New research on the extent of automobile insurance fraud was released today by the Insurance Research Council. Shortly after, I received an analysis from insurance attorney Barry Zalma, whose views I don’t always share, but fully respect. His observations are usually insightful and sometimes provocative, and he doesn’t disappoint on this latest:

Readers will not be surprised by the most recent conclusion of the Insurance Research Council (IRC) that estimates that claim fraud and buildup added between $4.8 billion and $6.8 billion in excess payments to auto injury insurance claims closed with payment in 2007.

What is amazing about this report, and what should cause all shareholders in stock insurers and members of mutual insurers or interinsurance exchanges, is that those insurers identified more than 20,000 claims that involved fraud and yet made payment on each of those claims. Since one who commits fraud may not recover at all, regardless of how small the fraud, any more than a person can just be partially dead, those more than 20,000 claims were successful frauds identified by the insurer. At least the same amount of fraud – more likely tenfold more – were not discovered and were paid.

Insurers who identify fraud should not pay a cent to the perpetrator. That $4.8 to $6.8 billion was paid to people who committed fraud is a travesty and a mark of unprofessional claims handling.

The payments, described by the IRC to be “excess payments” amount to between 13 percent and 18 percent of total payments under the five main private passenger auto injury coverages.

The study showed that excess payments were greater in 2007 than in 2002. In 2002 IRC estimated excess payments at between $4.3 billion and $5.8 billion, or between 11 and 15 percent of total payments.

The percentage of claims that appeared to involve fraud, defined as specific material misrepresentation of the facts of a loss, increased from 9 percent of bodily injury (BI) claims closed with payment in 2002 to 11 percent of closed claims in 2007.

The most common type of claim abuse found by the IRC was described as “buildup,” that the IRC defined as the inflation of an otherwise legitimate claim, such as through unnecessary medical treatments or diagnostic procedures. Twenty percent of BI claims appeared to involve buildup in 2007, up from 18 percent in 2002. Apparent buildup was found in 14 percent of PIP claims, up from 12 percent in 2002.

The study also examined differences in claiming behavior between claims with apparent fraud or buildup and claims without apparent fraud or buildup. Claims with apparent fraud or buildup were more likely than other claims to involve sprain and strain injuries and periods of disability. In addition, the study found that claimants in apparent fraud and buildup claims were more likely than other claimants to receive treatment from physical therapists, chiropractors, and other alternative medical providers.

The study, Fraud and Buildup in Auto Injury Insurance Claims: 2008 Edition, is based on data from more than 42,000 auto injury claims closed with payment under the five principal private passenger coverages. Twenty-two insurers, representing 58 percent of the private passenger auto insurance market in the Unites Sates in 2006, participated in the study. The IRC closed claim study collected detailed data on injury, medical treatment, claimed losses and total payments, claim handling techniques, and attorney involvement. In addition, claim file reviewers were asked to indicate whether specific elements of fraud or buildup appeared in the claims.

Because the study involves only claims closed with payment, it likely understates the incidence of fraud and buildup in all claims filed whether without payment or with payment but not discovered as fraud.

Thanks, Barry. And thanks for the IRC for its continued work in producing useful research on insurance fraud.