Latest Report: Insurance Fraud on the Rise

The Property Casualty Insurers Association of America (PCI) and FICO (Fair Isaac, maker of fraud detection software) conducted a survey of underwriters that reveals almost half of the companies that participated (45% to be exact) think that insurance fraud represents 5% to 10% of their total claim reports, while a third of the participants believe that fraud costs comprise as much as 20% of their claims.

The horizon isn't rosy either. Over half of the companies surveyed anticipate a rise in the cost of fraudulent claims on personal insurance lines. Of course, commercial lines have always been thought to be rife with a surfeit of suspicious claims. These cases add burdensome cost throughout the system (the “fraud tax” concept).  

The largest areas of fraud include workers compensation, commercial auto, commercial property, personal auto, and personal property. Interestingly, the prediction from those surveyed is that workers compensation, personal property, and personal auto will demonstrate the most significant increase in fraud costs in the coming year.  

Of course, there is nothing shocking about the maker of fraud detection analytics co-sponsoring a survey on what insurance companies believe is the extent of “fraud.” You can classify that as smart market research. Neither is it particularly astounding that insurers think that “fraud” is on the increase, and workers compensation is one of the lines in the forefront of that prediction.

My issue is the actual definition of “fraud” within the WC area. Fraud is usually taken to mean a material misrepresentation of facts. In its “pure” form, it can represent the report of an accident that never took place, or one that occurred outside of the course and scope of employment.  These examples can be termed “hard fraud,” or “outright fraud.”  But what about “soft fraud” which is usually termed a gray area?  

“Soft fraud” may be classified as the embellishment of disability. The accident is compensable, and there is bodily injury sustained, but the injured employee magnifies the physical impact of the incident to extend disability and obtain a more lucrative settlement.

I'm not commenting about situations where an injured employee claims to be disabled and is then found to be working. That is more a “hard fraud” case. The soft fraud claim is of the type where the legitimately injured employee exaggerates the physical aspect of the injury. For example, an accident involving the low back is claimed to produce exquisite pain that restricts motion to a great degree when this simply is not the case.

For those of us who have been involved in WC for decades, it is intuitively obvious that the incidence of “soft fraud” is far more common than “hard fraud.” It is also virtually impossible to stop (or to quantify in terms of cost).

In order to controvert a claim of subjective pain, you must have a physician testify (either in writing or orally) that the injured employee's complaints of pain have no objective foundation in fact. Try to find a doctor who is going to say that based on an IME review! The fact that each person has varying levels of pain tolerance, and what one may think is excruciating another may think is incidental, makes it more than difficult to try and challenge “soft fraud.”

From time immemorial, insurance companies have been willing to offer increased settlement amounts over their objective valuation of claim worth in order to make the case “go away.” To this extent, they participate in the “soft fraud” phenomenon. Additionally, all of analytical algorithms that FICO and other organizations create will never be able to separate truth from fiction when it comes to a person's claim of pain level.

In reality, “soft fraud” has always been the cost of doing business in the WC arena. What that cost is remains an elusive figure, but rest assured it is not insignificant. This institutionalized cost burden will not be dissipating any time soon.

In the meantime, accolades to the efforts to identify and eradicate hard fraud. This is an area where anti-fraud analytics can make a substantive difference. But soft fraud will remain the bane of the WC underwriter, and other than pass the cost along to the consumer in the form of rate increase that take into account total claim costs, there is in reality little to be done about it.

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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

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