JAI HIND COLLEGE

BASANTSINGH INSTITUTE OF SCIENCE &

J.T.LALVANI COLLEGE OF COMMERCE

23-24, Backbay Reclamation, “A”Road, Churchgate, Mumbai – 400 020

B.Com In (banking & Insurance)

Frauds In Insurance

Name of the Student: Kejriwal Surbhi

Seat No: ____________

Date: ____________

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DECLARATION

I, Kejriwal Surbhi Gopal of Jai Hind College Of T.Y.BBI(Semester VI)hereby declare that I have completed this project on Frauds InInsurancein the Academic year 2005-2006 The information submitted istrue andoriginal to the best of my knowledge.

Signature of the Student

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CERTIFICATE

I, Mrs. Suri hereby certify that Kejriwal Surbhi Gopal of JaiHind College ofT.Y.BBI (Semester VI) has completed the project on Frauds InInsurance.In the Academic year 2005-2006. The information submittedis true andoriginal to the best of my knowledge.

Signature of the Project Signature of thePrincipalCoordinator of thecollege

3

NTENTSCO

TOPICS COVERED PAGE

NUMBER

Acknowledgement 5

Introduction To Frauds 6

Insurance Fraud And Abuse 9

Schemes, Scams, Scammed 16

Real Eyes...Realize...Real Lies… 18

Itching To Know Who Can Help? 24

Division Of Insurance Fraud 25

Deceptive Life Insurance Sales Practices Continue 26

Viatical Settlements Investment Fraud 29

Case Study 32

Be Aware, Don’t Be A Victim 40

International Association Of Insurance Fraud Agencies(Iaifa) 45

Dealing With Fraud On The Net 48

Precaution Is Better Than Cure 52

Summary 56

Bibliography 58

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ACKNOWLEDGEMENTS

I Surbhi Kejriwal, the student of Jai Hind College pursuing mythird year ofBachelors of Banking & Insurance (T.Y.B.B.I), am verygrateful to a lot ofpeople for guided and helping me in the right directionthroughout myproject.

First of all, I would like to specially thank Mr. Iyer andMr. Joshi, forintroducing me to such a wonderful and challenging topicbecause ofwhich I learnt about the world and especially about the variousfrauds thattake place in detail and for being my guide in the true sense ofthe wordand for guiding, correcting and motivating me at each andevery momentduring my project.

I would also like to thank Mrs. Suri, our coordinator to whomwe shallforever remain indebt for setting the foundation for thiscourse and forassisting in the project whenever help was required.

5

Introduction to frauds

What Are Frauds?

In a broad strokes definition, fraud is a deliberatemisrepresentation whichcauses another person to suffer damages, usually monetarylosses. Mostpeople consider the act of lying to be fraud, but in a legal senselying isonly one small element of actual fraud.

A salesman may lie about his name, eye color, place of birthand family,but as long as he remains truthful about the product he sells, hewill notbe found guilty of fraud. There must be a deliberatemisrepresentation ofthe product's condition and actual monetary damages mustoccur.

Many fraud cases involve complicated financial transactionsconducted by'white collar criminals', business professionals with specializedknowledgeand criminal intent. An unscrupulous investment brokermay presentclients with an opportunity to purchase shares inprecious metalrepositories.

For example, His status as a professional investor gives himcredibility,which can lead to a justified believability among potentialclients. Thosewho believe the opportunity to be legitimate contributesubstantialamounts of cash and receive authentic-looking bonds inreturn. If theinvestment broker knew that no such repositoriesexisted and stillreceived payments for worthless bonds, then victims maysue him forfraud.Fraud is not easily proven in a court of law. Laws concerningfraud mayvary from state to state, but in general several differentconditions mustbe met. 6

One of the most important things to prove is a deliberate

misrepresentation of the facts. Did the seller know beforehandthat theproduct was defective or the investment was worthless? Someemployeesof a large company may sell a product or offer a servicewithout personalknowledge of a deception.

The account representative who sold a fraudulent insurancepolicy onbehalf of an unscrupulous employer may not have known thepolicy wasbogus at the time of the sale. In order to prove fraud, theaccuser mustdemonstrate that the accused had prior knowledge andvoluntarilymisrepresented the facts.

Another important element to prove in a fraud case isjustifiable or actualreliance on the expertise of the accused. If a strangerapproached youand asked for ten thousand dollars to invest in avending machinebusiness, you would most likely walk away. But if a well-dressed manheld an investment seminar and mentioned his success in thevendingmachine world, you might rely on his expertise and perceivedsuccess todecide to invest in his proposal. After a few months haveelapsed withoutfurther contact or delivery of the vending machines, you mightreasonablyassume fraud has occurred. In court, you would have to testifythat yourinvestment decision was partially based on a reliance on hisexpertiseand experience.

The element of fraud which tends to stymie successfulprosecution is theobligation to investigate. It falls on potential investors orcustomers to fullyinvestigate a proposal before any money exchanges hands.Failure to take appropriate measures at the time of theproposal canseriously weaken a fraud case in court later. The accused canclaim thatthe alleged victim had every opportunity to discover thepotential for fraudand failed to investigate the matter thoroughly. 7

Once a party enters into a legally binding contract,remorse over theterms of the deal is not the same as fraud.

The dictionary defines fraud as the intentionalperversion of truth toinduce another to part with something of value or to surrendera legalright. Insurance fraud can be “hard” or “soft.” Hard fraudoccurs whensomeone deliberately fabricates claims or fakes an accident.Criminalsare using increasingly sophisticated electronic schemesto defraudinsurance companies.

Soft insurance fraud, also known as opportunistic fraud,occurs whennormally honest people pad legitimate claims or intentionallyunderstatethe number of miles they drive each year or, in the case ofbusinessowners, list fewer employees or misrepresent the work they doto get alower premium.

Those who commit insurance fraud range from organizedcriminals whosteal large sums through fraudulent business activities andinsuranceclaim mills to professionals and technicians who inflatethe cost ofservices or charge for services not rendered, to ordinary peoplewho wantto cover their deductible or view filing a claim as anopportunity to make alittle money.

Some lines of insurance are more vulnerable to fraud thanothers. Healthcare, workers compensation and auto insurance are believed tobe thesectors most affected. 8

Insurance Fraud and Abuse:

A Very Serious Problem

Fraud and abuse are widespread and very costly to anycountry’s health-care system. Fraud involves intentional deception ormisrepresentationintended to result in an unauthorized benefit. An examplewould be billingfor services that are not rendered.

Abuse involves charging for services that are not medicallynecessary, donot conform to professionally recognized standards, or areunfairly priced.An example would be performing a laboratory test on largenumbers ofpatients when only a few should have it. Abuse may be similarto fraudexcept that it is not possible to establish that the abusive actswere donewith an intention to deceive the insurer.

Type of Fraud and Abuse

False claim schemes are the most common type of healthinsurancefraud. The goal in these schemes is to obtain undeservedpayment for aclaim or series of claims. Such schemes include any of thefollowing whendone deliberately for financial gain:

Billing for services, procedures, and/or supplies thatwere not

•

provided.

Misrepresentation of what was provided; when it was provided;the

•condition or diagnosis; the charges involved; and/or the identityofthe provider recipient.Providing unnecessary services or ordering unnecessary tests.•

Many insurance policies cover a percentage of the physician's"usual" fee.Some physicians charge insured patients more than uninsuredones butrepresent to the insurance companies that the higher fee is theusual one. 9

This practice is illegal. It is also illegal to routinely excusepatients fromco-payments and deductibles. (A co-payment is a fixedamount paidwhenever an insured person receives specified health-careservices. Adeductible is the amount that must be paid before the insurancecompanystarts paying. ) It is legal to waive a fee for people with agenuine financialhardship, but it is not legal to provide completely free care ordiscounts toall patients or to collect only from those who have insurance.

Studies have shown that if patients are required to pay for evena smallportion of their care they will be better consumers and selectitems orservices because they are medically needed rather than becausethey arefree. Routine waivers thus raise overall health costs. They areconsideredfraudulent because averaging them with the doctor's full feeswould makethe "usual" fees lower than the amounts actually billed for.

Other illegal procedures include:

Charging for a service that was not performed.•

Unbundling of claims: Billing separately for procedures thatnormally

•

are covered by a single fee. An example would be a podiatristwhooperates on three toes and submits claims for threeseparateoperations.

Double billing: Charging more than once for the same service.•

Up coding: Charging for a more complex service thanwas

•

performed. This usually involves billing for longer or morecomplexoffice visits (for example, charging for a comprehensive visitwhenthe patient was seen only briefly), but it also can involvechargingfor a more complex procedure than was performed or formoreexpensive equipment than was delivered. Medicaredocumentationguidelines describe what the various levels of serviceshouldinvolve. 10

Miscoding: Using a code number that does not applyto the

•

procedure.

Kickbacks: Receiving payment or other benefit for making areferral.

•

Indirect kickbacks can involve overpayment for something ofvalue.

For example, a supplier whose business depends onphysicianreferrals may pay excessive rent to physicians who own thepremisesand refer patients. Another example would be a mobile testingservicethat performs diagnostic tests in a doctor's office. Kickbackscan distortmedical decision-making, cause over utilization, increasecosts, andresult in unfair competition by freezing outcompetitors who areunwilling to pay kickbacks.

Criminals sometimes obtain Medicare numbers for fraudulentbilling byconducting a health survey, offering a free "health screening"test, payingbeneficiaries for their number, obtaining beneficiary listsfrom nursinghomes or boarding facilities, or offering "free" services, food,or suppliesto beneficiaries.

Excessive or Inappropriate Testing

Many standard tests can be useful in some situations but not inothers.The key question in judging whether a diagnostic test isnecessary iswhether the results will influence the management of thepatient. Billingfor inappropriate tests—both standard and nonstandard—appears to bemuch more common among chiropractors and jointchiropractic/medicalpractices than among other health-care providers. Thecommonly abusedtests include:

Computerized inclinometers: Inclinometers is a procedure that•

measures joint flexibility. Inclinometer testing may beuseful ifprecise range-of-motion measurements are needed for adisability 11

evaluation, but routine or repeated measurements "togauge apatient's progress" are not appropriate.

Nerve conduction studies: These tests can provide valuable

•

information about the status of nerve function invariousdegenerative diseases and in some cases of injury.However,"personal injury mills" often use them inappropriately "to"follow theprogress" of their patients.

Thermographs: Thermo-graphic devices portray small temperature

•

differences between sides of the body as images.Chiropractorswho use thermographs typically claim that it candetect nerveimpingements or "nerve irritation" and is useful formonitoring theeffect of chiropractic adjustments on subluxations. These usesarenot appropriate.

Unnecessary x-rays: X-rays examinations can be important to look

•

for conditions that require medical referral. However, itis notappropriate for chiropractors to routinely x-ray every patient tolookfor "subluxations" or to "measure the progress" ofpatients whoundergo spinal manipulation.

Many insurance administrators are concerned aboutchiropractic claimsfor "maintenance care" (periodic examination and "spinaladjustment" ofsymptom-free patients), which is not a covered service. Todetect suchcare, many companies automatically review claims formore than 12visits.

Personal Injury MillsMany instances have been discovered in which corruptattorneys andhealth-care providers combine to bill insurance companies fornonexistentor minor injuries. The typical scam includes "cappers" or"runners" whoare paid to recruit legitimate or fake auto accident victimsor worker'scompensation claimants. Victims are commonly told theyneed multiple 12

visits. The providers fabricate diagnoses and reportsand commonlyprovide expensive but unnecessary services.

The lawyers then initiate negotiations on settlements basedupon thesefraudulent or exaggerated medical claims. Theclaimants may beunwitting victims or knowing participants who receivepayment for theirinvolvement. Mill activity can be suspected when claims aresubmitted formany unrelated individuals who receive similar treatmentfrom a smallnumber of providers.

Quackery-Related Miscoding

In processing claims, insurance companies rely mainly ondiagnostic andprocedural codes recorded on the claim forms. Theircomputers areprogrammed to detect services that are not covered.Most insurancepolicies exclude nonstandard or experimental methods. Tohelp boosttheir income, many nonstandard practitioners misrepresentwhat they do.They may also misrepresent their diagnosis. For example:

Brief or intermediate-length visits may be coded aslengthy or

•

comprehensive visits.

Patients receiving chelating therapy may be falselydiagnosed as

•

suffering from lead poisoning; and the chelating may be billedas"infusion therapy" or simply an office visit.

The administration of quack cancer remedies may bebilled as

•

"chemotherapy."Nonstandard allergy testsmay be represented as standard ones.•Viatical Fraud

In viatical settlement transactions, people with terminalillnesses assigntheir life insurance policies to viatical settlement companies inexchangefor a percentage of the policy's face value. The company, inturn, may sell 13

the policy to a third-party investor. The company or theinvestor thenbecomes the beneficiary to the policy, pays the premiums, andcollectsthe face value of the policy after the original policyholder dies.

Fraud occurs when agents recruit terminally ill people to applyfor multiplepolicies. They misrepresent the truth and answer "no" to all ofthe medicalquestions. Healthy impostors then undergo the medicalevaluation. Inmany cases, the insurance agent who issues the policy is a partyto thescheme. The agent or one applicant may even submitthe sameapplication to many insurance companies.

Viatical settlement companies then purchase the policies andsell them tounsuspecting third-party investors. The insurance industry isthe biggestvictim of this fraud and could incur huge losses within the nextfew years.Some investors receive nothing in return for their"guaranteed"investment.

Bogus Health Insurance Companies

There have been two reports issued concerning thesale of healthinsurance plans that lack legal authorization. These plans placethe buyerat risk for financial disaster if serious illness strikes. One reportfocuseson consumer vulnerability. The other notes that from 2000 to2002, 144unauthorized entities enrolled at least 15,000 employers andmore than200,000 policyholders who got stuck for over $200million in unpaidclaims.The investigators found that many of the entitles bore namessimilar tothose of legitimate companies. In response to thereport, the HealthInsurance Institute of America is again urging the NationalAssociation ofInsurance Commissioners to create an online database oflicensed healthinsurance companies so that anyone can easily check thelegitimacy of 14

companies offering health insurance products. Meanwhile, theCoalitionagainst Insurance Fraud offers a few warning signs of apossible swindle:

The plan readily accepts people with serious illnesses andother

•

medical conditions that other plans normally reject.

The insurance has few or no underwriting guidelines—theagent or

•

rep appears almost too eager to sign you up.

You're approached by an insurance agent, phone or directmail.

•

Honest group plans normally are sponsored by your employer—andaren't sold directly to individuals.

The plan isn't licensed in your state, and the agent (falsely)assures

•

you the federal ERISA law exempts the plan from statelicensing.The plan seems like insurance, but the agent or rep avoidscalling

•

"insurance," and instead uses evasive terms such as "benefits."

The agent or rep doesn't have clear answers to yourquestions,

•

seems ill-informed, or avoids sharing information.

You've never heard of that health insurance company—andnobody

•

else has, either.

Your hospital keeps calling you to complain that your healthplan

•

isn't paying your medical bills. Often the plan's reps keepmakingflimsy excuses, or stop returning phone calls altogether.

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Schemes, scams, scammed

Property/casualty insurance fraud cost insurers about $30billion in 2004.Fraud may be committed at different points in the insurancetransactionby different parties: applicants for insurance,policyholders, third-partyclaimants and professionals who provide services to claimants.

Common frauds include "padding," or inflating actualclaims;misrepresenting facts on an insurance application; submittingclaims forinjuries or damage that never occurred; and "staging"accidents.Prompted by the incidence of insurance fraud, about 40 stateshave setup fraud bureaus. These agencies are reporting a record numberof newinvestigations, significant increases in referrals — tip aboutsuspectedfraud — and cases brought to prosecution.

RECENT DEVELOPMENTS

The hurricanes of 2005, especially Hurricane Katrina, are likelytoresult in a surge in insurance fraud. In addition tothe usualschemes, where homeowners or renters make claims forstereos,televisions or other expensive items they never purchased,andinflate claims for items actually destroyed, home arsons are ontherise. Since many homeowners in the Gulf areas did not havefloodinsurance, they may not be covered for some or all of thedamagecaused by the hurricanes. Dozens of fires have broken out inmanyaffected communities, some of which may be the result ofarson. 16

The National Insurance Crime Bureau (NICB) saysthat byNovember 2005, there were 160,000 vehicles in its floodedmotorvehicle and boat database, which was set up by catastrophesteamsto combat title fraud in the hurricane-affected states.The NICBwarns that flooded vehicles may be cleaned up, moved and soldinother areas of the country by unscrupulous operators. Althoughthevehicles were totaled by insurance companies andidentified as“salvage” on their titles, which means they are not fit for anyuseexcept for scrap or parts, they could end up on the market instateswhere it is relatively easy to apply for a regular title. A databasewascreated in which vehicle identification numbers (VINs) andboat hullidentification numbers (HINs) from flooded vehicles and boatscouldbe stored and made available to law enforcers, state fraudbureaus,insurers and state departments of motor vehicles.

One in 10 paid bodily injury liability (BI) auto claims inCalifornia hadthe appearance of fraud or misrepresented the facts of theclaim,according to the Insurance Research Council’s Fraud.Morecommon is the appearance of buildup, or the padding ofclaims,which was found in one in five claims. The study,released inJanuary 2006, examined about 73,000 claims closed withpaymentin 2002. It found that between $319 and $432 million in BIpaymentswere attributable to fraud and buildup.

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Real eyes...Realize...Real lies…

Short History of Antifraud Efforts

Fraud in insurance has undoubtedly existed since theindustry'sbeginnings in the seventeenth century, but it received littleattention untilthe 1980s because law enforcement agencies had otherpriorities andwere reluctant to provide the training needed to investigate andprosecutecases of insurance fraud. And, given the fine line betweeninvestigatingsuspicious claims and harassing legitimate claimants, someinsurers wereafraid that a concerted effort to eradicate fraud might beperceived as ananti-consumer move. In addition, the need to complywith the timerequirements for paying claims imposed by fair claim practiceregulationsin many states made it difficult to adequatelyinvestigate suspiciousclaims.

But by the mid-1980s the rising price of insurance, particularlyauto andhealth insurance, together with the growth in fraudcommitted byorganized criminals, prompted many insurers to reexaminethe issue.Gradually, insurers began to see the benefit of strengtheningantifraudlaws and more stringent enforcement as a means of controllingescalatingcosts — a pro-consumer move — and they found ready alliesamongthose who been adversely affected by fraud. These includedconsumers,who were paying for fraud through their insurance premiums;the peopleused by organized fraud groups to file false claims, often thepoor, whosometimes found themselves on the wrong side of thelaw; andchiropractors and other medical professionals who wereconcerned thattheir reputation as a group was being tarnished byorganized fraudringleaders who had recruited their members to makefraudulent claimsfor treatment. 18

In their fight against fraud, insurers have also been hamperedby publicattitudes. Ongoing studies by the Insurance Research Councilshow thatsignificant numbers of Americans think it is all right toinflate theirinsurance claims to make up for all the insurance premiumsthey havepaid in previous years when they have had no claims, or to pada claim tomake up for the deductible they would have to pay.

Antifraud activity on the part of state fraud bureaus andSIUs (specialinvestigative units within insurance companies) increased in the1990s.Heightened antifraud activity along with growth infunding for fraud-fighting personnel resulted in increased prosecutions.Successfulprosecution not only blocks future fraudulent activities byindividuals whoare repeat offenders, but news of prosecutions also acts as adeterrent toothers who may be contemplating committing fraudulent acts.

While the focus initially was on auto insurance fraud, antifraudefforts alsoencompass workers compensation fraud, whereinvestigations aredirected toward employers who, to obtain a lower premium,misrepresenttheir payroll or the type of work carried out by their employees.These twofactors impact premiums. Payroll is important becauseworkerscompensation insurance provides for lost wages andinsurers need toknow the maximum they would have to pay if all employeeswere injuredin the same accident; the type of work carried out by the firmaffects thelikelihood of injuries. Workers that use cutting tools, forexample, aremore likely to get injured on the job than office workers. Someemployersalso apply for coverage under different names to foil attemptsto recovermonies owed on previous policies or to avoid detection of theirpoor claimrecord, which would put them in a higher rating category.Fraud and abuse take place at many points in the health caresystem.Doctors, hospitals, nursing homes, diagnostic facilities andattorneys have 19

been cited in scams to defraud the system. One huge area offraud is theMedicare and Medicaid systems. Health care is especiallysusceptible toelectronic data interchange (EDI) fraud. EDI is direct filing ofclaims —computer to computer — and is widely used for Medicareclaims.In 1999, the Government Accounting Office released astudy of theMedicare, Medicaid and private health insurance sectors thatconfirmedthat organized crime is heavily involved in healthcare fraud. Theinvestigation found that in seven cases of health care fraudstudied, about160 health related groups — medical clinics, physician groups,labs ormedical suppliers — had submitted fraudulent claims.The criminalsidentified in the report were not health care workers butcriminals alreadyprosecuted for securities fraud, forgery and auto theft.Apparently, thesecriminals had moved to health care because fraud wasrelatively easy toaccomplish.

Anti-Fraud Programs

Several large insurance companies have joined forcesthrough theNational Health Care Anti-Fraud Association to developsophisticatedcomputer systems to detect suspicious billing patterns.The FederalBureau of Investigation (FBI) and the Office of theInspector General(OIG) each have assigned hundreds of special agents tohealth-fraudprojects. The Coalition Against Insurance Fraud ,a public advocacy and

educational organization founded in 1993, includes consumersas well asgovernment agencies and insurers.The Omnibus Consolidated Appropriation Act of 1997authorized a HealthCare Anti-Fraud, Waste, and Abuse Community VolunteerDemonstrationProgram to further reduce fraud and abuse in the Medicare andMedicaidprograms. The program enrolled thousands of retiredaccountants, healthprofessionals, investigators, teachers, and other communityvolunteers to 20

help Medicare beneficiaries and others to detect and reportfraud, waste,and abuse.

The Inspector General's office has recovered over a billiondollars throughfines and settlements. Its Operation Restore Trust, which beganin 1995,was a joint federal-state program aimed at fraud, waste, andabuse inthree high-growth areas of Medicare and Medicaid:home healthagencies, nursing homes, and durable medical equipmentsuppliers. Thequestionable activities included:

Billing for advanced life support services when basic lifesupport

•

was provided. Documentation may be falsified to indicate apatientneeded oxygen—which is a key indicator in establishingmedicalnecessity for advanced life support.

Billing for larger amounts of drugs than are dispensed; orbilling for

•

brand-name drugs when less expensive generic versionsaredispensed.

Billing for more miles than traveled for transportation.•

Falsification of documentation to substantiate the needfor a

•

transport from a hospital back to the patient's home. Medicarewillonly cover transport from hospital to home if the patient couldnot goby any other means.

Insurers’ Antifraud Measures

Insurance companies are not law enforcement agencies. Theycan onlyidentify suspicious claims, withhold payment where fraud issuspectedand to justify their actions by collecting the necessary evidenceto use in acourt. The success of the battle against insurancefraud thereforedepends on two elements: the resources devoted by theinsuranceindustry itself to detecting fraud and the level ofpriority assigned bylegislators, regulators, law enforcement agencies and society asa wholeto eradicating it. 21

Many insurance companies have established specialinvestigation units(SIUs) to help identify and investigate suspicious claims; someinsurancecompanies outsource their units to other insurers.

These units range from a small team, whose primary role is totrain claimrepresentatives to deal with the more routine kinds of fraudcases, toteams of trained investigators, including former lawenforcement officers,attorneys, accountants and claim experts to thoroughlyinvestigatefraudulent activities. More complex cases, involving large scalecriminaloperations or individuals that repeatedly stage accidents, maybe turnedover to the National Insurance Crime Bureau (NICB).This insuranceindustry-sponsored organization has special expertise inpreparing fraudcases for trial and serves as a liaison between the insuranceindustry andlaw enforcement agencies. In addition, it publicizes thearrest andconviction of the perpetrators of insurance fraud to helpdeter futurecriminal activities. Insurance company surveys confirmthat SIUsdramatically impact the bottom line of many insurancecompanies.

In the mid-1990s insurers said that for every dollar theyinvested inantifraud efforts, including SIUs, they got up to $27back, but thesereturns have become harder to achieve as the moreapparent fraudschemes have been uncovered and more effort is necessary toferret outthe sophisticated fraud that remains. A 2000 study by ConningResearch& Consulting suggests that results vary widely. Using the ratioof “claimsexposure reduction” to the expense of running SIUs, thestudy foundratios ranging from a low of 3 to 1 to a high of 27 to 1,depending on theyear and line of insurance. Although some insurers are cuttingback onfraud investigation by outsourcing investigations anddissolving their fraudunits, advances in software technology, especiallyprograms that siftthough the millions of claims that large health insurers processannually,are proving effective in fighting fraud. These “data mining”programs can 22

uncover repetitions and anomalies and analyze links tofraudulentactivities or entities.

The consolidation of insurance industry claims databaseshas put avaluable new tool in the hands of investigators. The InsuranceServicesOffice Inc.'s system, known as Claim Search, utilizesa data-miningprogram. Claim Search is the world’s largest comprehensivedatabase ofclaims information. The NICB has developed a program calledPredictiveKnowledge that collects and analyzes informationwhich can bedisseminated to insurers and law enforcement agenciesto detect,investigate and prevent insurance fraud. In addition,the NICB, inpartnership with iMapData Inc., introduced CAT fraud,to identifypotentially fraudulent catastrophe/weather-related insuranceclaims.A national fraud academy — a joint initiative of theProperty CasualtyAssociation of America, the FBI, NICB and the InternationalAssociationof Special Investigating Units — was designed to fightinsurance claimsfraud by educating and training fraud investigators. It offersonline classesunder the leadership of the NICB.

An emerging issue for insurers using data sharing services istheir impacton privacy. Financial institutions, including insurers,must respect theprivacy of their customers and protect their personalinformation, apractice that may deter efforts to combat fraud.

Insurers may also file civil lawsuits under the federalRacketeeringInfluenced and Corrupt Organizations Act (RICO), whichrequires provinga preponderance of evidence rather than the stricter rules ofevidencerequired in criminal actions and allows for triple damages.Since 1997,some of the largest insurers in the country, especially autoinsurers, havebeen filing and winning lawsuits against individuals andorganized ringsthat perpetrate insurance fraud. 23

ItchingTo Know Who Can Help?

Insurance Agent Fraud on the Rise

Two years ago, at the age of 90, Thomas Pickering was doingthe twist.Atthe behest of his trusted insurance agent, Pickering wasbuying andselling one annuity after another in a deceitful industrypractice called"twisting." That's when dishonest agents persuade clients tocash in oneinvestment for another—against their clients' best interestsand for theagents' own financial gain.

In Pickering's case, he followed his agent's advice, soldinvestmentsbefore they matured and lost 11,000/- in forfeited interest andpenalties.He was about to lose another 35,000/- cashing in oneannuity to buyanother,netting his agent 20,000/- in commissions. When thecompanyholding the annuity intervened. It suspected Pickering wasgetting rippedoff and called the authorities.An investigation led Florida'sDepartment ofFinancial Services (DFS) to revoke agent PeterWaldon's license forfraud.

Barry Lanier of Florida's DFS says he's fielding morecomplaints aboutgreedy agents earning whopping commissions upfrontby pitchingunsuitable investments like annuities to older people. ButLanier and otherexperts say some annuities are not considered to be wiseinvestments formost olders because they're based on life expectancy.Growingconcernover the sale of annuities to older people promptedthe NationalAssociation of Insurance Commissioners (NAIC) to adoptregulations thatassure that the annuities are suitable to the buyer's needs. 24

Division of Insurance Fraud

The Division of Insurance Fraud was originallyformed in 1976 toinvestigate only fraudulent automobile tort claims. Inthe early years,investigators had arrest powers but could not carry firearms.Today, thedivision investigates all types of insurance fraud crimes.

Investigators are assigned to work general fraud cases,workers’compensation fraud, medical and health-care fraud, andagent andcompany fraud. Areas of assignment may include:

Insolvency - Fraud committed by insurance companies thatfail

•

financially due to internal fraud by owners and corporateofficers.Unauthorized Entities - fraud, both criminal and civil,committed

•

by insurance companies operating illegally in the state.

Health Care Fraud - focuses on organized medical andhealth

•

care scams.

Workers’ Compensation - investigates employers forworkers’

•

compensation premium fraud.

Public Employee Fraud - investigates state and localgovernment

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employees for workers’ compensation claimant fraud.

25

Deceptive Life Insurance Sales Practices

Continue

The life insurance industry has been hit with billion dollarverdicts andmulti-million dollar fines for deceptive sales practices.

The two largest companies, MetLife and Prudential, have eachbeen hitwith billion-dollar-plus verdict.

Most major companies have also been sued for deceptive salespractices.The list goes on and on, as successful lawsuits finally caught upwith anindustry that has long bilked the public, misrepresented itsproduct, andignored the urgent need for basic reforms to stop abuses.

With billion dollar judgments (and that is "billion" with a "b"),you'd thinkthe industry would learn its lesson. That's what you'd think butyou'd bewrong.

The life insurance industry did establish the InsuranceMarketplaceStandards Association (IMSA). Of course, there are now adsannouncingthat the life insurance industry is committed to thefair treatment ofpolicyholders. But early returns on the industry's efforts suggestit is just asham and a shell game designed to prevent real reform bylegislation andregulation.Now a study by Professor Joseph Belth, publisher ofthe InsuranceReform, a respected newsletter on the life insurance industry,finds thereforms are a sham. I'd have to say as usual the life insuranceindustrywants to improve its public relations, not its policy relations. 26

The Insurance Forum study correctly notes that much of the lifeinsurancedeception comes about because the industry does notmake fulldisclosure on rates of return and prices necessary tosound decisionmaking by insurance buyers. By failing to disclose neededinformation,consumers are easily duped by deceptive methods.

The Insurance Forum put the industry to a test byasking the chiefexecutive officers of 40 companies (31 of which are membersof IMSA)for the kind of information that should be freely andautomaticallyavailable to prospective policyholders.

Of the 41 companies surveyed, 27 did not participate. Only 13companies(10 of which are members of IMSA) participated in the study.

And some of the 13 participants provided deceptiveinformation. Someprovided incomplete information. Some provided the kind ofinformationthat would not be helpful to the typical consumer.

The Insurance Forum study concludes that IMSA will not bringabout theneeded changes in the life insurance industry, but will simplydelay theirenactment. Most industries prefer "voluntary" action, sothe foxes cancontinue to guard (and eat) the chickens, also known aspolicyholders.

What's more, after the great life insurance scandals of the1980s and1990s, the industry is determined to perpetuate a system inwhich lifeinsurance rip-offs by major and minor companies alike willcontinue to bestandard operating procedures.The bottom line is that the life insurance industry has practicesthat areprecisely the opposite of its proclaimed ethical principles. 27

Here are some examples:

IMSA has an ethical principle that says its companymembers will"provide competent and customer-focused sales andservices." TheInsurance Forum survey suggests that most companies willengage inbusiness as usual, giving the consumer no information,inadequateinformation or deceptive information.

IMSA has another ethical principle that says it will "engage inactive andfair competition." But by not providing information orby providingdeceptive information, it is clear that major segments of theindustry willcontinue to engage in competition by confusion.

As Bob Hunter of the Consumer Federation put it, "Theproof of thepudding is in the eating. It's hard to trust the life insuranceindustry, givenits recent history. They're going to have to reprovethemselves astrustworthy."

Unfortunately, the life insurance industry is proving itselfuntrustworthy.And as for the proof of its good intention being in the pudding,my adviceis don't eat its pudding. It's the same old stuff plus a phonysermon onethical principles.

28

Viatical Settlements Investment Fraud

Historically, some insurance companies have offered anaccelerateddeath benefits option which allows the insured an opportunityto receiveup to 80% of the death benefit at any time within the last yearof theirprojected life. The remaining 20% is then paid to the insured'sestate.

On the other hand, the business of viatical settlements involvesthe sellingof a policy death benefit, at less than face value, by a terminallyill personto a third party. This is accomplished, for acommission, with theassistance of a broker who offers the policies tosettlement providercompanies for bid, with the highest bidder obtaining the policyfor resaleto investors. The broker receives a commission based on thesale price.

Size of the Industry

Fraud in the unregulated viatical settlement industryhas becomerampant; as much as 40-50% of the life insurance policiesviaticated mayhave been procured by fraud.

Clean Sheeting

Unscrupulous individuals in the viatical industry procurepolicies by apractice referred to as "clean sheeting" which is the act ofapplying for lifeinsurance while intentionally failing to disclose the applicant'sstatus asbeing terminally ill. They can get away with it initiallybecause mostinsurance companies avoid the added costs and invasiveness ofmedicalexams and blood tests by relying on an honor system below acertainpolicy face value. 29

Many insurance agents and brokers assist and often encourageaviatorsin committing the fraud because it not only provides morepolicies thanwould be available though legitimate means, but it alsoprovides a muchhigher rate of return due to the fact they can be bought fromaviators socheaply.

In a legitimate transaction, the ill person usually receives 50%-70% of theface value of the policy. However, a "clean sheeted"policy viaticatedduring the contestable period may offer as little as 10% of theface valuebecause it carries the high risk of rescission, orcancellation by theinsurance company, due to fraud.

Wet Ink Policies

After the policy is issued, the insured person will sell his policyor multiplepolicies from different insurance companies, sometimes withinweeks, toa settlement provider using a broker. This is referred to as a"wet inkpolicy" because the ink on the contract is still "wet" when thepolicy issold.

The odds against an individual finding out that he is terminallyill withinweeks of buying a policy are exceedingly high. To seethat happenrepeatedly within a short period of time with the same broker orprovideris strong evidence that they are both well aware that thepolicies havebeen "clean sheeted".To hide the fact that the policy has been viaticated shortly afterissuance,con artists will obscure viatication by simply changing thebeneficiary tosomeone at the settlement provider firm. A second way is toemploy a"collateral assignment" which is similar to where the insuredseeks a loanfrom a third party and secures the loan by pledging the deathbenefits of 30

the policy. In fraudulent transactions they pledge the deathbenefits but donot receive a loan.

Contestability Period

Finally, some settlement providers merely delay reporting thatthe policyhas been viaticated until the contestability period is over;falsely believingthat it is not a crime then. An indication of culpability is thatvirtually allparties attempt to hide the viatication of fraudulentlyobtained policiesfrom the insurance company for as long as possible.

The contestability clause for life insurance lasts fortwo years afterissuance, during which time it may be rescinded by the insurerfor fraud inthe application. After this period ends, the insurer is obligatedto pay thedeath benefit, regardless of any fraud in the application.Because policiesviaticated during the contestability period may be rescinded,they bring,as mentioned, a much lower price in the market.

31

A Case Study

As an investor, you are offered the opportunity to purchase aninterest ina life insurance policy in which the insured is terminally ill(i.e., viaticalsettlement).

You are told:

that your investment will produce a 100% rate of returnbecause you are

assigned a policy with a face value of twice your investmentwhich you canclaim upon their death;

that you will have the option of reselling your policy once itbecomes

incontestable (two years after the date the policy is issued) for70% of theface value;

and that if the policy is contested or canceled by theinsurer, the

promoters will provide a replacement policy through a"replacement policytrust" managed by them.

They say these are better investments than stocks,mutual funds,annuities, and CD's because viatical investments havethe followingattributes:"Full liquidity at maturity from rock solid 'A'rated insurancecompanies!""Tax advantaged & hassle free! 100% fixed rate of returnwhich isfully secured." 32

"Zero risk to principal, a totally safe investment with noload & nofees!"

"Short holding periods with early buyout optionsavailable aswell!"

"No speculation, no interest rate risk, no market risk, noeconomicrisk!"

In addition they say you will be making a"humanitarian investment"because the terminally ill person will be able to use the funds toreceiveimproved health care; pay off debts; take a vacation, reducefamily stress,and enhance their quality of life. In exchange for your moneyyou receivea Membership Certificate certifying that you are amember of ViaticalFunding LLC.

After deducting the fees paid to sales agents, viator agents, andotherintermediaries from your funds, you find that the ill person willactually beleft with very little. In this case only $5,400, which is only12% of yourinvestment of $45,000, or 6% of the policy's face value of$90,000.

They fail to disclose to you that the insured was terminally illprior to beinginsured, that they concealed this fact on theapplication, and thussubjected the policy to cancellation by the insurer.

Instead of being designated as the sole beneficiary youmay find youshare it with creditors and family members, and that the optionto resellthe ownership interests is not a guaranteed option, butrather an"assurance" that they will "make an effort" to facilitate a resale.In any event, you will not likely receive a promised 70% of theface valuebut only the amount another investor would bewilling to pay, lesscommissions, which could be much less. 33

They also fail to mention:

the risk of the insured living much longer than theestimated life

expectancy, thereby greatly reducing the annual yield;

the risk of their becoming insolvent and unable to replace acontested

or canceled policy;

the risk of the life insurance policy lapsing, or that you willoften have to

pay the policy premiums for the duration of the policyholder'slife;

the 15% commission the sales agent receives from yourinvestment;

who is responsible for monitoring the health status and locationof the

insured, obtaining a death certificate, and making a claim to theinsurancecompany.

Life Expectancy of the Insured

To determine their rate of return investors rely on a reportwhich projectsthe life expectancy of the insured, but there are no minimumrequirementsas to who may generate these reports or projections. Onecompany useda nurse and a plastic surgeon but could have used the janitor.Viatical investing is highly speculative and risky. Evenwhen thepolicyholder exists and is terminally ill, there is ahigh degree ofuncertainty in predicting when they will die. New AIDS drugsand cancertreatments have compounded the risk for investors becausethey helppolicyholders live longer. 34

Viatical settlements are illegal under Canadian insurancelegislation soCanadian investors should not be involved in these schemes atall.

Not Enough Sick People

Financial Federated Title & Trust, and Asset SecurityCorporation pledguilty after being charged with conspiring to recruit insuranceagents todefraud more than 3,000 investors while purchasing viaticatedinsurancepolicy investments over a three year period.

Investors were told that their money would be usedto purchase abeneficial interest in viaticated insurance policies, andthat medicaloverviews were being performed on the insured persons whosepolicieswere being bought.

Although at least $115 million in investor monieswas taken in, thepromoters used only $6 million of these funds to buy insurancepolicieswhose total face value was just over $7 million. They used thebalance ofthe money for purposes totally unrelated to the purchase ofviaticatedinsurance policies.

Industry Terminology

Cleansheeting:Refers to a fraudulent criminal act committed by a

proposed life insurance applicant, and by life insuranceagents whoknowingly assist or conspire with the insurance applicants, byfailing todisclose a pre-existing medical condition in response to aquestion on alife insurance application which would affect issuance of thepolicy.Viator:

A person who has a life threatening or terminal illness whosells orassigns their life insurance policy. 35

Viatical Settlement: The life insurance policy of a terminally ill person

sold or offered for sale, generally at less than facevalue, through aviatical settlement company.

Contestability: Policies are generally contestable for two years from the

date of issue and are subject to being rescinded by the insurerfor cause,such as application fraud and suicide.

Viatical Settlement Provider:A person who enters into a viatical

settlement contract with a viator. Often referred to asa settlementcompany or funder.

Viatical Settlement Broker: A person who, for profit, offers or attempts

to negotiate a settlement contract between a viator andone or moreviatical settlement providers.

Viatical Settlement Sales Agent: A person other than a licensed viatical

settlement provider who arranges for the purchase of a viaticalsettlementor an interest in a viatical settlement from a viatical settlementprovider.

Mortality Profile Report:A report based on a review of a viator's medical

history, which gives a prognosis of a viators life expectancy.Usually doneby a health-care professional and generally at the behest of theviaticalsettlement provider to calculate the value of a viatical contract.

Viatical Investment Broker:Defines a person or entity other than alicensed viatical settlement provider who solicits investors topurchase aviatical settlement interest from a viatical settlementprovider. 36

We Chose to Keep Your Money

Personal Choice Opportunitiesmislead investors when they sold

viatical securities in the form of loan transactions. Investorslent money toPCO in order for them to purchase the benefits of life insurancepoliciesfrom terminally ill individuals on the promise that they wouldreceive areturn on their investment of 21-25% per annum.

The funds, however, were not used to purchase life insurancepolicies butkept instead. Over 1100 investors nationwide arebelieved to haveinvested $80-100 million in these transactions in just tenmonths. Noevidence of any valid life insurance policies being purchasedhas beendiscovered.

Repercussions for the Industry

Life insurance premiums are based on actuarial tableswhich areworthless in fraudulent applications. Insurance companiescannot affordto pay out large death benefits after collecting small premiumsfor only afew years. Even if they don't go bankrupt the added costs areeventuallypassed on to other policyholders.

The viatical industry as a whole must take steps to better policeitself. If itdoes not, it risks ceasing to exist as an industry either by beinglegislatedout of existence or by being pushed out of the market afterdestroyinginvestor confidence in its product. If this fraud is to bestopped, it willrequire the total commitment of the insurance industry. Thefirst step is forthe industry to wake up to the existence and scope of theproblem. 37

Penalties

Currently a person charged with viaticating afraudulently procuredinsurance policy worth $100,000 face value, who stands to gaintens ofthousands of dollars, faces the same penalty as a shoplifter whotakes apack of cigarettes. A mere sixty days in jail is anencouragement, not adeterrent which may be why the industry watchdog has neverreceived asingle referral from the industry itself reporting such fraud.

Life Settlements

Once thriving on those dying from a terminal illness, medicaladvances,which are helping patients live longer, has caused the businessto starttargeting new clients - usually seniors with high payoffs - whomay bewilling to sell their life insurance policy to investors at adiscount.

Life settlements, or the sale of a life insurance policy to a thirdparty, aresometimes referred to as "senior settlements" because most ofthe lifeinsurance policies purchased insure the life of a senior citizen.

The owner of the policy gets cash and the buyer becomes thenew ownerand/or beneficiary of the life insurance policy, pays all futurepremiumsand collects the entire death benefit when the insured dies.

People decide to sell their life insurance policies for manyreasons. Somecommon ones are the changed needs of dependents, a desire toreduceor eliminate premiums, and a need for additional cash to meetexpenses.State regulation of insurance generally does not extendto lifesettlements. Certain aspects of these transactions may fallunder thevarious Securities Acts so there can be financial risksinvolved whenentering into such arrangements. 38

You should consider contacting a professional tax advisor tofind out thetax implications as life settlement proceeds are generallynot tax free.Also know, if you are the seller that you will be required toprovide certainmedical and personal information to third parties who will bepaid theproceeds from your policy upon your death. These third partiesmay sellyour policy and pass along your medical and personalinformation to otherindividuals.

Typically, life settlements are offered to buyers, for resale toinvestors, ata discount from the death benefit. The discount is for the entirelife of thepolicy, not an annual rate of return. An annual rate of returncannot beguaranteed. Your rate of return depends on when the insureddies, andno one can predict a person's life expectancy. Keep in mindthat a lifesettlement is not a liquid investment because the returnon such aninvestment does not occur until the insured dies.

Spreading the Risk

The Alabama Securities Commission issued a Cease and DesistOrderagainst Viatical & Elderly Settlement Providers, LLC

(VESPERS)Washington, D.C., to stop conducting business in a few statesafter theyreceived information that they were engaged in the illegal offerand sale ofinvestment contracts involving fractionalized viaticalsettlement contractsthere.

VESPERS, though not licensed to sell this type of security inthe state,have solicited independent insurance agents to sell interests inviaticalsissued by them with promises of low risk and highreturns of 28-70percent on two to five year investments for a 10% commission. 39

Be Aware, Don’t Be a Victim

The Coalition Against Insurance Fraud (CAIF) is anational advocacyorganization of consumer groups, public interestorganizations,government agencies and insurers. Its website notes “insurancefraud ishard to measure because so much goes undetected,and completeresearch has yet to be done. Still, we have enough evidence toknow thatfraud is widespread — and expensive.” 14

National studies conducted by the Insurance ResearchCouncil (IRC)show that auto insurance, workers’ compensation and healthinsuranceare the lines that are most vulnerable to fraud. The IRCestimates thatone-third of all bodily injury claims from auto accidentscontain someamount of fraud, usually in terms of padding or exaggerating aclaim, butonly 3% are totally fraudulent such as staged accidents.Another form offraud, lying on applications in order to reducepremium, costs autoinsurers $13.7 billion annually (Insurance Information Institute,or III).

As to workers’ compensation fraud, one of the most commonforms ofworkers’ compensation fraud in Maine is a faked orexaggerated injury, anarea within the jurisdiction of the Maine Workers’Compensation Board’sFraud and Abuse Unit to investigate. There are, however, otherforms ofworkers compensation fraud are employers who misrepresentpayroll orthe type of business in order to reduce their insurancepremiums and realor bogus entities that purport to provide real orbogus workerscompensation coverage or “alternatives” to coverage toemployers.In late 1999 the Governmental Accounting Office found thatorganizedcrime is heavily involved in health insurance fraud and that thecriminalsidentified were not health care workers, per say, but individualsalreadyprosecuted for securities fraud, forgery and auto theft. With theenactment 40

of HIPAA (Health Insurance Portability and AccountabilityAct of 1996)detection and prosecution of health insurance fraud received aboost. TheDepartment of Justice calls health care fraud and abuse itsnumber twolaw enforcement priority, after violent crimes. In 1996,according to theFBI, Congress provided an added $54 million over seven yearsfor healthcare fraud enforcement.

Property insurance, based upon the Bureau’s 2004 data, hadthe thirdhighest fraud and abuse count by line of business at 165reported cases.According to the National Fire Protection Association, arson orsuspectedarson account for nearly 500,000 fires each year, or one in fourfires inthe United States. Arson and suspected arson are the largestcauses ofproperty damage in the U.S.

Despite what may appear to be a bleak picture, a number oftools exist forcombating fraud. In addition to those Maine Insurance andCriminal Codeprovisions, previously discussed, several federal lawsare used toaddress fraud. These include: The Federal Mail FraudStatute, theRacketeer Influenced and Corrupt Organizations (RICO) andthe HealthInsurance Portability and Accountability Act (HIPAA). Also,the ViolentCrime Control and Law Enforcement Act of 1994 makesinsurance fraud afederal crime when it affects interstate commerce.

Certain state agencies work with insurers to address fraud, aswell. TheWorkers’ Compensation Board’s Fraud and Abuse Unittackles issuessuch as fakes or exaggerated injuries, the FireMarshal’s Officeinvestigates possible arson, and the Department ofHuman Servicestakes on Medicare and Medicaid fraud. Recently, one DHSemployeereceived the Office of the Inspector General IntegrityAward for herinvestigative and logistical support in a Medicare and Medicaidfraud casein Bangor Federal Court. 41

Fraud has also gotten the attention of the NationalAssociation ofInsurance Commissioners (NAIC), which encourages theinsuranceindustry to take a proactive role in controlling fraud.The NAIC offersstates support through their Antifraud Task Force.

The mission of the Antifraud Task Force is to serve the publicinterest byassisting state insurance supervisory officials, individually andcollectively,in the following fundamental antifraud activities:

Promotion of the public interest through the detection,monitoring

•

and appropriate referral for investigation of insurance crime,both byand against consumers.

Provision of assistance to the insurance regulatorycommunity

•

through the maintenance and improvement of electronicdatabasesregarding fraudulent insurance activities.

Disseminate the results of research and analysis of insurancefraud

•

trends as well as case-specific analysis to the insuranceregulatorycommunity and state and federal law enforcement agencies.

Provision of the liaison function between insurance regulators,law

•

enforcement and other specific antifraud organizations.

Highlights of the 2004 charges of the Antifraud TaskForce include:compile and maintain detailed information on antifrauddatabasesmaintained by antifraud organizations, financialregulators, and lawenforcement; consider developing further guidelines foruse by theindustry in determining when suspicious claims shouldbe reported;review industry compliance with antifraud initiatives; developmethods toenhance the investigation and prosecution of financial servicesfraud; andestablish guidelines on the investigation and prosecutionof insiderinsurance industry fraud. 16

Additionally, in 2005 the NAIC created a “Fraud Webline,” an onlineinsurance fraud reporting system located on the Web site of theNational 42

Association of Insurance Commissioners (NAIC). Thesystem allowsconsumers to provide information anonymously.

The new fraud reporting system was developed as part of theresponseby insurance regulators to the national allegations aboutmisconductinvolving compensation agreements between some insurancecompaniesand brokers. The allegations of improper activity spurredregulators toimprove their abilities to collect information from consumers,producersand insurance company employees. Many placesparticipates in theonline fraud reporting system, in conjunction with the NAIC.

The online fraud reporting system lets consumersanonymously supplydetailed information regarding suspected fraudulent activitiesto the NAICwhere the information is then forwarded to the appropriatestate. Althoughconsumers may identify themselves, no personal identifyinginformation isrequired to report an allegation of suspected fraud.Consumers arerequired to designate the state where the suspected fraudoccurred andthe name and address of the business or individual. A text boxis includedfor the consumer to provide the details of the suspectedfraud. Otheroptional fields on the form include phone number, date of birth,date ofsuspected fraud, and amount of loss.

Despite the anti-fraud activities of state and federal agenciesdiscussedabove, the Bureau notes that an enforcement andprosecutorial gapexists in current Maine government operations insofar as noentity existsthat is focused on investigation and prosecution of fraudulentinsuranceacts and the crimes of insurance deception and deceptiveinsurance acts.The American Insurance Association and the Property CasualtyInsurersAssociation and several of the individual fraudinvestigators whocommented as interested persons all noted the frustrationwhen hardwork has been expended to develop a case and localprosecutors haverefused to prosecute or believe that it is not a serious crimemeriting their 43

attention. The interested persons believe that a strongand effectiveinsurance fraud unit would be effective not only inpunishing thoseconvicted of insurance fraud, but in deterring others.

Forty other states currently have insurance fraud units. TheDirector of theFraud Division of the New Hampshire Insurance Departmentshared hisconcern with the Joint Standing Committee on Insurance andFinancialServices during his testimony on L.D. 1561 thatorganized insurancefraud rings are gravitating toward those jurisdictionswith the leastregulation, for the conduct of affairs. That concern has beenechoed byother interested persons as well.

OUR MISSION:

The mission of the NAIC is to assist state insuranceregulators,individually and collectively, in serving the public interest andachievingthe following fundamental insurance regulatory goals in aresponsive,efficient and cost effective manner, consistent with thewishes of itsmembers:

Protect the public interest;

Promote competitive markets;

Facilitate the fair and equitable treatment of insuranceconsumers;Promote the reliability, solvency and financial solidityofinsurance institutions;and Support and improve state regulation of insurance. 44

International association of insurancefraud

agencies(iaifa)

HOW do they operate?

The IAIFA and its members are continually working to improvethe qualityof data available to members and break down the jurisdictionalbarriers byworking with regulators, companies and other lawenforcementagencies.Those who break the law are adept at using thesejurisdictionalboundaries as a protective shield. IAIFA is trying to cut red tapeinvolvedin the various (often necessary) jurisdictions' "privacy" laws inan attemptto track down crime and encourage other enforcement agenciesto shareinformation to the mutual benefit of all who are involved inassuring a highlevel of integrity throughout the insurance industry.

WHAT are their Goals:

IAIFA's goal is "to co-ordinate the efforts, training andeducation of lawenforcement agencies, government bodies, and the insuranceindustry tomove more efficiently prevent and combat insurance fraudworldwide."IAIFA has kept its focus on insurance fraud, which its membersview as acrime against all segments of society - not a victimless felony,as somewould define it.

WHEN do they meet?IAIFA meets annually. The annual conference hostseminent speakerswhose presentations update the members on criticaldevelopments. Italso enhances personal contacts and exchange of informationbetweenmembers throughout the year. 45

IAIFA cooperates in regional seminars which focuses on suchtopics ashow to effectively use the laws to prosecute and recover assetsgained byfraudulent means. Added to this, these meetings havewidened thenetwork of contacts for members from Europe, Asia,Australia, theCaribbean, Africa, and North America.

Between meetings, our newsletterkeeps members informed of the

various projects undertaken by the Association and itsmembers, as wellas presenting new trends in the field of insurance fraud,both from acriminal and law enforcement perspective.

WHERE are they found?

International is the first word in IAIFA's name. That meanswhat it says.While IAIFA began in North America, the founders were not soinsular tobelieve that they had a unique place in insurance fraud. Morethan ever,sharing intelligence and finding ways to successfully preventand combatcrimes is essential for the members to do their job effectively.

This is why the IAIFA wants even more countries to join in thisworldwideeffort. It is a classic case of the sum of the whole being greaterthan thesum of its parts. The interchange of information is invaluable,and shouldbe available to everyone in their fight against sophisticatedglobal fraud

WHO are the members?

It could be you and your organization. IAIFA'smembers includegovernment insurance departments and fraud bureaus, lawenforcementagencies, respected insurance companies, and related firmswith a stronginterest in combating insurance frauds.You may obtain the application by logging on the site or bycontacting usfor a mailing of the application. Upon receipt, yourapplication will beconsidered by IAIFA's executive committee. If you areaccepted, you and 46

your organization will have made a major stepforward in beatinginsurance crime. This will be true not only for you in your ownjurisdiction,but for your colleagues elsewhere, who will welcome hearinghow youcope with escalating problems of insurance fraud.

WHY were they formed?

Insurance fraud is recognized internationally as amulti-billion dollarproblem. IAIFA was created after a group consisting of theDirectors ofInsurance Fraud Agencies from the U.S.A. and Canada met toconfrontthis burgeoning problem which is not restricted byjurisdictionalboundaries.

It soon became apparent that if the agencies could shareinformation theywould increase their degree of effectiveness. Rapidcommunication is ofthe essence in catching fraud artists who know how tomove moneyliterally at the speed of light. From those early beginnings in1986, withonly a handful of members in North America, IAIFA nowencompassesthe Globe.

47

Dealing with fraud on the Net

As time goes on, the number of attacks will only increase andnetworkforensics will become a part of our lives, who could put you onthe trackby helping record and analyse previous security threats.

In a perfect world, network security wouldn’t be required.Unfortunatelythis isn’t a perfect world, and even if there are many who willthrow up afirewall and other such security measures as solutions, thisdoesn’t stopthe problem. No firewall is impenetrable and there’s no suchthing as aperfect security measure. There’s always a way to get aroundthem, andthe number of people trying to do that keeps increasing.

According to the US General Accounting Office, approximately250,000break-ins were attempted into Federal computer systems alonein 1995and this number gets bigger every year. Only one to four percent of theseattacks ever get detected.

Network forensics is the capture, recording, andanalysis of networkevents in order to discover the source of security attacks orother problemincidents. It attempts to prevent hackers from attacking asystem, andsearches for evidence after an attack has occurred.

There are three parts to network forensics: intrusiondetection; logging(the best way to track down a hacker is to keep vast records ofactivity ona network with the help of an intrusion detectionsystem); correlatingintrusion detection and logging.The ultimate goal of network forensics is to provide sufficientevidence toallow the criminal perpetrator to be successfully prosecuted.The practicalapplications could be in areas such as hacking, fraud,insurance 48

companies, data theft—industrial espionage, defamation,narcoticstrafficking, credit card cloning, software piracy, electorallaw, obscenepublication, perjury, murder, sexual harassment, anddiscrimination.

Technical Challenges

IT managers, network consultants, auditors, softwaredevelopers, andanalysts would all like to understand the data that is sentover theircorporate networks. Network monitoring is an essential tool fornetworkoptimization and security. How much data was sent? When?What wassent? Current tools only answer the first two questions, andhave troublewith the third. The tools base their analysis primarily onIP and TCPheaders, which can be misleading or intentionally falsified.

This leaves security consultants and network managers tomanually siftthrough raw network packet dumps, piece together datastreams andundo transfer encoding, and seek to understand thesignificance of asingle connection. This is tremendously time-consumingand sincenetworks deal with one packet at a time, this isn’t very usefulor completeto someone trying to get a big picture view of an employee’ssuspectednetwork abuse, or a deep-level view of an intrusion attempt.

And yet the internet is critical, and we haven’t a choice but toconnectinternal networks to the rest of the world — to linkwith customers,suppliers, partners, and their own employees. Even if thatconnectionbrings in threats of malicious hackers, criminals, andindustrial spies.These network predators regularly steal corporate assets andintellectualproperty, cause service breaks and system failures,sully corporatebrands, and frighten customers. Unless companies cansuccessfullynavigate around them, they will not be able to unlock the fullbusinesspotential of the internet. 49

Even enterprises with exceptional security have their frontdoors open toemployees sending and receiving data. Is there a userabusing thesystem for personal reasons, or accidentally ormaliciously releasingconfidential information? Unfortunately, the variety of dataformats andsheer volume of traffic make detailed networkmonitoring a majortechnical challenge. Traffic monitors focus on bandwidth.Although somego so far as to keep basic statistics such as web page hits andaveragevisit length, they’re mostly useful for capacity planning andsimple webmarketing. Port scans allow network security specialists tofind somevulnerability.

Intrusion detection systems scan traffic for knownattack signatures.However, because these tools base their analysis primarily onthe IP andTCP headers, which can be intentionally falsified ormisleading, they aresubject to incorrect analysis and spoofing. Current tools can’tprovide theinformation that IT managers, network consultants,auditors, softwaredevelopers, and analysts need to know:

“Who is running an unauthorized web server on a non-standardport?”“How long is it taking our e-commerce system to processa customerorder from start to finish?”

“What generated that huge spike of traffic between 5:35am and5:40amthis morning?”

“Exactly what happened during – and before – lastnight’s attemptedbreak-in?”The fleeting nature of any kind of electronic data issuch that itspreservation, is required especially for legalproceedings — themethodology can be broken down into two keyelements: acquiringevidence and analyzing evidence. 50

This information is required for dealing with a lawenforcementinvestigation. It involves capturing and storing everypacket passingthrough wires and then regenerating the sequence flow foranalysis. If weare able to regenerate the attack it can now be treated asevidence.Full-content network monitoring is no longer the province ofspooks andspies — it’s increasingly a practice that is anintegral part of amultilayered defense system that serves a variety ofgoals for bothcomputer security and overall network policy.

The solution is to follow a multi-layered security approach anda systemthat can perform the following tasks: integrated networkIDS/ anomalydetection /forensic analysis; capture data at high speeds; runinvisibly andcapture packets from the monitored network; assemblethe collectedpackets into connection streams; read the actual data inpackets andcategorizes it by type, rather than make assumptions based onpacketheaders and port numbers; automatically determine keyconnectionattributes; operates at the level of complete, assembled datastreams,rather than arbitrarily mixed-together packets; search capabilitythroughnetwork traffic by keyword; protocol recognition capability andcorrelationfunctionality.

As time goes on, the number of attacks will only increase andnetworkforensics will become a part of our lives. It has an ability tostrengthen oursecurities, check compliance against policies, andpunish those thatattempt to disrupt our IT infrastructure. The future ofinformation securitylies in an organisation abilityto not only prevent malicious activity, but also investigate andprosecutethe perpetrators whether internal or external. 51

Precaution is better than cure

Insurance fraud is not typically a violent crime, just a lucrativeone. As

consumers, there are several common-sense steps you can taketo helpreduce fraud and minimize its impact.

Be an Informed Consumer.

Insurance premiums are a significant expense for mostof us. Thepremiums you pay are based on your individual claims historyand thedegree of risk involved. Generally speaking, the greaterthe risk, thehigher the premium. For example, the theft premium for aHonda Accordwill be far higher than that of a Yugo quite simply becausemore HondaAccords are stolen. Similarly, a tightrope walker will paymore for lifeinsurance than a librarian, all else being equal.

Comparison Shop.

Premiums can vary significantly frominsurer to insurer so it pays to shop

around. To make comparison shopping a little easier,the InsuranceDepartment publishes consumer guides for auto, homeowners,long-termcare and HMO/health insurance that provide samplepremiums forinsurers that offer these coverage. In addition, theInsuranceDepartment's Web site is also the home of an Interactive Guideto HMOs,which allows consumers to find information about HMOsoperating withintheir home county. 52

Know Your Agent or Broker.

Consumers can often be victimized by unscrupulous agents orbrokersand discover only after they file a claim that they are withoutcoverage fortheir home or their car. If an uninsured home is damagedby fire, theowner is solely responsible for restoring it and paying back anymortgageholders. If a driver is involved in an accident while driving anuninsuredvehicle, any personal assets are subject to forfeiture if thatdriver is suedfor damages. Deal only with licensed agents and brokers.Agents andbrokers must carry proof of licensure.

Where's the Proof?

Never pay for a premium in cash. Pay by check or a moneyorder madeout to the insurance company directly or to theagency—not to theindividual agent or broker. In addition, always request a receipt.

Where's the Policy?

You should receive a copy of any type of insurance policycomplete withendorsements and declarations specifically outlining yourcoverage andits limitations within a reasonable period after your purchase. Ifyou do notreceive it, question your agent or broker. If there isno satisfactoryexplanation for the delay, contact the New York InsuranceDepartmentimmediately. You may not have the insurance coverage youpaid for. 53

Are You Being Billed for Services You Have Not Received?

If you have received medical or dental treatment that is coveredby anHMO or an insurance company, you will receive an"Explanation ofBenefits" statement listing the services for which benefits havebeen paid.Review it carefully to ensure that your health careprovider has not"bumped up" your claim ( i.e.,overstated services provided in order to

receive a higher payment), or charged for services you did notreceive.Contact your insurer immediately if you feel there arediscrepancies.Fraudulent claims payments translate into higher insurancepremiums forall of us.

What If You’re Involved in an Automobile Accident?

Call the police to the scene and make sure that the details of theaccidentare documented and the identities of the occupants of the othervehicleare verified. Be suspicious if the driver of the other vehicleinsists there isno need to call the police. That driver’s insurance card may befraudulentand his car uninsured.

Auto Insurance Fraudis a multi-billion-dollar problem nationwide. Watch

out for these common scams:

The staged accident – A vehicle filled with people will stop suddenly infront of you, setting you up as the cause of a rear-endcollision. The"victims" will then file costly multiple medical and damageclaims usingdoctors and lawyers who are part of the scam.Steerers – These individuals will solicit the injured or allegedly injuredparties and direct them, for a "referral fee," to lawyers,doctors and/or 54

medical facilities that are part of the scheme. Be on thelookout forsteerers at accident scenes and don’t become their victim.

Inflated claims– If you are in an automobile accident, be sure you know

the extent of the damages to your own car and the othervehicle andcarefully review claims. Vehicle owners and body shopsfrequently inflateestimates for damages and then either perform other repairs notrelatedto the accident or simply keep the extra money.

BE ALERT! IT’S YOUR MONEY.

Think twice before replacing an existing life insurance policywith a newone. The new policy may have exclusions or waitingperiods for pre-existing conditions that are covered by your current policy. Andpremiumsare likely to be higher because you are older. The InsuranceDepartmentprotects consumers by requiring agents to provideprospectivepurchasers with pertinent facts when that purchase will causethe buyer tosurrender, lapse, or in any way change the status of anexisting lifeinsurance policy. Department Regulation 60 requires this fulldisclosureso that prospective life insurance purchasers can makedecisions in theirown best interest.

Don’t allow high-pressure salesmanship to persuade you to signup for atype of policy or certain coverage that you are not sure youneed. Taketime to decide what’s right for you.Read your policy carefully before you sign. If you havequestions, askyour agent or broker, or your insurer. An additional source ofinformationand help is the Insurance Department’s Consumer ServicesBureau. 55

Summary

Insurance, a very well known concept today and many peoplecould relateto in more than one ways. This is the influence of the changingtimes thathave changed the concept of insurance in the minds of theyoung and theold. People have changed their attitude towards insurance andacceptedits new look from being an entry of luxury to aninvestment and anecessity. The number of people taking insurance hasincreasedconsiderably in the past few decades due to the entry of privateplayers inthe market.

One knows that every coin has two sides. Similarly, insurancealso hastwo faces. One of which is investments and getting regularreturns fromfinancial institutions for oneself and for loved ones. The other,awfully, isof which people deceive insurance companies for their undueadvantageand cause intimidation to many others.

Though, there have been many laws and agencies all over theworld toimpede such criminal activity, it is not a full proof solution toall insurancefrauds.

In a world today where every person seeks their right toinformation anddemands the same, it is very difficult to scam them. One mustknow allthe loop-holes of their business to scheme some one. This couldbe theact of some one who is carrying on criminal bustle on the vigorof hisacute knowledge about their business. Lack ofknowledge and notknowing ones basic rights on behalf of the prey couldland them inscrambled scam bisque.There have been many institutions and agencies formed all overthe worldto detect fraud and penalize the one conscientious for suchmishaps.There is Division of Insurance Fraud, InternationalAssociation Of 56

Insurance Fraud Agencies (Iaifa), etc. through theenduring andconscious endeavor of these institutions insurance fraudtempo hasdeclined by an enormous amount. Several have studiedpreceding andenduring market conditions to identify with the diverse fraudsthat takeplace and the reasons behind committing these frauds.

One cannot diminish frauds, schemes, swindles, scams but canpositivelybe alert of them so as not to be a victim of itthemselves. Tumblingfraudulent situations is a unremitting and collective effort ofcountless.One must be sensitive and offer their helping as much as theycan.

One can either grumble about how things are all going wide ofthe markand swallow the consequences. Or put their foot downand make anattempt to change the immoral to the right. The wrong willchange andeveryone will see the bright light of truth and right with therevolution ofknowledge, awareness, an attitude for change amongst thehumanity.

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Bibliography

BlueCross & BlueShield United of Wisconsin: What is healthcare

•

fraud?

• Stern RA, Montana R.: Identify patterns of medical providerfraudthrough data base graphic pattern. FDN Fraud Report

Barrett S.: Chelation therapy and insurance fraud•

Private health insurance: Employers and individuals arevulnerable

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to unauthorized or bogus entities selling coverage

Scam alert.: Coalition Against Insurance Fraud Web site•

www.naic.org•

www.google.com•

www.yahoo.com•

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