Guidelines on drafting state anti-fraud regulations
This is the second phase of a project begun by the Coalition Against Insurance Fraud when it established a regulatory guidelines taskforce. The task force was given the responsibility to 1) review existing regulatory requirements and 2) produce a document that could guide state legislators and regulators in the development of anti-fraud laws and regulations that are effective, consistent and fair.
As stated in the guidelines for the first phase of this project, it is the Coalition's intent to encourage standardization among all jurisdictions in the insurance anti-fraud effort. We recognize and encourage the preservation of the current state-by-state scheme of insurance fraud regulation, but believe that it is in the best interest of consumers, regulators and insurers to establish uniformity in standards. The power to effectively fight fraud comes from a concentration of effort that would result from a generally uniform set of rules that would deter, detect and help prosecute fraud.
The cost effectiveness and efficiency of standardization will provide greater incentives for insurers to fight fraud and would reduce the regulatory burdens that otherwise distract them. Coincidentally, this uniformity of effort would improve the measurement of insurer fraud fighting performance that would give a better state-by-state comparison of fraud fighting techniques.
Uniformity will help reduce the effect of fraud on the cost of insurance borne by consumers.
The first phase of the guidelines provided recommendations for the three most common requirements:
• Fraud warnings
• Fraud plans
• Mandatory reporting of suspected fraud.
The second phase is intended to deal with other issues affecting insurance fraud regulation and where uniform regulations would aid in keeping anti-fraud efforts efficient and cost-effective. These areas are:
• Requirements for Special Investigative Units
• Annual reporting of fraud statistics
• Pre-insurance inspection of automobiles.
This new phase along with the original three elements of the guidelines will serve as a resource for regulators and legislators to obtain current information on insurance fraud regulatory requirements. The Coalition's objective is to reduce insurance fraud. When taken with information from the NAIC and other sources, these guidelines will assist states in drafting necessary anti-fraud regulations.
1) Requirements for special Investigative Units
A dozen states require insurance companies to utilize special investigative units to investigate suspicious activity. These requirements vary from simply stating that the insurer should have a plan on how to investigate suspicious claims to detailed regulations spelling out minimum number of investigators per policies in force, plus specific educational requirements investigators must have.
The Coalition's model insurance fraud act contains provisions requiring insurers doing business in a state to implement and maintain an anti-fraud plan that includes how suspected fraud will be investigated. The fraud plan requirement is a skeleton approach that gives states and insurers a framework of what the plan should contain and how insurers should go about hiring or contracting investigators.
The National Association of Insurance Commissioners model fraud act is slightly different than the Coalition's model. The NAIC model would require insurers to have either a fraud plan or have an investigative unit. The model act does not get into any detail of what should be in the fraud plan nor does it mention anything about the background for the fraud investigators.
As previously mentioned, the existing requirements in the states vary — some states have utilized either the Coalition's language or the NAIC language verbatim without additional regulatory clarifications allowing individual insurers to decide how best to handle their own anti-fraud effort. On the other extreme is New Jersey which has strict regulations detailing how many investigators per policies an insurer should have and strict education requirements on how many hours of continuing education the investigators should maintain.
The New Jersey department has argued that its requirements set a floor for all insurers doing business in the state to meet. However, some have argued that instead of a floor, the New Jersey requirement may set the ceiling - instead of the minimum amount of investigators required, an insurer may see the requirement as the maximum investment they need to make, thus potentially reducing its anti-fraud effort while still meeting state requirements.
The Coalition recommends the following general guidelines to assure cost-effective and enforceable requirements on Special Investigative Units:
• States should give insurers the discretion to either maintain their own investigative units or contract for that service. Given certain size and type of business, it may be cost-effective for an insurer not to maintain its own investigative unit but to have a contract with an outside vendor for such services. Additionally, the ability to contract out for such services allows insurers to quickly address emerging schemes and efficiently expand or contract coverage without dealing with employment issues involving SIUs.
• Insurers should have the discretion to decide SIU staffing levels. Requiring a ratio to an insurer's business can unfairly restrict an insurer from being able to respond to new types of frauds that are being committed. And, setting a ratio, as previously stated, could give an insurer an incentive to make that ratio the maximum effort for the company instead of the minimum effort. However, in reviewing the implementation of fraud plans, regulators should have the authority to determine whether insurers are in compliance and whether an insurer's staffing levels are adequate for the size, location and type of business written.
• Any state education or continuing education requirement should take into account that the bottom line of the investigative activity is to identify and reduce the amount of fraud that is being committed. Stringent requirements on paper may sound logical, but can reduce the effectiveness of the insurer's anti-fraud effort.
We do not believe that micromanagement of insurer's anti-fraud effort achieves any of the goals in fighting fraud. On the contrary, it is possible that through governmental micromanagement decisions, it would be more costly and less efficient to fight fraud than if the state did nothing to encourage anti-fraud activity. Consumers and insurers benefit when government decisions allow individual insurers to build an investigative effort that best meets the needs of the individual insurer. One size-fits-all does not necessarily make for cost-effective and efficient management.
State regulation must recognize the expertise of the insurer in designing its anti-fraud effort, based on the belief that most insurers will be aggressively working on an anti-fraud effort.
However, state insurance departments should have the ability to review any insurer's anti-fraud effort to assure that the insurer is meeting minimum requirements to fight insurance fraud. Insurance departments should have authority to assure that each insurer is putting forth an honest and effective effort to prevent and detect fraud.
Coalition Model Act Language on Special Investigative Units
View all Model laws.
• Anti-fraud plans
Each Insurer's anti-fraud plan shall outline specific procedures, appropriate to the type of insurance the Insurer writes in the state, to:
(2) educate appropriate employees on fraud detection and the Insurer's anti-fraud plan.
(3) provide for the hiring of or contracting for fraud investigators.
NAIC Model Language on Antifraud Initiatives
Insurers shall have anti-fraud initiatives reasonably calculated to detect, prosecute and prevent fraudulent insurance acts. Anti-fraud initiatives may include:
• Fraud investigators, who may be insurers, employees or independent contractors; or
• An anti-fraud plan submitted to the commissioner. Anti-fraud plans submitted to the commissioner shall be privileged and confidential and shall not be a public record and shall not be subject to discovery or subpoenas in a civil or criminal action.
See Appendix A for specific language on Special Investigative Units.
2) Annual reporting
The filing of statistical information by insurance companies with the state can be a useful tool to help quantify anti-fraud activity and undercover anti-fraud trends overall.
The annual report can help regulators, insurers and policymakers to begin to fully understand the scope and dimensions of the insurance fraud problem. Having uniform standards will help on several fronts. First, it will be cost effective since insurers will be compiling similar information for several states without having to reinvent its methodology and re-program computer systems to compile the information. Second, uniformity will make it easier to quantify the problem from a national perspective and to be able to compare efforts among the states.
Currently, 11 states require insurers to file an annual report of their anti-fraud activities.
Some of the statistical information requested includes:
• the number of suspicious activities that are being investigated in a year.
• the number of claims denied for fraud and referred to the state's fraud bureau.
• the estimated dollar amount of suspicious activity the insurer identifies.
The Coalition's model fraud act does not require an annual report, but does include a provision that allows for the state's insurance commissioner to have a summary of an insurer's anti-fraud activity. And, if the commissioner requires this annual summary, then it would be a privileged document not open to the public for any purpose. The NAIC does not have any similar provision in its model act.
• Allow the insurer to summarize their anti-fraud activity without getting into specific details of any specific fraud investigation that may have occurred.
• Specify that any submission by an insurer is kept privileged and not open to anyone through the state's freedom of information or public records act. Also, the summary should not be discoverable or admissible in any civil litigation.
• Make sure requested data elements are well defined so aggregate data from all insurers will be meaningful. This also will allow regulators to better compare data from insurer to insurer.
• Make sure requested information is readily available.
Annual reporting is a tool to help quantify the amount of fraud that is occurring and to see the trends by comparing the individual company experiences. It should be noted that annual reporting should not solely be used by states as a means to check to see if individual insurers are maintaining a strong anti-fraud agenda. By helping to understand trends, a state may be able to work with insurers to fight fraud in a more efficient manner. Also, the annual reports can be utilized in a regional and national approach to help quantify the fraud problem.
See Appendix B for specific language on annual reports.
3) Automobile Pre-Insurance Inspection
Five states currently require insurers to physically inspect certain automobiles prior to issuing insurance coverage. This program is targeted to address two forms of insurance fraud that has been prevalent against automobile insurance:
• Insurance for phantom of "paper" automobiles
• Insurance for vehicles with pre-existing damage
The insurance system in certain jurisdictions had seen a rash of "stolen" vehicle reports and claims for damages to automobiles that was nothing more than scams to rip off the insurance system.
As a response, the Coalition has advocated that having certain applicants for insurance for certain types of vehicles go through a pre-insurance inspection as a means to verify the existence of the vehicle and to document any existing damage would reduce the amount of automobile fraud being committed. A study conducted for the Coalition indeed noted that reports of automobile theft was reduced by a greater percentage in the few states that have adopted inspection programs than in states that do not have such a program.
• States with high levels of auto insurance fraud should consider a vehicle inspection program for the purchase of used vehicles to help reduce the amount of automobile fraud.
• Photo identification of vehicles using the latest technology should be part of the vehicle inspection program.
• Insurers should establish procedures to assure that the inspection reports are easily accessible if there is a need for anyone to verify the authenticity of a claim.
Cost-effective vehicle inspection programs can be a useful tool to reduce frauds being committed against automobile insurers. Programs would not require inspection of every automobile or every insurance consumer, but only those vehicles that have the highest risk of being used for fraud.
Those states that have this program have seen greater decreases in reporting of auto theft than in other jurisdictions that do not have an inspection program. Even though there is a slight cost for the inspection, the savings from reduced fraudulent claims more than makes up the difference.
An inspection program is part of an overall anti-fraud agenda and will help ease the burden fraud bears on the cost of insurance.
Coalition Model Pre-Insurance Inspection Act
(Insert text of model)
See Appendix C for specific pre-insurance inspection language.
If you are aware of pending or existing regulation not contained here, please send updates to Howard Goldblatt, Director of Government Affairs. Phone: 202-393-7332; Fax: 202-517-9139.
This document should serve only as a guide in complying with regulatory requirements and should not serve as an alternative to legal counsel.