The tennessee Department Of Commerce And Insurance wishes to provide a “Welcome To Tennessee” to the Casualty Actuarial Society

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  • THE Tennessee Department Of Commerce And Insurance wishes to provide a “Welcome To Tennessee” to the Casualty Actuarial Society.

  • We trust you will have a pleasant stay and hope you will enjoy the program prepared for you today.





  • Insurance fraud is any deliberate deception perpetrated against, or by, an insurance company or agent for the purpose of unwarranted financial gain.

  • Insurance fraud occurs during the process of buying, using, selling and underwriting insurance.


  • Insurance fraud has been defined as being the second largest economic crime in America.

  • It is reported as being second only to income tax evasion.


  • Whether committed by sophisticated criminals, otherwise honest consumers or by insurance company employees or owners-is an increasingly expensive burden on the U. S. economy.

  • Money is taken out of the pockets of all citizens.


  • This illegal activity diverts vital resources away from businesses, law enforcement, the civil justice system, regulatory agencies and local emergency services.


  • Are there any easy solutions to this problem?

  • No, there are not.

  • We, consumers, legislators, regulators, and insurers, must work together to create an environment that either prevents or detects insurance fraud easily when it happens.

What Are The Types Of Insurance Fraud?


  • Usually a deliberate attempt either to stage or invent an accident, injury, theft, arson, or other type of loss, that would be covered under an insurance policy.


  • The following slides will provide more information on these two types of insurance fraud.

Hard Fraud

Hard Fraud

  • This is also committed by executives and employees within the insurance industry.

  • Examples:

  • An employee of an insurance company accepting bribes or kickbacks.

  • An insurance agent who accepts premium payments, and fails to remit the funds to the insurance company.

Hard Fraud

  • Also included are phony insurance companies set up by con men.

  • Premiums are collected from unsus-pecting consumers and claims are rarely or never paid.

  • When too many claims are filed the con artist disappears with the company assets.

Soft Fraud

  • One example is the inflation of an auto claim to cover the deductible or the rise in insurance premiums.

  • This also occurs during the underwriting process when an applicant provides false information to lower insurance premiums or increase the likelihood of acceptance for insurance.

Soft Fraud-Examples

  • 1. Underreporting the number of miles driven either to and from work or on an annual basis.

  • 2. Giving a false location where the car is garaged.

  • 3. Failing to report an accurate medical history when applying for health insurance.

Soft Fraud-Continued

  • 4. Exaggeration of the amount and value of items stolen from a home or business.

  • 5. Failing to report the correct number of employees for workers’ compensation insurance coverage.

  • 6. Providing a false report of income or inventory to lower the insurance premium for a business.

What is the scope of insurance fraud?

  • The true extent of insurance fraud is difficult to determine as so much of it is undetected.

  • Comprehensive research to make an accurate estimate of the extent of fraud has not been done.

  • Studies focusing on specific aspects of insurance fraud suggest the cost is enormous.

Coalition Against Insurance Fraud

  • This organization estimates the annual cost to be more than $85 billion per year---

  • ----and growing.

  • These estimates are the basis for the statement that “Insurance Fraud is the second largest economic crime in America-exceeded only by tax evasion.”


  • Individual studies have provided evidence as shown in the following slides:

A Study In Massachusetts Showed

  • Some aspect of fraud or abuse was found in 48 percent of injury claims resulting from auto accidents.

An Audit In Florida

  • Of workers’ compensation insurance policies, indicated 46 percent of employers underreported the level of their payroll or misclassified employee occupations.

Company Insolvencies

  • At least 30 percent of 302 property/casualty insurance company insolvencies between 1969-90 were due to fraudulent activities.

A 1995 Rand Study

  • A Rand Institute study for Civil Justice concluded more than 35 percent of people hurt in auto accidents exaggerate their injuries, adding $13-$18 billion to the nation’s annual insurance bill.

1996 Tennessee Claims Fraud (est)

1996 United States Claims Fraud (est)

Why has insurance fraud increased?

  • Public attitudes-many think it is a victimless crime.

  • Insurer claims practices-many suspicious claims are paid rather than fighting them.

  • High-risk insurance-many companies are unwilling to provide this and the market is open to “bogus” insurers.

Increased Fraud-Continued

  • Medical economics-large numbers of uninsured and/or underinsured patients.

  • Insufficient penalties- insurance fraud is perceived as high reward/low risk crime

  • Low law enforcement priority-top priority is given to reducing drugs and violence thus shifting manpower away from white collar crimes.

What is Being Done About Insurance Fraud?

  • How is this problem being combated?

  • The following slides will show some means being used at this time.

Insurance Regulators

  • The NAIC has created model legislation for states to enact that makes it harder for con artists to set up insurance companies. In many states, regulators are increasing insurer oversight. There is interest in making white collar crime a federal crime. In 1994 the omnibus crime bill set penalties for anyone convicted of submitting false financial data to state insurance regulators.

Insurance Companies

  • Special Investigation Units-created within the companies to detect and investigate suspicious claims.

  • National Insurance Crime Bureau-created by insurance companies in 1992, dedicated to fighting insurance fraud.

  • Creation of insurance fraud database networks accessible online.

Other Possible Solutions

  • Enactment of stiffer penalties and extending current laws attacking Medicare and Medicaid fraud.

  • Enact additional legislation to combat the problem at the state level.

The States Can:

  • Make insurance fraud a specific crime, with appropriate penalties, including restitution.

  • Require administrative action against licensed individuals or businesses-body shops, doctors, lawyers, etc.-upon conviction of insurance fraud.

  • Require all insurers to establish, and use, anti-fraud plans.


  • Require claims forms and insurance applications to carry insurance fraud warnings.

  • Provide immunity to insurers, and others, reporting insurance fraud and sharing information.

  • Require inspection of automobiles before granting insurance coverage.

Is There Any Progress?

  • Yes, the per family cost has dropped from $1,032 to $1,017 in 1996.

  • Health insurance fraud dropped from $710 per family to $696.

  • Workers’ Compensation has consistently dropped for the past five years. It has dropped from $2.9 billion to $2.1 in 1996.


  • The Department of Health and Human Services has reported that, since 1996, anti-fraud efforts have resulted in a savings of $11 billion. The bad news?

  • Remaining improper payments are $12.6 billion.

  • More good news-many criminals have gotten the message and have closed their illicit Medicare operations.

Is Insurance Fraud Whipped?

  • No, it is not yet time to ease off our efforts. It does appear that our years of work is paying off. There has been, for the first time, virtually no actual increase in the amount of insurance fraud annually while, with population increase, there has been a lowering of the average cost to consumers for the first time.

Can We Ever Relax?

  • No, and the following example, which is based upon a true story, will serve to illustrate why we must always maintain our vigilance against fraud.

  • In one of our western states a “swap meet” was being conducted. There were a number of dealers who were engaged in selling merchandise.


  • A very lovely young woman appeared. She was dressed in a macramé bikini. Needless to say, she received a lot of attention.

  • The young woman went around the dealers trading $20 bills for change.

  • Apparently, no one thought to ask why she needed so much change.


  • Finally, someone realized all the $20 bills were identical.

  • Now-they realized why she needed so much change.

  • She was exchanging counterfeit $20 bills for $20 in good money.

  • The macramé bikini was a diversionary tactic on her part.


  • She probably would have gotten away with it if the bills had been printed on both sides.


  • We must never let down our guard. The fight against insurance fraud is a permanent battle which will never be won in its entirety.

  • One major part of the battle is public education. We must show the consumer that insurance fraud costs them and they must aid in the battle.

Credits Due

  • Thanks are due to the National Insurance Crime Bureau and to The Coalition Against Insurance Fraud for providing information and for their assistance in the preparation of this program.


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