In the US, insurance fraud costs an estimated $80 billion each year. Matthew Smith, from The Coalition Against Insurance Fraud, talks about who commits insurance fraud—and some of the surprising reasons why.

Highlights

  • In this episode of the Accenture Insurance Influencers podcast, we speak with Matthew Smith, director of government affairs and general counsel for the Coalition Against Insurance Fraud.
  • The Coalition estimates that insurance fraud costs the US $80 billion each year.
  • In recent decades, insurance fraud has changed in three main ways: advances in anti-fraud technology have improved fraud investigations; fraud has become more sophisticated; and the fraud-fighting industry has become more diverse.
  • Baby Boomers and millennials pose different challenges for fraud fighters.
  • The Coalition’s Four Faces study indicates that consumer education is helping to increase awareness and decrease tolerance for insurance fraud.

The new faces of insurance fraud, with Matthew Smith

Matthew Smith is the director of government affairs and general counsel for the Coalition Against Insurance Fraud. Prior to this role, he spent nearly three decades in insurance law.

In this episode, Matthew talks about the financial—and human—cost of insurance fraud, and the ways that insurance fraud has changed over time. He also shares research from the Coalition on who commits insurance fraud, and the role of consumer education campaigns on reducing Americans’ acceptance of fraud.

I understand that fraud is very expensive. Does the Coalition Against Insurance Fraud (the Coalition) have an estimated annual cost of insurance fraud in the United States?

We do. The number we use conservatively is an astounding $80 billion every year. If we took one-dollar bills and stacked them end-to-end, it would reach to the moon and back 16 times. And close to home for me and some of our listeners as well, the $80 billion we lose to insurance fraud each year could pay for all federally funded cancer research in our nation for almost the next 20 years. So that’s what we’re talking about. And keep in mind, unlike the national debt, we’re talking about every single year.

That is an astonishing figure. And while $80 billion is clearly a huge financial cost, I understand that fraud also causes other kinds of damage. Can you tell me about that?

We talk about insurance fraud as the crime we all pay for. One of the frustrating things to me, is when I talk to legislators or state regulators, sometimes even those high-level officials will say, “It’s the insurance company’s issue. It really isn’t a crime.” And that is so false and so wrong.

In New York there was a grandmother who was killed in a staged automobile accident that went wrong. She wasn’t involved in it. She was the victim and she died and left behind her children and her grandchildren. And there’s a bill pending in her honor right now in New York that would make it a felony to commit staged accidents.

These are the type of real victims that we’re talking about. The way that we really educate consumers is to let them know they’re paying for it—that they and their loved ones’ lives are literally at risk if we don’t work together to fight insurance fraud.

Clearly, insurance fraud is not just worrying for the insurers, but for society in general. How does the Coalition fit into this? What’s its mandate and what’s your role there?

We were founded 25 years ago in 1993, by the Consumer Federation of America and at that point the American Insurance Association or AIA, which has now recently merged back with PCI into a new organization, American Property Casualty Insurance Association (APCIA). Obviously, consumer advocacy and the world of insurance don’t always see things eye to eye––but they united a quarter century ago to say, “We can agree on insurance fraud as a problem and we can work with each other to find solutions.”

I serve as our director of government affairs, which means I interact with the 50 state legislatures and the District of Columbia, as well as our nation’s insurance commissioners and the National Association of Insurance Commissioners, on legislation and regulation that impacts the world of insurance fraud.

That sounds like important work, particularly in the States because insurance is very much a patchwork when it comes to regulation and legislation. Is that correct?

Absolutely it is. In our country, unlike many of the European nations, insurance is not regulated at the federal level. Under the McCarran-Ferguson Act, insurance regulation is relegated to the states and to the District of Columbia to oversee at that level. There are advantages to that. It’s closer to the consumer, but it also means, as you correctly said, we have a patchwork of laws and regulations—including in the world of insurance fraud and how it’s fought.

You mentioned the legal aspect of that, which is an area that you have a lot of experience in. Prior to joining the Coalition, you were in insurance law for nearly three decades. I’m curious, over the course of that time did you see changes in insurance fraud? For example, today we have much more technology and we’ve seen this huge shift towards mobile phones and digital. Has insurance fraud essentially been the same, just with different devices? Or has it fundamentally changed as our world has changed?

I think it’s fundamentally changed, somewhat in conjunction with our world and somewhat apart from our world. The areas where I’ve seen the largest change in the three decades falls into several categories:

  • Number one: the change of technology. We have technology now to investigate and fight insurance fraud that, when I started doing this type of work in the mid-1980s, would be like Star Trek or Star Wars. We now have the ability to literally track people and build a digital model to scrape cell phones and other devices, to find where people have searched for information, and whom they’ve communicated with.
  • Number two: fraud has become much more sophisticated. Thirty years ago, fraud was localized. It might have been a local staged accident ring, a local arson case or medical fraud. We now have national fraud rings, even international operators. Some operating under organized crime, some operating specifically in the world of insurance fraud that are perpetuating ring activity, from staged accidents to arson fires to medical fraud, that literally can sweep around the globe.
  • Number three: we have diversified our profession. This area is one we don’t talk about a lot. But going back 30 years ago, if you looked at who was investigating insurance fraud from insurance companies, from law enforcement and government, and who was litigating these cases, they were almost all Caucasian males. And we have diversified our profession––and that is fabulous, because today we have highly trained women who are insurance fraud investigators, arson origin and cause investigators. Many people in our society have seen that fighting fraud is a career path that they can take, with opportunities on the law enforcement, governmental judicial side or legislative side.

You’ve mentioned how organized fraud has become more sophisticated. I’m wondering if opportunistic fraud has also changed. I think sometimes people say, “Oh you know the good old days we were more honest, we were more accountable to each other.” So have people have fundamentally changed? Are we more likely to say, inflate an insurance claim or claim something that we later find, and maybe not tell the insurance company that’s what happened?

It’s very interesting. We look very closely now at the demographics of insurance fraud. This too is something that even if you go back 20 or 25 years ago, we were grouping all insurance fraud together and we were looking at people that commit insurance fraud together. Let me give you two examples at either end of the spectrum.

Historically we looked at people who were in their 60s, 70s and 80s, and said people that age don’t commit insurance fraud––and historically we gave people of that age block a free pass, saying we didn’t think they were fraudsters or scammers. Well, we’ve come to learn the hard way that if you lie, cheat and steal in your 20s, 30s, and 40s––yes, you will lie, cheat and steal in your 60s, 70s, and 80s and even beyond.

So we’re looking at the Baby Boomer generation. Why? Because with that population bubble that was the Baby Boomers, between now and 2050 in America we have ten thousand citizens every day turning age 65. And not to indict an entire generation––and I happen to be a Baby Boomer––but if we look at people that age and say they will not commit insurance fraud, then we are going to open literally a Pandora’s box of fraud in the future.

When we look at that age block, the other things that are interesting is many of those people that will commit insurance fraud in their 60s, 70s, or 80s, were very honest policy holders for many years––but they have faced challenges that they never thought they would:

  • We have people that have not planned for their retirement. Less than a third of Americans have any money saved for retirement and about another third have $25,000 or less put back for retirement.
  • We have a whole group of people—being the Baby Boomers—who were raised on Madison Avenue advertising of wanting goods, services and a lifestyle and they’re not willing to give that up.
  • We have people living longer. Sadly, we also have people in need of medical expenses and medical coverage.

And some of those people—not everyone, but some of those people—will look to insurance claims. Like burning a shed or an outbuilding, a garage, reporting a stolen jewelry items that they don’t need anymore, so they can use that money for another purpose.

If we go to the other end of the spectrum, there are some very interesting studies being done right now on the millennial generation. And what we’re seeing is the millennial generation is much more tolerant of committing fraud and insurance fraud than prior generations. And that’s significant, because while the Baby Boomers were the largest population bubble in American history, the millennial generation is the largest that we’ve ever had in our country.

For example, a recent study was done that showed that millennials––58 percent––felt it was entirely proper to lie to get yourself out of a difficult position, or when someone was questioning you about some type of activity that you may want to hide or not disclose.

We look at those studies very closely when we’re looking at the world of insurance fraud. So it’s both ends of the spectrum. But we are starting to study the demographics of insurance fraud in more depth.

That’s really interesting, particularly as you explain to me the logic of not just giving Baby Boomers a free pass. That’s a huge generation of people who are getting older and, unfortunately due to a lot of the factors that you’ve mentioned, brings a more human side to the fraud conversation as well. Not that that makes it acceptable, but it pulls on your heartstrings. Or maybe I’m just a softy.

No, you’re not. And it’s very sad. When I was still practicing law a few years ago, I questioned a gentleman in his 80s. He’d filed a claim for a bag of jewelry that he contended someone stole from his home, but he still had it and it was hidden in a safety deposit box. When we confronted him with that evidence, that he was obviously lying to his insurance company, he readily admitted that he was doing it, but then he said, “My wife needs medication that costs $1500 every month; she needs that to live. We don’t need that jewelry anymore.”

Now you tell me you wouldn’t do the same if it were your wife. And that’s heartbreaking, but that’s the type of thing that can motivate someone, who otherwise has been a very honest person, to commit an act of insurance fraud.

It’s a tricky point and one that, unfortunately, we’re not going to solve on this podcast. So let’s switch tacks now—I understand that every decade since 1997, the Coalition has conducted a study on public attitudes toward insurance fraud, called the Four Faces study. Can you tell us a bit about the Four Faces study?

The Four Faces study is one of the more interesting studies that we do. We look at fraud historically, and are able to see the changes in Americans’ attitudes toward insurance fraud. We call it Four Faces because we look at the various viewpoints that people may have regarding insurance fraud. And we group those people into four categories:

  • Moralists say, “Under no circumstances would I, or would I support anyone, committing insurance fraud.” That’s the ideal person that every insurance company would like to have as their policyholder.
  • Realists say, “I think insurance fraud is wrong, but it’s always been there and it’s always going to be there. You just have to accept it.”
  • Conformists say, “Insurance fraud’s out there. And if everybody else is going to commit it, then I’m gonna jump on the bandwagon and get my share too.”
  • Critics basically cheer on those committing insurance fraud. For whatever reason they feel the insurance company is getting what it deserves, that that person is entitled to that more than the insurance company is. So they actually advocate and feel that people committing insurance fraud have the right to do so.

Over the years, we’ve seen a move to the middle. The moralist side has gone down, and that’s a sad factor. But the realist and the conformist have moved to larger blocks in the middle. And successfully, the biggest drop we’ve seen is the critic—in the most recent study, a drop of about 11 percent. So that does tell us that the message is getting through, that people pay the cost and the price and are the victims of the insurance fraud. We are seeing that squeeze to the middle, but more from the critic side than from the moralist side.

Do you attribute that drop in the percentage of critics to any key factors that you able to track?

I do. I think we’re doing a better job, and by we, I’m talking about not only the Coalition, I’m talking about our members. I’m talking about our partner organizations, such as the International Association of Special Investigation Units, the National Insurance Crime Bureau. I think we’re all doing a better job of educating Americans about the risk and the damage that insurance fraud causes.

When we have better-informed consumers, we’re going to see that they have more awareness and less tolerance for committing insurance fraud. And I think in large measure, that is what we’re seeing with that very dramatic drop in the critic side. The squeezing to the middle? I think we’re somewhat also seeing the rise of the million millennial generation and that the millennials are a little more tolerant of fraud than generations that have preceded them.

Right. It’s a fascinating study. I think there’s a lot there for insurers, and I’m wondering if you have any recommendations for how insurers might use these findings to bolster their anti-fraud strategies.

Absolutely we do. The reason that we do the Four Faces study and try to educate people in general, and insurance companies in specific, about the attitudes toward insurance fraud, is to show through measurable data that we can move that needle––that we can change the public perception, that we can communicate to policyholders and consumers about insurance fraud, how to not become a victim of it, and perhaps more importantly the reasons not to commit it.

So the Four Faces study, we use as the hallmark to take to our members to say, “You have to be committed to educating your policyholders, your employees and the consumer public, about insurance fraud––that it is not a victimless crime, that is just the crime we all pay for. And more importantly convince them it’s not worth it to try to commit it.”

And if you go to the Coalition’s website or you go out to social media, you will find that we’re on Instagram, we’re on Twitter, we’re on YouTube, we are on every social media platform to try to convey that message to try to continue that drive to educate Americans about insurance fraud.

Summary

In this episode of the Accenture Insurance Influencers podcast, we talked about:

  • The financial and human cost of insurance fraud.
  • The ways that insurance fraud has changed over time, including new tools and technologies to investigate and fight fraud; increasingly sophisticated fraud rings; and diversity within the fraud-fighting profession.
  • Demographic research shows that old assumptions need to be revisited. Among them: that policyholders aged 60-plus don’t commit fraud. In addition, the sheer size of the millennial generation means insurers need to understand and address millennial attitudes toward fraud.
  • In a comparison of 2007 and 2017 surveys, the Coalition’s Four Faces study shows an 11-point drop in the percentage of Americans who condone insurance fraud.

In the next episode, Matthew will look more closely at the technology that insurers can use to better detect and fight fraud. He’ll also examine the industry trend toward more streamlined customer experiences—and how it could be leaving insurers vulnerable to fraud.

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