIGH? Claims Paid Per Car 2002 Statewide $714 Lawrence $2,061 2002 Reported Pure Premiums (BI, PIP, PD, COMP, COLL)

26. WHY ARE RATES SO HIGH? • Statewide # of claims as a percentage of policyholders 28% • Lawrence # of claims as a percentage of policyholders 66% 2002 Reported Claims (BI, PIP, PD, COMP, COLL)

27. WHY ARE RATES SO HIGH? • In 2002, Lawrence rates are 1.82 times the statewide average • accident rate is 1.5 X state avg. but... • PIP (no-fault) claims are 4.9 X state avg. • BI Liability claims are 4.9 X state avg. 2002 Reported Frequency Indices (PD, PIP, BI)

28. WHY ARE RATES SO HIGH? • In 2002, Lawrence rates are 1.82 times the statewide average • accident rate is 1.5 X state avg. but... • Collision claims are 1.9 X state avg. • Theft claims are 10.3 X state avg. 2002 Reported Frequency Indices (PD, COLL, COMP-theft)

29. WHY ARE RATES SO HIGH? • 1 out of 260 cars insured for theft in Mass. were stolen in 2002 • 1 out of 25 cars insured for theft in Lawrence were stolen in 2002 2002 Reported Frequency (COMP-theft)

30. WHY ARE RATES SO HIGH? • For every 100 accidents in the state 43 injuries are reported! • For every 100 accidents in Lawrence 141 injuries are reported! 2002 Number of Claims Per 100 Accidents (PIP)

31. Similar Population Size # Cars Insured 20,053 23,666 19,771 Insured population relatively similar in size for both towns 26,689

32. Claims Very Different Dollar Amount of BI Claims $3,800,000 $5,400,000 Claims have soared in Lawrence while only increasing slightly in Salem $7,300,000 $16,900,000

33. ROOT CAUSES OF HIGH RATES • Auto theft out of control • Disproportionate # of Injuries to Accidents • Network of high volume medical and legal professionals aggressively ready to assist in filing your insurance claim!

34. PIP Average Amount Billed

35. PIP Average Amount Billed

36. PIP Average Amount Billed

37. PIP Average Amount Billed

38. Spring promotion 2001 …each time you refer a patient injured in an auto accident…”WE WILL PRESENT YOU WITH A VOUCHER WORTH $200”... ...Free transportation ...Treated 10,000 people injured in auto accidents That's 5 new patients per day! But Lawrence only had 7 auto accidents per day!!!

39. The Anatomy of an Investigation

41. September 25, 2003 The Lawrence Task Force, working with several major insurance companies, launch an investigation into staged accidents in Lawrence. They hope the probe will lead to dozens of arrests and deal a body blow to a cottage industry of fraudulent personal injury claims that cost honest drivers hundreds of dollars a year in added insurance premiums.

42. Lawrence Insurance Fraud Task Force • Lawrence Police Department • Attorney General • Essex County District Attorney • Insurance Fraud Bureau • Insurance Industry

43. Partnerships • Continuous involvement with a designated prosecutor • Partnership with the local newspaper to “keep the story in the news”

44. February 26, 2004 • 6 people charged with staging an accident. • 5 people apprehended. • 5 people confess to the staged accident in another city (Methuen). • Cooperative effort with another police agency. • Leads investigators to Chiropractor Sean Nisivoccia.

45. March 2, 2004 Chiropractor Sean Nisivoccia from Health Group of New England arrested at his place of employment for taking part in staging accidents.

46. March 15, 2004 First conviction sends a clear message. Doel Miranda, one of 52 people charged in a sweeping investigation that began in September 2003, pleaded guilty to three charges stemming from a fake hit & run accident in January 2003. Sentence: One year in jail and probation for a year and a half.

47. September 22, 2004 Grand Jury Indictments • 4 Chiropractors • 3 Lawyers • Others working in their offices • 1 insurance agency manager • Runners • 16 in all!

49. To Date in Lawrence Task Force Totals: 130 people charged in connection with 42 cases of insurance fraud. Charges include: • Manslaughter • Motor Vehicle Insurance Fraud • Conspiracy to Commit Insurance Fraud • Perjury • Larceny • False Report to Police

50. To Date in Lawrence Task Force Totals: • Seven individuals pleaded or found guilty. • 18 individuals continued without a finding.