The magnitude of insurance fraud surprises even insiders when they see the numbers. Property-casualty fraud is estimated by the Insurance Information Institute at $32 billion per year. The Coalition Against Insurance Fraud (CAIF) estimates further that fraud comprises up to 10 percent of loss and loss adjustment expense each year. Finally and overall, according to the CAIF estimates, annual fraud costs $80 billion per year across all lines of insurance.
That's $400–$700 per year in increased premiums and costs the average consumer $900 per year in reduced compensation. Clearly, claim fraud is a significant problem for the insurance industry and one that is growing in the workers compensation line even while average claim frequency is on the decline.
Insurance Fraud as a Crime?
The states ascribe significant importance to insurance fraud as well. The District of Columbia and 48 states make insurance fraud a specific crime. Further, the District of Columbia and 41 states have a fraud bureau dealing with multiple lines, solely workers compensation or both. Importantly, all but 14 states have statutorily mandated fraud reporting requirements, typically defined as only requiring a "suspicion."
Insurance companies have been viewed by many as justifiable targets of fraud and malingering and other behaviors that most would agree are less than honest. This is a cultural problem in America and elsewhere and is reflected in a March 20, 2013, Insurance Journal survey of US consumers titled "Insurance Fraud: A Public View, 2013 Edition," which shows the following.
24 percent believe it is acceptable to pad an insurance claim to make up for a deductible.
18 percent believe it is acceptable to pad a claim to make up for premiums paid in the past.
55 percent say poor service from an insurer is more likely to cause fraudulent behavior.
76 percent say they are more likely to commit fraud during an economic downturn (up from 66 percent in 2003).
68 percent say they believe insurance fraud happens because people believe they can get away with it (up from 49 percent in 2003).
I believe many of these beliefs and behaviors were born in or at least exacerbated by the Great Depression of the early 1930s. Another survey by the CAIF in 2014 found the following.
20 percent of US adults say it is acceptable to defraud insurance companies under certain circumstances.
10 percent of those agree it is okay to submit phony or exaggerated claims.
40 percent say they are "not very likely" or "not likely at all" to report someone who defrauded an insurer.
This last finding is what should really concern those who care about this exposure. Why? Because the Association of Certified Fraud Examiners in their 2014 Report to the Nations on Occupational Fraud and Abuse shows that "tips" are by far (43.3 percent) the most common way in which fraud is detected. Unfortunately, other sources suggest that, even when "tips" come in, they are often well after the fraud (some up to 18 months later), making recovery far less likely. This problem is cultural, both in society and within organizations, and is simply a microcosm of overall culture.
Why Commit Insurance Fraud?
The famous criminologist Donald Cressey put forth the theory of the "fraud triangle" as to why people engage in fraudulent activities. It is based on the following three key elements.
Motivation
Opportunity
Rationalization
These correlate to three key questions that people pose as they consider engaging in fraud. First, "Do I have a reason to commit fraud?" The biggest driver is, not surprisingly, personal financial gain driven by greed and life pressures both on and off the job. Second, "Can I get away with it?" Success for the fraudster often requires weak internal controls and collusion with others, even with a solid control environment and/or reckless dishonesty, regardless of controls. As has been shown repeatedly when caught, criminals often behave as if they have no brain. In other words, it's amazing how stupidly criminals behave.
The third and final question is "Can I live with myself?" This reflects the ability to persuade oneself that something wrong is really not. Often, all internal restraints have been removed and an entitlement mentality rules. The answers these culprits provide themselves include the following.
"Everyone is doing it."
"The company owes me."
"I will replace the money soon."
"No one will get hurt."
Of course, seldom are any of these self-delusional statements actually true.
Insurance Fraud Red Flags
Every type of claim has "red flag indicators" that allow claim professionals to know when to refer a claim to a special investigative unit for more in-depth review by a properly trained and experienced fraud investigative professional. This is important to achieving the efficiencies needed by claim administrators where, like everywhere, limited resources need to be appropriately allocated to where they can produce the best results. Fraud experts suggest that two or more of these elements are good indicators of likely fraud.
In the workers compensation world, there are common indicators of fraud. The top 10 include the following.
Monday morning first reports of injury
Suspicious providers
Conflicting accident descriptions
Refusal of medical care
Hard-to-reach injured workers
Changes in employment
Lack of witnesses to the accident
A history of making insurance claims
Late reporting of the accident facts
Changes in doctor, address, phone numbers, etc.
The Influence of Social Media
If there is any doubt about the pervasive nature of social media, consider the following facts.
Facebook has nearly 1.2 billion users—23 percent check their account at least 5 times a day.
There are over 3 million company pages on LinkedIn and 238-plus million users.
On Twitter, 288 million monthly active users send 400 million tweets a day.
On YouTube, 100 hours of video are uploaded every single minute.
Of social media users, 35 percent admit to posting something they later regretted.
Over 1.7 billion people are on Internet social networking sites.
Social networking sites have changed the way people interact and are used daily by over 70 percent of the US population. They will continue to increase the amount of information available to investigators as people love to share and promote themselves, their own brand, and their popularity. Fear of being left out and addiction are often cited as key drivers for the growth of social media use.
With these facts in mind, it is clear that social media is both here to stay and will be a growing source of information used for a variety of purposes, including identifying and shutting down fraudulent insurance claims.
Detecting Insurance Fraud
So, now that we have a better understanding of what the predicates of fraud are and why people do what they do, let's move on to how we detect and address it with an emphasis on how social media has become one of the biggest boosters to successful fraud detection and prosecution. It used to be that proving claim fraud meant hiding in the bushes to catch claimants doing things they said they couldn't. While sometimes successful, getting useable evidence was expensive and sometimes dangerous. This is not to say that this method is no longer used or useful; in fact, it is. But there are many other methods for dealing with suspected fraud that are typically applied on a customized basis, depending on the case facts and other circumstances.
One of those that has proven highly productive is social media investigations. This is the method of having trained investigators dive into the social networks of claimants (e.g., Facebook, Myspace, LinkedIn, etc.), sifting through typically personal information looking for court-admissible evidence that has the potential of stopping suspected fraudulent behavior and terminating the related claims.
Fundamentally, social media investigation is applied to further develop the basic investigative information generated by most every insurance claim, including witnesses, claimant identification, claimant activity, evidence of disability, appropriateness of medical care, etc. But, where social media is particularly rich and often uniquely applied is in its ability to find and leverage relationships tied to claimants that can point to and ideally validate suspicions of exaggerated and/or illegal conduct. These often validate the "red flags" and related proof of the suspected behaviors.
To use this tool most effectively, it is important to understand that skilled expertise is required. As a result, it is not typical for the frontline claim professional to attempt to leverage social network sources, as much as many of them might want to and even feel qualified to do so. In fact, the common rules of evidence suggest that delving into this source of information should be done carefully and with specific and targeted intent. In other words, beyond using properly trained and credentialed fraud professionals, knowing where to go on the Web, how to get there, and which information and in what form may be most useful require professional fraud expertise in the use of social media. Nevertheless, certain limited prereferral to a special investigation unit (SIU) activity can be done by the claim file handler to validate the potential for a deeper dive into the world of social media on the Web. This activity might take the form of the following.
Gathering the basic facts
Providing photographs of the claimant
Identifying witnesses
Identifying other stakeholders in the claim
Identifying red flag indicators of potential fraud
Securing Web addresses, emails, and other Internet-based information that may assist the SIU
Gathering other facts that may help narrow social media investigation
Once completed, the key questions to be asked are the following.
What am I missing?
What do I think might be gained from a referral to the SIU for social media investigation?
What information may need verification or further validation?
What "hunch" do I have that needs further development?
From these questions, the referral to the SIU can then be made, and the appropriate tools can be selected to mine the Internet for answers. Among the many tools that are commonly employed are the following.
Algorithm-driven Web crawlers—both free and subscription-based
Website change trackers, such as ChangeDetection.com
Google alerts and advanced Google search
Internet archives, such as the Wayback Machine
License plate recognition technology
Geofencing
Each of these has specific and narrow purposes, but all are part of the social media investigative toolkit that allows access to more information to support effective claim resolution more than ever before. Many experts opine that these tools have provided unprecedented advances to the investigative discipline so needed in a world of increasingly dubious motivations.
When the Law Steps in
It's important to understand that lawyers representing many claim consumers have made understanding their clients' social network profile a top priority. This should not be a surprise since they don't want to be surprised downstream when Web-based evidence might come forth in a court of law and be potentially dispositive to the legitimacy of a case. If they're concerned, then we know the claim professional must take this new source of intelligence seriously.
We should not forget to ensure we follow the law. And while there are not many directly applicable laws that confine social network investigations, there are privacy laws that are most applicable. Among them are the National Association of Insurance Commissioners Insurance Information and Privacy Protection Model Act (NAIC 670-1) that appropriately urges ethical behaviors when engaged in data collection and use, regardless of the sources. They loosely align with the model laws for professional conduct that are applicable to behavioral expectations for lawyers.
Here are a few things to keep in mind relative to the use of Facebook and similar competing social networking sites.
Messages are never deleted, including chat and emails.
Check-ins are never deleted.
Only credit card and passwords are encrypted on most sites.
Every "friend" request, even those you rejected, are stored indefinitely.
Pokes are never deleted.
"Unfriends" either way are always in the database.
The IP address used each and every time you've logged in is saved indefinitely.
Camera metadata, including time stamps and latitude/longitude of picture location (geotagging), are also saved indefinitely.
Finally, there are two laws that investigators should pay particular attention to when engaging in this work. First, the Stored Communications Act of 1986 prevents "providers" of communication services from divulging the content of private communications, such as electronic messages, to certain entities and individuals. Second, the Electronic Communications Privacy Act of 1986 limits the legal authority of "a person or entity providing an electronic communication service to the public" to disclose either the contents of electronic communications (email or instant message) or subscriber information. While not created specifically for the constraint of the social media investigators, these laws are germane to this activity. For more on the ethical questions and concerns around this type of investigative work, see the white papers at the links at the references listed below.
Many courts have permitted the discovery of social media content. To be useful, discovery demands must be narrowly tailored to produce relevant information and be reasonably calculated to lead to the development of admissible evidence. As a result, courts have upheld social media evidence in various decisions as a valid evidentiary source, and claims have been terminated as a direct result. Even without direct court adjudication, claims have been successfully denied based on social media-sourced evidence in not just workers compensation but auto and general liability claims as well. Clearly, social media must be considered in cases where it may lead to a better and/or quicker claim resolution and help motivate more integrity in the presentation of insurance claims of the future.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
The magnitude of insurance fraud surprises even insiders when they see the numbers. Property-casualty fraud is estimated by the Insurance Information Institute at $32 billion per year. The Coalition Against Insurance Fraud (CAIF) estimates further that fraud comprises up to 10 percent of loss and loss adjustment expense each year. Finally and overall, according to the CAIF estimates, annual fraud costs $80 billion per year across all lines of insurance.
That's $400–$700 per year in increased premiums and costs the average consumer $900 per year in reduced compensation. Clearly, claim fraud is a significant problem for the insurance industry and one that is growing in the workers compensation line even while average claim frequency is on the decline.
Insurance Fraud as a Crime?
The states ascribe significant importance to insurance fraud as well. The District of Columbia and 48 states make insurance fraud a specific crime. Further, the District of Columbia and 41 states have a fraud bureau dealing with multiple lines, solely workers compensation or both. Importantly, all but 14 states have statutorily mandated fraud reporting requirements, typically defined as only requiring a "suspicion."
Insurance companies have been viewed by many as justifiable targets of fraud and malingering and other behaviors that most would agree are less than honest. This is a cultural problem in America and elsewhere and is reflected in a March 20, 2013, Insurance Journal survey of US consumers titled "Insurance Fraud: A Public View, 2013 Edition," which shows the following.
I believe many of these beliefs and behaviors were born in or at least exacerbated by the Great Depression of the early 1930s. Another survey by the CAIF in 2014 found the following.
This last finding is what should really concern those who care about this exposure. Why? Because the Association of Certified Fraud Examiners in their 2014 Report to the Nations on Occupational Fraud and Abuse shows that "tips" are by far (43.3 percent) the most common way in which fraud is detected. Unfortunately, other sources suggest that, even when "tips" come in, they are often well after the fraud (some up to 18 months later), making recovery far less likely. This problem is cultural, both in society and within organizations, and is simply a microcosm of overall culture.
Why Commit Insurance Fraud?
The famous criminologist Donald Cressey put forth the theory of the "fraud triangle" as to why people engage in fraudulent activities. It is based on the following three key elements.
These correlate to three key questions that people pose as they consider engaging in fraud. First, "Do I have a reason to commit fraud?" The biggest driver is, not surprisingly, personal financial gain driven by greed and life pressures both on and off the job. Second, "Can I get away with it?" Success for the fraudster often requires weak internal controls and collusion with others, even with a solid control environment and/or reckless dishonesty, regardless of controls. As has been shown repeatedly when caught, criminals often behave as if they have no brain. In other words, it's amazing how stupidly criminals behave.
The third and final question is "Can I live with myself?" This reflects the ability to persuade oneself that something wrong is really not. Often, all internal restraints have been removed and an entitlement mentality rules. The answers these culprits provide themselves include the following.
Of course, seldom are any of these self-delusional statements actually true.
Insurance Fraud Red Flags
Every type of claim has "red flag indicators" that allow claim professionals to know when to refer a claim to a special investigative unit for more in-depth review by a properly trained and experienced fraud investigative professional. This is important to achieving the efficiencies needed by claim administrators where, like everywhere, limited resources need to be appropriately allocated to where they can produce the best results. Fraud experts suggest that two or more of these elements are good indicators of likely fraud.
In the workers compensation world, there are common indicators of fraud. The top 10 include the following.
The Influence of Social Media
If there is any doubt about the pervasive nature of social media, consider the following facts.
Social networking sites have changed the way people interact and are used daily by over 70 percent of the US population. They will continue to increase the amount of information available to investigators as people love to share and promote themselves, their own brand, and their popularity. Fear of being left out and addiction are often cited as key drivers for the growth of social media use.
With these facts in mind, it is clear that social media is both here to stay and will be a growing source of information used for a variety of purposes, including identifying and shutting down fraudulent insurance claims.
Detecting Insurance Fraud
So, now that we have a better understanding of what the predicates of fraud are and why people do what they do, let's move on to how we detect and address it with an emphasis on how social media has become one of the biggest boosters to successful fraud detection and prosecution. It used to be that proving claim fraud meant hiding in the bushes to catch claimants doing things they said they couldn't. While sometimes successful, getting useable evidence was expensive and sometimes dangerous. This is not to say that this method is no longer used or useful; in fact, it is. But there are many other methods for dealing with suspected fraud that are typically applied on a customized basis, depending on the case facts and other circumstances.
One of those that has proven highly productive is social media investigations. This is the method of having trained investigators dive into the social networks of claimants (e.g., Facebook, Myspace, LinkedIn, etc.), sifting through typically personal information looking for court-admissible evidence that has the potential of stopping suspected fraudulent behavior and terminating the related claims.
Fundamentally, social media investigation is applied to further develop the basic investigative information generated by most every insurance claim, including witnesses, claimant identification, claimant activity, evidence of disability, appropriateness of medical care, etc. But, where social media is particularly rich and often uniquely applied is in its ability to find and leverage relationships tied to claimants that can point to and ideally validate suspicions of exaggerated and/or illegal conduct. These often validate the "red flags" and related proof of the suspected behaviors.
To use this tool most effectively, it is important to understand that skilled expertise is required. As a result, it is not typical for the frontline claim professional to attempt to leverage social network sources, as much as many of them might want to and even feel qualified to do so. In fact, the common rules of evidence suggest that delving into this source of information should be done carefully and with specific and targeted intent. In other words, beyond using properly trained and credentialed fraud professionals, knowing where to go on the Web, how to get there, and which information and in what form may be most useful require professional fraud expertise in the use of social media. Nevertheless, certain limited prereferral to a special investigation unit (SIU) activity can be done by the claim file handler to validate the potential for a deeper dive into the world of social media on the Web. This activity might take the form of the following.
Once completed, the key questions to be asked are the following.
From these questions, the referral to the SIU can then be made, and the appropriate tools can be selected to mine the Internet for answers. Among the many tools that are commonly employed are the following.
Each of these has specific and narrow purposes, but all are part of the social media investigative toolkit that allows access to more information to support effective claim resolution more than ever before. Many experts opine that these tools have provided unprecedented advances to the investigative discipline so needed in a world of increasingly dubious motivations.
When the Law Steps in
It's important to understand that lawyers representing many claim consumers have made understanding their clients' social network profile a top priority. This should not be a surprise since they don't want to be surprised downstream when Web-based evidence might come forth in a court of law and be potentially dispositive to the legitimacy of a case. If they're concerned, then we know the claim professional must take this new source of intelligence seriously.
We should not forget to ensure we follow the law. And while there are not many directly applicable laws that confine social network investigations, there are privacy laws that are most applicable. Among them are the National Association of Insurance Commissioners Insurance Information and Privacy Protection Model Act (NAIC 670-1) that appropriately urges ethical behaviors when engaged in data collection and use, regardless of the sources. They loosely align with the model laws for professional conduct that are applicable to behavioral expectations for lawyers.
Here are a few things to keep in mind relative to the use of Facebook and similar competing social networking sites.
Finally, there are two laws that investigators should pay particular attention to when engaging in this work. First, the Stored Communications Act of 1986 prevents "providers" of communication services from divulging the content of private communications, such as electronic messages, to certain entities and individuals. Second, the Electronic Communications Privacy Act of 1986 limits the legal authority of "a person or entity providing an electronic communication service to the public" to disclose either the contents of electronic communications (email or instant message) or subscriber information. While not created specifically for the constraint of the social media investigators, these laws are germane to this activity. For more on the ethical questions and concerns around this type of investigative work, see the white papers at the links at the references listed below.
Many courts have permitted the discovery of social media content. To be useful, discovery demands must be narrowly tailored to produce relevant information and be reasonably calculated to lead to the development of admissible evidence. As a result, courts have upheld social media evidence in various decisions as a valid evidentiary source, and claims have been terminated as a direct result. Even without direct court adjudication, claims have been successfully denied based on social media-sourced evidence in not just workers compensation but auto and general liability claims as well. Clearly, social media must be considered in cases where it may lead to a better and/or quicker claim resolution and help motivate more integrity in the presentation of insurance claims of the future.
References
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.