1. Insurance Fraud The Lecture Richard A. Derrig, Ph.D. OPAL Consulting LLC Visiting Scholar, The Wharton School University of Pennsylvania richard@derrig.com University of Illinois December 2, 2005

3. Agenda What Is Fraud? What Is Fraud? How Much Fraud Is There? How Much Fraud Is There? Who Are The Fraud Fighters? Who Are The Fraud Fighters? What do Companies do about Fraud? What do Companies do about Fraud? What is the “Lawrence” story? What is the “Lawrence” story?

4. Fraud Definition PRINCIPLES Clear and willful act Clear and willful act Proscribed by law Proscribed by law Obtaining money or value Obtaining money or value Under false pretenses Under false pretenses Abusive/Unethical: Fails one or more Principles

5. Fraud Types Insurer Fraud Insurer Fraud –Fraudulent Company –Fraudulent Management Agent Fraud Agent Fraud –No Policy –False Premium Company Fraud Company Fraud –Embezzlement –Inside/Outside Arrangements Claim Fraud Claim Fraud –Claimant/Insured –Providers/Rings

7. FRAUD AND ABUSE THE TOP TEN DEFENSES 1. Adjusters 1. Adjusters 2. Computer Technology 2. Computer Technology 3. Criminal Investigators 3. Criminal Investigators 4. Data and Information 4. Data and Information 5. Experts 5. Experts 6. Judges 6. Judges 7. Lawyers 7. Lawyers 8. Legislators 8. Legislators 9. Prosecutors 9. Prosecutors 10. Special Investigators 10. Special Investigators

8. 10% Fraud

10. Easy Paid Investigation Routine Adjusting DM Target Claims Investigative Paid Build-up Negotiation Civil Proceeding Suspected Fraud SIU Criminal Referral Prosecuted Not Guilty Guilty

11. DATA

12. DM Databases Scoring Functions Graded Output Non-Suspicious Claims Routine Claims Suspicious Claims Complicated Claims

13. Data Mining “Misplaced faith in black boxes: Data Mining is sometimes perceived as a black box, where you feed the data in and interesting results and patterns emerge. Such an approach is particularly misleading when no prior knowledge or experience is used to validate the results of the mining exercise” “Misplaced faith in black boxes: Data Mining is sometimes perceived as a black box, where you feed the data in and interesting results and patterns emerge. Such an approach is particularly misleading when no prior knowledge or experience is used to validate the results of the mining exercise” –Exploratory Data Mining and Data Cleaning, by Dasu and Johnson

14. Red Loveseat by Patterns, The New Data To Manage

15. Mae West by

16. DCD Seminar on Insurance Fraud Boxborough, MA November 19, 2003 The Detail Claim Database

17. Auto Injury Claims Closed Since 1/1/94 Auto Injury Claims Closed Since 1/1/94 Over 1,646,000 Claims Over 1,646,000 Claims Data: Claimant, Insured, Injury, Medical & Legal Providers, Claim Payment, Bills, Claim Handling IME, Med Audit, Special Investigation Data: Claimant, Insured, Injury, Medical & Legal Providers, Claim Payment, Bills, Claim Handling IME, Med Audit, Special Investigation On-Line Access for Company Adjusters and SIU Personnel through Internet On-Line Access for Company Adjusters and SIU Personnel through Internet Company Oversight: Claim Committee, Operations Subcommittee Company Oversight: Claim Committee, Operations Subcommittee Seminar on Insurance Fraud DCD

18. Special Investigation (SI) Yes/No Special Investigations (SI) Special Investigations (SI) are performed on claims suspected of fraud. Special Investigations may be performed by SIU personnel or other personnel trained to handle suspicious claims using activity checks, surveillance, accident reconstruction, statements or examinations under oath. Special Investigations also includes third party expert analysis of documents associated with suspicious claims. Liability investigations are not considered to be special investigations.

19. SI Results Report a valid SI Result Code: Code SI Result 1 – No Change Recommended 1 – No Change Recommended 6 – Claim Denied 6 – Claim Denied 7 – Claim Compromised 7 – Claim Compromised 9 - Unknown or Pending 9 - Unknown or Pending

20. Source: AIB/DCD 1995/1997 Accident Year

21. Injury Type Changes Inj8996 Fracture14%5% Inpatient7%4% Serious Visible 14%2% Prior Inj. 6%27% Source: AIB Final Report (2003)

22. The Lawrence Fraud Problem A Crisis Needing a Special Solution

23. Lawrence Auto Insurance Rates Why are rates so high? Why are rates so high? Causes Causes Solutions Solutions

24. WHY ARE RATES SO HIGH? Statewide average rate $1,176 Statewide average rate $1,176 Lawrence average rate $2,145 Lawrence average rate $2,145 Commissioner’s rates, 2002 (BI, PIP, PD, U-1, U-2, COMP, COLL)

25. WHY ARE RATES SO HIGH? Claims Paid Per Car 2002 2002 Statewide $714 Lawrence $2,061 2002 Reported Pure Premiums (BI, PIP, PD, COMP, COLL)

26. WHY ARE RATES SO HIGH? Statewide # of claims as a percentage of policyholders 28% Statewide # of claims as a percentage of policyholders 28% Lawrence # of claims as a percentage of policyholders 66% Lawrence # of claims as a percentage of policyholders 66% 2002 Reported Claims (BI, PIP, PD, COMP, COLL)

27. WHY ARE RATES SO HIGH? In 2002, Lawrence rates are 1.82 times the statewide average In 2002, Lawrence rates are 1.82 times the statewide average –accident rate is 1.5 X state avg. but... –PIP (no-fault) claims are4.9 X state avg. –BI Liability claims are 4.9 X state avg. 2002 Reported Frequency Indices (PD, PIP, BI )

28. WHY ARE RATES SO HIGH? Theft claims as a multiple of state average: Theft claims as a multiple of state average: –200210.3 Comparisons Comparisons –Roxbury 9.2 –Dorchester 7.9 –Methuen 2.1 –Springfield 3.3 –Lowell 2.1 2002 Reported Frequency Indices (COMP-theft)

29. WHY ARE RATES SO HIGH? In 2002, Lawrence rates are 1.82 times the statewide average In 2002, Lawrence rates are 1.82 times the statewide average –accident rate is 1.5 X state avg. but... –Collision claims are1.9 X state avg. –Theft claims are 10.3 X state avg. 2002 Reported Frequency Indices (PD, COLL, COMP-theft)

30. WHY ARE RATES SO HIGH? 1 out of 260 cars insured for theft in Mass. were stolen in 2002 1 out of 260 cars insured for theft in Mass. were stolen in 2002 1 out of 25 cars insured for theft in Lawrence were stolen in 2002 1 out of 25 cars insured for theft in Lawrence were stolen in 2002 2002 Reported Frequency (COMP-theft)

31. WHY ARE RATES SO HIGH? For every 100 accidents in the state For every 100 accidents in the state 43 injuries are reported! For every 100 accidents in Lawrence For every 100 accidents in Lawrence 141 injuries are reported! 2002 Number of Claims Per 100 Accidents (PIP)

32. Similar Population Size Insured population relatively similar in size for both towns # Cars Insured 20,053 23,666 19,771 26,689

33. Claims Very Different Claims have soared in Lawrence while only increasing slightly in Salem $3,800,000 $7,300,000 $16,900,000 Dollar Amount of BI Claims $5,400,000

34. ROOT CAUSES OF HIGH RATES Auto theft out of control Auto theft out of control Disproportionate # of Injuries to Accidents Disproportionate # of Injuries to Accidents Network of high volume medical and legal professionals aggressively ready to assist in filing your insurance claim! Network of high volume medical and legal professionals aggressively ready to assist in filing your insurance claim!

35. PIP Average Amount Billed

40. Spring promotion 2001 …each time you refer a patient injured in an auto accident…”WE WILL PRESENT YOU WITH A VOUCHER WORTH $200”......Free transportation...Treated 10,000 people injured in auto accidents But Lawrence only had 7 auto accidents per day!!!

41. The Anatomy of an Investigation

42. 9/4/03 Altagracia Arias a 65-year-old grandmother, dies in a staged car accident in Lawrence. 9/11/03 Lawrence and State Police arrest Hairo L. Gomez, 26, of Lawrence, charging him with manslaughter in connection with the fatal crash. An arrest warrant for the same charge is also issued for Jacinto Maldonado, 22, of Lawrence, who is the driver of the car in which his grandmother was killed. 9/12/03 Eagle Tribune publishes front page story titled ”Police: Scam crash killed grandmother. 9/17/03 Police arrest Jason Pimentel, 22, of Lawrence, a front seat passenger in the car that Altagracia Arias was killed in. He is charged with insurance fraud, under a new felony law that carries up to five years in prison and a $10,000 fine. Two other passengers in the two-car crash are later charged with insurance fraud.

43. September 25, 2003 The Lawrence Task Force, working with several major insurance companies, launch an investigation into staged accidents in Lawrence. They hope the probe will lead to dozens of arrests and deal a body blow to a cottage industry of fraudulent personal injury claims that cost honest drivers hundreds of dollars a year in added insurance premiums.

44. Lawrence Insurance Fraud Task Force Lawrence Police Department Lawrence Police Department Attorney General Attorney General Essex County District Attorney Essex County District Attorney Insurance Fraud Bureau Insurance Fraud Bureau Insurance Industry Insurance Industry

45. Lawrence Insurance Fraud Task Force On site team- On site team- –One full time LPD detective –Other LPD resources as needed –Three IFB investigators Computer support Computer support –Links to IFB and Law Enforcement databases

46. Partnerships Continuous involvement with a designated prosecutor Continuous involvement with a designated prosecutor Partnership with the local newspaper to “keep the story in the news” Partnership with the local newspaper to “keep the story in the news”

47. Added Steps Insurance Fraud Bureau announces Insurance Fraud Bureau announces Tip-Reward Program to generate attention –Announcements in local news sources –Flyers to chiropractic clinics, law offices –Billboards around town

48. Insurance Fraud Bureau Offers $5,000 Reward for Tips

49. February 26, 2004 6 people charged with staging an accident. 5 people apprehended. 5 people confess to the staged accident in another city (Methuen). Cooperative effort with another police agency. Leads investigators to Chiropractor Sean Nisivoccia.

50. March 2, 2004 Chiropractor Sean Nisivoccia from Health Group of New England arrested at his place of employment for taking part in staging accidents.

51. March 15, 2004 First conviction sends a clear message. Doel Miranda, one of 52 people charged in a sweeping investigation that began in September 2003, pleaded guilty to three charges stemming from a fake hit & run accident in January 2003. Sentence: One year in jail and probation for a year and a half.

52. September 22, 2004 Grand Jury Indictments 4 Chiropractors 4 Chiropractors 3 Lawyers 3 Lawyers Others working in their offices Others working in their offices 1 insurance agency manager 1 insurance agency manager Runners Runners 16 in all! 16 in all!

54. To Date in Lawrence Task Force Totals: 130 people charged in connection with 42 cases of insurance fraud. Charges include: Manslaughter Manslaughter Motor Vehicle Insurance Fraud Motor Vehicle Insurance Fraud Conspiracy to Commit Insurance Fraud Conspiracy to Commit Insurance Fraud Perjury Perjury Larceny Larceny False Report to Police False Report to Police

55. To Date in Lawrence Task Force Totals: Seven individuals pleaded or found guilty. Seven individuals pleaded or found guilty. 18 individuals continued without a finding. 18 individuals continued without a finding.

56. EFFECTS OF PROGRAM Claims Paid Per Car 2002 2002 Statewide $714 Lawrence $2,061 2004 Reported Pure Premiums (BI, PIP, PD, COMP, COLL) 2004 $614 $951

57. EFFECTS OF PROGRAM In 2002, for every 100 accidents in Lawrence In 2002, for every 100 accidents in Lawrence 141 injuries are reported! In 2004, for every 100 accidents in Lawrence In 2004, for every 100 accidents in Lawrence 60 injuries are reported! 2004 Number of Claims Per 100 Accidents (PIP)

58. EFFECTS OF PROGRAM 2002 insurance claims in Lawrence $48.6 million 2004 insurance claims in Lawrence $19.8 million Savings $28.7 million! 2004 Total Loss Amount (BI, PIP, PD, COMP, COLL)