Insurance fraud is an $80-billion a year industry-and the bad news is: Organized criminals know it."The word has gotten out," says Dennis Jay, executive director of the Coalition Against Insurance Fraud (CAIF), Washington, D.C. "There are huge loopholes in state legislation that have made insurance fraud at least as lucrative as drug trafficking."

Furthermore, he says, "if you get caught perpetrating insurance fraud, you're not going to serve the time you'd serve if you're involved in drugs or other crimes-and, you're probably not going to get killed doing it."

But the good news for insurers is: Criminal convictions for insurance fraud rose by 31% from 2001 to 2002-a record 2,535 convictions, according to CAIF, which recently released its annual statistical study of state insurance fraud bureaus. In addition, fraud bureaus referred 14% more cases for prosecution (nearly 99,000), and fraud investigations spiked nearly 18% to a record 33,000 in 2002.

Whatever fraud bureaus and insurers' special investigation units are doing to increase fraud detection, prosecution and conviction, it seems to be working.

In December, Allstate, Encompass Insurance, and Nationwide filed the largest-ever civil insurance fraud case in the state of New York, seeking $100 million in damages (see "Allstate, Nationwide File $100 Million New York Fraud Case," January, page 6).

Seventy-four defendants were named in the civil suit, which the insurers filed a few months after the New York Police Depart-ment arrested 50 people in its first phase of "Operation Gateway," a criminal investigation into an organized ring allegedly taking advantage of New York's No-Fault law by staging auto accidents, bribing police personnel, falsifying medical reports, and submitting bogus bills for medical services and tests.

Technology's role

Recent state legislation passed in states such as New Jersey and Florida have closed some loopholes in No-Fault laws and increased penalties for committing insurance fraud, which has factored into the rising conviction rate, says CAIF's Jay. And, some states have accelerated their community outreach campaigns, he says.

Not surprisingly, however, insurance fraud-fighting technologies have played a significant role in detecting suspicious patterns and linking suspicious characteristics in insurance claims data, according to industry sources.

"Technology is becoming better and better," says Jerry Dolan, vice president of strategic and tactical information at the National Insurance Crime Bureau (NICB) in Palos Hills, Ill. Tools that enable insurers to detect fraud they may not have detected earlier in the claims process have improved significantly over the last few years, he says.

The National Insurance Crime Bureau provides Forewarn Alerts to its member companies-notification of potential fraud that NICB has identified in its investigations.

"We provide them in electronic format-so companies can take those identities and run them against their own internal database," he says. If there's a "hit," it doesn't necessarily mean the claim is fraudulent. "It simply says the insurer may want to take a closer look."

That's important, Dolan adds, because claims representatives are historically overworked. "They have huge claim loads, and it's easy to get into the mode where they're trying to settle claims and pay people who have legitimate needs. So, a lot of times, they don't recognize a pattern."

"When you talk about convictions rising, almost anyone would probably admit that most of those cases began with information out of an ISO ClaimSearch-whether it was an insurer checking on a claim or a law enforcement official conducting an investigation," says Vincent Cialdella, vice president of the American Insurance Services Group of Insurance Services Office Inc. (ISO), Jersey City, N.J.

ISO's ClaimSearch database is a repository of property/casualty claims gathered by submissions from about 4,500 insurers. At the end of December, the database consisted of 360 million claims-including casualty, auto, workers' compensation, general liability, homeowners, and commercial property, according to Cialdella.

Every day, ISO receives approximately 200,000 new claims and 55,000 inquiries from 15,000 and 17,000 people who use it daily.

In addition, NICB's Dolan cites new claims-scoring technology provided by ISO and Computer Sciences Corp. (CSC) as helpful in fraud investigations. ISO's ClaimDirector service and CSC's First software tool combine identity verification, business rules and predictive analysis to calculate individual scores for insurance claims, thereby enabling insurers to identify those that may be linked to fraud.

ISO's claim-scoring technology uses about 140 rules for the personal auto liability line alone, says Cialdella. And the rules are extensive, he says.

For example, they determine characteristics such as the distance between the doctors and the lawyers on a claim-and how far the claimant had to travel to go to the doctor.

"In Montana, it wouldn't be unusual to travel 50 miles to see the doctor," he says. "But in New York, that might be a little suspicious."

"We've found that identity search tools typically come into play very heavily in investigating fraud ring activities," says Thomas Barger, director of fraud solutions at El Segundo, Calif.-based CSC. In those cases, prosecutors and investigators are trying to find connections among different perpetrators who purposely use mail drops or post office boxes as mailing addresses, and who make subtle changes to their names to escape detection.

"In terms of visual presentation, they'll typically use tools such as link charting to draw spider diagrams that show where the connections are," says Barger. "We've found that's very widely used by investigators and prosecutors when they're trying to prosecute cases, particularly complex networks and rings."

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