White paper: Emerging issues

White paper:

Emerging issues

Two separate "emerging issues" workshops were conducted over the course of two days. Each of the groups had spirited, open exchanges in each session. The result was a wide-ranging list of fraud fighting opportunities, problems and threats as we enter the new millennium. It was agreed that technology, globalization, and the changing nature of financial services are accelerating the speed and nature of change. This presents an enormous challenge to all involved in the fraud battle.

Each group independently summarized its discussions not with prioritization of the listed items, but with articulation of the need for more fundamental change in the fraud fighting process. Each group agreed that while it is imperative to be alert constantly for new schemes and techniques in committing fraud, it is also imperative that we balance this with a critical examination of how we are organizing and managing the anti-fraud forces.

The groups agreed that the top priority emerging issue is the need for the public, legislators and regulators, civic leaders, and insurance executives to reexamine their view of the role fraud plays in their day-to-day success or failure. Fraud can not be considered a victimless prank, a cost of doing business, an unpleasant but unavoidable part of our lives.

We must manage fraud not as a necessary expense but as a competitor for our personal, governmental and corporate assets.

This change in viewpoint is imperative if we are to win the short and long-term fraud war. We must know our competitors and deal with them aggressively and directly. This change in viewpoint will create the right atmosphere and drive consistent decision making. The number one priority is to develop an action plan to effect this change in perspective.


The workshops recommend the establishment of a working group within the Coalition Against Insurance Fraud's Emerging Issues taskforce to develop and execute an action plan to achieve this reassessment and redefinition of the fraud problem on the part of all involved parties.

The Challenge

"To me, a claims man is a surgeon — his desk is an operating table. And those pencils are scalpels and bone chisels. And those papers are not just forms and statistics and claims for compensation. They're alive; they're packed with drama, with twisted hopes and crooked dreams. A claims man, Walter, is a doctor and a bloodhound and a cop and a judge and a jury and a father confessor all in one."

-Edward G. Robinson as Claims Manager Keyes in Double Indemnity

The topic of this paper is "emerging issues" but we are continually reminded that there are constants in this ever-changing world of fraud and investigation. The tools and techniques may change but we still deal person to person in detecting and defeating fraud.

"Double Indemnity" was made in 1944 but the most powerful defense against insurance crime discovered to date remains the passion and the principles portrayed by Edward G. Robinson as Claims Manager Keyes.

However, time and technology do change the landscape where this battle takes place. The greed factor drives each new generation of insurance criminals to believe it is smarter than the previous generation and smarter than any investigator. The risk/reward scale still tilts heavily in its favor. It knows the risk of detection and punishment is far outweighed by the potential gain from insurance crime.

Despite the best efforts of an army of dedicated fraud fighters, new schemes are devised and old ones are revitalized in unique ways as quickly as barricades are established to detect and defeat the crime techniques of today.

The new millennium finds us much better equipped to detect and attack fraud, yet the basic story line of the 50-year-old "Double Indemnity," homicide disguised as accidental death to obtain insurance proceeds, is still a frequent headline today... although new cases usually have some 21st century trappings. Our challenge is to anticipate and thwart those with "twisted hopes and crooked dreams."

Can we identify the topics and issues that will monopolize our time over the next five years while also keeping a watchful eye on a horizon well beyond that time period? We all know that somehow time is accelerating — five years will flash past like a shooting star. We must run harder and faster than the insurance criminals do. Our vulnerability is great. Our strengths and our opportunities are many but so too are our weaknesses, our problems, and our threats.

What are the new generation of fraud rings, auto body shop scams, car theft/export, med/legal mills, viaticals, workers comp premium evasion.... The well-known list goes on and on? What are the problems and threats of new legislation, privacy, e-commerce, the Internet, globalization of our companies? What is the state of our fraud-fighting programs in the year 2000?

An Expert's Assessment

Here is one expert's assessment of fraud fighting at the millennium.

Peter Goldmann of the newsletter White Collar Crime Fighter interviewed Professor Malcolm Sparrow, a pre-eminent fraud expert from the JFK School of Government at Harvard University. Professor Sparrow's primary focus is health care fraud but his comments apply across the many lines of insurance.

Professor Sparrow declares that the number-one obstacle to effective fraud fighting is a widespread failure on the part of insurers, employers, politicians, and law enforcement to understand the complex nature of fraud.

He identifies six cornerstones of this complex obstacle:

• Unless fraud is detected close to the time committed, it will probably remain undetected forever.

• Performance indicators are highly misleading — is apparent increased fraud because of better detection or is it a true rise in fraud incidence? Should we measure fraud prevention or measure reaction to committed fraud? Some thump their chests about recoveries; some invest more in deterrence. This results in confusion when we try to assess or compare success measures reported by different agencies, states, or companies.

• The productivity/efficiency/fraud control balance equation generally is solved in favor of the proponents of processing efficiency. Small processing efficiencies are easily measurable and readily achieved. Large potential fraud control savings are uncertain and hard to measure. Moreover, processing efficiencies can greatly increase the vulnerability to fraud.

• Today's controls will not detect tomorrow's fraud. The white-collar criminal is a true chameleon — ingenious in adjusting and adapting to survive in a hostile environment.

• There is widespread misplaced emphasis on detecting and investigating committed crimes, rather than on controlling, neutralizing, and deterring future crime. Despite some progress, the probability of detection and of criminal prosecution is still extremely small. The risk/reward ratio is still very attractive in insurance fraud — small risk with high reward. There is great potential in shifting the investment balance from heavily weighted identification of already committed crime — the "pay and chase" model — to more investment in detecting attempted fraud and defeating it.

• Today's fraud control systems mirror the production environment. Generally, our fraud fighting programs examine claims or transactions one at a time so we address only the least sophisticated fraud schemes.

Given all this, Professor Sparrow identifies two fatal flaws in our efforts:

• Because fraud control is dynamic and continuously evolving, a static set of "filters" has only short-term value.

• Sophisticated fraudsters study unsophisticated fraud control programs and easily design schemes to avoid detection.

The result of these flaws is that today's fraud programs detect primarily the casual, careless, and opportunistic scheme — the seasoned, sophisticated fraud perpetrator is generally successful.

Professor Sparrow points out that there are other factors impeding our success in defeating fraud:

• Insurers are socially acceptable fraud targets

• Fraud is not "self-revealing." Claimants rarely see the bills and accompanying details of treatment, which are sent directly from the provider to the insurance carrier. Moreover, explanation of benefit material is cryptic, rarely reviewed, and easily misunderstood, if even seen by the claimant.

• There exists great consumer respect of and confidence in the health care and the legal professions. The public trusts providers. Fraud discovery is a direct attack on the integrity of professions and their ability or inclination to police themselves. Both the legal and medical communities resist efforts to allocate greater resources to fraud prevention and investigation.

• The public can be deceived and confused. Outright criminal fraud can be overshadowed and shielded by indignant rebuttals to challenges to "professional judgement" and "medical necessity" by insurance clerks. Unnecessary treatment, unnecessary testing and other abuses relating to the question of medical necessity also confuse the issues.

The Response

We need to examine our past critically and plan for the future carefully and boldly.

The Fraud Forum is one step in this long journey. Two separate workshops were held. In planning, the workshop team defined the following objective, constraint, and planned product.

Objective — Under the general topics of fraud schemes, fraud detection, fraud investigation, fraud case resolution, special investigation management, and legislation/regulation; identify, define, and assess the priority of newly developing issues classified as strengths, weaknesses, threats, problems, or opportunities.

Constraint — It was not the objective of the workshops to determine plans of action or solutions to address the identified threats or problems or to take advantage of the opportunities. Practical time limitations prohibited this.

Product — Prioritized list of specific topics for in-depth evaluation and examination by future ad hoc groups.

The goal in the workshops was to create full and open involvement while keeping each group focused. There was no time to devise solutions or action plans, no time for anecdotes or war stories. The goal was to generate a cascade of ideas — and then reach consensus about the top priority issues in each category. The intent is that these issues now become the focus of individual ad hoc committees of the Coalition's taskforce on emerging issues.

Forum attendees had their choice of any one of the five two-hour workshops during the two time periods available. There was surprising consistency in the overall profile of the groups attending the two separate "Emerging Issues" workshops.

The demographics of the employers of the two "Emerging Issues" groups:

Workshop I
Workshop II
Law Enforcement

This variety in background and perspective was invaluable in achieving a balanced assessment of the nature and the priority of developing issues.

The Emerging Issues

The following lists detail the specific issues raised by the two workshops.

1) Fraud Schemes

Emerging Problems

• Money laundering

• "Shell" insurance operations, domestic and foreign

• Health care fraud — HMOs

• Advanced commission schemes — nine-month promissory notes — promise of high commissions attractive to agents who may be duped into selling them

• Managed care fraud

• As companies seek to leverage cross marketing opportunities in providing financial services, they may start giving insurance away as a means to obtain the mortgage, banking and investment business of customers. Underwriting will become problematic and people will see the opportunity to secure coverage and commit fraud

• Viatical fraud

• Elderly and senior care fraud

• Annuities as a vehicle for money laundering

• Catastrophe fraud — contractors

• Commerce — tracking transactions, phony IDs — the Internet

• Identity theft

• Distribution systems changing — agent less and less involved

Emerging Threats

• Possible collapse of HMO managed care system

• Excessive cost of prosecution due to international venues

• Ease of doing business mindset opens up opportunities for those who commit fraud

Emerging Opportunities

• Form new partnerships and alliances for technology, training etc.

• Need to marry internal information exposure value on record vs. claim amount

• Reinsurance needs to refine its approach to the fraud problem

• International partnerships

2) Fraud Detection

Emerging Problems

• Technology-driven systems for underwriting and claim evaluation

• Lack of quality data for technology tools designed to fight fraud

• Need new red flags for new types of schemes

• Schemes that develop in foreign countries are hard to uncover.

• SIU management needs new skill sets to deal with technology issues

• Training must be changed to match up with new schemes

• Still reactive not proactive

Emerging Threats

• Systems issues, data integrity, failure to obtain basic information critical to investigation

• Claims systems built to track claims only

• Fewer adjusters — claims payments will be automated

• Reactive systems to find fraud

Emerging Opportunities

• Possibility of developing a universal data set.

• Data mining systems

• Rule-based decision-making systems that help prevent fraud by including all processes in the insurance business, not just the claims process.

• Analysis of data — look for patterns, focus on activities other than just when a claim is made.

3) Fraud Investigation

Emerging Problems

• Evidentiary problems — What will be used to prove the crime?

• Privacy issues — What information will be available from the insurance and the banking realm?

4) Fraud Case Resolution

Emerging Problems

• Multi-jurisdictional crimes

• Insufficient laws written to cover insurance fraud here and abroad

• Evidentiary requirements differ in every country.

• Cost of doing business attitude an impediment to prosecution

Emerging Opportunities

• Prosecution may be more favorable in some countries.

5) Special Investigation Management

Emerging Problems

• Bank/Insurance mergers

• Insurance companies chartering banks

• Non-traditional partnerships, TPAs, self-insureds

• Management of anti-fraud efforts expensive

• State regulations extremely specific in nature limiting flexibility and innovation

• Resources to fight fraud — public and private, scarce and diminishing

• Global economy — Mergers and acquisitions will require we train everyone in the organization.

• Need to become involved in product development so that we can give input before products are rolled out.

• Manage processes not investigations or people

• Manage fraud as a business problem and present it to management as such.

Emerging Threats

• Need for SARs (special activity reports) anything over $5,000 because of banking regulations and SEC oversight

• New set of regulators (Treasury Department)

• Outsourcing

• Licensing

Emerging Opportunities

• Management of processes instead of people to detect and control fraud

• Partnering between P&C and Life

• Involvement in e-commerce initiatives to include a fraud fighting perspective in process development

6) Fraud Legislation/Regulation

Emerging Problems

• Federal and State regulations

• 1033/1034 requirements (criminal background check of employees )

• International regulations for multi-nationals

• Lack of regulations for managed care industry

• States require carriers must provide certain coverages or a certain percentage must be renewed, increasing a company's exposure to fraud in some segments.

Emerging Threats

• Jury awards — completely unpredictable

• Lobby groups inadvertently or intentionally undermining anti-fraud regulation

• Too many levels of regulation — how many times must the data bereported, how many ways?

• Privacy laws not well thought out when it comes to what the exceptions should be — who has legitimate business reasons for access?

Emerging Opportunities

• Federal regulation as opposed to state — one set of rules countrywide

• Federal immunity statutes

• Lobbying activity to provide balanced input into legislative process domestically and internationally

In the dynamic give-and-take sessions, there were other important ideas and themes, which did not necessarily become a bullet on the charts.

• Special investigation managers need to discover new ways to leverage technology to compensate for diminishing available human resources.

• Special investigation managers need to move to proactive identification of vulnerability and management of risk and away from the reactive management of individual suspected fraudulent claims.

• Special investigation managers must invest in better selling/marketing to broaden awareness of all types of fraud and the true fraud implication on the business of insurance.

• This selling/marketing must lead to a mindset change by senior management. Anti-fraud efforts should be seen as an essential part of the business of insurance by top management for good business reasons.

• Insurance fraud will be a refuge for criminals both domestically and internationally who face increasing pressure and reduced opportunity for other crimes — insurance fraud is easy, profitable and relatively painless in that it is prosecuted less often than other crimes.

• The elimination of the opportunity for abuse of certain entitlement systems is a threat to workers comp and other medical/disability insurance products.

• Insurance executives must begin to consider fraud and fraud fighting as a business opportunity and strategy not just a problem expense, fraud is a competing interest.

• Government, business and consumers need to adopt a holistic approach to the serious economic cancer of fraud which can be stimulated by federal program for the control of abuse and fraud in national programs as well as in private insurance

The workshops generated a wide-ranging, far-reaching, provocative set of issues. Each of the bulleted items and topics detailed above calls for analysis and action.

The workshop team distilled the material into a few basic themes, which follow and will shape our strategic and tactical planning in the years to come.

Broad Issues:

• Financial De-regulation Implications

Mergers/Acquisitions and Bank Charters

• SEC rules and regulations

• New complex financial products

• New distribution channels

Possible shift in regulation — federal vs. state

• Insurance traditionally does not want federal oversight.

• Banking is already regulated federally.

Immunity provision — federal vs. state

• Changing Nature of insurance business

Globalization — international companies/business

• International law enforcement/investigation

• Jurisdictional Issues

• Privacy Issues

Scheme: Shell companies

Growth/Market Share

• Underwriting is changing

Distribution Systems Changing

• E-commerce

• Regulatory

• Jurisdictional

• Privacy

Scheme: Agents

• Advanced commissions

• Premium finance

• Promissory Notes (9 month)



• Life — viaticals

• Collapsing HMOs/Managed Care — affects guarantee funds, PIP

• Judicial regulation setting

• Disparate state regulations (51) — from micro-management to none.

• Technology

• Proactive use for identification

• Tool for devising and committing crime as well as for detecting and defeating it

• Better decision-making tools

• E-commerce

• Evidentiary issues

• Electronic signatures

Scheme: Identity theft

• Resources — Do we have enough/are we doing the right things?

• Right functions

• Right people

• Right job

• Right knowledge/skills

• Right tools — particularly public partners

• Right communication — w/public partners, internally, externally

• Outsourcing changes the resources

• State/federal prosecution investigation/prosecution resources

Overall Strategy

There is a well-defined litany of specific topics and issues that demand immediate and urgent attention. However, in order to achieve the fundamental change needed to effect real progress in reducing the tremendous negative drain of fraud on society, in order to create the environment in which we can deal successfully with the specific emerging issues defined in these workshops, we need a paradigm shift — a basic change in the way the fraud problem is viewed.

The public, legislators and regulators, civic leaders, and insurance executives all must reexamine their view of the role fraud plays in their day-to-day success or failure. Fraud can not be considered a victimless prank, a cost of doing business, an unpleasant but unavoidable part of our lives.

We must manage fraud not as a necessary expense, but as a competitor for our personal, governmental and corporate assets.

This change in viewpoint is imperative if we are to win the fraud war. We must know our competitors and deal with them aggressively.