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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: ____________


I, Kejriwal Surbhi Gopal of Jai Hind College Of T.Y.BBI (Semester VI)

hereby declare that I have completed this project on Frauds In Insurance
in the Academic year 2005-2006 The information submitted is true and
original to the best of my knowledge.

Signature of the Student


I, Mrs. Suri hereby certify that Kejriwal Surbhi Gopal of Jai Hind College of
T.Y.BBI (Semester VI) has completed the project on Frauds In Insurance.
In the Academic year 2005-2006. The information submitted is true and
original to the best of my knowledge.

Signature of the Project Signature of the Principal

Coordinator of the college




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

I Surbhi Kejriwal, the student of Jai Hind College pursuing my third year of
Bachelors of Banking & Insurance (T.Y.B.B.I), am very grateful to a lot of
people for guided and helping me in the right direction throughout my

First of all, I would like to specially thank Mr. Iyer and Mr. Joshi, for
introducing me to such a wonderful and challenging topic because of
which I learnt about the world and especially about the various frauds that
take place in detail and for being my guide in the true sense of the word
and for guiding, correcting and motivating me at each and every moment
during my project.

I would also like to thank Mrs. Suri, our coordinator to whom we shall
forever remain indebt for setting the foundation for this course and for
assisting in the project whenever help was required.

Introduction to frauds

What Are Frauds?

In a broad strokes definition, fraud is a deliberate misrepresentation which

causes another person to suffer damages, usually monetary losses. Most
people consider the act of lying to be fraud, but in a legal sense lying is
only one small element of actual fraud.

A salesman may lie about his name, eye color, place of birth and family,
but as long as he remains truthful about the product he sells, he will not
be found guilty of fraud. There must be a deliberate misrepresentation of
the product's condition and actual monetary damages must occur.

Many fraud cases involve complicated financial transactions conducted by

'white collar criminals', business professionals with specialized knowledge
and criminal intent. An unscrupulous investment broker may present
clients with an opportunity to purchase shares in precious metal

For example, His status as a professional investor gives him credibility,

which can lead to a justified believability among potential clients. Those
who believe the opportunity to be legitimate contribute substantial
amounts of cash and receive authentic-looking bonds in return. If the
investment broker knew that no such repositories existed and still
received payments for worthless bonds, then victims may sue him for

Fraud is not easily proven in a court of law. Laws concerning fraud may
vary from state to state, but in general several different conditions must
be met.

One of the most important things to prove is a deliberate
misrepresentation of the facts. Did the seller know beforehand that the
product was defective or the investment was worthless? Some employees
of a large company may sell a product or offer a service without personal
knowledge of a deception.

The account representative who sold a fraudulent insurance policy on

behalf of an unscrupulous employer may not have known the policy was
bogus at the time of the sale. In order to prove fraud, the accuser must
demonstrate that the accused had prior knowledge and voluntarily
misrepresented the facts.

Another important element to prove in a fraud case is justifiable or actual

reliance on the expertise of the accused. If a stranger approached you
and asked for ten thousand dollars to invest in a vending machine
business, you would most likely walk away. But if a well-dressed man
held an investment seminar and mentioned his success in the vending
machine world, you might rely on his expertise and perceived success to
decide to invest in his proposal. After a few months have elapsed without
further contact or delivery of the vending machines, you might reasonably
assume fraud has occurred. In court, you would have to testify that your
investment decision was partially based on a reliance on his expertise
and experience.

The element of fraud which tends to stymie successful prosecution is the

obligation to investigate. It falls on potential investors or customers to fully
investigate a proposal before any money exchanges hands.

Failure to take appropriate measures at the time of the proposal can

seriously weaken a fraud case in court later. The accused can claim that
the alleged victim had every opportunity to discover the potential for fraud
and failed to investigate the matter thoroughly.

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

The dictionary defines fraud as the intentional perversion of truth to

induce another to part with something of value or to surrender a legal
right. Insurance fraud can be “hard” or “soft.” Hard fraud occurs when
someone deliberately fabricates claims or fakes an accident. Criminals
are using increasingly sophisticated electronic schemes to defraud
insurance companies.

Soft insurance fraud, also known as opportunistic fraud, occurs when

normally honest people pad legitimate claims or intentionally understate
the number of miles they drive each year or, in the case of business
owners, list fewer employees or misrepresent the work they do to get a
lower premium.

Those who commit insurance fraud range from organized criminals who
steal large sums through fraudulent business activities and insurance
claim mills to professionals and technicians who inflate the cost of
services or charge for services not rendered, to ordinary people who want
to cover their deductible or view filing a claim as an opportunity to make a
little money.

Some lines of insurance are more vulnerable to fraud than others. Health
care, workers compensation and auto insurance are believed to be the
sectors most affected.

Insurance Fraud and Abuse:
A Very Serious Problem

Fraud and abuse are widespread and very costly to any country’s health-
care system. Fraud involves intentional deception or misrepresentation
intended to result in an unauthorized benefit. An example would be billing
for services that are not rendered.

Abuse involves charging for services that are not medically necessary, do
not conform to professionally recognized standards, or are unfairly priced.
An example would be performing a laboratory test on large numbers of
patients when only a few should have it. Abuse may be similar to fraud
except that it is not possible to establish that the abusive acts were done
with an intention to deceive the insurer.

Type of Fraud and Abuse

False claim schemes are the most common type of health insurance
fraud. The goal in these schemes is to obtain undeserved payment for a
claim or series of claims. Such schemes include any of the following when
done deliberately for financial gain:

• Billing for services, procedures, and/or supplies that were not

• Misrepresentation of what was provided; when it was provided; the
condition or diagnosis; the charges involved; and/or the identity of
the 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 uninsured ones but
represent to the insurance companies that the higher fee is the usual one.

This practice is illegal. It is also illegal to routinely excuse patients from
co-payments and deductibles. (A co-payment is a fixed amount paid
whenever an insured person receives specified health-care services. A
deductible is the amount that must be paid before the insurance company
starts paying. ) It is legal to waive a fee for people with a genuine financial
hardship, but it is not legal to provide completely free care or discounts to
all patients or to collect only from those who have insurance.

Studies have shown that if patients are required to pay for even a small
portion of their care they will be better consumers and select items or
services because they are medically needed rather than because they are
free. Routine waivers thus raise overall health costs. They are considered
fraudulent because averaging them with the doctor's full fees would make
the "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 that normally
are covered by a single fee. An example would be a podiatrist who
operates on three toes and submits claims for three separate
• Double billing: Charging more than once for the same service.
• Up coding: Charging for a more complex service than was
performed. This usually involves billing for longer or more complex
office visits (for example, charging for a comprehensive visit when
the patient was seen only briefly), but it also can involve charging
for a more complex procedure than was performed or for more
expensive equipment than was delivered. Medicare documentation
guidelines describe what the various levels of service should

• Miscoding: Using a code number that does not apply to the
• Kickbacks: Receiving payment or other benefit for making a referral.
Indirect kickbacks can involve overpayment for something of value.

For example, a supplier whose business depends on physician

referrals may pay excessive rent to physicians who own the premises
and refer patients. Another example would be a mobile testing service
that performs diagnostic tests in a doctor's office. Kickbacks can distort
medical decision-making, cause over utilization, increase costs, and
result in unfair competition by freezing out competitors who are
unwilling to pay kickbacks.

Criminals sometimes obtain Medicare numbers for fraudulent billing by

conducting a health survey, offering a free "health screening" test, paying
beneficiaries for their number, obtaining beneficiary lists from nursing
homes or boarding facilities, or offering "free" services, food, or supplies
to beneficiaries.

Excessive or Inappropriate Testing

Many standard tests can be useful in some situations but not in others.
The key question in judging whether a diagnostic test is necessary is
whether the results will influence the management of the patient. Billing
for inappropriate tests—both standard and nonstandard—appears to be
much more common among chiropractors and joint chiropractic/medical
practices than among other health-care providers. The commonly abused
tests include:

• Computerized inclinometers: Inclinometers is a procedure that

measures joint flexibility. Inclinometer testing may be useful if
precise range-of-motion measurements are needed for a disability

evaluation, but routine or repeated measurements "to gauge a
patient's progress" are not appropriate.
• Nerve conduction studies: These tests can provide valuable
information about the status of nerve function in various
degenerative diseases and in some cases of injury. However,
"personal injury mills" often use them inappropriately "to "follow the
progress" of their patients.
• Thermographs: Thermo-graphic devices portray small temperature
differences between sides of the body as images. Chiropractors
who use thermographs typically claim that it can detect nerve
impingements or "nerve irritation" and is useful for monitoring the
effect of chiropractic adjustments on subluxations. These uses are
not appropriate.
• Unnecessary x-rays: X-rays examinations can be important to look
for conditions that require medical referral. However, it is not
appropriate for chiropractors to routinely x-ray every patient to look
for "subluxations" or to "measure the progress" of patients who
undergo spinal manipulation.

Many insurance administrators are concerned about chiropractic claims

for "maintenance care" (periodic examination and "spinal adjustment" of
symptom-free patients), which is not a covered service. To detect such
care, many companies automatically review claims for more than 12

Personal Injury Mills

Many instances have been discovered in which corrupt attorneys and

health-care providers combine to bill insurance companies for nonexistent
or minor injuries. The typical scam includes "cappers" or "runners" who
are paid to recruit legitimate or fake auto accident victims or worker's
compensation claimants. Victims are commonly told they need multiple
visits. The providers fabricate diagnoses and reports and commonly
provide expensive but unnecessary services.

The lawyers then initiate negotiations on settlements based upon these

fraudulent or exaggerated medical claims. The claimants may be
unwitting victims or knowing participants who receive payment for their
involvement. Mill activity can be suspected when claims are submitted for
many unrelated individuals who receive similar treatment from a small
number of providers.

Quackery-Related Miscoding

In processing claims, insurance companies rely mainly on diagnostic and

procedural codes recorded on the claim forms. Their computers are
programmed to detect services that are not covered. Most insurance
policies exclude nonstandard or experimental methods. To help boost
their income, many nonstandard practitioners misrepresent what they do.
They may also misrepresent their diagnosis. For example:

• Brief or intermediate-length visits may be coded as lengthy or

comprehensive visits.
• Patients receiving chelating therapy may be falsely diagnosed as
suffering from lead poisoning; and the chelating may be billed as
"infusion therapy" or simply an office visit.
• The administration of quack cancer remedies may be billed as
• Nonstandard allergy tests may be represented as standard ones.

Viatical Fraud

In viatical settlement transactions, people with terminal illnesses assign

their life insurance policies to viatical settlement companies in exchange
for a percentage of the policy's face value. The company, in turn, may sell

the policy to a third-party investor. The company or the investor then
becomes the beneficiary to the policy, pays the premiums, and collects
the face value of the policy after the original policyholder dies.

Fraud occurs when agents recruit terminally ill people to apply for multiple
policies. They misrepresent the truth and answer "no" to all of the medical
questions. Healthy impostors then undergo the medical evaluation. In
many cases, the insurance agent who issues the policy is a party to the
scheme. The agent or one applicant may even submit the same
application to many insurance companies.

Viatical settlement companies then purchase the policies and sell them to
unsuspecting third-party investors. The insurance industry is the biggest
victim of this fraud and could incur huge losses within the next few years.
Some investors receive nothing in return for their "guaranteed"

Bogus Health Insurance Companies

There have been two reports issued concerning the sale of health
insurance plans that lack legal authorization. These plans place the buyer
at risk for financial disaster if serious illness strikes. One report focuses
on consumer vulnerability. The other notes that from 2000 to 2002, 144
unauthorized entities enrolled at least 15,000 employers and more than
200,000 policyholders who got stuck for over $200 million in unpaid

The investigators found that many of the entitles bore names similar to
those of legitimate companies. In response to the report, the Health
Insurance Institute of America is again urging the National Association of
Insurance Commissioners to create an online database of licensed health
insurance companies so that anyone can easily check the legitimacy of

companies offering health insurance products. Meanwhile, the Coalition
against Insurance Fraud offers a few warning signs of a possible swindle:

• The plan readily accepts people with serious illnesses and other
medical conditions that other plans normally reject.
• The insurance has few or no underwriting guidelines—the agent or
rep appears almost too eager to sign you up.
• You're approached by an insurance agent, phone or direct mail.
Honest group plans normally are sponsored by your employer—and
aren'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 state licensing.
• The plan seems like insurance, but the agent or rep avoids calling
"insurance," and instead uses evasive terms such as "benefits."
• The agent or rep doesn't have clear answers to your questions,
seems ill-informed, or avoids sharing information.
• You've never heard of that health insurance company—and nobody
else has, either.
• Your hospital keeps calling you to complain that your health plan
isn't paying your medical bills. Often the plan's reps keep making
flimsy excuses, or stop returning phone calls altogether.

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

Common frauds include "padding," or inflating actual claims;

misrepresenting facts on an insurance application; submitting claims for
injuries or damage that never occurred; and "staging" accidents.
Prompted by the incidence of insurance fraud, about 40 states have set
up fraud bureaus. These agencies are reporting a record number of new
investigations, significant increases in referrals — tip about suspected
fraud — and cases brought to prosecution.


 The hurricanes of 2005, especially Hurricane Katrina, are likely to

result in a surge in insurance fraud. In addition to the usual
schemes, where homeowners or renters make claims for stereos,
televisions or other expensive items they never purchased, and
inflate claims for items actually destroyed, home arsons are on the
rise. Since many homeowners in the Gulf areas did not have flood
insurance, they may not be covered for some or all of the damage
caused by the hurricanes. Dozens of fires have broken out in many
affected communities, some of which may be the result of arson.

 The National Insurance Crime Bureau (NICB) says that by
November 2005, there were 160,000 vehicles in its flooded motor
vehicle and boat database, which was set up by catastrophes teams
to combat title fraud in the hurricane-affected states. The NICB
warns that flooded vehicles may be cleaned up, moved and sold in
other areas of the country by unscrupulous operators. Although the
vehicles were totaled by insurance companies and identified as
“salvage” on their titles, which means they are not fit for any use
except for scrap or parts, they could end up on the market in states
where it is relatively easy to apply for a regular title. A database was
created in which vehicle identification numbers (VINs) and boat hull
identification numbers (HINs) from flooded vehicles and boats could
be stored and made available to law enforcers, state fraud bureaus,
insurers and state departments of motor vehicles.

 One in 10 paid bodily injury liability (BI) auto claims in California had
the appearance of fraud or misrepresented the facts of the claim,
according to the Insurance Research Council’s Fraud. More
common is the appearance of buildup, or the padding of claims,
which was found in one in five claims. The study, released in
January 2006, examined about 73,000 claims closed with payment
in 2002. It found that between $319 and $432 million in BI payments
were attributable to fraud and buildup.

Real eyes...Realize...Real lies…

Short History of Antifraud Efforts

Fraud in insurance has undoubtedly existed since the industry's
beginnings in the seventeenth century, but it received little attention until
the 1980s because law enforcement agencies had other priorities and
were reluctant to provide the training needed to investigate and prosecute
cases of insurance fraud. And, given the fine line between investigating
suspicious claims and harassing legitimate claimants, some insurers were
afraid that a concerted effort to eradicate fraud might be perceived as an
anti-consumer move. In addition, the need to comply with the time
requirements for paying claims imposed by fair claim practice regulations
in many states made it difficult to adequately investigate suspicious

But by the mid-1980s the rising price of insurance, particularly auto and
health insurance, together with the growth in fraud committed by
organized criminals, prompted many insurers to reexamine the issue.
Gradually, insurers began to see the benefit of strengthening antifraud
laws and more stringent enforcement as a means of controlling escalating
costs — a pro-consumer move — and they found ready allies among
those who been adversely affected by fraud. These included consumers,
who were paying for fraud through their insurance premiums; the people
used by organized fraud groups to file false claims, often the poor, who
sometimes found themselves on the wrong side of the law; and
chiropractors and other medical professionals who were concerned that
their reputation as a group was being tarnished by organized fraud
ringleaders who had recruited their members to make fraudulent claims
for treatment.

In their fight against fraud, insurers have also been hampered by public
attitudes. Ongoing studies by the Insurance Research Council show that
significant numbers of Americans think it is all right to inflate their
insurance claims to make up for all the insurance premiums they have
paid in previous years when they have had no claims, or to pad a claim to
make up for the deductible they would have to pay.

Antifraud activity on the part of state fraud bureaus and SIUs (special
investigative units within insurance companies) increased in the 1990s.
Heightened antifraud activity along with growth in funding for fraud-
fighting personnel resulted in increased prosecutions. Successful
prosecution not only blocks future fraudulent activities by individuals who
are repeat offenders, but news of prosecutions also acts as a deterrent to
others who may be contemplating committing fraudulent acts.

While the focus initially was on auto insurance fraud, antifraud efforts also
encompass workers compensation fraud, where investigations are
directed toward employers who, to obtain a lower premium, misrepresent
their payroll or the type of work carried out by their employees. These two
factors impact premiums. Payroll is important because workers
compensation insurance provides for lost wages and insurers need to
know the maximum they would have to pay if all employees were injured
in the same accident; the type of work carried out by the firm affects the
likelihood of injuries. Workers that use cutting tools, for example, are
more likely to get injured on the job than office workers. Some employers
also apply for coverage under different names to foil attempts to recover
monies owed on previous policies or to avoid detection of their poor claim
record, which would put them in a higher rating category.

Fraud and abuse take place at many points in the health care system.
Doctors, hospitals, nursing homes, diagnostic facilities and attorneys have
been cited in scams to defraud the system. One huge area of fraud is the
Medicare and Medicaid systems. Health care is especially susceptible to
electronic data interchange (EDI) fraud. EDI is direct filing of claims —
computer to computer — and is widely used for Medicare claims.
In 1999, the Government Accounting Office released a study of the
Medicare, Medicaid and private health insurance sectors that confirmed
that organized crime is heavily involved in health care fraud. The
investigation found that in seven cases of health care fraud studied, about
160 health related groups — medical clinics, physician groups, labs or
medical suppliers — had submitted fraudulent claims. The criminals
identified in the report were not health care workers but criminals already
prosecuted for securities fraud, forgery and auto theft. Apparently, these
criminals had moved to health care because fraud was relatively easy to

Anti-Fraud Programs

Several large insurance companies have joined forces through the

National Health Care Anti-Fraud Association to develop sophisticated
computer systems to detect suspicious billing patterns. The Federal
Bureau of Investigation (FBI) and the Office of the Inspector General
(OIG) each have assigned hundreds of special agents to health-fraud
projects. The Coalition Against Insurance Fraud, a public advocacy and
educational organization founded in 1993, includes consumers as well as
government agencies and insurers.

The Omnibus Consolidated Appropriation Act of 1997 authorized a Health

Care Anti-Fraud, Waste, and Abuse Community Volunteer Demonstration
Program to further reduce fraud and abuse in the Medicare and Medicaid
programs. The program enrolled thousands of retired accountants, health
professionals, investigators, teachers, and other community volunteers to

help Medicare beneficiaries and others to detect and report fraud, waste,
and abuse.

The Inspector General's office has recovered over a billion dollars through
fines and settlements. Its Operation Restore Trust, which began in 1995,
was a joint federal-state program aimed at fraud, waste, and abuse in
three high-growth areas of Medicare and Medicaid: home health
agencies, nursing homes, and durable medical equipment suppliers. The
questionable activities included:

• Billing for advanced life support services when basic life support
was provided. Documentation may be falsified to indicate a patient
needed oxygen—which is a key indicator in establishing medical
necessity for advanced life support.
• Billing for larger amounts of drugs than are dispensed; or billing for
brand-name drugs when less expensive generic versions are
• Billing for more miles than traveled for transportation.
• Falsification of documentation to substantiate the need for a
transport from a hospital back to the patient's home. Medicare will
only cover transport from hospital to home if the patient could not go
by any other means.

Insurers’ Antifraud Measures

Insurance companies are not law enforcement agencies. They can only
identify suspicious claims, withhold payment where fraud is suspected
and to justify their actions by collecting the necessary evidence to use in a
court. The success of the battle against insurance fraud therefore
depends on two elements: the resources devoted by the insurance
industry itself to detecting fraud and the level of priority assigned by
legislators, regulators, law enforcement agencies and society as a whole
to eradicating it.
Many insurance companies have established special investigation units
(SIUs) to help identify and investigate suspicious claims; some insurance
companies outsource their units to other insurers.

These units range from a small team, whose primary role is to train claim
representatives to deal with the more routine kinds of fraud cases, to
teams of trained investigators, including former law enforcement officers,
attorneys, accountants and claim experts to thoroughly investigate
fraudulent activities. More complex cases, involving large scale criminal
operations or individuals that repeatedly stage accidents, may be turned
over to the National Insurance Crime Bureau (NICB). This insurance
industry-sponsored organization has special expertise in preparing fraud
cases for trial and serves as a liaison between the insurance industry and
law enforcement agencies. In addition, it publicizes the arrest and
conviction of the perpetrators of insurance fraud to help deter future
criminal activities. Insurance company surveys confirm that SIUs
dramatically impact the bottom line of many insurance companies.

In the mid-1990s insurers said that for every dollar they invested in
antifraud efforts, including SIUs, they got up to $27 back, but these
returns have become harder to achieve as the more apparent fraud
schemes have been uncovered and more effort is necessary to ferret out
the sophisticated fraud that remains. A 2000 study by Conning Research
& Consulting suggests that results vary widely. Using the ratio of “claims
exposure reduction” to the expense of running SIUs, the study found
ratios ranging from a low of 3 to 1 to a high of 27 to 1, depending on the
year and line of insurance. Although some insurers are cutting back on
fraud investigation by outsourcing investigations and dissolving their fraud
units, advances in software technology, especially programs that sift
though the millions of claims that large health insurers process annually,
are proving effective in fighting fraud. These “data mining” programs can
uncover repetitions and anomalies and analyze links to fraudulent
activities or entities.

The consolidation of insurance industry claims databases has put a

valuable new tool in the hands of investigators. The Insurance Services
Office Inc.'s system, known as Claim Search, utilizes a data-mining
program. Claim Search is the world’s largest comprehensive database of
claims information. The NICB has developed a program called Predictive
Knowledge that collects and analyzes information which can be
disseminated to insurers and law enforcement agencies to detect,
investigate and prevent insurance fraud. In addition, the NICB, in
partnership with iMapData Inc., introduced CAT fraud, to identify
potentially fraudulent catastrophe/weather-related insurance claims.
A national fraud academy — a joint initiative of the Property Casualty
Association of America, the FBI, NICB and the International Association
of Special Investigating Units — was designed to fight insurance claims
fraud by educating and training fraud investigators. It offers online classes
under the leadership of the NICB.
An emerging issue for insurers using data sharing services is their impact
on privacy. Financial institutions, including insurers, must respect the
privacy of their customers and protect their personal information, a
practice that may deter efforts to combat fraud.
Insurers may also file civil lawsuits under the federal Racketeering
Influenced and Corrupt Organizations Act (RICO), which requires proving
a preponderance of evidence rather than the stricter rules of evidence
required in criminal actions and allows for triple damages. Since 1997,
some of the largest insurers in the country, especially auto insurers, have
been filing and winning lawsuits against individuals and organized rings
that perpetrate insurance fraud.

Itching To Know Who Can Help?

Insurance Agent Fraud on the Rise

Two years ago, at the age of 90, Thomas Pickering was doing the twist.At
the behest of his trusted insurance agent, Pickering was buying and
selling one annuity after another in a deceitful industry practice called
"twisting." That's when dishonest agents persuade clients to cash in one
investment for another—against their clients' best interests and for the
agents' own financial gain.

In Pickering's case, he followed his agent's advice, sold investments

before they matured and lost 11,000/- in forfeited interest and penalties.
He was about to lose another 35,000/- cashing in one annuity to buy
another,netting his agent 20,000/- in commissions. When the company
holding the annuity intervened. It suspected Pickering was getting ripped
off and called the authorities.An investigation led Florida's Department of
Financial Services (DFS) to revoke agent Peter Waldon's license for

Barry Lanier of Florida's DFS says he's fielding more complaints about
greedy agents earning whopping commissions upfront by pitching
unsuitable investments like annuities to older people. But Lanier and other
experts say some annuities are not considered to be wise investments for
most olders because they're based on life expectancy.Growing concern
over the sale of annuities to older people prompted the National
Association of Insurance Commissioners (NAIC) to adopt regulations that
assure that the annuities are suitable to the buyer's needs.

Division of Insurance Fraud

The Division of Insurance Fraud was originally formed in 1976 to

investigate only fraudulent automobile tort claims. In the early years,
investigators had arrest powers but could not carry firearms. Today, the
division investigates all types of insurance fraud crimes.

Investigators are assigned to work general fraud cases, workers’

compensation fraud, medical and health-care fraud, and agent and
company fraud. Areas of assignment may include:

• →Insolvency - Fraud committed by insurance companies that fail

financially due to internal fraud by owners and corporate officers.
• →Unauthorized Entities - fraud, both criminal and civil, committed
by insurance companies operating illegally in the state.
• →Health Care Fraud - focuses on organized medical and health
care scams.
• →Workers’ Compensation - investigates employers for workers’
compensation premium fraud.
• →Public Employee Fraud - investigates state and local government
employees for workers’ compensation claimant fraud.

Deceptive Life Insurance Sales Practices

The life insurance industry has been hit with billion dollar verdicts and
multi-million dollar fines for deceptive sales practices.

The two largest companies, MetLife and Prudential, have each been hit
with billion-dollar-plus verdict.

Most major companies have also been sued for deceptive sales practices.
The list goes on and on, as successful lawsuits finally caught up with an
industry that has long bilked the public, misrepresented its product, and
ignored the urgent need for basic reforms to stop abuses.

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

The life insurance industry did establish the Insurance Marketplace

Standards Association (IMSA). Of course, there are now ads announcing
that the life insurance industry is committed to the fair treatment of
policyholders. But early returns on the industry's efforts suggest it is just a
sham and a shell game designed to prevent real reform by legislation and

Now a study by Professor Joseph Belth, publisher of the Insurance

Reform, a respected newsletter on the life insurance industry, finds the
reforms are a sham. I'd have to say as usual the life insurance industry
wants to improve its public relations, not its policy relations.

The Insurance Forum study correctly notes that much of the life insurance
deception comes about because the industry does not make full
disclosure on rates of return and prices necessary to sound decision
making by insurance buyers. By failing to disclose needed information,
consumers are easily duped by deceptive methods.

The Insurance Forum put the industry to a test by asking the chief
executive officers of 40 companies (31 of which are members of IMSA)
for the kind of information that should be freely and automatically
available to prospective policyholders.

Of the 41 companies surveyed, 27 did not participate. Only 13 companies

(10 of which are members of IMSA) participated in the study.

And some of the 13 participants provided deceptive information. Some

provided incomplete information. Some provided the kind of information
that would not be helpful to the typical consumer.

The Insurance Forum study concludes that IMSA will not bring about the
needed changes in the life insurance industry, but will simply delay their
enactment. Most industries prefer "voluntary" action, so the foxes can
continue to guard (and eat) the chickens, also known as policyholders.

What's more, after the great life insurance scandals of the 1980s and
1990s, the industry is determined to perpetuate a system in which life
insurance rip-offs by major and minor companies alike will continue to be
standard operating procedures.

The bottom line is that the life insurance industry has practices that are
precisely the opposite of its proclaimed ethical principles.

Here are some examples:
IMSA has an ethical principle that says its company members will
"provide competent and customer-focused sales and services." The
Insurance Forum survey suggests that most companies will engage in
business as usual, giving the consumer no information, inadequate
information or deceptive information.

IMSA has another ethical principle that says it will "engage in active and
fair competition." But by not providing information or by providing
deceptive information, it is clear that major segments of the industry will
continue to engage in competition by confusion.

As Bob Hunter of the Consumer Federation put it, "The proof of the
pudding is in the eating. It's hard to trust the life insurance industry, given
its recent history. They're going to have to reprove themselves as

Unfortunately, the life insurance industry is proving itself untrustworthy.

And as for the proof of its good intention being in the pudding, my advice
is don't eat its pudding. It's the same old stuff plus a phony sermon on
ethical principles.

Viatical Settlements Investment Fraud

Historically, some insurance companies have offered an accelerated

death benefits option which allows the insured an opportunity to receive
up to 80% of the death benefit at any time within the last year of their
projected life. The remaining 20% is then paid to the insured's estate.

On the other hand, the business of viatical settlements involves the selling
of a policy death benefit, at less than face value, by a terminally ill person
to a third party. This is accomplished, for a commission, with the
assistance of a broker who offers the policies to settlement provider
companies for bid, with the highest bidder obtaining the policy for resale
to investors. The broker receives a commission based on the sale price.

Size of the Industry

Fraud in the unregulated viatical settlement industry has become

rampant; as much as 40-50% of the life insurance policies viaticated may
have been procured by fraud.

Clean Sheeting

Unscrupulous individuals in the viatical industry procure policies by a

practice referred to as "clean sheeting" which is the act of applying for life
insurance while intentionally failing to disclose the applicant's status as
being terminally ill. They can get away with it initially because most
insurance companies avoid the added costs and invasiveness of medical
exams and blood tests by relying on an honor system below a certain
policy face value.

Many insurance agents and brokers assist and often encourage aviators
in committing the fraud because it not only provides more policies than
would be available though legitimate means, but it also provides a much
higher rate of return due to the fact they can be bought from aviators so

In a legitimate transaction, the ill person usually receives 50%-70% of the

face value of the policy. However, a "clean sheeted" policy viaticated
during the contestable period may offer as little as 10% of the face value
because it carries the high risk of rescission, or cancellation by the
insurance company, due to fraud.

Wet Ink Policies

After the policy is issued, the insured person will sell his policy or multiple
policies from different insurance companies, sometimes within weeks, to
a settlement provider using a broker. This is referred to as a "wet ink
policy" because the ink on the contract is still "wet" when the policy is

The odds against an individual finding out that he is terminally ill within
weeks of buying a policy are exceedingly high. To see that happen
repeatedly within a short period of time with the same broker or provider
is strong evidence that they are both well aware that the policies have
been "clean sheeted".

To hide the fact that the policy has been viaticated shortly after issuance,
con artists will obscure viatication by simply changing the beneficiary to
someone at the settlement provider firm. A second way is to employ a
"collateral assignment" which is similar to where the insured seeks a loan
from a third party and secures the loan by pledging the death benefits of

the policy. In fraudulent transactions they pledge the death benefits but do
not receive a loan.

Contestability Period

Finally, some settlement providers merely delay reporting that the policy
has been viaticated until the contestability period is over; falsely believing
that it is not a crime then. An indication of culpability is that virtually all
parties attempt to hide the viatication of fraudulently obtained policies
from the insurance company for as long as possible.

The contestability clause for life insurance lasts for two years after
issuance, during which time it may be rescinded by the insurer for fraud in
the application. After this period ends, the insurer is obligated to pay the
death benefit, regardless of any fraud in the application. Because policies
viaticated during the contestability period may be rescinded, they bring,
as mentioned, a much lower price in the market.

A Case Study

As an investor, you are offered the opportunity to purchase an interest in

a life insurance policy in which the insured is terminally ill (i.e., viatical

You are told:

that your investment will produce a 100% rate of return because you are
assigned a policy with a face value of twice your investment which you can
claim upon their death;

that you will have the option of reselling your policy once it becomes
incontestable (two years after the date the policy is issued) for 70% of the
face value;

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

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

They say these are better investments than stocks, mutual funds,
annuities, and CD's because viatical investments have the following

→"Full liquidity at maturity from rock solid 'A' rated insurance


→"Tax advantaged & hassle free! 100% fixed rate of return which is
fully secured."

→"Zero risk to principal, a totally safe investment with no load & no

→"Short holding periods with early buyout options available as


→"No speculation, no interest rate risk, no market risk, no economic


In addition they say you will be making a "humanitarian investment"

because the terminally ill person will be able to use the funds to receive
improved health care; pay off debts; take a vacation, reduce family stress,
and enhance their quality of life. In exchange for your money you receive
a Membership Certificate certifying that you are a member of Viatical
Funding LLC.

After deducting the fees paid to sales agents, viator agents, and other
intermediaries from your funds, you find that the ill person will actually be
left with very little. In this case only $5,400, which is only 12% of your
investment 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 ill prior to being
insured, that they concealed this fact on the application, and thus
subjected the policy to cancellation by the insurer.

Instead of being designated as the sole beneficiary you may find you
share it with creditors and family members, and that the option to resell
the ownership interests is not a guaranteed option, but rather an
"assurance" that they will "make an effort" to facilitate a resale.

In any event, you will not likely receive a promised 70% of the face value
but only the amount another investor would be willing to pay, less
commissions, which could be much less.

They also fail to mention:

the risk of the insured living much longer than the estimated life
expectancy, thereby greatly reducing the annual yield;

the risk of their becoming insolvent and unable to replace a contested

or canceled policy;

the risk of the life insurance policy lapsing, or that you will often have to
pay the policy premiums for the duration of the policyholder's life;

the 15% commission the sales agent receives from your investment;

who is responsible for monitoring the health status and location of the
insured, obtaining a death certificate, and making a claim to the insurance

Life Expectancy of the Insured

To determine their rate of return investors rely on a report which projects

the life expectancy of the insured, but there are no minimum requirements
as to who may generate these reports or projections. One company used
a nurse and a plastic surgeon but could have used the janitor.

Viatical investing is highly speculative and risky. Even when the

policyholder exists and is terminally ill, there is a high degree of
uncertainty in predicting when they will die. New AIDS drugs and cancer
treatments have compounded the risk for investors because they help
policyholders live longer.

Viatical settlements are illegal under Canadian insurance legislation so
Canadian investors should not be involved in these schemes at all.

Not Enough Sick People

Financial Federated Title & Trust, and Asset Security Corporation pled
guilty after being charged with conspiring to recruit insurance agents to
defraud more than 3,000 investors while purchasing viaticated insurance
policy investments over a three year period.

Investors were told that their money would be used to purchase a

beneficial interest in viaticated insurance policies, and that medical
overviews were being performed on the insured persons whose policies
were being bought.

Although at least $115 million in investor monies was taken in, the
promoters used only $6 million of these funds to buy insurance policies
whose total face value was just over $7 million. They used the balance of
the money for purposes totally unrelated to the purchase of viaticated
insurance policies.

Industry Terminology

Cleansheeting: Refers to a fraudulent criminal act committed by a

proposed life insurance applicant, and by life insurance agents who
knowingly assist or conspire with the insurance applicants, by failing to
disclose a pre-existing medical condition in response to a question on a
life insurance application which would affect issuance of the policy.

Viator: A person who has a life threatening or terminal illness who sells or
assigns their life insurance policy.

Viatical Settlement: The life insurance policy of a terminally ill person
sold or offered for sale, generally at less than face value, through a
viatical settlement company.

Contestability: Policies are generally contestable for two years from the
date of issue and are subject to being rescinded by the insurer for 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 as a settlement
company or funder.

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

to negotiate a settlement contract between a viator and one or more
viatical settlement providers.

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

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

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 done
by a health-care professional and generally at the behest of the viatical
settlement provider to calculate the value of a viatical contract.

Viatical Investment Broker: Defines a person or entity other than a

licensed viatical settlement provider who solicits investors to purchase a
viatical settlement interest from a viatical settlement provider.

We Chose to Keep Your Money

Personal Choice Opportunities mislead investors when they sold

viatical securities in the form of loan transactions. Investors lent money to
PCO in order for them to purchase the benefits of life insurance policies
from terminally ill individuals on the promise that they would receive a
return on their investment of 21-25% per annum.

The funds, however, were not used to purchase life insurance policies but
kept instead. Over 1100 investors nationwide are believed to have
invested $80-100 million in these transactions in just ten months. No
evidence of any valid life insurance policies being purchased has been

Repercussions for the Industry

Life insurance premiums are based on actuarial tables which are

worthless in fraudulent applications. Insurance companies cannot afford
to pay out large death benefits after collecting small premiums for only a
few years. Even if they don't go bankrupt the added costs are eventually
passed on to other policyholders.

The viatical industry as a whole must take steps to better police itself. If it
does not, it risks ceasing to exist as an industry either by being legislated
out of existence or by being pushed out of the market after destroying
investor confidence in its product. If this fraud is to be stopped, it will
require the total commitment of the insurance industry. The first step is for
the industry to wake up to the existence and scope of the problem.


Currently a person charged with viaticating a fraudulently procured

insurance policy worth $100,000 face value, who stands to gain tens of
thousands of dollars, faces the same penalty as a shoplifter who takes a
pack of cigarettes. A mere sixty days in jail is an encouragement, not a
deterrent which may be why the industry watchdog has never received a
single referral from the industry itself reporting such fraud.

Life Settlements

Once thriving on those dying from a terminal illness, medical advances,

which are helping patients live longer, has caused the business to start
targeting new clients - usually seniors with high payoffs - who may be
willing to sell their life insurance policy to investors at a discount.

Life settlements, or the sale of a life insurance policy to a third party, are
sometimes referred to as "senior settlements" because most of the life
insurance policies purchased insure the life of a senior citizen.

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

People decide to sell their life insurance policies for many reasons. Some
common ones are the changed needs of dependents, a desire to reduce
or eliminate premiums, and a need for additional cash to meet expenses.

State regulation of insurance generally does not extend to life

settlements. Certain aspects of these transactions may fall under the
various Securities Acts so there can be financial risks involved when
entering into such arrangements.

You should consider contacting a professional tax advisor to find out the
tax implications as life settlement proceeds are generally not tax free.
Also know, if you are the seller that you will be required to provide certain
medical and personal information to third parties who will be paid the
proceeds from your policy upon your death. These third parties may sell
your policy and pass along your medical and personal information to other

Typically, life settlements are offered to buyers, for resale to investors, at

a discount from the death benefit. The discount is for the entire life of the
policy, not an annual rate of return. An annual rate of return cannot be
guaranteed. Your rate of return depends on when the insured dies, and
no one can predict a person's life expectancy. Keep in mind that a life
settlement is not a liquid investment because the return on such an
investment does not occur until the insured dies.

Spreading the Risk

The Alabama Securities Commission issued a Cease and Desist Order

against Viatical & Elderly Settlement Providers, LLC (VESPERS)
Washington, D.C., to stop conducting business in a few states after they
received information that they were engaged in the illegal offer and sale of
investment contracts involving fractionalized viatical settlement contracts

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

Be Aware, Don’t Be a Victim

The Coalition Against Insurance Fraud (CAIF) is a national advocacy

organization of consumer groups, public interest organizations,
government agencies and insurers. Its website notes “insurance fraud is
hard to measure because so much goes undetected, and complete
research has yet to be done. Still, we have enough evidence to know that
fraud is widespread — and expensive.”14

National studies conducted by the Insurance Research Council (IRC)

show that auto insurance, workers’ compensation and health insurance
are the lines that are most vulnerable to fraud. The IRC estimates that
one-third of all bodily injury claims from auto accidents contain some
amount of fraud, usually in terms of padding or exaggerating a claim, but
only 3% are totally fraudulent such as staged accidents. Another form of
fraud, lying on applications in order to reduce premium, costs auto
insurers $13.7 billion annually (Insurance Information Institute, or III).

As to workers’ compensation fraud, one of the most common forms of

workers’ compensation fraud in Maine is a faked or exaggerated injury, an
area within the jurisdiction of the Maine Workers’ Compensation Board’s
Fraud and Abuse Unit to investigate. There are, however, other forms of
workers compensation fraud are employers who misrepresent payroll or
the type of business in order to reduce their insurance premiums and real
or bogus entities that purport to provide real or bogus workers
compensation coverage or “alternatives” to coverage to employers.

In late 1999 the Governmental Accounting Office found that organized

crime is heavily involved in health insurance fraud and that the criminals
identified were not health care workers, per say, but individuals already
prosecuted for securities fraud, forgery and auto theft. With the enactment

of HIPAA (Health Insurance Portability and Accountability Act of 1996)
detection and prosecution of health insurance fraud received a boost. The
Department of Justice calls health care fraud and abuse its number two
law enforcement priority, after violent crimes. In 1996, according to the
FBI, Congress provided an added $54 million over seven years for health
care fraud enforcement.

Property insurance, based upon the Bureau’s 2004 data, had the third
highest fraud and abuse count by line of business at 165 reported cases.
According to the National Fire Protection Association, arson or suspected
arson account for nearly 500,000 fires each year, or one in four fires in
the United States. Arson and suspected arson are the largest causes of
property damage in the U.S.

Despite what may appear to be a bleak picture, a number of tools exist for
combating fraud. In addition to those Maine Insurance and Criminal Code
provisions, previously discussed, several federal laws are used to
address fraud. These include: The Federal Mail Fraud Statute, the
Racketeer Influenced and Corrupt Organizations (RICO) and the Health
Insurance Portability and Accountability Act (HIPAA). Also, the Violent
Crime Control and Law Enforcement Act of 1994 makes insurance fraud a
federal crime when it affects interstate commerce.

Certain state agencies work with insurers to address fraud, as well. The
Workers’ Compensation Board’s Fraud and Abuse Unit tackles issues
such as fakes or exaggerated injuries, the Fire Marshal’s Office
investigates possible arson, and the Department of Human Services
takes on Medicare and Medicaid fraud. Recently, one DHS employee
received the Office of the Inspector General Integrity Award for her
investigative and logistical support in a Medicare and Medicaid fraud case
in Bangor Federal Court.

Fraud has also gotten the attention of the National Association of
Insurance Commissioners (NAIC), which encourages the insurance
industry to take a proactive role in controlling fraud. The NAIC offers
states support through their Antifraud Task Force.
The mission of the Antifraud Task Force is to serve the public interest by
assisting state insurance supervisory officials, individually and collectively,
in the following fundamental antifraud activities:

• Promotion of the public interest through the detection, monitoring

and appropriate referral for investigation of insurance crime, both by
and against consumers.
• Provision of assistance to the insurance regulatory community
through the maintenance and improvement of electronic databases
regarding fraudulent insurance activities.
• Disseminate the results of research and analysis of insurance fraud
trends as well as case-specific analysis to the insurance regulatory
community 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 Task Force include:

compile and maintain detailed information on antifraud databases
maintained by antifraud organizations, financial regulators, and law
enforcement; consider developing further guidelines for use by the
industry in determining when suspicious claims should be reported;
review industry compliance with antifraud initiatives; develop methods to
enhance the investigation and prosecution of financial services fraud; and
establish guidelines on the investigation and prosecution of insider
insurance industry fraud.16

Additionally, in 2005 the NAIC created a “Fraud Web line,” an online

insurance fraud reporting system located on the Web site of the National
Association of Insurance Commissioners (NAIC). The system allows
consumers to provide information anonymously.

The new fraud reporting system was developed as part of the response
by insurance regulators to the national allegations about misconduct
involving compensation agreements between some insurance companies
and brokers. The allegations of improper activity spurred regulators to
improve their abilities to collect information from consumers, producers
and insurance company employees. Many places participates in the
online fraud reporting system, in conjunction with the NAIC.

The online fraud reporting system lets consumers anonymously supply

detailed information regarding suspected fraudulent activities to the NAIC
where the information is then forwarded to the appropriate state. Although
consumers may identify themselves, no personal identifying information is
required to report an allegation of suspected fraud. Consumers are
required to designate the state where the suspected fraud occurred and
the name and address of the business or individual. A text box is included
for the consumer to provide the details of the suspected fraud. Other
optional fields on the form include phone number, date of birth, date of
suspected fraud, and amount of loss.

Despite the anti-fraud activities of state and federal agencies discussed

above, the Bureau notes that an enforcement and prosecutorial gap
exists in current Maine government operations insofar as no entity exists
that is focused on investigation and prosecution of fraudulent insurance
acts and the crimes of insurance deception and deceptive insurance acts.
The American Insurance Association and the Property Casualty Insurers
Association and several of the individual fraud investigators who
commented as interested persons all noted the frustration when hard
work has been expended to develop a case and local prosecutors have
refused to prosecute or believe that it is not a serious crime meriting their
attention. The interested persons believe that a strong and effective
insurance fraud unit would be effective not only in punishing those
convicted of insurance fraud, but in deterring others.

Forty other states currently have insurance fraud units. The Director of the
Fraud Division of the New Hampshire Insurance Department shared his
concern with the Joint Standing Committee on Insurance and Financial
Services during his testimony on L.D. 1561 that organized insurance
fraud rings are gravitating toward those jurisdictions with the least
regulation, for the conduct of affairs. That concern has been echoed by
other interested persons as well.


The mission of the NAIC is to assist state insurance regulators,

individually and collectively, in serving the public interest and achieving
the following fundamental insurance regulatory goals in a responsive,
efficient and cost effective manner, consistent with the wishes of its

→Protect the public interest;

→Promote competitive markets;

→Facilitate the fair and equitable treatment of insurance consumers;

→Promote the reliability, solvency and financial solidity of
insurance institutions;

→and Support and improve state regulation of insurance.

International association of insurance fraud

HOW do they operate?

The IAIFA and its members are continually working to improve the quality
of data available to members and break down the jurisdictional barriers by
working with regulators, companies and other law enforcement
agencies.Those who break the law are adept at using these jurisdictional
boundaries as a protective shield. IAIFA is trying to cut red tape involved
in the various (often necessary) jurisdictions' "privacy" laws in an attempt
to track down crime and encourage other enforcement agencies to share
information to the mutual benefit of all who are involved in assuring a high
level of integrity throughout the insurance industry.

WHAT are their Goals:

IAIFA's goal is "to co-ordinate the efforts, training and education of law
enforcement agencies, government bodies, and the insurance industry to
move more efficiently prevent and combat insurance fraud worldwide."
IAIFA has kept its focus on insurance fraud, which its members view as a
crime against all segments of society - not a victimless felony, as some
would define it.

WHEN do they meet?

IAIFA meets annually. The annual conference hosts eminent speakers

whose presentations update the members on critical developments. It
also enhances personal contacts and exchange of information between
members throughout the year.

IAIFA cooperates in regional seminars which focuses on such topics as
how to effectively use the laws to prosecute and recover assets gained by
fraudulent means. Added to this, these meetings have widened the
network of contacts for members from Europe, Asia, Australia, the
Caribbean, Africa, and North America.

Between meetings, our newsletter keeps members informed of the

various projects undertaken by the Association and its members, as well
as presenting new trends in the field of insurance fraud, both from a
criminal and law enforcement perspective.

WHERE are they found?

International is the first word in IAIFA's name. That means what it says.
While IAIFA began in North America, the founders were not so insular to
believe that they had a unique place in insurance fraud. More than ever,
sharing intelligence and finding ways to successfully prevent and combat
crimes is essential for the members to do their job effectively.

This is why the IAIFA wants even more countries to join in this worldwide
effort. It is a classic case of the sum of the whole being greater than the
sum of its parts. The interchange of information is invaluable, and should
be available to everyone in their fight against sophisticated global fraud

WHO are the members?

It could be you and your organization. IAIFA's members include
government insurance departments and fraud bureaus, law enforcement
agencies, respected insurance companies, and related firms with a strong
interest in combating insurance frauds.

You may obtain the application by logging on the site or by contacting us

for a mailing of the application. Upon receipt, your application will be
considered by IAIFA's executive committee. If you are accepted, you and
your organization will have made a major step forward in beating
insurance crime. This will be true not only for you in your own jurisdiction,
but for your colleagues elsewhere, who will welcome hearing how you
cope with escalating problems of insurance fraud.

WHY were they formed?

Insurance fraud is recognized internationally as a multi-billion dollar

problem. IAIFA was created after a group consisting of the Directors of
Insurance Fraud Agencies from the U.S.A. and Canada met to confront
this burgeoning problem which is not restricted by jurisdictional

It soon became apparent that if the agencies could share information they
would increase their degree of effectiveness. Rapid communication is of
the essence in catching fraud artists who know how to move money
literally at the speed of light. From those early beginnings in 1986, with
only a handful of members in North America, IAIFA now encompasses
the Globe.

Dealing with fraud on the Net

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

In a perfect world, network security wouldn’t be required. Unfortunately

this isn’t a perfect world, and even if there are many who will throw up a
firewall and other such security measures as solutions, this doesn’t stop
the problem. No firewall is impenetrable and there’s no such thing as a
perfect security measure. There’s always a way to get around them, and
the number of people trying to do that keeps increasing.

According to the US General Accounting Office, approximately 250,000

break-ins were attempted into Federal computer systems alone in 1995
and this number gets bigger every year. Only one to four per cent of these
attacks ever get detected.

Network forensics is the capture, recording, and analysis of network

events in order to discover the source of security attacks or other problem
incidents. It attempts to prevent hackers from attacking a system, and
searches for evidence after an attack has occurred.
There are three parts to network forensics: intrusion detection; logging
(the best way to track down a hacker is to keep vast records of activity on
a network with the help of an intrusion detection system); correlating
intrusion detection and logging.

The ultimate goal of network forensics is to provide sufficient evidence to

allow the criminal perpetrator to be successfully prosecuted. The practical
applications could be in areas such as hacking, fraud, insurance

companies, data theft—industrial espionage, defamation, narcotics
trafficking, credit card cloning, software piracy, electoral law, obscene
publication, perjury, murder, sexual harassment, and discrimination.

Technical Challenges

IT managers, network consultants, auditors, software developers, and

analysts would all like to understand the data that is sent over their
corporate networks. Network monitoring is an essential tool for network
optimization and security. How much data was sent? When? What was
sent? Current tools only answer the first two questions, and have trouble
with the third. The tools base their analysis primarily on IP and TCP
headers, which can be misleading or intentionally falsified.

This leaves security consultants and network managers to manually sift

through raw network packet dumps, piece together data streams and
undo transfer encoding, and seek to understand the significance of a
single connection. This is tremendously time-consuming and since
networks deal with one packet at a time, this isn’t very useful or complete
to someone trying to get a big picture view of an employee’s suspected
network abuse, or a deep-level view of an intrusion attempt.

And yet the internet is critical, and we haven’t a choice but to connect
internal networks to the rest of the world — to link with customers,
suppliers, partners, and their own employees. Even if that connection
brings in threats of malicious hackers, criminals, and industrial spies.
These network predators regularly steal corporate assets and intellectual
property, cause service breaks and system failures, sully corporate
brands, and frighten customers. Unless companies can successfully
navigate around them, they will not be able to unlock the full business
potential of the internet.
Even enterprises with exceptional security have their front doors open to
employees sending and receiving data. Is there a user abusing the
system for personal reasons, or accidentally or maliciously releasing
confidential information? Unfortunately, the variety of data formats and
sheer volume of traffic make detailed network monitoring a major
technical challenge. Traffic monitors focus on bandwidth. Although some
go so far as to keep basic statistics such as web page hits and average
visit length, they’re mostly useful for capacity planning and simple web
marketing. Port scans allow network security specialists to find some

Intrusion detection systems scan traffic for known attack signatures.

However, because these tools base their analysis primarily on the IP and
TCP headers, which can be intentionally falsified or misleading, they are
subject to incorrect analysis and spoofing. Current tools can’t provide the
information that IT managers, network consultants, auditors, software
developers, and analysts need to know:

“Who is running an unauthorized web server on a non-standard port?”

“How long is it taking our e-commerce system to process a customer
order from start to finish?”
“What generated that huge spike of traffic between 5:35am and 5:40am
this morning?”
“Exactly what happened during – and before – last night’s attempted

The fleeting nature of any kind of electronic data is such that its
preservation, is required especially for legal proceedings — the
methodology can be broken down into two key elements: acquiring
evidence and analyzing evidence.

This information is required for dealing with a law enforcement
investigation. It involves capturing and storing every packet passing
through wires and then regenerating the sequence flow for analysis. If we
are able to regenerate the attack it can now be treated as evidence.
Full-content network monitoring is no longer the province of spooks and
spies — it’s increasingly a practice that is an integral part of a
multilayered defense system that serves a variety of goals for both
computer security and overall network policy.

The solution is to follow a multi-layered security approach and a system

that can perform the following tasks: integrated network IDS/ anomaly
detection /forensic analysis; capture data at high speeds; run invisibly and
capture packets from the monitored network; assemble the collected
packets into connection streams; read the actual data in packets and
categorizes it by type, rather than make assumptions based on packet
headers and port numbers; automatically determine key connection
attributes; operates at the level of complete, assembled data streams,
rather than arbitrarily mixed-together packets; search capability through
network traffic by keyword; protocol recognition capability and correlation

As time goes on, the number of attacks will only increase and network
forensics will become a part of our lives. It has an ability to strengthen our
securities, check compliance against policies, and punish those that
attempt to disrupt our IT infrastructure. The future of information security
lies in an organisation ability
to not only prevent malicious activity, but also investigate and prosecute
the perpetrators whether internal or external.

Precaution is better than cure

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

consumers, there are several common-sense steps you can take to help
reduce fraud and minimize its impact.

Be an Informed Consumer.

Insurance premiums are a significant expense for most of us. The

premiums you pay are based on your individual claims history and the
degree of risk involved. Generally speaking, the greater the risk, the
higher the premium. For example, the theft premium for a Honda Accord
will be far higher than that of a Yugo quite simply because more Honda
Accords are stolen. Similarly, a tightrope walker will pay more for life
insurance than a librarian, all else being equal.

Comparison Shop.

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

around. To make comparison shopping a little easier, the Insurance
Department publishes consumer guides for auto, homeowners, long-term
care and HMO/health insurance that provide sample premiums for
insurers that offer these coverage. In addition, the Insurance
Department's Web site is also the home of an Interactive Guide to HMOs,
which allows consumers to find information about HMOs operating within
their home county.

Know Your Agent or Broker.

Consumers can often be victimized by unscrupulous agents or brokers

and discover only after they file a claim that they are without coverage for
their home or their car. If an uninsured home is damaged by fire, the
owner is solely responsible for restoring it and paying back any mortgage
holders. If a driver is involved in an accident while driving an uninsured
vehicle, any personal assets are subject to forfeiture if that driver is sued
for damages. Deal only with licensed agents and brokers. Agents and
brokers must carry proof of licensure.

Where's the Proof?

Never pay for a premium in cash. Pay by check or a money order made
out to the insurance company directly or to the agency—not to the
individual agent or broker. In addition, always request a receipt.

Where's the Policy?

You should receive a copy of any type of insurance policy complete with
endorsements and declarations specifically outlining your coverage and
its limitations within a reasonable period after your purchase. If you do not
receive it, question your agent or broker. If there is no satisfactory
explanation for the delay, contact the New York Insurance Department
immediately. You may not have the insurance coverage you paid for.

Are You Being Billed for Services You Have Not Received?

If you have received medical or dental treatment that is covered by an

HMO or an insurance company, you will receive an "Explanation of
Benefits" statement listing the services for which benefits have been paid.
Review it carefully to ensure that your health care provider has not
"bumped up" your claim (i.e., overstated services provided in order to
receive a higher payment), or charged for services you did not receive.
Contact your insurer immediately if you feel there are discrepancies.
Fraudulent claims payments translate into higher insurance premiums for
all of us.

What If You’re Involved in an Automobile Accident?

Call the police to the scene and make sure that the details of the accident
are documented and the identities of the occupants of the other vehicle
are verified. Be suspicious if the driver of the other vehicle insists there is
no need to call the police. That driver’s insurance card may be fraudulent
and his car uninsured.

Auto Insurance Fraud is a multi-billion-dollar problem nationwide. Watch

out for these common scams:

The staged accident – A vehicle filled with people will stop suddenly in
front of you, setting you up as the cause of a rear-end collision. The
"victims" will then file costly multiple medical and damage claims using
doctors and lawyers who are part of the scam.

Steerers – These individuals will solicit the injured or allegedly injured

parties and direct them, for a "referral fee," to lawyers, doctors and/or

medical facilities that are part of the scheme. Be on the lookout for
steerers 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 other vehicle and
carefully review claims. Vehicle owners and body shops frequently inflate
estimates for damages and then either perform other repairs not related
to the accident or simply keep the extra money.


Think twice before replacing an existing life insurance policy with a new
one. The new policy may have exclusions or waiting periods for pre-
existing conditions that are covered by your current policy. And premiums
are likely to be higher because you are older. The Insurance Department
protects consumers by requiring agents to provide prospective
purchasers with pertinent facts when that purchase will cause the buyer to
surrender, lapse, or in any way change the status of an existing life
insurance policy. Department Regulation 60 requires this full disclosure
so that prospective life insurance purchasers can make decisions in their
own best interest.

Don’t allow high-pressure salesmanship to persuade you to sign up for a

type of policy or certain coverage that you are not sure you need. Take
time to decide what’s right for you.

Read your policy carefully before you sign. If you have questions, ask
your agent or broker, or your insurer. An additional source of information
and help is the Insurance Department’s Consumer Services Bureau.


Insurance, a very well known concept today and many people could relate
to in more than one ways. This is the influence of the changing times that
have changed the concept of insurance in the minds of the young and the
old. People have changed their attitude towards insurance and accepted
its new look from being an entry of luxury to an investment and a
necessity. The number of people taking insurance has increased
considerably in the past few decades due to the entry of private players in
the market.

One knows that every coin has two sides. Similarly, insurance also has
two faces. One of which is investments and getting regular returns from
financial institutions for oneself and for loved ones. The other, awfully, is
of which people deceive insurance companies for their undue advantage
and cause intimidation to many others.

Though, there have been many laws and agencies all over the world to
impede such criminal activity, it is not a full proof solution to all insurance

In a world today where every person seeks their right to information and
demands the same, it is very difficult to scam them. One must know all
the loop-holes of their business to scheme some one. This could be the
act of some one who is carrying on criminal bustle on the vigor of his
acute knowledge about their business. Lack of knowledge and not
knowing ones basic rights on behalf of the prey could land them in
scrambled scam bisque.

There have been many institutions and agencies formed all over the world
to detect fraud and penalize the one conscientious for such mishaps.
There is Division of Insurance Fraud, International Association Of
Insurance Fraud Agencies (Iaifa), etc. through the enduring and
conscious endeavor of these institutions insurance fraud tempo has
declined by an enormous amount. Several have studied preceding and
enduring market conditions to identify with the diverse frauds that take
place and the reasons behind committing these frauds.

One cannot diminish frauds, schemes, swindles, scams but can positively
be alert of them so as not to be a victim of it themselves. Tumbling
fraudulent situations is a unremitting and collective effort of countless.
One must be sensitive and offer their helping as much as they can.

One can either grumble about how things are all going wide of the mark
and swallow the consequences. Or put their foot down and make an
attempt to change the immoral to the right. The wrong will change and
everyone will see the bright light of truth and right with the revolution of
knowledge, awareness, an attitude for change amongst the humanity.


• BlueCross & BlueShield United of Wisconsin: What is health care


• Stern RA, Montana R.: Identify patterns of medical provider fraud

through data base graphic pattern. FDN Fraud Report

• Barrett S.: Chelation therapy and insurance fraud

• Private health insurance: Employers and individuals are vulnerable

to unauthorized or bogus entities selling coverage

• Scam alert.: Coalition Against Insurance Fraud Web site