Gaming the Workers Comp System

Usually when we think of fraud in the WC arena, it conjures up pictures of injured workers embellishing their disability.

If you have been keeping up with recent developments, you no doubt have read about the fact that AIG is paying out $596 million to settle two court actions. The first involves $146 million to various states where AIG has apparently under reported $2.1 billion in WC premium between 1985 and 1996. The second involves $450 million to AIG’s competitors in the WC market, the likes of which include, among others, Liberty Mutual, Travelers, Hartford, and ACE.  

Now WC is certainly not the “ne plus ultra” line of profit in any P/C environment. In the last two decades there have been only three years where the industry combined loss ratio has been under 100%. So what did AIG gain by under reporting WC premiums? The advantage was twofold. First, lower residual market financial liabilities along with reduced premium taxes and assessments.

Second, it placed AIG’s major competition in the WC line at a competitive disadvantage by forcing those competitors to pay higher than appropriate assessments to fund the residual markets around the nation, while AIG paid less? 

This is serious stuff, folks. AIG subsidiary insurance companies (e.g. American Home, National Union, Commerce & Industry, Insurance Company of the State of PA, Granite State, etc.) cumulatively have been in the top five WC carriers in terms of total premium for the last three decades. By systematically under reporting comp premiums by billions of dollars for over a decade, AIG was “gaming” the system to their advantage. It took a while for the issue to be discovered, but in 2006 the NY Attorney General began an investigation that eventually led to the discovery of the situation and begin to seek redress.  Multiple states, alerted to the problem by NY, began to follow suit.

Of course, AIG’s WC carrier competitors were not to be denied their day in court, and filed what was eventually certified as a class action suit against AIG’s business practices. In fact, AIG’s largest WC competitor, Liberty Mutual, was grossly dissatisfied with the recent $450 million “settlement” of the class action and has filed an appeal because they do not think the amount of settlement is fair. I’m sure senior management at AIG took that kick in the crotch in the spirit in which it was meant.  

Let’s be mindful of the fact that AIG was bailed out of total financial ruin by the taxpayers in 2009 in the amount of $186 billion dollars. So the $596 million to settle the actions were really borne by the US taxpaying citizens. There is something obscene about that scenario.

So what does this unfortunate episode teach us? Cheating is wrong? State premium audits are not rigorous enough? No company should be immune to the discipline of market failure and be bailed out with taxpayer funds? At the core, I think the lesson is a gross failure of management ethics and morals.

Keep in mind that the under reporting of WC premium was documented to have lasted over a decade. In no sense of reality can that be termed a singular “mistake.” Indeed, this transgression became institutionalized as standard operating procedure.

Senior management at AIG during the period the WC premium under reporting was transpiring were guilty of negligence by not knowing what was occurring, or even more diabolical, knowing what was occurring and endorsing the activities.  In any event, wrong was done, and the consequences, though slow to materialize, have arrived.

A failure of ethics and morals is a harbinger of more endemic problems than this episode illustrates. However, in the scheme of things, this behavioral trend by AIG is hopefully in the past.

AIG faces serious hurdles in paying back the loans that prevented the AIG ship from capsizing in 2009. However, this episode does illustrate the axiom that, in business as well as our personal lives, “for evil to triumph, all it takes is for good men to do nothing.”    

About the Author:

John D’Alusio has over 30 years experience in P/C insurance with executive management positions in administration, field operations, and claim technical areas. Mr. D’Alusio has had many articles published in industry periodicals, and is also a contributing author to the LexisNexis published, “Complete Guide to Medicare Secondary Payer Compliance.”  He writes a monthly column for Risk & Insurance Magazine and is a quarterly columnist for AMComp Magazine.

His Risk & Insurance column is located at:
http://www.riskandinsurance.com/workerscomp.jsp