Is the life payout scam really a scam?

insurance probeBloomberg Markets magazine published an investigative article this week accusing life insurers of duping beneficiaries by sending them a checkbook to access their insurance proceeds rather than just sending a check for the full amount of the life policy.

The magazine breathlessly reported that insurers are “secretly” investing the proceeds and making millions off the widows, orphans and fallen soldiers.

The news media have gone into a feeding frenzy, and the New York AG has launched an investigation. The news release AG Cuomo issued today has a telling headline:

ATTORNEY GENERAL CUOMO LAUNCHES INVESTIGATION OF LIFE INSURANCE INDUSTRY FOR DEFRAUDING MILITARY FAMILIES AND OTHERS OF MILLIONS IN CASH PAYOUTS

I thought investigations are conducted to determine if fraud had occurred, but in this case it appears the outcome is pre-determined — all based on one article.

And speaking of the article, Bloomberg has an unsavory record of trashing the insurance industry. We’ve dealt with their writers on fraud stories in the past, and frankly, their style of journalism is not for us. And that’s too bad because insurers sometimes do unsavory things to consumers that should be exposed. The life payout practice in this case, however, doesn’t appear to be one of them.

I just don’t see the fraud here. As long as insurers fully disclose that beneficiaries can write a check for the full amount of the death benefit and receive the cash quickly, there’s no foul. And as insurers claim, some beneficiaries probably like to earn a little interest while they decide what to do with the money.

Kudos to the National Association of Insurance Commissioners for quickly issuing a rational statement on the issue.

Full-blown consumer scam

consumer alertGood Morning America aired an excellent segment this morning warning viewers about bogus health discount plans and limited benefits plans. Scam artists are taking advantage of the perfect storm of high health care costs, people losing jobs (and thus, their health coverage) and consumer’s not knowing the difference between these plans and full-blown coverage.

The Coalition’s Jim Quiggle brought this story to GMA several weeks ago after our research started showing the number of cases surfacing around the country was growing at an alarming rate. This looks like a full-blown national scam that could rival the last wave of bogus health plans that defrauded more than 200,000 Americans.

Much more public awareness (and action by regulators and law enforcement) is needed to stem this wave.

Now’s the time to boost anti-fraud investment

These are trying times for insurance companies. In addition to tumbling stock markets and a credit crunch, premium growth is down, investments are lagging badly and the cost of doing business continues to climb. Property-casualty insurers have come a long way since record profits just three years ago.

The economy hasn’t been kind to insurance consumers, either. People have been dumping their low-mileage, high-premium cars; there’s a record number of abandoned properties; the worker pool is shrinking; and fewer people can buy health insurance on their own. All of this creates less demand for insurance products.

pie chartSo it’s natural that stories abound about cost reductions within insurance companies — including their anti-fraud operations. There are plenty of stories on the street about companies that have downsized their investigative staffs, outsourced more anti-fraud activities, and delayed investment in new technology.

Interestingly, we hear just as many stories about insurers that have increased budgets over last year and plan to spend even more in 2009. In fact, a recent survey we conducted of 41 major insurers in the U.S. found that nearly half have increased resources for anti-fraud activities from last year either moderately or substantially. Only about 12 percent say resources have declined.

Insurers aren’t outsourcing anti-fraud activities in greater numbers either. Only 10 percent report more outsourcing in the last year, with the same percentage reporting less. The rest say there was no change. Looking ahead, 45 percent say they expect larger outlays for fraud in 2009 while only 13 percent indicate they’ll work with smaller budgets next year.

So what’s going on here?

There are likely two factors at work here. An enlightened insurer executive recently explained to me that the current economic conditions call for more investment in anti-fraud activities. He said he continually reviews his operation to see where increased investment would produce the greatest return. With declining policy counts, investing in sales and marketing likely won’t produce the returns they did just a couple of years ago.

Same goes for other insurer operations. Smart insurers are beefing up their ability to stop money flowing out the door needlessly, either through enhanced training of claims handlers or better use of technology. Same also goes for strengthening their underwriting. Getting the appropriate premium for the true risk exposure is more important than ever when profit margins are slim.

The second factor is the sense that today’s economic downturn fosters more fraud. During desperate times, decent people often commit desperate acts. The increases in auto giveups, home arsons and people stealing health benefits correlate with the downturn in the economy. A recent study by the coalition in 10 regions of the country found a record number of frauds involving car fires.

Add in the higher public acceptance of unethical behavior the coalition documented last year, and you can understand why more insurers are concerned about losses from opportunistic fraud.

So savvy insurers are investing in anti-fraud infrastructure, from tightening existing systems, to investing in predictive modeling technology to adding ground troops in hot area across the country.

Financial advisers stress that a troubled economy is the best time to buy depressed stocks and real estate. Years from now you’ll benefit handsomely. Same with insurers, except their investments in fraud will pay dividends almost immediately.

Unfair policy rescissions hurt everyone

insuranceCrackedA dozen years ago, when fraud fighters were pushing for stronger anti-fraud laws and more power for insurers, lawmakers expressed a common concern that insurers might use the threat of fraud charges to force claimants to accept low-ball offers.

These many years and thousands of fraud cases later, the record of insurers is quite impressive. With a few exceptions, the 3,000 or so insurers in the U.S. have used their anti-fraud powers wisely, even while reporting more than 100,000 cases of suspected fraud each year.

This clean record has eased the concerns of legislators is recent years, resulting in the enactment of even more anti-fraud laws, such as civil immunity for reporting suspected fraud and sharing anti-fraud information among insurers.

Now come headlines about health insurers rescinding policies of people with serious illnesses. The goodwill built up over the years is fading fast, thanks to the eagerness of a few insurers to yank coverage from policyholders whose applications display the slightest inconsistencies.

Some of the stories are heart-wrenching. People with life-threatening diseases — and huge medical bills — are told their policies are nullified, and thus are forced into financial ruin. Over the last few weeks, the news about health-policy rescissions hasn’t been pretty:

• Anthem Blue Cross and Blue Shield of California was fined $10 million for unfairly rescinding policies.

• California enacted a law banning insurers from giving bonuses to employees for limiting or canceling coverage.

• Congress held hearings on the issue, threatening federal legislation to regulate policy rescission.

• Los Angeles filed a $1 billion-plus lawsuit against Blue Cross of California for illegally rescinding 850 policies.

What’s lost in all of this is that policy rescission is a legitimate response when people willfully submit false information on policy applications. The practice also serves to encourage people to be more honest. But when the practice is abused — as appears to be the case, at least in California — it hurts all insurers and all fraud fighters. It calls into question the credibility of the fraud-fighting community and gives credence to opponents who say anti-fraud efforts unfairly target the little guy.

Industry critics have been quick to capitalize on the unsavory insurer practices. Witness the video cleverly titled Insurance Company Rules, which was posted on YouTube and has been viewed almost 100,000 times.

As time passes and these headlines fade, we hope to tout the good record of insurers once again, and to ask legislators to give fraud fighters more weapons against this crime. In the meantime, it would help if more insurers came out and expressed their outrage at these unfortunate developments.

Walking a tightrope on paying claims

balance graphicFor insurers, getting tough with suspect claims can land them in court, facing billion-dollar lawsuits. If they pay claims too quickly and generously, they can incur the wrath of editorial writers and even face regulatory fines.

So goes the balancing act insurers must perform in dealing with suspect claims.

Case in point: Allstate was sued for $1.43 billion by a Kentucky woman who alleged the company delayed her auto accident claim and then low-balled her. Allstate suspected the claimant had exaggerated her claim. A jury last week took all of 35 minutes to side with Allstate. The company won the case, but likely had to shell out a ton of money to defend it.

Second case in point: Six years ago Erie Insurance received a claim for injuries from a state superior court judge who was involved in a minor car accident. The company paid the $390,000 claim, which subsequently was deemed fraudulent by federal investigators who recently have charged the judge.

Erie Insurance now is being admonished by a Pennsylvania newspaper for paying the claim. Now, I don’t know the details of the claim — and I doubt the editorial writers at this newspaper know either — but I do know that most insurers don’t deny claims lightly. Unless they have solid evidence — especially involving a claim from a judge — they must pay.

To Erie’s credit, they have formed an internal committee to review claims practices.

The fact is, insurers pay thousands of fraudulent claims every year. Some they should have detected and others are nearly impossible to catch. Checks and balances need to be in place — whether they be regulatory fines, lawsuits or oversight by the media — to encourage insurers to be ever vigilant.

They should pay honest claims promptly and fairly, detect dishonest ones accurately and have the wisdom to distinguish the difference.

Bad claims and bad journalism: an unsavory mix

Home fireDo insurers routinely cheat policyholders in lowballing homeowner claims? They do if you believe the story out this morning by Bloomberg News.

The 6,000-word piece is filled with horror stories by unhappy claimants, quotes by industry critics and allegations by former insurance company adjusters. It covers everything from software systems to record industry profits to successful lawsuits against insurers.

The piece starts with the story of Julie Tunnell of San Diego, whose home was lost to wildfire in 2003, and her insurer offered $220,000 of the estimated $306,000 to rebuild. No word from the authors on what the limits of her policy were or whether the estimate might be inflated. But nonetheless, they write this blanket condemnation:

Tunnell joined thousands of people in the U.S. who already knew a secret about the insurance industry: When there’s a disaster, the companies homeowners count on to protect them from financial ruin routinely pay less than what policies promise.

And then the article goes downhill from there.

No new ground is covered by the authors. It’s a greatest hits collection of all the negative stories going back many years.

There’s a lot of circumstantial evidence to indict insurers here, but this story lacks balance and context. “Routinely” is such a subjective word. Nowhere is there statistical evidence to back it up. Convince me my providing trending data from insurance department complaint files. How about a statistical sampling of satisfaction rates among claimants — along with an accurate count of claims that are deemed by regulators and the courts to be wrongly denied or lowballed.

The story also fails to cite the pressure on insurers — and their legal duty — to resist inflated and fraudulent claims. The authors seem to suggest that insurers should not investigate claims but just hand over whatever amount is demanded by claimants.

That’s not to say that unsavory claims practices don’t exist. Insurers should get whacked hard when they screw up. But let’s keep the misdeeds in perspective. If insurer surveys are still showing 90-plus percent of claimants are satisfied with the claims-handling process, then the problems likely are isolated.

But still, insurers need to get ahead of this issue. The statements in defense put forth have been weak.

The growing perception that insurers are cheating hurts the efforts by the anti-fraud community to reduce public tolerance of fraud. Legislators also tend to be much less sympathetic when they think there constituents are not being treated fairly.

Insurers have a fine line to tread: They should pay legitimate claims fully and quickly, aggressively detect and resist bad claims — and have the wisdom to carefully distinguish between the two.