[Senate Hearing 115-431]
[From the U.S. Government Publishing Office]
S. Hrg. 115-431
INSURANCE FRAUD IN AMERICA: CURRENT ISSUES FACING INDUSTRY AND
CONSUMERS
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HEARING
before the
SUBCOMMITTEE ON CONSUMER PROTECTION,
PRODUCT SAFETY, INSURANCE,
AND DATA SECURITY
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
AUGUST 3, 2017
__________
Printed for the use of the Committee on Commerce, Science, and Transportation
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available online: http://www.govinfo.gov
_______________
U.S. GOVERNMENT PUBLISHING OFFICE
34-303 PDF WASHINGTON : 2019
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
JOHN THUNE, South Dakota, Chairman
ROGER F. WICKER, Mississippi BILL NELSON, Florida, Ranking
ROY BLUNT, Missouri MARIA CANTWELL, Washington
TED CRUZ, Texas AMY KLOBUCHAR, Minnesota
DEB FISCHER, Nebraska RICHARD BLUMENTHAL, Connecticut
JERRY MORAN, Kansas BRIAN SCHATZ, Hawaii
DAN SULLIVAN, Alaska EDWARD MARKEY, Massachusetts
DEAN HELLER, Nevada CORY BOOKER, New Jersey
JAMES INHOFE, Oklahoma TOM UDALL, New Mexico
MIKE LEE, Utah GARY PETERS, Michigan
RON JOHNSON, Wisconsin TAMMY BALDWIN, Wisconsin
SHELLEY MOORE CAPITO, West Virginia TAMMY DUCKWORTH, Illinois
CORY GARDNER, Colorado MAGGIE HASSAN, New Hampshire
TODD YOUNG, Indiana CATHERINE CORTEZ MASTO, Nevada
Nick Rossi, Staff Director
Adrian Arnakis, Deputy Staff Director
Jason Van Beek, General Counsel
Kim Lipsky, Democratic Staff Director
Chris Day, Democratic Deputy Staff Director
Renae Black, Senior Counsel
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SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, INSURANCE, AND
DATA SECURITY
JERRY MORAN, Kansas, Chairman RICHARD BLUMENTHAL, Connecticut,
ROY BLUNT, Missouri Ranking
TED CRUZ, Texas AMY KLOBUCHAR, Minnesota
DEB FISCHER, Nebraska EDWARD MARKEY, Massachusetts
DEAN HELLER, Nevada CORY BOOKER, New Jersey
JAMES INHOFE, Oklahoma TOM UDALL, New Mexico
MIKE LEE, Utah TAMMY DUCKWORTH, Illinois
SHELLEY MOORE CAPITO, West Virginia MAGGIE HASSAN, New Hampshire
TODD YOUNG, Indiana CATHERINE CORTEZ MASTO, Nevada
C O N T E N T S
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Page
Hearing held on August 3, 2017................................... 1
Statement of Senator Moran....................................... 1
Prepared statement........................................... 2
Coalition Against Insurance Fraud 2016 study entitled ``The
State of Insurance Fraud Technology''...................... 41
Coalition Against Insurance Fraud 2016 Annual Report......... 56
Statement of Senator Blumenthal.................................. 3
Statement of Senator Nelson...................................... 3
Prepared statement........................................... 4
Statement of Senator Capito...................................... 38
Witnesses
Hon. John D. Doak, Insurance Commissioner, State of Oklahoma, On
Behalf of the National Association of Insurance Commissioners.. 6
Prepared statement........................................... 8
Dennis Jay, Executive Director, Coalition Against Insurance Fraud 11
Prepared statement........................................... 13
Sean Kevelighan, Chief Executive Officer, Insurance Information
Institute...................................................... 17
Prepared statement........................................... 19
Timothy J. Lynch, Director, Government Affairs, National
Insurance Crime Bureau......................................... 20
Prepared statement........................................... 22
Rachel Weintraub, Legislative Director and General Counsel,
Consumer Federation of America................................. 23
Prepared statement........................................... 24
INSURANCE FRAUD IN AMERICA: CURRENT ISSUES FACING INDUSTRY AND
CONSUMERS
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THURSDAY, AUGUST 3, 2017
U.S. Senate,
Subcommittee on Consumer Protection, Product
Safety, Insurance, and Data Security
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:49 a.m. in
room SR-253, Russell Senate Office Building, Hon. Jerry Moran,
Chairman of the Subcommittee, presiding.
Present: Senators Moran [presiding], Blumenthal, Nelson,
Fischer, Klobuchar, Capito, Hassan, Cortez Masto, and Young.
OPENING STATEMENT OF HON. JERRY MORAN,
U.S. SENATOR FROM KANSAS
Senator Moran. Good morning, everyone. I call the hearing
of this Subcommittee on Consumer Protection, Product Safety,
Insurance, and Data Security to order. As our title suggests,
this Subcommittee exercises wide jurisdiction over a diverse
range of topics. And this will be our first hearing this
Congress to examine matters related to insurance, specifically
today, that of insurance fraud.
Thank you for our expert witnesses who have joined us.
Insurance fraud is a major concern not only for insurers--
who bear the cost of fraudulent claim payouts--but also
consumers, who see those costs passed on to them in the form of
higher premiums. This hearing will examine the scope of
insurance fraud at large in the United States and address
nationwide fraud trends across a variety of insurance markets,
including property and casualty, and life insurance. In
addition, we'll discuss the tools available to states,
insurers, and consumers to protect themselves against these
crimes.
The insurance industry has an enormous presence in the
United States. There are nearly 3,000 property and casualty
insurance companies across the country, another 850 life and
health insurance companies. Together, they generated over $1
trillion in premiums in 2015 alone.
The FBI reports that the sheer size of this industry makes
it an attractive target for criminals by providing ample
opportunities and bigger incentives for committing illegal
activities, estimating the total cost of non-health insurance
fraud in the United States at more than $40 billion annually.
That level of insurance fraud, in turn, costs the average
American family upwards of $700 per year in the form of
increased premiums.
With examples of insurance consumer concerns as recent news
reports indicate, Wells Fargo charged its automobile loan
customers for collision insurance they did not need, this
hearing is timely. As for oversight, my staff is already in
communication with Wells Fargo regarding these concerns, and we
plan to follow up accordingly to gather additional information
on the circumstances and what should be done.
While insurance is largely regulated at the state level,
insurance fraud schemes can and do lead to Federal criminal
charges, and I believe the Federal Government must do what it
can to protect consumers from bad actors who seek to defraud
them.
As was a common theme among popular consumer scams
discussed in this Subcommittee earlier this year, insurance
fraud schemes are constantly evolving and growing in complexity
over time. Technology must and will play a crucial role in
catching sophisticated fraud activity. And I look forward to
learning more from our distinguished witness panel about the
use and efficacy of emerging technologies, data collection, and
information-sharing practices to better detect and prevent
insurance fraud.
Once again, thank you for being here. Thank you for
generously delaying your August travel plans to be part of this
important hearing.
[The prepared statement of Senator Moran follows:]
Prepared Statement of Hon. Jerry Moran, U.S. Senator from Kansas
Good morning, everyone. I call to order this hearing of the Senate
Subcommittee on Consumer Protection, Product Safety, Insurance and Data
Security.
As the title suggests, this Subcommittee exercises wide
jurisdiction over a diverse range of topics. This will be our first
hearing this Congress to examine matters pertaining to insurance--
specifically, that of insurance fraud. Thank you to our expert
witnesses who came here to join us today.
Insurance fraud is a major concern not only for insurers--who bear
the costs of fraudulent claim payouts--but also consumers, who see
these costs passed on to them in the form of higher premiums. This
hearing will examine the scope of insurance fraud at-large in the
United States and address nationwide fraud trends across a variety of
insurance markets, including property and casualty, and life insurance.
In addition, we'll discuss the tools available to states, insurers, and
consumers to protect themselves against these crimes.
The insurance industry has an enormous presence in the United
States. There are nearly 3,000 property and casualty insurance
companies across the country, and another 850 life and health insurance
companies. Together, they generated over 1 trillion dollars in premiums
in the year 2015 alone.
The FBI reports that the sheer size of this industry makes it an
attractive target for fraudsters by providing ample opportunities and
bigger incentives for committing illegal activities, estimating the
total cost of non-health insurance fraud in the U.S. to be more than 40
billion dollars annually. That level of insurance fraud, in turn, costs
the average American family upwards of 700 dollars per year in the form
of increased premiums.
With examples of insurance consumer concerns like recent news
reports indicating Wells Fargo charged its automobile loan customers
for collision insurance they did not need, this hearing is
exceptionally timely. As for oversight, my staff is already in
communication with Wells Fargo regarding these concerns, and I plan to
follow up accordingly to gather additional information on the
circumstances and what is being done to address these issues.
While insurance is largely regulated at the state level, insurance
fraud schemes can and do lead to Federal criminal charges, and I
believe the Federal government must do what it can to protect consumers
from bad actors who seek to defraud them.
Raising consumer awareness is a significant component of helping
consumers protect themselves, and to that end this hearing will
highlight a number of current insurance fraud trends--including auto
insurance fraud, workers' compensation fraud, fee churning schemes, and
contractor fraud in the wake of natural disasters.
As was a common theme among popular consumer ``scams'' discussed in
this Subcommittee earlier this year, insurance fraud schemes are
constantly evolving and growing in complexity over time. Technology
must and will play a crucial role in catching sophisticated fraud
activity, and I look forward to learning more from our distinguished
witness panel about the use and efficacy of emerging technologies, data
collection, and information sharing practices to better detect and
prevent insurance fraud.
Once again, thank you all for being here and generously delaying
your August recess travel plans to be a part of this important hearing.
With that I will now turn to the Ranking Member, Senator Blumenthal,
for his opening remarks.
Senator Moran. And I now turn to my Ranking Member, Senator
Blumenthal, for his opening remarks.
STATEMENT OF HON. RICHARD BLUMENTHAL,
U.S. SENATOR FROM CONNECTICUT
Senator Blumenthal. Thank you, Mr. Chairman, and thank you
so much for having this hearing.
Before I give some very, very brief opening remarks, I want
to yield to the Ranking Member, my friend Senator Nelson, for
some remarks because he has to leave to go to a classified
intelligence briefing this morning.
STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA
Senator Nelson. Thank you for your courtesies, Mr. Chairman
and Senator Blumenthal.
Years ago, I had the hardest job, Commissioner, that I've
ever had in public service, that of the elected insurance
commissioner of Florida. Not the least of one of the challenges
was the fact that we inherited a mess in the aftermath of a
monster hurricane.
In the course of all of those years of trying to be a
proactive insurance commissioner, we would run into fraud quite
a bit. And when I say ``quite a bit,'' I mean a small
percentage, just minimal percentage, of all the insurance that
is bought and sold, but when you would find it, it would be
despicable.
For example, we found insurance companies selling low-value
burial policies that had done it for decades in the African
American community for which they charged the African American
community a higher rate than the same policies sold in the
white community. Once we discovered that and busted it open, it
quickly stopped. Some of those insurance companies have long
since been sold to other insurance companies, and the practice
involved some of the national insurance companies.
Individual states, not the Federal Government, continue to
be the primary regulators of insurance. And, that fact is not
lost on us, as we are now trying to fix the existing law on
health insurance. As we're going forward, the insurance
commissioners are going to have to be brought into the
discussion to determine what will work in their states. As
recently as last night, there were a group of 14 of us,
interestingly, divided evenly between Rs and Ds, talking about
the fixes that could be done primarily through Senator
Alexander's Committee, once we get back here in September. And
so it's important that we consider your ideas, Mr.
Commissioner.
Insurance has been an issue in front of us so much because
of the dominance of the debate of health care. We discussed,
for example, one of the experiences that we had in Florida when
I inherited a paralyzed marketplace in the state because
insurance companies had fled Florida due to monster Hurricane
Andrew.
By the way, there happened to be a lot of fraud committed
in the course of all of that debacle. And one of the ways of
getting insurance companies back into the state was to create a
reinsurance fund against hurricane catastrophe. That fund
exists today with huge reserves, the Florida Hurricane
Catastrophe Fund.
As we look at the question of fraud, I am very, very
appreciative of you, Mr. Chairman and Mr. Ranking Member, that
you all would hold this hearing. All fraud does is it hurt
insurance companies, hurt the people, and hurt the providers,
and hurt the agents. It hurts everybody, and we ought to be
ferreting it out.
Thank you for bringing forth this hearing. Thank you.
[The prepared statement of Senator Nelson follows:]
Prepared Statement of Hon. Bill Nelson, U.S. Senator from Florida
Thank you for calling this hearing Mr. Chairman. As Florida's
former insurance commissioner, I've seen firsthand how fraud impacts
consumers and insurers.
Insurance fraud takes on many forms from sales abuses that target
the elderly to ``cash for crash'' schemes where accidents are
deliberately staged or caused for financial gain.
One of the most despicable cases I can recall was that of an
insurer who took advantage of black policyholders for decades by
overcharging them for burial policies.
Fortunately, we were able to put a stop to that practice.
While individual states, and not the Federal government, continue
to be the primary regulators of insurance, I welcome hearing from our
distinguished panel today regarding the trends they're seeing on the
fraud front and whether there is a role the Federal government can play
to help the states.
Meantime, since we are talking about insurance, I would also like
to take this opportunity to share my thoughts on last week's health
care vote and its aftermath.
As I have said throughout this process, we need to come together
and seek bipartisan solutions to fix the Affordable Care Act and not
undo all of the good things its done.
That is why I've been working with Senator Collins to find
solutions that will provide immediate relief to families back home.
In fact, over the last week the two of us have joined a bipartisan
group of other senators who share our desire to find a path forward.
We've discussed creating a permanent reinsurance fund to lower the
financial risk of insurance companies and reduce premiums for American
families.
I've seen this work before during my days as insurance commissioner
following Hurricane Andrew, the second costliest hurricane in our
Nation's history.
In Andrew's aftermath, Florida established a reinsurance fund to
insure the insurance companies for their catastrophic losses.
The same thing can and should be done for health care.
I cosponsored a bill to create a permanent reinsurance program that
would provide Federal funding to cover 80 percent of insurance claims
falling between $50,000 and $500,000 over the next two years.
After that, Federal funding would cover 80 percent of insurance
claims between $100,000 and $500,000.
One Florida insurer estimated the bill would reduce premiums for
Floridians by up to 13 percent.
We can also work in a bipartisan manner to fund payments that lower
Americans' out-of-pockets costs.
These are the same payments the administration is threatening to
end that lower costs for millions of Americans.
If these payments are stopped, there will be real consequences.
Working families will face higher premiums and fewer insurance
options. In Florida, premiums will increase by 25 percent if these
payments are cancelled.
Higher costs mean fewer folks will be able to afford coverage.
Our colleagues on the HELP Committee, Chairman Alexander and
Ranking Member Patty Murray, have the right idea.
They have committed to holding a series of hearings with the goal
of stabilizing the ACA's insurance market.
That's a good start and one I hope we can all get behind because,
in reality, it's going to take more than just a few of us to improve
health care for families back home.
That said Mr. Chairman, I would welcome working with you or any of
my colleagues here to find that path forward.
Senator Moran. Senator Nelson, thank you for joining us. We
appreciate you being here and understand there are other
commitments.
And I again recognize the Senator from Connecticut, the
Ranking Member.
Senator Blumenthal. Thank you.
Senator Nelson is absolutely right. Insurance fraud hurts
everyone, including the business people, who are charged higher
premiums, as well as consumers, because insurance fraud is
costly to those companies. And, of course, it hurts individual
consumers who are misled or deceived when they believe they are
owed money for legitimate claims and they find that somehow
there is fine print in the policy, sometimes inserted or
interpreted in ways they never thought possible. And that's why
we're here today.
I hope that you will not take personally the anger and
frustration that I and others may express today. Your
willingness to be here I think is very important, and I want to
thank each of you for being here to enlighten us and respond to
our questions.
But what we've seen is, for example, in Connecticut,
homeowners affected by a substance called pyrrhotite. Insurance
companies have surreptitiously modified their homeowner
policies without properly telling them to exclude damage to a
home's foundation once the insurance companies learn that those
foundations had a potential and naturally occurring flaw as a
result of that substance, pyrrhotite. The insurance companies
in effect changed the policies without properly notifying their
consumers. And I'm going to be asking questions about that
occurrence.
Insurance companies have stalled and delayed payment of
claims citing obscure clauses in policies, forcing
policyholders into protracted and expensive legal battles just
to receive legitimate and rightful claims.
Insurance companies have used Social Security data to cut
off annuity or retirement payments upon a policyholder's death,
but they haven't stopped collecting premium payments in the
meantime. And just last week, we learned about Wells Fargo
forcing unwanted insurance on auto loan borrowers without their
knowledge since at least 2012 through a process known as,
``force-placed insurance.''
I spent a couple of decades as Connecticut's Attorney
General, and I saw all kinds of fraudulent schemes and the
stories and testimonies about misleading and sneaky insurance
companies from Americans across my state in Connecticut, ought
to be of tremendous concern because at the end of the day, what
insurance companies have that's most important to them is their
credibility and their reputation for honesty. And these kinds
of instances, even if they are a handful, cost literally
millions, tens of millions, of dollars to ordinary consumers,
and they give the vast majority of insurance companies and
brokers and agents a bad name.
And I want to hear today from industry and consumer
advocates about how we can hold insurance companies accountable
for any misleading or unfair action. I hope that today's
hearing is the beginning, not the end, of this inquiry.
And again I thank the Chairman for having us all together
today. And I will be--I've read your testimony. I'm going to be
leaving for your testimony because I have a Judiciary Committee
meeting, but I'll be back for the questions.
I apologize for my absence, Mr. Chairman.
Senator Moran. Senator Blumenthal, thank you for your
cooperation. We look forward to your return. I'll introduce the
witnesses, and we'll take their testimony.
Our panel consists of the following: The Honorable John
Doak, who is the Oklahoma Insurance Commissioner, and he is
here testifying on behalf of the National Association of
Insurance Commissioners; Mr. Dennis Jay, Executive Director,
Coalition Against Insurance Fraud; Mr. Sean Kevelighan, Chief
Executive Officer, Insurance Information Institute; Mr. Tim
Lynch, Director of Government Affairs, National Insurance Crime
Bureau; and Ms. Rachel Weintraub, General Counsel, Consumer
Federation of America. Thank you all for being here today.
We'll begin with you, Commissioner Doak. Senator Inhofe
intended to introduce you today. He is unable to be with us
this morning. He had prepared some remarks of introduction, and
I will make those a part of the record. We now turn to you for
your testimony.
STATEMENT OF HON. JOHN D. DOAK, INSURANCE
COMMISSIONER, STATE OF OKLAHOMA, ON BEHALF OF THE
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS
Mr. Doak. Thank you very much.
Good morning, Chairman Moran, Ranking Member Blumenthal,
and members of the Subcommittee. I appreciate the opportunity
to testify to provide state insurance regulators' perspective
on insurance fraud trends and our efforts to reduce and deter
this activity.
Insurance is an attractive target for fraud because
detection can be challenging. Unlike bank or credit card
accounts, consumers do not frequently interact with insurance
policies. Premiums are typically paid annually, and claims are
filed only upon injury, death, or damage to one's property.
With consumers and business spending over $2 trillion on
insurance per year with infrequent interactions, tempting
windows of opportunity are created for criminals. Some estimate
insurance fraud costs between $80 billion to $100 billion
annually across all lines of insurance. Ten percent or more of
the property/casualty insurance claims may be fraudulent.
State insurance regulators are tracking several current
trends in insurance fraud. For example, state insurance
departments have seen contractor and adjustor fraud occurring
after natural disasters. In these instances, contractors or
insurance adjusters require advanced payment from consumers for
services or advance assignment of insurance policy benefits and
then disappear without ever doing the work. In cases where
repairs were made, the contractor does shoddy work using
substandard materials. In Oklahoma, my department's Anti-fraud
Unit deploys after disasters to assess damage and educate
consumers about fraud prevention. Here's a photo of myself and
Governor Fallin and state legislators with our anti-fraud unit
after a recent tornado in Elk City, Oklahoma.
[Photo shown of Mr. Doak with Governor Fallin]
We've also seen a scam where strangers offer to replace
vehicle windshields, claiming it's unsafe and the insurance
will cover the cost. Even though the windshield is undamaged,
the fraudster replaces it, files a claim on the individual's
policy, and not only is the work unnecessary and the claim
fraudulent, but the replacement windshield may not be installed
correctly, leading to serious safety risk.
Last, state insurance regulators are seeing an increase in
fraudulent activity in the health care sector, such as
prescription drug and medical equipment scams, including
unjustified claims and identity theft. These trends are deeply
troubling, which is why fighting insurance fraud is one of the
highest priorities of state insurance regulators. We initiate
inquiries on suspected fraud acts, and we have the authority to
conduct exams to investigate. Many of the state bureaus possess
law enforcement powers and may have civil authority to impose
fines.
State insurance regulators work with insurers and their
special investigation units to address suspected fraud and
ensure that they are complying with state fraud prevention
statutes. As part of our anti-fraud efforts, state insurance
regulators formed an Antifraud Task Force in the 1980s to
coordinate this work. I serve as the current Chair. In this
task force, the states review fraudulent insurance activities,
discuss national trends, address concerns related to insurance
agent fraud and unauthorized insurance sales. We also engage
with consumers and insurers to address anti-fraud issues.
The NAIC created the Online Fraud Reporting System through
which consumers and insurers can report suspected fraud to
insurance departments. This provides consumers and insurers one
central portal to report suspected fraud. A report made against
an insurer or intermediary is delivered to all states in which
they do business.
In addition, the Task Force is evaluating sources of anti-
fraud data and looking at ways to improve the exchange of
information among regulators, law enforcement, insurers, and
anti-fraud organizations. The Task Force is developing uniform
fraud referral requirements that would require companies to
submit data relating to suspected fraud to insurance
departments.
Finally, we engage in efforts to educate consumers
regarding insurance fraud. The NAIC has consumer resources,
including its ``Fight Fake Insurance'' program, which
encourages, ``Stop, Call, and Confirm,'' the insurance agent
and the company to make sure the insurance agent and company
are properly licensed before buying coverage.
In conclusion, as insurance fraud continues to develop, the
state regulators will remain vigilant. We continue to adapt
strategies that prevent and detect fraud in order to protect
consumers and maintain insurers' financial health.
Thank you, sir, for the opportunity to be here. And we'd be
pleased to take your questions at the appropriate time.
[The prepared statement of Mr. Doak follows:]
Prepared Statement of John D. Doak, Insurance Commissioner, State of
Oklahoma, On Behalf of the National Association of Insurance
Commissioners
Introduction
Chairman Moran, Ranking Member Blumenthal, and members of the
Subcommittee, thank you for the invitation to testify today. My name is
John Doak. I am the elected Insurance Commissioner for the state of
Oklahoma and I present today's testimony on behalf of the National
Association of Insurance Commissioners (NAIC).\1\ I serve as the Chair
of the NAIC's Antifraud Task Force as well as its Property and Casualty
Committee. On behalf of my fellow state insurance regulators, I
appreciate the opportunity to provide an overview of our efforts to
detect, investigate, and prevent insurance fraud.
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\1\ The NAIC is the United States standard-setting and regulatory
support organization created and governed by the chief insurance
regulators from the 50 states, the District of Columbia, and five U.S.
territories. Through the NAIC, we establish standards and best
practices, conduct peer review, and coordinate our regulatory
oversight. NAIC members, together with the central resources of the
NAIC, form the national system of state -based insurance regulation in
the U.S.
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Insurance is an essential part of the financial services sector, a
fundamental pillar of our economy and vital for the well-being of our
citizens. It is a means of protection against damage to property or
loss of life, and is at the core of the risk management strategies of
consumers and businesses. Insurance can be an attractive target for
fraud because detection can be a challenge. Unlike other financial
products, particularly bank or credit card accounts, which consumers
access weekly or even daily, consumers do not interact with their
insurance policies with the same frequency--premiums are generally paid
monthly or annually and claims are filed only upon the occurrence of an
insured event such as injury, death, or damage to one's property.
Consumers and businesses spend more than $2 trillion on insurance per
year, and the relatively infrequent interactions between consumers and
many of their policies creates tempting windows of opportunity for
criminals. The prevalence of insurance fraud costs an estimated $80-100
billion dollars annually across all lines of insurance and industry
estimates that 10 percent or more of property-casualty insurance claims
alone may be fraudulent. Insurance fraud inflicts significant financial
and personal damage on consumers and imposes additional costs on
insurance companies that can be passed along to policyholders in the
form of higher premiums.
Reducing and deterring fraud is a priority for state insurance
regulators, whose antifraud activities aim to protect consumers and
maintain insurers' financial health. The state insurance regulatory
response to insurance fraud is multifaceted, involving consumer
education and information, reporting and prevention, investigation, and
corrective action.
State Insurance Regulators' Efforts to Fight Fraud
Fighting fraud is an important aspect of state insurance
regulation. States combat insurance fraud through special fraud bureaus
that are charged with identifying fraudulent acts, investigating cases,
and preventing insurance scams. Thirty-one states and the District of
Columbia have fraud bureaus housed in their insurance department \2\
while eleven states have bureaus housed in their attorney general's
office, law enforcement agencies, or another regulatory entity. Other
states address insurance fraud through their market conduct, consumer
affairs, or legal divisions. Many state fraud bureaus possess law
enforcement powers and may also have civil authority to impose fines.
State fraud bureaus initiate independent inquiries and conduct
investigations on suspected fraudulent insurance acts. They also review
reports or complaints of alleged fraudulent insurance activities from
federal, state and local law enforcement and regulatory agencies,
persons engaged in the business of insurance, and the public to
determine whether the reports require further investigation and to
conduct these investigations. State fraud bureaus regularly conduct
independent examinations of alleged fraudulent insurance acts and
undertake studies to determine the extent of these acts. States can
also access the NAIC's Regulatory Information Retrieval System (RIRS),
which contains all final adjudicated actions taken and submitted by
state insurance departments. This information typically includes
administrative complaints, cease and desist orders, settlement
agreements and consent orders, and license suspensions or revocations.
Since 2007, there have been more than 96,000 adjudicated actions
submitted by the states into RIRS. States can receive alerts through
this system.
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\2\ California, Connecticut, Louisiana, Maryland, and Oklahoma also
have fraud bureaus in their state attorney general's office. Louisiana
also has a fraud bureau in their state law enforcement agency.
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State insurance regulators work with insurers and their special
investigation units (SIUs) to address suspected fraud. The SIUs are
divisions within insurers to investigate insurance fraud and usually
consist of former law enforcement or claims employees turned
investigators. Insurers' SIUs must comply with the NAIC Insurance Fraud
Prevention Model Act (#680) or similar state fraud prevention statutes.
This model act creates a framework to help state insurance regulators
identify, investigate, and prevent insurance fraud and provides
guidance on how to assist and receive assistance from other state,
local and Federal law enforcement and regulatory agencies in enforcing
laws prohibiting fraudulent insurance acts. Further, the NAIC Antifraud
Plan Guideline (#1690) establishes standards for SIUs regarding the
preparation of an antifraud plan to meet state insurance department
requirements. By conducting an audit or inspection, or by reviewing an
insurer's antifraud plan in conjunction with a market conduct
examination, state insurance regulators help ensure an insurance
company is following its submitted antifraud plan.
NAIC Antifraud Initiatives
As part of state insurance regulators' efforts to help fight the
growing problem of insurance fraud, the NAIC formed an Antifraud Task
Force in the 1980s. Through this task force, states coordinate efforts
to review issues related to fraudulent insurance activities and
schemes; address national concerns related to insurance agent fraud and
unauthorized insurance sales; educate consumers about insurance fraud;
maintain and improves electronic databases regarding fraudulent
insurance activities; and disseminate research and analysis of
insurance fraud trends to the insurance regulatory community. The Task
Force also serves as a liaison between insurance regulators, law
enforcement and other antifraud organizations, and coordinates with
state and Federal securities regulators.
Data collection and information-sharing are critical to our
antifraud efforts. Through the NAIC, state insurance regulators created
the Online Fraud Reporting System (OFRS), through which consumers and
insurers can electronically report suspected fraud to the appropriate
insurance department. By using this system, consumers and insurers have
one central, online portal to report suspected fraud to one or more
states. A report made in OFRS against an insurer or intermediary is
delivered to all states in which the insurer or intermediary does
business. Since its inception in 2005, there have been more than
685,000 reports of suspected fraud received through OFRS.
In addition, the Task Force is undertaking an initiative to
evaluate sources of antifraud data and propose methods for improving
the exchange of information among insurance regulators, law enforcement
officials, insurers SIUs, and other antifraud organizations. The Task
Force is developing uniform insurance fraud referral requirements for
insurers to submit suspected insurance fraud data to state insurance
departments. We are collecting information from the states in order to
develop these requirements. Task Force members also continue to develop
new and update existing seminars, trainings and webinars for regulators
regarding insurance fraud and relevant trends, and efforts to combat
fraud.
The NAIC and state insurance regulators also play an important role
in educating consumers. The NAIC has a robust communications effort in
place through its consumer alerts and Insure U public education program
to assist consumers with navigating the complexities of insurance. The
NAIC website provides tools to help consumers avoid being scammed. The
NAIC's ``Fight Fake Insurance'' program was developed to protect
consumers from insurance fraud by encouraging them to ``Stop, Call,
Confirm'' that the individual insurance agent and company are properly
licensed by their state insurance department before buying coverage. In
my home state of Oklahoma, my department leads a series of Senior Fraud
Conferences throughout the year focused on educating and protecting
seniors regarding Medicare fraud and other types of financial fraud. In
2017, we held seven conferences with approximately 500 attendees
statewide.
Coordination with Federal Government and International Partners
In addition to our work with insurance consumers within our own
states, state insurance regulators collaborate with our Federal and
international colleagues to address insurance antifraud issues. State
insurance regulators work with the U.S. Department of Treasury and
other financial regulators on Anti-Money Laundering (AML) initiatives
as well as initiatives to combat the financing of terrorism (CFT),
which can involve permanent life insurance, annuities, and other
products with cash value or investment features. While the Treasury
Department's Financial Crimes Enforcement Network (FinCen) has primary
responsibility in this arena, state regulators coordinate with FinCen
and monitor insurer activities to make sure they are not engaging in
these activities and are not susceptible to those acts. To cooperate
and facilitate the sharing of information, state insurance departments
and FinCen have established Memorandums of Understanding and insurance
regulators notify appropriate Federal regulators if an insurer is not
in compliance with AML/CFT requirements.
With regard to health care, the NAIC and state insurance regulators
participate in the Centers for Medicare and Medicaid Services' (CMS)
Healthcare Fraud Prevention Partnership (HFPP), a voluntary public-
private partnership between the Federal government, state agencies, law
enforcement, private health insurance plans, and healthcare anti-fraud
associations. The HFPP aims to foster a proactive approach to detect
and prevent healthcare fraud through data and information sharing.
On the international front, the NAIC actively participates in the
International Association of Insurance Supervisors' (IAIS) Financial
Crime Task Force to addresses supervisory practices and issues
surrounding fraud, anti-money laundering/combatting the financing of
terrorism, and cyber risks.
Current Insurance Fraud Trends
Through our interactions with our state and Federal regulatory and
law enforcement counterparts, we are seeing some disturbing insurance
fraud trends, including:
Contractor/adjuster fraud following natural disasters: State
insurance departments have seen a number of instances of
contractor and adjuster fraud recently that have occurred
immediately after floods, tornados, and other natural
disasters. Contractors or insurance adjusters have required
advance payments from consumers for services or advance
assignment of insurance policy benefits. In these cases, the
contractors sometimes disappear without ever doing the work. In
other cases where repairs are made, the contractor engaging in
this conduct does substandard work using substandard materials.
In Oklahoma, my department's antifraud unit deploys to disaster
areas to assess damage and to educate consumers about potential
fraud and how to avoid it. They will place yard signs in
affected areas with our consumer hotline so consumers know how
to get help with insurance issues and go door to door to speak
to impacted individuals.
Medical equipment scams on seniors and identity theft: In
this scam, seniors receive unsolicited calls from scammers who
insist that the seniors have an urgent need for medical
equipment and claim Medicare or Medicaid will pay for the
equipment at no cost to them. The personal information provided
by the victim is then used to file unjustified claims and for
other fraud schemes, such as identity theft.
Opioid abuse/insurance scam: As a result of the growing
opioid epidemic, state insurance regulators are seeing an
increase in fraudulent prescription scams to capitalize on this
surge in addiction. Some corrupt medical professionals are
unlawfully and overly prescribing opioids, while billing the
costs to insurance companies. ``Pill mill'' doctors that overly
prescribe pills without medical justification run clinics in
which they give patients opioid prescriptions, typically for
cash, with few questions asked. This scheme allows patients to
easily obtain opioids in order to sell or misuse them.
Automotive windshield replacement scams: State insurance
departments are seeing a rise in a scam whereby a stranger at a
car wash, a parking lot attendant, or valet parking service
offers to repair or replace a vehicle owner's windshield. The
fraudster claims the windshield is unsafe and says that
insurance will take care of the entire cost. Even though the
windshield is perfectly fine, the fraudster replaces the
windshield and files a claim on the individual's policy. Not
only is the work unnecessary and the claim fraudulent, the
replacement windshield may itself be defective, may not be a
correct fit or may not be installed correctly, which can then
lead to serious safety risks.
Life insurance fraud: State insurance departments are also
seeing a rise in the tragic case of parents or guardians taking
out a life insurance policy on their child and then murdering
them for the payout. State insurance departments are currently
working diligently on ways to tighten insurers' underwriting
procedures and assist local law enforcement by closely
monitoring and possibly preventing the sale and issuance of
such policies.
These examples are a few of the recent trends that we have
observed, but other fraudulent scams have been around for some time,
such as staged auto accidents with the resulting fraudulent automotive
and medical claims, faked workers compensation claims, and arson by
homeowners.
Conclusion
As insurance fraud continues to evolve, state insurance regulators
remain vigilant in our efforts to combat fraud and work with relevant
stakeholders to address critical concerns. Our fight against insurance
fraud never stops and state insurance regulators continue to adapt our
strategies to prevent, detect, and investigate such schemes to protect
consumers and support insurers' financial health. We appreciate the
subcommittee's focus on this important issue and the opportunity to be
here on behalf of the NAIC, and I look forward to your questions.
Senator Moran. Thank you very much for your testimony.
Now, Mr. Jay.
STATEMENT OF DENNIS JAY, EXECUTIVE DIRECTOR, COALITION AGAINST
INSURANCE FRAUD
Mr. Jay. Chairman Moran, members of the Committee, thank
you for holding this hearing on an important issue that
virtually affects every consumer and business in America. My
name is Dennis Jay, and I am Executive Director of the
Coalition Against Insurance Fraud. We were founded 24 years ago
as a national broad-based alliance of the major stakeholders in
the fight against fraud, and that includes consumers,
government agencies, and insurance companies. And, in fact, the
four organizations represented at the table today all had a
hand in founding our organization, particularly so with
Consumer Federation of America.
Our mission is to unite the forces in combating insurance
fraud, while we also are involved in legislative advocacy on
the state level, empowering consumers to help fight fraud, as
well as conducting meaningful research.
Mr. Chairman, as you said in your opening remarks, overall,
insurance fraud in property/casualty specifically, continues to
be a drain on consumers and businesses in this country to the
tune of tens of billions of dollars each year. And it's
committed by organized rings, by professionals, such as medical
providers and lawyers, insurance agents, by home contractors,
by body shops, as well as everyday Americans, our friends,
coworkers, and neighbors.
The schemes go beyond just inflating insurance claims. Some
of them can leave businesses and consumers in financial ruin,
some can injure and even kill innocent consumers. Our submitted
statement includes a comprehensive list of these scams and some
of the ways that the fraud-fighting community is looking to
counter them.
During the last 20 years, property/casualty insurers have
helped counter the growing threat by establishing investigation
units within their company and investing heavily in training
and in technology. And on that last point, the sharing of
claims data by these insurance companies has been absolutely
essential in helping to detect fraud, especially some of the
schemes by these organized criminal enterprises that are
defrauding billions of dollars.
I would also like to mention that the property/ casualty
industry also participates in the successful Healthcare Fraud
Prevention Partnership. This is a collaborative effort in which
Medicare, Medicaid, TRICARE, the VA, private health plans, and
others share data and intelligence on crooked medical
providers. And to date, this effort, this public-private
partnership, has saved over $300 million. And we just will
continue to see good things from them in the future.
However, the property/casualty insurers are not allowed to
access or to contribute to the data in this rich pool of anti-
fraud information because of restrictions in HIPAA, and that's
a shame because we know that some of the fraudsters that are
ripping off property/casualty insurers are also defrauding
Medicare and Medicaid, and vice versa. And I know it's beyond
the jurisdiction of this Committee, but at some point, I hope
Congress will take a look at that, and maybe we can resolve it
at some point.
On the state level, following up on Commissioner Doak,
state legislatures really have come to the table and have
enacted some very responsible anti-fraud initiatives. To date,
all states but two have enacted specific fraud statutes to
define insurance fraud and set penalties.
Thirty-eight states have established anti-fraud units that
investigate and prosecute insurance fraud. Many of them have
police powers. And some of them have prosecutors within their
departments that specifically only do insurance fraud, and that
has really done a lot to help over the last few years.
There is a high level of collaboration between these state
agencies and insurance companies in fighting fraud, and that in
part is spurred because most states do require insurance
companies to report fraud and to sponsor active anti-fraud
programs within the companies.
However, after 20 years of increasing efforts to combat
fraud, we're convinced that we're never going to arrest or
convict our way out of this problem. More focus has to be on
prevention and deterrence of insurance fraud. And public
outreach programs, again like the Commissioner mentioned, have
been vital in helping to alert consumers about some of the
scams that can impact them, and also help otherwise honest
people understand that there's a high price to pay for
committing insurance fraud. And the research that we've done
and others have done demonstrates that these programs are
powerful in helping to stop fraud, and we need many more of
them.
We use social media to try to engage consumers directly
and, again, help to educate them about some of the scams, but
also we see on social media that people brag about committing
insurance fraud. Some actually use social media, Facebook, and
Twitter, to solicit others to help them execute scams. We
communicate with them, too, and hopefully we'll have an impact
on that.
So at a time when the acceptance of unethical behavior
seems to be increasing across the country, it's important that
we have strategies that help to counter some of these trends.
So in conclusion, while I think we've come a long way in
recent years, insurers, state governments, even the Federal
Government, in combating fraud, and we need to be proud of
that, we need to understand we're still a long ways away of
turning the corner on insurance fraud. But we feel through
continued collaboration and perhaps some of these prevention
and deterrence efforts, we'll continue down the path of curbing
insurance fraud and the associated costs to help save all
Americans some money.
Thank you.
[The prepared statement of Mr. Jay follows:]
Prepared Statement of Dennis Jay, Executive Director,
Coalition Against Insurance Fraud
Mr. Chairman, members of the Committee. My name is Dennis Jay and I
am Executive Director of the Coalition Against Insurance Fraud. I
commend you for holding this hearing and shedding light on an issue
that affects virtually every consumer and every business in the United
States.
The Coalition Against Insurance Fraud was founded 24 years ago as a
national, broad-based alliance of major stakeholders in the fight
against fraud--specifically consumers, government agencies and
insurance companies. More than 150 mostly national organizations belong
to our coalition.
Our mission is to help unite the forces working to combat fraud
while focusing on legislative advocacy in the states, empowering
consumers and conducting meaningful and useful research. The Coalition
seeks to curb fraud in all lines of insurance no matter who may be a
victim or a perpetrator.
We have successfully helped enact anti-fraud legislation in more
than 20 states with what we call ``balanced bills.'' This means they
not only include criminal and civil penalties for defrauding insurers,
but also include sanctions against people in the insurance industry who
defraud consumers.
Fraud is committed by organized fraud rings, by professionals such
as medical providers, lawyers and insurance agents, by home contractors
and auto body shops as well as everyday Americans--our neighbors,
friends and co-workers. Our research suggests this is an equal-
opportunity crime committed by people of all ages, income levels,
races, gender sand education levels. Most Americans admit to knowing
someone who has committed insurance fraud.
Today, we would like to provide background on the impact and cost
of insurance fraud in the United States and give you an update of the
state of the fraud fight in property/casualty insurance.
Fraud involving automobile insurance, homeowners coverage and
commercial insurance continues to be a drain on consumers, businesses
and society in general. No one knows the total cost of insurance fraud
because of the hidden nature of the crime. The data the Coalition
analyzes from insurers, government agencies and others suggest
insurance fraud costs tens of billions of dollars each year. This
expense creates
hardships for low and middle-income consumers who are forced to pay
an annual ``fraud tax'' on premiums for car and home insurance--as well
as a built-in cost on every good and service.
Additionally, some scams injure and even kill innocent consumers.
Businesses also suffer when they can ill-afford workers compensation
insurance because of rising premiums due to fraud. Left unchecked, this
can also cause an ever-increasing spiral as others become more tempted
to commit insurance fraud as premiums continue to climb.
Types of insurance fraud.
Insurance fraud is one of the most eclectic crimes in America.
Types of fraud include:
Automobile--staged crashes. Perpetrators can include runners, who
coordinate the scams, drivers, passengers, lawyers and medical
providers. Scammers intentionally cause cars to collide--sometimes with
innocent motorists--to file fake damage and medical claims. This type
of fraud is most severe in states that have no-fault automobile
insurance. Lives are jeopardized when innocent motorists are maneuvered
into car crashes staged by crime rings to collect large injury payouts
from auto insurers. A family of three burned to death when a setup
crash went awry after their car was hit by two large trucks on a
California freeway. A grandmother in Queens, N.Y. died when her car
went out of control after she was maneuvered into a staged crash. One
organized ring in New York City collected more than $279 million in
false claims through a network of chiropractors, lawyers and staged
crash coordinators.\1\
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\1\ ``Colossal crash ring in permanent reverse,'' http://
www.insurancefraud.org/article.htm
?RecID=3453, December 23, 2015
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In many cases, medical clinics in these scams are secretly owned by
organized rings, employ a licensed physician to front for them and
offer no real medical services. The tactics by many of these organized
fraud rings can change quickly as insurers and government investigators
focus on their scams. One day they may be involved in bogus
chiropractic care; and the next they are billing for questionable
medical procedures or useless nerve testing.\2\ Additionally, motorists
with real injuries may be subject to useless template treatment that
does nothing to alleviate their injuries, and may enhance their injury.
---------------------------------------------------------------------------
\2\ Scammers evolve tactics for medical equipment, sham clinics,
nerve tests, Robert A. Stern and James A. McKenney, Journal of
Insurance Fraud in America, April 2017.
---------------------------------------------------------------------------
Automobile--padding/false claim. This usually occurs by a consumer,
a body shop or glass-repairs facility that pads damage on an existing
automobile claim, or submits a bill for unnecessary work or work not
done in connection with an auto accident. In some cases, body shops
will intentionally inflict more damage after the vehicle has been towed
to their facility in order to increase their profits. Repairs may be
substandard or haphazard, placing unsafe vehicles back on the road.
Automobile--give-up. Give-ups involve falsely reporting a vehicle
stolen when it actually is hidden, shipped overseas, repossessed,
dumped in a body of water, buried or burned. Perpetrators can include
car owners and the people they hire to get rid of their vehicles. This
crime is more severe during economic downturns when people feel they
can no longer afford monthly auto payments or they are ``underwater''
on their loans. One factor that seems to encourage this fraud is longer
loan terms (five and six years), when the loan balance is greater than
the value of the vehicle. High gas prices also are a factor, especially
of gas guzzlers, such as SUVs. Give-ups and can include motorcycles,
recreational vehicles, boats and even farm equipment.
Automobile--underwriting. Underwriting fraud in auto insurance
includes lying on an application to reduce premium or gain coverage
that one wouldn't otherwise be qualified to obtain. Deceptions can
include untruths about driving record, miles driven, where the car is
garaged, and number and age of drivers in household. Auto underwriting
fraud is also called rate evasion. This type of fraud causes the
insurance rates of honest people to increase in order to subsidize
either the increased risk presented or the accidents of the people who
cheat.
Rate evasion has increased in recent years as more people purchase
insurance online rather than by telephone or in person through an
insurance agent. One version of this scam is the ``crash and buy''
scheme. Motorists who fail to purchase auto insurance get in accidents
and then buy coverage and lie, claiming the accident occurred post-
purchase.
Business--arson. Owners or operators who burn down or hire someone
to torch a business, which is usually failing, for profit. Arson is
more frequent during economic downturns. Cases have included building
owners of occupied houses and apartments. In some cases, fire has
spread to adjacent businesses and homes that also destroy these
structures, placing lives and jobs at risk. This type of insurance
fraud spans all socio-economic levels. Sadly, every year first-
responders such as fire fighters die from battling intentionally-set
fires.
Business--padding/faking. This type of fraud includes inflating a
legitimate claim, or faking a theft or damage claim on a business. A
classic case is inflating the value of inventory after a fire or flood.
Contractor fraud. Home contractors can defraud both insurers and
consumers, from doing shoddy work to stealing claims payments. During
natural disasters, unlicensed contractors from out of state are
especially prone to committing fraud. Documented cases include
contractors causing added damage to roofs and siding to billing the
insurer for repair work.
Drug diversion. The opioid crisis affects property/casualty
insurance as well as health insurers. Drug diversion includes the
prescribing, distribution, selling, acquiring or using legal
prescription drugs for illegal or illicit purposes. It is committed
when patients addicted to painkillers and other prescription drugs
illegally receive drugs from doctors, pharmacists, and street dealers.
Physicians and pharmacists commit drug diversion when they knowingly
prescribe and dispense painkilling drugs for no legitimate medical
reason. Property/casualty insurers face these scams when they reimburse
claimants and medical providers who treat auto accident victims,
premises liability and workplace injuries.
Homeowners--arson. This includes burning a home that is either
owned or rented to profit from claimed payments. Perpetrators can
include home and business owners and the people they hire to commit the
arson. Organized rings in major urban centers also have bought run-down
homes, over-insured them and then set them on fire. One ring in South
Florida was caught after photos of the same singed furniture kept
showing up in claims for different house fires.\3\
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\3\ ``Smoking Out Insurance-Arson Rings Earns Laura Uriarte
Prosecutor Of Year Award,'' news release, January 12, 2017.
---------------------------------------------------------------------------
Homeowners--padding/faking. This includes inflating a legitimate
theft or damage claim on a home or apartment. Sometimes fake receipts
are used to inflate claims. Another common scheme is reporting a false
burglary claim.
Fraud by insurance agents. Dishonest insurance agents and brokers
defraud consumers by failing to remit their premiums to insurers, and
sometimes by selling fake policies backed by no insurer. This type of
fraud can leave consumers in financial ruin if they experience a major
loss, such as a home or business fire or a large liability lawsuit.
Fraud by insurance company employees. Most criminal cases include
claims-check diversion by claims adjusters who collude with a
legitimate or fake claimant. Company employees also manufacture claims,
manipulating the claims system. There also have been rare cases of
insurance executives who loot companies and jeopardize the ability to
pay claims. Some fake companies also have sold bogus coverage and have
no wherewithal to pay claims. Often these criminals use the names of
legitimate insurers to fool insurance buyers.
Liability--false claim. Grocery stores, restaurants, other
businesses and homeowners face false claims by people who fake injury
on their property. ``Slip and falls'' can result in large payouts to
injured victims and their lawyers. In some cases, people have falsely
claimed they found rodents, glass and severed fingers in food ordered
in restaurants.
Fraud by public adjusters. Unlike adjusters who work for insurance
companies, public adjusters are allowed to represent claimants in many
states. They are paid a percentage of the final claims payment. Thus
they have an incentive to illegally inflate the claims payment as high
as possible, sometimes illegally by manufacturing losses. Crooked
public adjusters can collude with attorneys and contractors to increase
losses cause by water damage, fire and other perils.
Workers compensation fraud by workers. This fraud includes workers
who fake injuries, refuse to go back to work after they heal, or have a
side job while still collecting benefits. It is often encouraged by
lawyers and medical providers who profit the more severe the injury and
the longer the employee is off the job. During the 2008-2010 recession,
solicitors were stationed outside of unemployment offices to encourage
recently laid-off workers to file false injury claims.
Workers compensation fraud by employers. These scams occur when a
business lies about how many employees it has, the types of jobs
workers do, and their overall workers compensation claims experience.
It is especially prevalent in the construction industry, where builders
may employ undocumented workers off the books. Large businesses can
saves hundreds of thousands of dollars in annual workers compensation
premiums by committing underwriting fraud. The money they save can be
used to underbid their honest competitors on construction bids.
Organized rings also help businesses commit fraud by ``renting'' them
shell corporations to use to buy coverage and fool insurers.\4\
Employee leasing schemes and the practice of declaring employees as
independent contractors both are prevalent in workers compensation
rate-evasion fraud.
---------------------------------------------------------------------------
\4\ ``Shell games: How construction cons steal workers-comp
premiums,'' by David M. Borum and Geoffrey R. Branch, Journal of
Insurance Fraud in America, February 2017
---------------------------------------------------------------------------
Workers compensation fraud by medical providers. The no-fault
system of treating and compensating injured workers has generally
worked well since its creation in the early 20th century. However, the
no-fault aspect of the system appears to be an open invitation for
dishonest medical providers to exploit injured workers and plunder the
system. Schemes includes billing for services not rendered or needed,
including chiropractic care, diagnostic tests and prescription drugs.
In California alone, medical fraud in the workers compensation system
costs multiple billions of dollars each year.
Anti-fraud efforts by industry
During the last 20 years, property/casualty insurers have helped
counter the growing fraud threat by establishing investigation units,
and investing in training and technology. In 2016, nearly three-
quarters of insurers were deemed to be fully engaged in using anti-
fraud technology to better and more quickly detect fraud.\5\ Property/
casualty insurers also support organizations that provide training and
credentialing programs for investigators and claims personnel.
---------------------------------------------------------------------------
\5\ ``The State of Insurance Fraud Technology,'' Coalition Against
Insurance Fraud, November, 2016.
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Increasingly, insurers have resorted to civil lawsuits against
medical providers to return payments from fraudulent claims, and to
send a message that fraud won't be tolerated.\6\
---------------------------------------------------------------------------
\6\ Insurer success in suing fraudsters expected to increase civil
actions,'' Duane Morris Health Law, February 17, 2015
---------------------------------------------------------------------------
The sharing of claims data among property/casualty insurers has
proven to be instrumental in detecting suspected fraud, especially by
organized rings. Property/casualty insurers also participate in the
successful Healthcare Fraud Prevention Partnership (HFPP).\7\ This
collaborative effort is a forum for Medicare, Medicaid, Tri-care,
private health plans and others to share intelligence about schemes by
medical providers who cost taxpayers and insurance buyers tens of
billions of dollars each year. Government health programs and private
health plans are allowed to pool and access data on suspect medical
providers. This effort has uncovered dozens of schemes, and has so far
saved nearly $300 million.
---------------------------------------------------------------------------
\7\ Healthcare Fraud Prevention Partnership website, https://
hfpp.cms.gov/
---------------------------------------------------------------------------
However, property/casualty insurers are not allowed to share or
access HFPP data because of restrictions of the Health Insurance
Portability and Accountability Act (HIPAA). The Coalition views this
restriction as a lost opportunity: Research shows that many medical
providers who defraud property/casualty insurers also file false claims
against government programs, and vice versa.
Anti-fraud efforts of government
During the last 20 years, state governments have responded
positively to what they see as the growing threat of insurance fraud.
All states but two (Oregon and Virginia \8\) have enacted specific
insurance fraud statutes to define fraudulent acts and set penalties.
Additionally, 38 states and the District of Columbia have established
specific agencies to investigate and prosecute insurance fraud. Most of
these state agencies have police powers, and several employ prosecutors
to exclusively deal with insurance fraud cases.
---------------------------------------------------------------------------
\8\ While Virginia does not have a specific insurance fraud
statute, it does have an insurance fraud bureau housed within the state
police.
---------------------------------------------------------------------------
In many states, such as California, Florida, New Jersey and New
York, insurance fraud bureaus are full law-enforcement agencies with
hundreds of investigators employed in their units.
Together, state insurance fraud bureaus receive some 150,000
referrals each year about incidents of insurance fraud. Referrals are
received from insurers, consumers and other law-enforcement agencies.
There is a high level of collaboration and cooperation among these
state agencies and insurers in investigating and prosecuting fraud. A
total of 43 states require insurers to report cases of suspected fraud.
Several also require insurers to sponsor internal investigation units
and provide training.
At least a half-dozen fraud bureaus also sponsor advisory
committees to gain feedback and intelligence from stakeholders in the
state, and to discuss ongoing anti-fraud efforts. The Coalition Against
Insurance Fraud currently serves on five of those advisory panels.
In addition to referring cases for criminal prosecution, several
fraud bureaus also have authority to take lower-level cases on an
administrative and civil basis.\9\
---------------------------------------------------------------------------
\9\ ``Un-civil civil penalties can thwart fraudsters,'' by Howard
Goldblatt, April 20, 2017, https://www.insurancefraud.org/blog/apr-
2017/un-civil-civil-penalties-can-thwart
---------------------------------------------------------------------------
Other efforts to counter fraud
Efforts by insurers and government agencies to detect, investigate
and prosecute insurance fraud is vital to curbing these costly crimes.
However, after more than 20 years of increasing efforts to combat
fraud, it's clear our Nation will never arrest or convict its way out
of insurance fraud.
No one knows what percentage of insurance fraud is detected.
Informal surveys of insurers suggest it may be anywhere from 20 to 50
percent. Only a small percentage of those cases is ever opened for
investigation by law enforcement agencies, and even a smaller
percentage is ever adjudicated.
In recent years, more efforts have focused on prevention and
deterrence. Public outreach messages help convince otherwise honest
consumers that they will a high price for cheating on insurance.\10\
---------------------------------------------------------------------------
\10\ Social-marketing campaigns taking on small-time crimes, by
Virginia Roth and Bernard Host, Journal of Insurance Fraud in America,
January 2016. https://www.insurancefraud.org/jifa/jan-2016/social-
marketing-campaigns-taking-o
---------------------------------------------------------------------------
Research by the Coalition Against Insurance Fraud and others
suggests that this strategy is helping to reduce fraudulent claims and
encourage consumers to report fraud. The Coalition also has adopted a
strategy of communicating directly with consumers through social media
about insurance fraud issues, especially about schemes that target
consumers, such as staged accidents, fake airbags, contractor fraud,
dishonest insurance agents and medical ID theft. The use of
Facebook,\11\ Twitter \12\ and other social-media outlets helps educate
consumers about fraud, empowers them to avoid being scammed, and
reduces their tolerance of this crime. Users of social media sometimes
brag about the fraud they have committed and solicit others for help in
executing scams.
---------------------------------------------------------------------------
\11\ https://www.facebook.com/insurancefraud
\12\ https://twitter.com/insurance_fraud
---------------------------------------------------------------------------
At a time when the acceptance of unethical behavior seems to be
increasing in our nation, it is important to have strategies in place
that will counter this negative trend.
In conclusion
Insurers, state governments and the Federal government are light
years away from where they were just twenty years ago in seeking to
curb insurance fraud in the U.S. However, we still have a long way to
go before we turn the corner on this crime. The Coalition Against
Insurance Fraud is confident, however, that through continued
collaboration, and though efforts to deter and encourage vigilance by
all stakeholders, we will continue down the path of reducing the high
costs of insurance fraud.
Senator Moran. Mr. Jay, thank you very much.
Now, Mr. Kevelighan.
STATEMENT OF SEAN KEVELIGHAN, CHIEF EXECUTIVE OFFICER,
INSURANCE INFORMATION INSTITUTE
Mr. Kevelighan. Thank you very much, Chairman Moran,
Ranking Member Blumenthal, and Committee members. I appreciate
the opportunity to address you here today about current issues
facing the insurance industry and consumers when it comes to
insurance fraud in America.
My name is Sean Kevelighan. I'm Chief Executive Officer of
the Insurance Information Institute. We are an industry-funded
organization that has been at work for over 50 years. Our job
is to, and our mission is to, explain what insurance does and
how it works to consumers, public policy members, and members
of the media as well.
Our members are primarily property and casualty, P&C,
insurers, although 70 percent of our members also offer life
insurance solutions.
Today, I will focus on fraud trends P&C insurers are seeing
and how insurers and consumers can protect themselves against
these crimes.
As economic first responders, P&C insurers paid out more
than $327 billion in 2015 to settle claims. Many of these were
to auto repair companies as well as building contractors, and
this will undoubtedly be the case in 2017.
Insurance companies recognize the overwhelming majority of
claims they receive are legitimate, and in those cases, the
claims are paid out promptly. In fact, in the U.S., the
consumers are recognizing them. Home insurers this year, from
J.D. Power, received their highest rankings ever.
The relationship between insurers and consumers is one of
trust. Consumers trust that insurance will help rebuild after
catastrophes happen. While the insurer trusts that the reported
information provided by the consumer is accurate and honest,
unfortunately, whenever there is an incident of fraud, it has
damaging consequences for the consumer and the insurance
company. In fact, Deloitte estimated in 2012 that P&C insurers
paid out as much as $30 billion, nearly 10 percent of all
claims, for fraud.
Such claims create an additional cost, which insurers must
factor into their underwriting and administration, resulting in
all consumers having to pay higher premiums. This, in essence,
puts a strain on the trust in the relationship. And for this
reason, the insurance industry is dedicated to doing whatever
it can to prevent fraud.
Five years ago--since the 5 years that Deloitte released
its fraud study, insurers and the state regulatory departments
have dramatically improved their fighting efforts, and we're
hearing that today. Insurers have allocated additional
resources, whether in their special investigation units or
extra training, while today, nearly every state department, as
we heard from Oklahoma, has in-house fraud bureaus, and they
are getting results.
Aside from what we heard here today from California, if you
look at the State of California, Commissioner Dave Jones has
issued nearly a dozen news releases about insurance fraud cases
in his department as either uncovered or worked on. The
California cases included fraudulent claims for auto collisions
that were either staged or never happened, or dealt with worker
compensation claims where the number of employees was
misrepresented or that the jobs that they undertook was
misrepresented. These frauds drive up the costs.
One of the things that is interesting that P&C insurers are
now seeing is how all of these are evolving, and as technology
improves, so are the fraudsters improving the ways that they
get more sophisticated and commit these crimes. And at the same
time, consumers are increasingly wanting to buy their insurance
policies from their mobile phones, they want to file a claim
through their smartphone via photo. And the question is, How
can they verify all this?
Fortunately, this is where the industry is beginning to
embrace new technological innovations stemming from big data
and artificial intelligence that will help improve delivery of
their services to the U.S. consumer and reduce costs.
As we are seeing in so much of our lives, technology and
digitalization can help bring benefits to society, in this
case, by rooting out unwanted fraud. A report released last
month by Boston-based Aite outlined the fact that insurers are
recognizing their fraud-fighting efforts must adapt to the
criminals and are finding that these efforts are actually
creating quite optimistic results, whether through data
aggregation, verification, or analyzing the data, and also
using artificial intelligence and predictive analytics. The
result, insurers are equipping themselves with technology tools
they need to neutralize high-tech criminals.
As much as these emerging technologies make a positive
impact, there will always be a human element to combating
fraud, and that is where the I.I.I. plays a role. Consumers
must have the information they need to make prudent financial
decisions and to protect themselves from fraudulent activities.
The I.I.I. is proud of the role it plays in keeping consumers
informed.
Thank you again for the opportunity to speak before you
today.
[The prepared statement of Mr. Kevelighan follows:]
Prepared Statement of Sean Kevelighan, Chief Executive Officer,
Insurance Information Institute
Chairman Moran, Ranking Member Blumenthal, and committee members. I
appreciate the opportunity to address you today about the current
issues facing the insurance industry and consumers when it comes to
insurance fraud in America.
My name is Sean Kevelighan and I am the Chief Executive Officer of
the Insurance Information Institute (I.I.I.). The Institute is an
industry-funded consumer education organization. We explain what
insurance does, and how it works, to consumers, the media, and public
policymakers.
The I.I.I.'s members include the Nation's largest auto, home, and
business insurers. While much of our work focuses on property/casualty
``(P/C)'' insurers, nearly 70 percent of our members also offer life
insurance solutions. Today I will focus on the insurance fraud trends
P/C insurers are seeing, and how insurers and consumers can protect
themselves against these crimes.
In its role as the U.S.'s economic first-responders, P/C insurers
paid out more than $327 billion in 2015 to settle claims. Two years
ago, many of these claim payout dollars went to auto repair companies
and building contractors. This will undoubtedly be the case in 2017 as
well. Insurers provide the capital infusion that allows consumers to
recover after an accident, a fire, a windstorm, or another incident
that causes either property damage or an injury.
Insurance companies recognize the overwhelming majority of claims
they receive are legitimate, and these claims are paid promptly. U.S.
consumers also recognize this fact. Indeed, in 2016 U.S. home insurers
scored their highest-ever satisfaction rating among consumers who filed
a claim, according to a J.D. Power survey. Insurers were given a score
of 859 on a 1,000-point scale.
The relationship between insurers and consumers is one of trust.
Consumers trust that insurers will help them re-build when catastrophe
strikes, while the insurer trusts that the reported information
provided by the consumer is honest. Unfortunately, whenever there is an
incident of fraud it has damaging consequences for the consumer and
insurance company alike. In fact, Deloitte estimated in a 2012 report
that P/C insurers paid around $30 billion annually--nearly 10 percent
of their total claim payouts--in fraudulent auto, home, and business
insurance claims. Such claims create additional costs, which insurers
must factor into underwriting and administration--resulting in all
consumers having to pay more in premium. This, in essence, puts a
strain on the trust relationship. And for this reason, the insurance
industry works tirelessly to prevent fraud.
In the five years since Deloitte released its insurance fraud
study, insurers and the state insurance departments that regulate them
have dramatically improved their fraud-fighting efforts. Insurers have
allocated additional resources to their internal Special Investigations
Units (SIUs) and expanded their training of claims adjusters to detect
fraudulent activity. Moreover, nearly every state insurance department
has an in-house fraud bureau. And they are getting results.
For example, California Insurance Commissioner Dave Jones has
issued this year alone nearly a dozen news releases on insurance fraud
cases his Department either uncovered or worked on. The California
cases involved the filing of fraudulent claims for auto collisions that
were either staged or never occurred. Others dealt with workers'
compensation insurance fraud, such as instances in which employers
either misrepresented the number of employees who worked for them or
misclassified the jobs the employees undertook. This type of fraud
drives up the cost of doing business for a state's employers.
Insurance fraud schemes are, however, always evolving and getting
more sophisticated, especially as insurance transactions are
increasingly conducted online. Consumers increasingly want to buy
insurance policies from their mobile devices, and have their insurance
claims paid solely on the basis of the photo they send electronically
to their insurer.
But how can insurers verify the identity of the mobile-device user,
or the legitimacy of a property damage claim, without having the
subject of the claim inspected personally by a claims representative?
This is where the insurance industry's embrace of new technological
innovations stemming from big data and artificial intelligence will
help improve delivery of their services to the consumer and reduce
costs. As we are seeing in so much of our lives, technology and
digitalization in insurance can help bring benefits to society; in this
case by rooting out unwanted fraud.
In a report released last month, the Boston-based Aite (EYE-TAY)
Group outlined the fact that insurers are recognizing their fraud-
fighting efforts must adapt to this new era, and found reason for
optimism. The Aite Group reports insurers are retaining state-of-the-
art vendors, like data aggregators, producers, and receivers and then
analyzing this data through the use of artificial intelligence and
predictive analytics. The result? Insurance companies are equipping
themselves with the high-tech tools they need to assess a prospective
customer, verify a claim, and identify suspicious activity.
As much as these emerging technologies make a positive impact,
there will always be a human element to combatting fraud, and that is
where the I.I.I. plays a role. Consumer education is at the core of
what we do, whether it be through our website content, media relations
efforts, or public speaking engagements.
Like insurers, consumers must have the information needed to make
prudent financial decisions and to protect themselves from fraudulent
activities. The I.I.I. is proud of the role it has played in keeping
consumers informed and vigilant about rogue contractors, staged auto
accidents, and the criminals who want either to steal their insurance
proceeds--or even their identity.
Thank you again for the opportunity to speak before you today.
Senator Moran. Mr. Kevelighan, thank you very much.
Now, Mr. Lynch.
STATEMENT OF TIMOTHY J. LYNCH, DIRECTOR, GOVERNMENT AFFAIRS,
NATIONAL INSURANCE CRIME BUREAU
Mr. Lynch. Good morning, Mr. Chairman and members of the
Committee. My name is Tim Lynch. I'm the Director of Government
Affairs at the National Insurance Crime Bureau, based in Des
Plaines, Illinois. The NICB is a national not-for-profit
organization supported by 1,100 insurance companies who
collectively write about 80 percent of the Nation's property
and casualty insurance premiums. We are led by President and
Chief Executive Officer Joe Wehrle, who is also a retired
lieutenant general in the U.S. Air Force.
Working with our member companies, legislators, regulators,
and law enforcement, we investigate organized criminal groups
that commit insurance fraud and vehicle crime. We have a 105-
year history of established cooperation with Federal, state,
and local law enforcement to fight insurance fraud and help
protect the American people from organized criminal rings.
Our investigative efforts are focused on external claims
fraud, that is, multi-claim, multi-carrier scams perpetrated by
organized criminal groups. Through a collective means of
investigation, data analysis, legislative advocacy, training,
and public awareness, NICB targets the most egregious forms of
insurance fraud and vehicle crime. Some of the schemes we see
are staged auto accidents, cargo theft, vehicle crime, and
medical fraud abuses, just to name a few.
I'll focus briefly today on three areas: medical fraud,
vehicle crime, and contractor fraud, as alluded to by
Commissioner Doak and Mr. Jay.
Several years ago, NICB made an adjustment to devote more
resources to fighting medical-related fraud based on a surge of
inflated medical billing and collusion between disreputable
doctors and other health care providers. To address this surge,
since 2002, NICB has opened eight Major Medical Fraud Task
Forces across the country in areas such as Chicago, Houston,
New York, and just down the road from here in Fairfax,
Virginia.
In 2012, based on our national reach and credibility on the
topic of medical fraud, NICB was asked to serve on the
Executive Board of the Healthcare Fraud Prevention Partnership
under the U.S. Department of Health and Human Services. We know
from experience that there is a significant amount of crossover
between the fraud that impacts property and casualty insurers
and the fraud that impacts Medicare, Medicaid, and private
health insurance.
Building on the NICB model, the HFPP is working to share
data and investigations across all lines of insurance to better
detect fraud and assist law enforcement to root out potential
criminal activity. For example, in 2014, our data analytics
team compared over $900 million of health care claims data to
NICB data resulting in the identification of over 100 schemes
with health care and property/casualty fraud exposure. In other
words, these folks, these organized rings, they don't
discriminate, they'll rip off anyone.
In terms of vehicle-related crime, NICB's experience with
this issue dates back to our founding in 1912. Stolen vehicles
are profitable, whether intact, parted out, or illegally
exported. Regardless if these vehicles are shipped overseas or
sold here in the U.S., buyers of these vehicles often do not
know these vehicles might be stolen. The essential, but
missing, piece that enables this kind of black market
enterprise is information.
Congress itself recognized this deficiency and, in 1992,
passed legislation that created the National Motor Vehicle
Title Information System, known as NMVTIS. Its purpose is to
help protect consumers from unsafe vehicles and to keep stolen
vehicles from being resold. We have served on the advisory
board for NMVTIS since 2010.
This program, which is administered by the U.S. Department
of Justice, protects states and consumers from fraud, reduces
the use of stolen vehicles for illicit purposes, and provides
consumers protection from unsafe vehicles. NMVTIS is intended
to ensure key vehicle history information is available to
consumers so they may make well-informed decisions.
Finally, as mentioned by Commissioner Doak and Mr. Jay,
another issue where we've seen many abuses is in the area of
roofer and contractor fraud. We've been very active on this
matter from a legislative and public awareness standpoint, and
we see numerous cases of exploitation from our team of
investigators.
In short, this issue is pretty simple. In areas impacted by
a severe weather event and there is serious damage to homes,
dishonest repair contractors descend on these scenes,
oftentimes within a day or two, and entice consumers into scams
involving phony contracts, offers of free repairs, and filing
bogus claims. Examples of inflating roof damage, as
Commissioner Doak mentioned, are also prevalent, as well as
these folks collecting a down payment from people to do no work
and then to leave town. Several states have taken action to
crack down on this, as Mr. Jay mentioned, including Oklahoma,
Texas, and others.
We have worked with state departments of insurance and are
willing to work with others, and we've worked with Commissioner
Doak, on increasing public awareness of this issue using
billboards, social media, and public service announcements.
In closing, Mr. Chairman, thank you for the opportunity to
be here. I'm pleased to answer any questions at the appropriate
time. Thank you.
[The prepared statement of Mr. Lynch follows:]
Prepared Statement of Timothy J. Lynch, Director, Government Affairs,
National Insurance Crime Bureau
Good Morning Mr. Chairman and Members of the Committee, my name is
Tim Lynch, Director of Government Affairs at the National Insurance
Crime Bureau (NICB), based in Des Plaines, Illinois. The NICB is a
national, not-for-profit organization supported by approximately 1,100
insurance companies that collectively write nearly 80 percent of the
Nation's total property/casualty insurance premium. NICB is led by
President and Chief Executive Officer Joe Wehrle. Mr. Wehrle is a
retired Lieutenant General in the United States Air Force.
Working with our member companies, legislators, regulators and law
enforcement, we investigate organized criminal groups that commit
insurance fraud and vehicle crimes. We have a 105-year history of
established cooperation with federal, state and local law enforcement
agencies to fight insurance fraud and help protect the American people
from criminal enterprises.
NICB's investigative efforts are mainly focused on external claims
fraud--multi-claim, multi-carrier scams perpetrated by organized
criminal groups. Through a collective means of investigation, data
analysis, training, public awareness and legislative advocacy, NICB
targets the most egregious forms of insurance fraud and vehicle crimes.
Some of the fraud schemes we are involved with are staged auto
accidents, cargo theft and medical fraud abuses.
I will focus my remarks today on 3 key areas: medical fraud,
vehicle crime, and some recent state legislative activity on roofer/
contractor fraud.
Several years ago, NICB made a strategic adjustment to devote more
resources to fighting medical-related fraud based on a surge of
inflated medical billing, collusion between disreputable doctors and
other healthcare providers. To address this surge, since 2002, NICB has
opened eight Major Medical Fraud Task Forces in major population
centers such as Chicago, Houston, New York and not far from here in
Fairfax, Virginia.
In 2012, based on our national reach and credibility on the topic
of medical fraud, NICB was asked to serve on the executive board of the
Healthcare Fraud Prevention Partnership (HFPP) under the U.S.
Department of Health and Human Services. We know from experience that
there is a significant amount of crossover between fraud impacting
property/casualty insurers and fraud impacting Medicare, Medicaid and
private health insurance.
Building on the NICB model, the HFPP is working to share data and
investigations across all lines of insurance to better detect fraud and
assist law enforcement to root out potential criminal activity. For
example, in 2014, our data analytics team compared over $900 million of
healthcare claims data to NICB data resulting in the identification of
over 100 schemes with health care and property/casualty fraud exposure.
In terms of vehicle related crime, NICB's experience with this
issue begins over 100 years to our founding in 1912. One of the most
common reasons for vehicle theft is the ability to generate profit from
organized vehicle theft activities. Stolen vehicles are profitable,
either intact, parted out or illegally exported. Regardless if these
vehicles are shipped overseas or sold right here in the United States,
buyers of these vehicles often do not know the vehicles are stolen. The
essential--but missing--piece that enables this kind of black market
enterprise is information.
Congress recognized this deficiency and, in 1992, passed
legislation that created the National Motor Vehicle Title Information
System (NMVTIS). Its purpose is to help protect consumers from fraud
and unsafe vehicles, and to keep stolen vehicles from being resold.
NICB has served on the advisory board for NMVTIS since 2010.
NMVTIS, which is administered by the U.S. Department of Justice,
protects states and consumers from fraud; reduces the use of stolen
vehicles for illicit purposes; and provides consumers protection from
unsafe vehicles. NMVTIS is intended to ensure key vehicle history
information is available and affordable to consumers, so consumers may
make well-informed decisions about used vehicle purposes and to avoid
purchasing potentially unsafe vehicles or paying more than fair market
value for a vehicle.
As mentioned by Oklahoma Commissioner Doak, another issue where we
have seen egregious abuses is the area of roofer/contractor fraud. NICB
has been very active in this matter from a legislative and public
awareness standpoint, and we see numerous cases of exploitation from
our team of investigators.
In short, this issue is fairly simple. An area is impacted by a
severe weather event, such as a tornado, and there is serious damage to
residential communities. Dishonest repair contractors descend on these
scenes--often times within days--and entice consumers into scams
involving phony contracts, offers of ``free repairs'' and filing bogus
claims. Instances of these individuals inflating roof damage is also
prevalent, as well as collecting a sizable down payment to perform
services only to skip town.
Several states have taken action to tighten up consumer protections
against these abuses, such as Colorado, Kentucky, Illinois, Indiana,
Minnesota, Nebraska, Oklahoma, Texas and others.
Since our industry is regulated at the state level, we have also
worked with state departments of insurance--including Commissioner Doak
on increasing public awareness of this issue using billboards, public
service announcements and social media.
We would encourage the committee members--especially those who
represent areas prone to severe weather--to communicate to your
constituents that they exercise caution after severe weather events,
and be sure to contact their insurance company before signing any
repair contracts or providing up-front cash for materials--especially
if it is from a contractor who just appears, unsolicited, at their
door.
In closing, we would like to thank Chairman Moran and the Committee
members for their interest in insurance fraud. We ask that you keep
these three issues in mind--medical fraud, vehicle crime and property
fraud--as you communicate with your state departments of insurance to
help protect the citizens of your state from insurance fraud.
Thank you for inviting us to testify and I'd be happy to answer any
questions.
Senator Moran. Mr. Lynch, thank you very much.
Welcome back, Ms. Weintraub.
STATEMENT OF RACHEL WEINTRAUB,
LEGISLATIVE DIRECTOR AND GENERAL COUNSEL,
CONSUMER FEDERATION OF AMERICA
Ms. Weintraub. Thank you, Chairman Moran and Ranking Member
Blumenthal. I appreciate the opportunity to provide testimony
on Consumer Federation of America's perspectives on insurance
fraud in America. I am Rachel Weintraub, Legislative Director
and General Counsel at CFA, a nonprofit association of
approximately 280 pro-consumer groups that was founded in 1968
to advance the consumer interest through advocacy and
education.
CFA is concerned about fraud by the insurance industry
against consumers, and fraud by consumers against the industry.
Both cost consumers dearly. Although most insurance companies
and agent/brokers are honest and ethical, fraud by the
insurance industry against consumers is a serious problem. It
costs consumers when they pay premiums for unnecessary
coverage, when they pay excessive rates for required coverage,
when they buy insurance priced in an unfairly discriminatory
manner, and it costs them when they are presented with
misleading policy language that is constructed to make them
believe they are purchasing protection they will never in fact
receive.
Fraud by insurers also costs consumers who face unfairly
denied claims, underpaid claims, and claims that take too long
to be paid. Examples abound, and here are just a few. Insurers
have used fake engineering reports to deny flood insurance
claims after Superstorm Sandy. Insurers have participated in
the sale of unnecessary policies, such as the placing of
unnecessary auto insurance onto the auto loan payments of
borrowers who were not advised of such action by Wells Fargo,
as we just learned last week. A Medicare Advantage insurer
settled a whistleblower case for $32 million in a case where
the insurer exaggerated how sick patients were.
CFA has undertaken a series of reports on the plight of
good-driving, lower income Americans. These consumers are
unable to afford state-required auto insurance due to the use
of unfair rating factors related to income. Our research has
identified that good-driving, low-income people often pay more
for auto insurance than wealthier people with accidents and
tickets. It is unquestionably a defrauding of American
consumers when insurers charge safe drivers more than unsafe
drivers for the same coverage.
Fraud against the insurance industry by consumers is a
serious issue. There are two types of such insurance fraud:
hard fraud and soft fraud.
Hard fraud entails somewhat deliberate--someone
deliberately planning or inventing a loss, such as a collision,
auto theft, or fire that is covered by their insurance policy
in order to receive a claim payment. Criminal rings are
sometimes involved in hard fraud schemes and can steal millions
of dollars. The data on hard fraud are fairly reliable since
such data can be collected from criminal case records.
Soft fraud consists of policyholders exaggerating otherwise
legitimate claims. For example, when involved in an automotive
collision, an insured person might claim more damage than
actually occurred. The statistics on the extent of such soft
fraud are unclear, and there are some incentives to overreport
it. Congress should be cautious about claims of soft fraud
exceeding more than a few percent of premium dollars.
A specific consumer's likelihood to commit soft fraud
appears to be impacted by how the consumer sees the insurance
industry's treatment of them to be. The public's perception of
insurers is very negative. If the industry can repair its
image, that could positively impact the degree of fraud against
it.
CFA supports insurer attempts to control fraud, including
the creation of special investigative units to look into
suspicious claims. However, SIUs and other attempts to control
fraud must be reasonable. Such investigations should not go on
for extensive periods while people are not able to return to
their home, for example.
In conclusion, CFA is concerned about insurance fraud. We
are aware of numerous types of fraudulent activity by a few
insurers and by a few consumers using the insurance market,
both of which harm the vast majority of consumers, who are
honest and ethical. Congressional efforts should consider the
whole range of frauds being committed in the insurance market,
and the prospect of fraud should not be used to justify an
unscrupulous attack on innocent consumers seeking claims
payments.
Thank you.
[The prepared statement of Ms. Weintraub follows:]
Prepared Statement of Rachel Weintraub, Legislative Director and
General Counsel, Consumer Federation of America
Chairman Moran, Ranking Member Blumenthal and other members of the
Consumer Protection, Product Safety, Insurance, and Data Security
Subcommittee. I appreciate the opportunity to provide testimony on
Consumer Federation of America's (CFA) perspectives on Insurance Fraud
in America. I am Rachel Weintraub, Legislative Director and General
Counsel at CFA. CFA is a non-profit association of approximately 280
pro-consumer groups that was founded in 1968 to advance the consumer
interest through advocacy and education.
CFA is concerned about insurance fraud and is working to contain it
as well as document and identify it. We were a founding member of the
Coalition Against Insurance Fraud and continue even today to serve on
its Board of Directors and we conduct research to document inequality
in the insurance market, especially the auto insurance market.
CFA is concerned about both kinds of fraud: that is, fraud by the
insurance industry against consumers and fraud by consumers against the
industry. Both cost consumers dearly.
Fraud by the Insurance Industry Against Consumers
I will first focus on fraud by the insurance industry against
consumers. Although most insurance companies and agents/brokers are
honest and ethical, fraud by the insurance industry against consumers
is a serious problem. It costs consumers when they pay premiums for
coverage they do not need; when they pay excessive and actuarially
unjustifiable rates for coverages they are required to buy; when they
buy insurance priced in an unfairly discriminatory manner; and it costs
them when they are presented with inadequate and misleading policy
language that is constructed to make them believe they are purchasing
protection they will never, in fact, receive. And, of course, fraud by
insurers also costs consumers who face unfairly denied claims,
underpaid claims and claims that take far too long to be paid.
Examples abound, and here are just a few of many:
Insurers, as Congress knows, have used faked engineering
reports to deny flood insurance claims after Superstorm Sandy.
This was documented by 60 Minutes in ``The Storm After the
Storm.'' \1\
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\1\ https://www.youtube.com/watch?v=11VjWZvA0Ig
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At times insurers participate in the sale of unnecessary
policies. A recent example is the placing of unnecessary auto
insurance onto the auto loan payments of borrowers who were not
advised of such action by Wells Fargo. This was documented just
last week by numerous news outlets.\2\
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\2\ https://www.nytimes.com/2017/07/27/business/wells-fargo-
unwanted-auto-insurance.html; https://www.reuters.com/article/us-wells-
fargo-insurance-idUSKBN1AG20Q; https://www.washingtonpost.com/news/
business/wp/2017/07/28/wells-fargo-charged-570000-customers-for-auto-
insurance-they-didnt-need-potentially-forced-some-to-have-cars-
repossessed/?utm_term=.9073ef7bfeff
A Medicare Advantage Insurer settled a whistleblower case
for $32 million, in a case where the insurer exaggerated how
sick patients were.\3\
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\3\ http://www.npr.org/sections/health-shots/2017/05/31/530868367/
medicare-advantage-insurers-settle-whistleblower-suit-for-32-million
Two top executives of AIG settled an accounting fraud case,
agreeing to return almost $10 million in salary.\4\
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\4\ https://www.nytimes.com/2017/02/10/business/dealbook/former-
aig-executives-reach-settlement-in-accounting-fraud-case.html?_r=0
In just the last few years, insurers have begun to raise
rates on people who do not shop around, a process called
``price optimization.'' In this scam, insurers use information
from non-driving related sources such as third-party consumer
databases, grocery store shopping records, and social media
analysis to determine if a person does or does not shop when
prices go up. They use this information to raise the rate above
the actuarially sound price on the non-shopping consumer. This
is illegal in every state, since state laws require prices to
be based on driving risk, not shopping tendency. Since CFA
raised the issue three years ago, 20 states have banned the
practice, but we believe this fraudulent pricing system is
---------------------------------------------------------------------------
still being deployed or introduced in several states.
A quick search over the last month or so of headlines from
Insurance Business Magazine identifies some other examples of the
consistent drumbeat of insurer/agent fraud against consumers:
A San Diego insurance agent was charged in connection with
allegedly scamming five people--three of them seniors--out of a
total of more than $1.1 million.\5\ (July 24, 2017)
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\5\ http://www.insurancebusinessmag.com/us/news/breaking-news/
insurance-agent-charged-in-1-1-million-scam-73861.aspx
A Connecticut man presented himself as an insurance agent
after the state pulled his license and is headed to prison for
nearly four years. The insurance agent pleaded guilty to wire
fraud, according to the San Francisco Chronicle. Prosecutors
say he scammed people out of more than $874,000.\6\ (July 21,
2017)
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\6\ http://www.insurancebusinessmag.com/us/news/breaking-news/fake-
insurance-agent-gets-nearly-four-years-73739.aspx
Farmers Insurance Exchange will refund $315,000 to more than
1,600 Minnesota drivers, after authorities found that the firm
wrongfully charged the drivers with higher auto insurance
rates. The state's Commerce Department said the insurer charged
drivers with higher rates solely because they were home renters
rather than homeowners. Minnesota law prohibits firms from
setting auto insurance rates or benefits, or denying coverage,
based on a driver's status as a residential tenant.\7\ (July
19, 2017)
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\7\ http://www.insurancebusinessmag.com/us/news/breaking-news/
farmers-insurance-exchange-must-make-refunds-to-1600-drivers-73452.aspx
A U.S. District Court has approved the $32.5 million
settlement of a racial discrimination case against MetLife
filed by a class of African-American former MetLife financial
services representatives. The former employees filed the case
against the insurer in 2015. They accused the firm of
maintaining ``a racially biased corporate culture and
stereotypical views about the skills, abilities, and potential
of African-Americans that affect personnel,'' a court docket
said.\8\ (July 12, 2017)
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\8\ http://www.insurancebusinessmag.com/us/news/breaking-news/
judge-approves-metlifes-32-5-million-race-bias-class-action-settlement-
72878.aspx
A health care system suing Chubb paid itself ``excessive''
amounts from employee retirement programs and ``unjustly
enriched itself,'' the insurer claims.\9\ (July 7, 2017)
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\9\ http://www.insurancebusinessmag.com/us/news/breaking-news/
insurer-claims-health-system-unjustly-enriched-itself-72483.aspx
A Colorado insurance broker was sentenced to 12 years in
state prison on Monday after he pleaded guilty to several
counts of forgery, insurance fraud, and theft. The insurance
broker pocketed some $130,000 in workers' compensation premiums
that he wrote while his license was revoked. Previously, this
broker had been sentenced to two years of probation and had his
license revoked in 2014 after pleading guilty to forgery in
what was described as a similar case.\10\ (June 28, 2017)
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\10\ http://www.insurancebusinessmag.com/us/news/workers-comp/
insurance-broker-gets-long-custodial-sentence-after-fraud-71698.aspx
A recommended Federal class-action lawsuit against Allstate
has been approved by the Pennsylvania Supreme Court. The class-
action is in relation to Allstate's policy that mandates
claimants undergo medical exams by a doctor of the carrier's
preference before they can receive benefits.\11\ (June 21,
2017)
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\11\ (http://www.insurancebusinessmag.com/us/news/breaking-news/
allstate-hit-by-another-potential-class-action-71111.aspx
The owners of a California insurance agency have been
indicted by a Federal grand jury for allegedly sending more
than a million pieces of mail without paying the postage.\12\
(June 13, 2017)
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\12\ http://www.insurancebusinessmag.com/us/news/breaking-news/
insurance-agents-indicted-for-300000-mail-fraud-70249.aspx
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A. Auto Insurance Pricing
CFA has undertaken a series of reports on the plight of good-
driving, lower-income Americans. These consumers are unable to afford
state-required auto insurance due to the use of unfair rating factors
related to income. Our research has identified that good-driving low-
income people often pay more for auto insurance than wealthier people
with accidents and tickets. It is, unquestionably, a defrauding of
American consumers when insurers charge safe drivers more than unsafe
drivers for the same coverage.
CFA's research addresses several different aspects of auto
insurance rates, premiums and the market, but all point to a few key
findings:
The cost of state-mandated basic liability insurance is
higher than many lower-income Americans can afford and the
number of uninsured citizens in this category is higher than
the national average as a result;
Insurers use a variety of socio-economic rating factors
unrelated to driving that push auto premiums up for lower-
income Americans despite good driving records; and
Stronger state consumer protections related to auto
insurance rate setting leads to greater access to and more
stability in auto insurance markets.
A description of each of the reports that CFA has issued since 2012
is available in the attached appendix. This is followed by a summary of
the key recommendations from the reports. Our research documents that
states require good-driving, lower-income Americans to purchase auto
insurance to drive and harshly penalize them for driving without that
insurance. But most states do not regulate the use of factors that
raise rates on widows, renters, low-wage workers, people with less
education and other factors that adversely discriminate against the
poor.
B. Actions Against Insurers for Bad Faith
There are hundreds of legal actions against insurers for bad faith.
Consumers pay money for premiums, often for many years, prior to an
event occurring or a claim being filed. Consumers believe that insurers
will do right by them if they file a claim. Once a claim is filed, the
insurer owes the consumer a duty of utmost good faith in handling the
claim. If the insurer improperly denies or delays payment of the claim,
it is possible that the insurer has not acted in good faith. It is
likely that the number of times consumers are defrauded by insurer bad
faith is orders of magnitude larger than the number of times insurers
are sued for this kind of fraud. For many consumers, this fraud comes
in the form of an insurer's low-ball offer--on a total loss claim on a
car insurance policy, for example--that may short the consumer by
$1,500, which is devastating to a consumer but not a viable legal
action against the insurance company either because the cost of
litigation is too high or because many states prohibit such suits.
C. Fraud Against Consumers by Other Entities Involved in the Insurance
Market
1. Storm Chasers
CFA warns consumers about ``storm chasers,'' which are repair firms
that come in after a storm and offer to repair structures. Often, they
have no local connections, may not have proper insurance for their
workers, and do subpar repairs. They have opportunities to do work,
particularly after catastrophic weather events, because there are so
many repairs that need to be done in a relatively short time. Insurers
want to settle claims from storms as quickly as possible. However,
insurers should work with reliable contractors to make sure that there
are sufficient workers and supplies in the catastrophe area as repairs
must be done in a timely way. State government action could assist in
making sure that there are sufficient resources available to complete
repairs promptly.
As bad as storm chasers can be, those that do acceptable work do
help to get necessary work completed. The market demands an increase of
contractors after a storm, and there would be value in helping
communities identify those who will not cut corners in the repairs and
can meet standards of quality that will equal the promises contained in
the insurance contract. Consumers would be served by better tools to
help distinguish between the fraudulent storm chasers and those
contractors who arrive in the wake of a catastrophe not just looking
for a quick buck but to provide a quality service.
Regardless of what additional resources might be made available in
the future, CFA always advises consumers to make sure that the people
they contract with for repairs after a storm are (1) capable of doing
the work well, (2) properly credentialed, and (3) have references. We
urge consumers to check with their insurance company if they have
questions about a contractor who approaches them.
2. Opioids
Insurers have the data to monitor opioid prescription levels and
should be a force for good in finding ways to tackle this mounting
problem. We encourage insurers' full cooperation in working with
government and others seeking solutions. However, insurers can also be
part of the problem in a number of ways. First and most importantly,
some insurers will not pay for alternatives to opioids such as steroid
injections, physical therapy and nerve blocks.\13\ Second, insurers try
to do the right thing by limiting the amount of opioids to a person but
sometimes are not sophisticated in doing so, since some patients have
been on the specific drug for a long time and need more of the drug to
get the necessary relief. In these cases, the patients often turn to
street drugs, exacerbating the problem.
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\13\ http://addictionblog.org/treatment/health-insurance-and-its-
influence-on-the-opioid-epidemic/
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We could list many other examples of frauds against consumers by
insurers. The point that CFA wants to make clear is that fraud against
consumers by insurers needs Congressional attention.
II. Fraud Against the Insurance Industry by Consumers
Fraud against the insurance industry by consumers is a serious
issue. There are two types of such insurance fraud: hard fraud and soft
fraud.
Hard fraud entails someone deliberately planning or inventing a
loss, such as a collision, auto theft, or fire that is covered by their
insurance policy in order to receive a claim payment. Criminal rings
are sometimes involved in hard fraud schemes that can steal millions of
dollars. The data on hard fraud are fairly reliable, since such data
can be collected from criminal case records.\14\
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\14\ http://www.insurance.ca.gov/0400-news/0200-studies-reports/
0700-commissioner-report/upload/AnnualReport2013.pdf, at page 39.
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Soft fraud consists of policyholders exaggerating otherwise
legitimate claims. For example, when involved in an automotive
collision an insured person might claim more damage than actually
occurred.
The statistics on the extent of such soft fraud are very squishy
and the insurers seem to have some incentives to over-report it.
Congress should be very cautious about claims of soft fraud exceeding
more than a few percent of premium dollars.
Some consumers believe that it is acceptable to increase insurance
claims to make up for deductibles or because they believe their insurer
has been unfair to them in some way. The Coalition Against Insurance
Fraud found these disturbing attitudes among consumers;\15\
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\15\ http://www.insurancefraud.org/statistics.htm
24 percent say it's acceptable to pad an insurance claim to
make up for the deductible--that's a drop since 33 percent said
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it was acceptable in 2002;
18 percent believe it's acceptable to pad a claim to make up
for premiums paid in the past;
Younger males were much more likely to condone claim
padding, and 23 percent of 18 to 34-year-old males say it's
alright to increase claims to make up for earlier premiums.
This compares with 5 percent of older males and 8 percent of
females of the same age;
More than half (55 percent) of U.S. consumers say poor
service from an insurance company is more likely to cause a
person to defraud that insurer;
More than three-quarters (76 percent) say they're more
likely commit insurance fraud during an economic downturn than
during normal times (up from 66 percent in 2003)
A specific consumer's likelihood to commit soft fraud appears to be
impacted by how the consumer sees the insurance industry's treatment of
them to be. The public's perception of insurers is very negative. The
2015 Harris Poll on consumer attitudes towards various industries rates
Insurance as 35 percent positive (only Financial Services, Tobacco and
Government rank lower).\16\ If the industry can repair its image, that
could positively impact the degree of fraud against it.
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\16\ https://skift.com/wp-content/uploads/2015/02/2015-RQ-Media-
Release-Report_020415.pdf at page 13.
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CFA supports insurer attempts to control fraud, including the
creation of Special Investigative Units (SIUs) to look into suspicious
claims. However, SIUs and other attempts to control fraud must be
reasonable. There are examples of such investigations going on for
extensive periods of time while, for example, people are not able to
return to their home because of the investigation into alleged arson
until the damage is repaired. Frequently, these delays go on for an
excessive period only to conclude with the finding that there was no
fraud. Steps must be taken to assure that insurer fraud investigations
are completed in a timely way so innocent people are not left hanging,
for example, without a place to live for month after month.
III. Conclusion
In conclusion, CFA is concerned about insurance fraud; we are aware
of numerous types of fraudulent activity by a few insurers and by a few
consumers using the insurance market, both of which harm the vast
majority of consumers who are honest and ethical. We would welcome
Congress undertaking research to document and to minimize these types
of harmful actions that put consumers at great economic disadvantage,
so long as the effort is deployed in such a way that considers the
whole range of frauds being committed in the insurance market, as we
have outlined here. We support efforts to control these types of fraud,
with the important warning that the prospect of fraud should not be
used as a device to justify an unscrupulous attack on innocent
consumers seeking claims payments.
Appendix
Consumer Federation of America Auto Insurance Research
3 Major Auto Insurers Usually Charge Higher Prices to Good Drivers
Previously Insured by Non-Standard Insurers Consumer Federation
of
America (2017)
Auto insurance giants Allstate, Farmers, and American Family often
charge nine to fifteen percent higher premiums to good drivers
previously insured by smaller, ``non -standard'' insurers than those
who had coverage from State Farm or other primary competitors. Allstate
charged 15 percent ($235) more on average to good drivers previously
covered by non-standard auto insurers such as Safe Auto Insurance and
Equity Insurance Co. than if the y had been previously insured by State
Farm. Farmers charged nine percent ($260) more on average to customers
coming from non-standard companies, including Titan Insurance and
Access Insurance Company, than those hailing from State Farm policies.
American Family Insurance, the Nation's ninth largest auto insurer,
charged nine percent ($166) more on average to customers previously
with non-standard carriers, such as Direct General and Safeway
Insurance.
Major Insurance Companies Raise Premiums After Not-At-Fault Accidents
Consumer Federation of America (2017)
Safe drivers who are in accidents caused by others often see auto
insurance rate hikes. The research analyzed premium quotes in 10 cities
from five of the Nation's largest auto insurers. Among the cities
tested, drivers in New York City and Baltimore pay out the most for an
accident where the driver did nothing wrong, and customers in Chicago
and Kansas City also face average increases of 10 percent or more when
another driver crashes into them. CFA's research over recent years has
consistently found that good drivers with certain socio--economic
characteristics that suggest lower incomes generally pay more for auto
insurance than higher-income drivers with the same driving record. This
pattern holds when it comes to penalizing drivers for accidents in
which they were not at fault. Higher-income drivers paid $78 more on
average after a not-at-fault accident, while moderate-income drivers
paid $208 more on average after a not-at-fault accident.
Major Insurers Charge Moderate-Income Customers With Perfect Driving
Records More Than High-Income Customers With Recent Accidents
Consumer Federation of America (2016)
Auto insurance prices are often more closely aligned with personal
economic characteristics than with drivers' accident and ticket
history. Testing premiums offered by the Nation's five largest insurers
in ten U.S. cities for drivers with different socio-economic
characteristics and different driving records, CFA found surprising
results, including: upper-income drivers with DUIs often pay less than
good drivers of modest means with no accidents or tickets on their
driving record; moderate-income drivers with perfect records pay more
than upper-income drivers who caused an accident in which someone was
injured; progressive and GEICO consistently charge upper-income bad
drivers less than moderate-income good drivers; moderate-income good
drivers often pay more than upper-income drivers with multiple points
on their record.
Major Auto Insurers Raise Rates Based on Economic Factors Consumer
Federation of America (2016)
In most states auto insurance premiums are driven in large measure
by economic factors that are unrelated to driving safety, a practice
that most Americans consider unfair. Among the most common of the
individual economic and socio-economic characteristics used by auto
insurers are motorists' level of education, occupation, homeownership
status, prior purchase of insurance, and marital status. Because each
of these factors are associated with an individual's economic status
and because insurers consistently use each factor to push premiums up
for drivers of lesser economic means, the combined effect of insurers'
use of these factors can result in considerably higher prices for low--
and moderate-income Americans, leaving many overburdened by unfairly
high premiums and others unable to afford insurance at all.
Good Drivers Pay More for Basic Auto Insurance If They Rent Rather Than
Own Their Home Consumer Federation of America (2016)
Several major auto insurance carriers hike rates on good drivers
who rent their home rather than own it. CFA tested the premiums charged
by seven large insurers to a good driver in ten cities. For each test
we only changed the driver's homeownership status and found that
renters were charged seven percent more on average--$112 per year--for
a minimum limits policy than insurers charged drivers who own their
homes, everything else being equal.
Price of Mandatory Auto Insurance in Predominantly African-American
Communities Consumer Federation of America (2015)
CFA released research comparing auto insurance prices in
predominantly African-American Communities with prices paid in
predominantly white communities. Nationwide, in communities where more
than three quarters of the residents are African American, premiums
average 71 percent higher than in those with populations that are less
than one quarter African American after adjusting for density and
income. In Baltimore, New York, DC, Detroit, Boston and other cities,
the disparity of premiums is more than 50 percent between predominantly
African American and predominantly white ZIP codes.
New Research Shows That Most Major Auto Insurers Vary Prices
Considerably Depending on Marital Status Consumer Federation of
America (2015)
CFA released research on how insurers utilize marital status in
their pricing of auto insurance policies. CFA questions the fairness
and relation to risk of this pricing by most major insurers,
particularly their practice of hiking rates on women whose husbands die
by 20 percent on average, the ``widow penalty.''
Auto Insurers Fail to Reward Low Mileage Drivers Consumer Federation of
America (2015)
CFA released research showing that large auto insurers frequently
fail to reward drivers with low mileage despite a strong relationship
between this mileage and insurance claims. The study found that three
of the five largest insurers often give low-mileage drivers no break at
all. In a 2012 nationwide survey conducted by ORC International for
CFA, 61 percent of respondents said that it was fair for auto insurers
to use mileage in pricing auto insurance.
Large Auto Insurers Charge High Prices, to a Typical Lower-Income Safe
Driver with Car Financing, for Minimal Coverage Consumer
Federation of America (2014)
CFA found that annual auto insurance premiums are especially high
for the estimated eight million low-and moderate-income drivers who
finance their car purchases. These drivers must purchase the
comprehensive and collision coverage required by auto lenders in
addition to the liability coverage required by states. In the 15 cities
CFA surveyed, annual premium quotes were almost always more than $900
and were usually more than $1,500. In a related national opinion survey
undertaken by ORC International for CFA, nearly four--fifths of
respondents (79 percent) said that a fair annual cost for this auto
insurance coverage was less than $750. One-half (50 percent) said that
a fair annual cost was less than $500. Respondents were asked what they
thought was a reasonable annual cost for a ``30-year old woman with a
modest income and ten years driving experience with no accidents or
moving violations'' for required liability, collision, and
comprehensive insurance coverage.
High Price of Mandatory Auto Insurance for Lower Income Households
Consumer Federation of America (2014)
The country's five largest auto insurance companies do not make a
basic auto insurance policy available to typical safe drivers for less
than $500 per year in over 2,300 urban and suburban ZIP codes including
484, or more than a third, of the Nation's lowest-income ZIP codes. In
the report, CFA analyzed 81,000 premium quotes for State Farm,
Allstate, Farmers, Progressive, GEICO and each of their affiliates in
all ZIP codes in 50 large urban regions, which include urban, suburban
and adjacent rural communities. CFA also reviewed the premium quotes
from an additional 58 insurance companies--comprising a total of 207
insurance affiliates including those of the five largest insurers--
which produced similar results.
In 24 of the 50 urban regions, there was at least one lower-income
ZIP code where annual premiums for a minimum limits policy exceeded
$500 from every major insurer. In nine of these 50 areas--Miami/Ft.
Lauderdale, Detroit, Minneapolis/St. Paul, Tampa/St. Petersburg,
Baltimore, Orlando, Jacksonville, Hartford, and New Orleans--prices
exceeded $500 in all lower-income ZIP codes.
This report included the finding from a recent national survey that
more than three-quarters of Americans (76 percent) believe that a
``fair annual cost'' for state-mandated insurance for a typical good
driver with no accidents and no tickets should be less than $500.
Uninsured Drivers: A Societal Dilemma in Need of a Solution Consumer
Federation of America (2014)
This report found that most uninsured drivers in America have low
incomes and cannot afford to purchase the mandatory minimum liability
coverage required by their state. The report also revealed that these
low-income drivers are increasingly adversely impacted by state and
local government actions, including raising liability requirements
(driving up premiums), more rigorous enforcement, and stiffer
penalties. However, there is little difference in uninsured rates
between those states that penalize uninsured drivers harshly and those
that do not. The report reviewed penalties for driving without auto
insurance in every state and found some of these very harsh penalties
for lower-income Americans who truly cannot afford the required
insurance:
Fourteen states allow jail sentences for a first offense.
Thirty-two states allow for the possibility of license
suspension for a first offense.
Thirty-three states have possible fines of $500 or more for
a first offense.
CFA Analysis Shows Auto Insurers Charge Higher Rates to Drivers with
Less Education and Lower-Status Jobs Consumer Federation of
America (2013)
Several major auto insurers place a heavy emphasis on their
customers' occupation and education when setting prices, forcing lesser
educated, blue collar workers with good driving records to pay
substantially higher premiums than drivers with more education and
higher paying jobs. For example:
GEICO charges a good driver in Seattle 45 percent more if
she is a factory worker with a high school degree than if she
is a plant superintendent with a bachelor degree;
Progressive charges the factory worker 33 percent more in
Baltimore; and
Liberty Mutual charges the worker 13 percent more in
Houston.
The reported also highlighted a national survey that found that
about two-thirds of Americans believe that it is unfair to use
education and occupation when pricing insurance policies.
What Works: A Review of Auto Insurance Rate Regulation in America and
How Best Practices Save Billions of Dollars Consumer Federation
of
America (2013)
Over the past quarter century, auto insurance expenditures in
America have increased by 43 percent on average and by as much as 108
percent. These increases occurred despite substantial gains in
automobile safety and the arrival of several new players in the
insurance markets. Only in California, where a 1988 ballot initiative
transformed oversight of the industry and curtailed some of its most
anti-consumer practices, did insurance prices fall during the period,
resulting in more than $4 billion in annual savings for California
drivers. This report used NAIC data to assess the impact of different
types of insurance market oversight (prior approval, file and use, use
and file, flex rating, and deregulation) on rates, industry
profitability, and competition. It also provided a detailed analysis of
California's experience with the Nation's most consumer protective
rules governing the auto insurance market.
Largest Auto Insurers Frequently Charge Higher Premiums To Safe
Drivers Than To Those Responsible For Accidents Consumer
Federation of America (2013)
CFA analyzed premium quotes from the five largest auto insurers in
twelve major cities and found that two-thirds of the time, insurers
would charge a working class driver with a 45 day lapse in coverage and
a perfect driving record more than companies charged an executive with
no lapse in coverage but a recent at-fault accident on their record. In
60 percent of the tests, the lower-income good driver was charged at
least 25 percent more than the higher-income driver who had caused an
accident.
Use of Credit Scores by Auto Insurers Adversely Impacts Low- and
Moderate-Income Drivers Consumer Federation of America (2013)
Holding all other factors constant, the two largest auto insurers,
State Farm and Allstate, charge moderate-income drivers with poor
credit scores much higher prices than drivers with excellent scores.
Using data purchased from a third party vendor of insurance rate
information, this report showed that State Farm increased rates for the
low credit score driver an average of 127 percent over the high credit
score customer and Allstate raised rates by 39 percent, costing State
Farm and Allstate customers an average of more than $700 and $350,
respectively, based solely on credit scores.
The report also pointed to a recent national survey conducted for
CFA that found that, by a greater than two to one ratio, Americans
reject insurer use of credit scores in their pricing of auto insurance
policies.
Auto Insurers Charge High and Variable Rate for Minimum Coverage to
Good Drivers from Moderate-Income Areas Consumer Federation of
America (2012)
This report used extensive website testing to show that good
drivers--those with no accidents or moving violations--who live in
moderate-income areas in 15 cities were being quoted high auto
insurance rates by major insurers for the minimum liability coverage
required by those states. Over half (56 percent) of the rate quotes to
two typical moderate -income drivers were over $1,000, and nearly one-
third of the quotes (32 percent) exceeded $1,500.
The report also presents findings from a national survey that shows
that lower -income families report knowing people who drive without
insurance at a much higher rate than higher-income drivers. Further,
nearly 80 percent of drivers agreed that ``they [the uninsured drivers]
do so because they need a car but can't afford the insurance.''
Lower-income Households and the Auto Insurance Marketplace: Challenges
and Opportunities Consumer Federation of America (2012)
Access to an automobile plays a critical role in creating economic
opportunities for lower-income Americans and the affordability of auto
insurance plays a key role in this access. This report provides an
overview of the auto insurance market with a detailed discussion of
low--and moderate-income (LMI) households' participation in the auto
insurance market. The report summarizes pricing information collected
by CFA as well as data related to availability, residual markets and
uninsured motorists.
At the heart of this report, which was the first in the series of
reports outlined above, is t he finding that for millions of lower-
income Americans auto insurance is unaffordable and inaccessible
despite their unblemished driving records. High priced auto insurance,
which often leads LMI drivers to choose between giving up their cars or
driving un insured, creates serious economic hardships, and the issue
must be addressed by policymakers and regulators. The report concludes
with a summary of the issues, obstacles and needs facing LMI customers
and policy suggestions for addressing them.\1\
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\1\ Links to the series with thumbnail descriptions of each report
ac be accessed at: http://consumerfed.org/cfa-studies-on-the-plight-of-
low-and-moderate-income-good-drivers-in-affording-state-required-auto-
insurance./
Senator Moran. Thank you very much.
Let me just ask a few general questions, and then I'll turn
to the Ranking Member.
Maybe it's with you, Mr. Doak. Our states share similar
kind of casualty opportunities for insurance claims to be paid
in tornadoes, windstorm, hail, and most recently, fires.
Mr. Doak. Yes, sir.
Senator Moran. Where is the circumstance in which that
fraud is likely to occur? Somebody has a hailstorm or there's a
tornado that goes through town, what are the places that are
most significant opportunities for fraud?
Mr. Doak. Sure. And thank you, Senator. Commissioner Selzer
and I have talked about this, and he has actually attended the
National Tornado Summit, which we host in Oklahoma City with
several other of our colleagues from around the United States
to talk specifically about natural catastrophes and disasters,
and what follows after that is unfortunately there is a high
propensity for fraud. And, unfortunately, most of the folks
that are taken advantage of first in those natural catastrophe
events, whether it be Sandy, Katrina, some of those events, are
seniors, who we want to protect and make sure that they're well
educated.
But we also see some of the basic things as after that size
scalable catastrophe example, the Moore tornado not too long
ago, we had over 80,000 claims in a very concentrated area. The
anti-fraud units worked, and we actually had the anti-fraud
unit from the State of North Carolina came and joined us
because of the very specific job that they do in deterrence.
You have folks that go through these neighborhoods that really
prey upon unsuspecting consumers that have never had this size
of a catastrophe. So you have folks that are asking them,
``We'll tarp your roofs,'' and then they'll put liens on their
property, and they'll find out later through the claims process
that there is a lien on the property. You have unscrupulous
contractors that take advantage of folks relative to roof
damage and hail. Whether it's a complete loss or partial loss,
a lot of times those find out that they are full losses.
So there are many things that happen there. But consumers,
at that particular point in time, for those large-scale
losses--hail, tornado--we just recently showed you the picture
of the one in Elk City, 100 homes, but the contractors that
descend on the area, we try to encourage them, Senator, to use
local reputable contractors from their community where they
know who they are, but when folks come in across state lines,
many times that's where you see the fraudulent activity
happening.
Senator Moran. A disreputable contractor, somebody who
enters into a contract with a homeowner following a natural
disaster, how does that become insurance fraud as compared to
fraud?
Mr. Doak. Right. Well, when it deals with the insurance
policy, when they're actually doing work and then billing it
back to the insurance company for some type of fraudulent
activity, that's where it crosses the line into the insurance
issues no matter what state they're in, is if they're getting
payment from the insurance companies, that's where the fraud is
happening. And that can even be a first dollar because if
they've got a deductible to meet, many times consumers are
using that out-of-pocket expense to tarp a roof, to have any
type of activity done on their home. In a major catastrophe,
they're keeping those receipts because all of those are applied
toward that total insurance claim. So hopefully that answers
your question.
But one of the things in Moore, Oklahoma, that really is I
think a best practice for the country is the registration of
contractors that come into an area. And we believe that that
should be done at the local community level where there is
recourse. If someone comes in from out of state, they register
at the local municipality, which it's very, very economical,
but they show that they've got liability insurance and there's
recourse if their workers are hurt or injured on the insured's
property, but there is some recourse to find them, they're just
not flight-by-nights.
So there are some things that we've learned from other
communities around the United States that really have been best
practices.
Senator Moran. Perhaps for all of the panelists, Ms.
Weintraub raises the topic of fraud committed by the insurance
company. I think perhaps stereotypically we think of a consumer
or a third party as the perpetrator of fraud. Do you see what
Ms. Weintraub has described? And do you take that seriously?
And are there efforts within the industry to make sure that the
insurance companies and their employees, their agents, behave
in a non-criminal manner, in an ethical way?
Mr. Doak. Absolutely. If that's directed toward me, we
absolutely do. We've got the insurance commissioners, whenever
there are complaints that are levied, as you've outlined, the
companies, the insurance commissioners, and the departments
take those very, very seriously. Insurance fraud by companies,
if there is unfair claims practices, if they're not treating
people fairly, if they are using some type of practice behind
the scenes, as she mentioned, that's something that state
regulators take very, very seriously. Other colleagues might
have some comments, but that's very high on our radar for all
state departments around the country. When we hear of those
things, we investigate those and follow up on them in a pretty
timely manner.
Senator Moran. Is there a way to estimate--to other
panelists, is there a way to estimate the cost to consumers of
that kind of fraud--fraud committed by companies and their
agents?
Mr. Kevelighan. Maybe I can--as an industry representative,
maybe I can speak to that. And I've heard a term used both by
Ranking Member Blumenthal as well as Ms. Weintraub, and it was
``vast majority,'' and I think that's something to take into
consideration. We all know that it only takes one instance to
damage reputation, but the vast majority of insurers are
working very closely with their regulators. All policies have
to be--all policy terms, conditions have to be approved by the
regulatory community and their state regulators.
So there's a very direct relationship here with the
regulatory community. The insurers want to get this right. They
want to make sure they're providing the right protection. And
there are success stories. So if we look recently at Sandy, in
the first 6 months, we had over 90 percent of the claims paid.
Now, we can look at specific instances where we had troubles,
and I think if you look at any industry, you're going to find
those things. But the vast majority of this industry is
dedicated to serving the consumer and to make sure that it's
rebuilding their lives.
Senator Moran. Anyone else? Mr. Jay?
Mr. Jay. Yes, Mr. Chairman, I think that's an excellent
question. And following up on what Ms. Weintraub said as far as
the industry doesn't like the few bad apples that are out
there, but a lot of these scams are perpetrated by rogue
insurance adjusters and especially rogue insurance agents. And
at one time, insurers really didn't do a very good job in
policing their own employees on this. I think that's changed
today because of pressure from regulatory bodies, but also
because I think it's in the insurers' best interest, and they
do want to make sure the consumers are protected and that their
own reputations are protected.
So in those areas, I think it is getting better, but some
of these other instances that you're taking a look at, I think
you also have to distinguish between what is a bad practice on
behalf of an insurance company that's harming consumers and
what may be deemed criminal or civil fraud as defined in the
state statutes. And I think we need remedies for both, but some
may be abuse and some may be outright fraud.
Senator Moran. Yes. I can see a difference between the
frustration that comes with a slow payment for the indemnity,
the check, or the bureaucracy that comes with filing the claim.
That's different, I think, than outright fraud, trying to deny
the consumer what they're due.
Senator Blumenthal.
Senator Blumenthal. Thank you very much, Mr. Chairman.
And again welcome to all of you.
I want to talk about an issue that is of grave concern to
Connecticut and possibly all of the Northeast and the country,
and it goes by name of pyrrhotite. Few in this room would know
how to spell it. And not many around the country would know
about it, but it is well known in Connecticut and in
Massachusetts and other parts of the Northeast, and it is an
example of the kind of insurance practice that may be
tantamount to fraud, certainly involve deceptive and misleading
practices, and unfortunately has cost hundreds of Connecticut
homeowners possibly their life saving.
Hundreds of homes in Connecticut, mostly working and middle
class families, are reported to have cracking or crumbling
foundations. Those homes are quickly declining in value. Some
have approached the point of worthlessness. The only known
solution is to replace the entire foundation at costs exceeding
$150,000 each. The fear is that this condition could spread to
thousands of other homes, whose foundations were also poured
using concrete aggregate from a particular quarry that contains
high levels of a naturally occurring mineral called pyrrhotite.
Insurers have been unwilling, they have been unwilling, to
provide desperately needed assistance to these homeowners.
Instead of alerting their customers about the risks once the
insurer became aware of them, they surreptitiously changed the
policies, they updated the policies, to strictly define
coverage of, quote, collapse, end quote, to only, quote, abrupt
collapse. And they added foundations to the list of policy
exclusion.
They never properly told their customers what they were
doing. They never told them the reason they were doing it. They
never adequately notified them so the homeowners could take
steps to protect themselves either by rebuilding or taking
construction precautions about the foundation or taking new
policies that cover this problem. Insurers clearly knew there
was a problem with crumbling foundations before homeowners
knew, and they immediately sought to shield their liability, in
other words, protect themselves, rather than protect their
customers.
I have highlighted the responsibility of insurers to do
more. Some have offered, but most have refused to step up and
honor their obligation to these homeowners. And I am out of
patience. There have been lawsuits. So far, I have declined to
enter them, but I think I and my colleagues and others are at
the point of wanting more action and more compensation for
these homeowners whose life savings are at risk, whose homes
are not only crumbling, but whose financial well-being are
crumbling as well.
So, Mr. Kevelighan, when insurers become aware of a
problem, as they did here, don't they have an obligation to
notify and inform their consumers, as insurers failed to do
here, that they are literally changing their policies, the
wording of the policies, that will deprive them of adequate
compensation for this kind of policy problem?
Mr. Kevelighan. Well, I know this issue, and it is an
unfortunate one, and we've paid very close attention to it at
the Insurance Information Institute, and we understand people
are very troubled financially as a result of this. It's
something that happened as a result of construction and
manufacturing that occurred 15 or so years ago. And as a
homeowner's policy, it is standard, and we've seen this in
other states before, where we have defective materials. Those
are--it's a standard exclusion in an insurance policy, so it's
not specific to Connecticut.
Senator Blumenthal. So this issue is potentially
widespread.
Mr. Kevelighan. I don't know--we only know of this
particular issue in Connecticut, and I----
Senator Blumenthal. Well, when I say the issue, I don't
mean pyrrhotite, I mean changing policies so as to, in effect,
exclude a problem that the insurers know is looming that will
in effect rob homeowners of their life savings. That is the
issue, not pyrrhotite, it's a larger issue, it's the practice
among insurers of changing policies. And you're telling me that
this kind of, in your words, issue, in my words, potential
fraud, is wider than just Connecticut.
Mr. Kevelighan. I should clarify. The exclusion of
defective construction materials is a standard exclusion in a
homeowner's policy.
Now, back to what we were talking about earlier about the
regulation of insurance. All policies, any changes, are
approved by the regulator. We work very closely with our
regulators to make sure that they understand what changes are
made. And as far as I understand in the State of Connecticut,
the insurance commissioner has stood by what the changes were.
Now, that doesn't exclude the fact that this is an
unfortunate situation. And I know Governor Malloy has also
asked FEMA for assistance, which has been denied. I understand
that something needs to--everybody wants there to be a
solution, but the solution and whether or not it was something
intentional from the insurance companies, I'm not sure. Again,
this is a standard exclusion.
Senator Blumenthal. Isn't this precisely the reason why
people buy insurance, homeowner's insurance specifically?
Mr. Kevelighan. Everybody buys insurance in order to cover
their risks. Now, what we do at the I.I.I. is to make sure that
people understand how that insurance works, because there are
things that need to happen in terms of standard exclusions for
defective construction materials. That is not a homeowner
insurance policy issue. That may be a manufacturer construction
issue, but it's not one that falls to the personal homeowner
insurance policy.
Senator Blumenthal. I'm going to ask Mr. Doak, doesn't this
situation make your blood boil as an insurance commissioner?
Mr. Doak. Well, Senator, it's unfortunate. We have similar
issues in my state as well. We had a 4.4 earthquake last night
at 9:58 in Edmond, Oklahoma. We have Oklahomans whose
foundations are having particular issues relative to seismic
activity. However, with earthquake insurance, much like the
policy that you're talking about, I do agree with Mr.
Kevelighan, that this, to me personally, is more of a
commercial risk exposure due to the manufacturer or the quarry
that was used, going back to the source, much like there are
cases in Oklahoma are----
Senator Blumenthal. I just want to make sure you
understand, Mr. Doak, what happened here, and I'll analogize it
to the earthquake situation. It is as though the insurers in
your State of Oklahoma figured out, ``Oh, we have earthquakes
in Oklahoma, so we're going to change these policies, because
this could mean a lot of losses for us, to exclude earthquakes,
but we are not going to properly inform consumers.'' So they're
going to wake up today, as many of your fellow Oklahomans did,
with damage from earthquakes, and go to their policy, and the
insurers are going to tell them, ``Oh, we changed that policy.
It's only earthquakes in April in leap years.'' That's the
equivalent of what happened here. It's the lack of proper
notification.
Mr. Doak. Exactly. And this is what I----
Senator Blumenthal. And as an insurance commissioner, and I
would say this to our insurance commissioner, the insurers have
an obligation to do better----
Mr. Doak. No question----
Senator Blumenthal.--and I think everybody on this panel
agrees.
Mr. Doak. No question. The disclosures whenever a product
or a contract is changed, those disclosures, the clients, the
consumers, should be educated on that. It's unfortunate,
though, through the National Association of Insurance
Commissioners, we have the Consumer Board of Trustees, and one
of the challenging efforts that we have on consumer education
is most consumers never read their policies before there is
ever a claim, and when they get these endorsements or
disclosures in the mail where some of the policies are changing
based upon the terms and conditions and regulatory authority,
some of these are changing, but many of them are not read.
But if the clients, if the folks, are not getting the
proper disclosures, I agree with you. I think we're all in
agreement there.
Senator Blumenthal. Well, in my view, there is no question
that the disclosures were totally inadequate, that this conduct
is unconscionable and indefensible, and that there ought to be
adequate redress in the courts.
Mr. Doak. Sure.
Senator Blumenthal. And I will take action to support the
efforts in the courts more vigorously than we have before
because, as I say, I have lost patience with FEMA, with other
sources of recourse. Some of the insurers have stepped up,
recognizing their obligation.
Mr. Doak. Sure.
Senator Blumenthal. But they rightly insist that all of the
insurers be part of the solution so it doesn't fall unjustly on
the ones who want to do the right thing. And so I would call
upon members of this panel to use your moral suasion with your
industry so that all of them do the right thing here because I
think it is a really important example of following moral and
legal responsibility.
I'm going yield, and then I hope we'll have a second round
of questions.
Senator Moran. The Senator from West Virginia, Senator
Capito.
STATEMENT OF HON. SHELLEY MOORE CAPITO,
U.S. SENATOR FROM WEST VIRGINIA
Senator Capito. Thank you. Thank you all. I'm sorry I
missed your testimony, but I do have questions. It's kind of
related along the lines of the tornado issue. In our state, it
happens to be flood, flood catastrophes. I just toured
Mannington, West Virginia, and I know McMechen, West Virginia,
had tremendous floods, homeowners really caught unawares, and
life-altering kinds of things. Unfortunately, we lost two
folks, but a lot of property damage.
How do you recommend that, as a public servant who goes in,
works with the EMS, works with FEMA, works with SBA, to try to
facilitate those conversations with our constituents who are
harmed, how do we inform them or make sure that rural Americans
are not going to be ripe for issues like contractor fraud or
insurance fraud in the case of really a once-in-a-lifetime sort
of event? We can--it's for anybody. So, Mr. Doak, I don't know
if you do anything in Oklahoma.
Mr. Doak. I think one of the things that the NAIC has done
very, very well is provide many different types of consumer
education, consumer tools, at the state level. Many of the
states like mine have put together PSAs. For instance, we have
put together a series of PSAs relative to earthquake, wildfire,
different types, to be able to drive that message at a local
level to understand the claims process or what's covered or not
covered. So in a flood process, those same principles apply
because most folks, when they have that type of catastrophic
event, have never been through it before.
Senator Capito. Right, right.
Mr. Doak. And so it's very, very challenging. And also
that's where the relationship with the insurers that we
regulate, we expect them to provide some of that education, and
through some of their marketing pieces, to be able to
articulate that. But it is very, very challenging, Senator. And
I do agree. I have been to too many sites in my state where
folks have been totally devastated, and they don't understand
the claims process, no matter what peril caused it.
Senator Capito. Right. And one of the things I've noticed,
and I don't know how you avoid this except through education,
is, for instance, in the flood, your first inclination in your
home is to get everything out, just to get it out, obviously
for obvious reasons, health reasons and other reasons, but I
kept saying you've got to document every single thing, you've
got to keep all your receipts for your cleaning fluids, all the
stuff that you--and they sort of give me this blank look like,
``Oh, well, that--,'' you know, you're in such a panic in the
first 48 hours to try to----
Mr. Doak. Yes, ma'am. One of the things my colleagues may
agree on, but one of the things that the NAIC has put together,
and it has been a very effective tool, is a home inventory
tool. They can go out on the website. We try to encourage that
in Oklahoma with the number of catastrophes that we have, but
take pictures of your home, document some of these things.
Senator Capito. Right, right.
Mr. Doak. Because a picture is worth a lot of money when it
comes time to a claims settlement if it's by a flood or
wildfire or whatever the case is.
Senator Capito. Right. I think like I said, that's a good
suggestion.
I'm going to go to Ms. Weintraub about the opioid issue.
Our State of West Virginia unfortunately has a high use of--
we've been hit hard with this opioid abuse issue. We've had
some pain clinic doctors who were recently indicted on fraud
charges. ``Pill mills'' is a term I've heard too much in our
state.
How do you approach this--I read your testimony--in terms
of insurance? How can you be helpful or how do you feel that
the insurance industry can be more helpful in this area?
Ms. Weintraub. Well, first, this is a huge problem across
the country and West Virginia.
Senator Capito. Right.
Ms. Weintraub. And our hearts go out to all of the people
and all the families who are suffering as a result of this
crisis.
Senator Capito. Right.
Ms. Weintraub. Some insurers have the data to monitor
opioid prescription levels, and I think should be, and some
are, a force for good in finding ways to tackle this mounting
problem. We encourage insurers' full cooperation in working
with government and others seeking solutions, but in some ways,
insurers could also be part of the problem.
First, some insurers will not pay for alternatives to
opioids, such as steroid injections or physical therapy and
nerve blocks. And some insurers try to do the right thing by
limiting the amount of opioids a person should be able to
obtain, but sometimes it's not done in the right way, and some
patients have been on a drug for so long that they then turn to
the streets and other much, much less safe alternatives. So in
these occasions, this sort of turning to street drugs
exacerbates the problem.
Senator Capito. I have one second left. So does anybody
have anything to add on that from the insurance perspective?
Mr. Jay.
Mr. Jay. Yes, Senator, that's an excellent question. And
part--almost every state, every state but one, has a drug
monitoring----
Senator Capito. Right.
Mr. Jay.--prescription monitoring program. And some states
have now recognized that if they share some of this data with
insurers, both health and property/casualty, who pay
reimbursement for these drugs, they can find some of these
schemes much more quickly, not only people who are doctor
shopping, but also some of the physicians who are prescribing
and some of the pharmacists who are dispensing these drugs like
giving candy out on the street, and those are the people we've
got to shut down first.
Senator Capito. Right. I would say in terms of the
insurance industry, our state has a pharmaceutical monitoring
system, so if that person who is going to the pharmacy is using
an insurance card, they can and are picked up much more
readily. There is a certain percentage who are paying cash for
this. And some states are not required to input that data into
a pharmaceutical monitoring system. I will say thank you to the
insurance companies in that they have created systems where
it's instantaneous, and if the person goes to the next
pharmacy----
Mr. Jay. Right.
Senator Capito.--it can pop up if they're on insurance, but
if they're paying cash, it's much, much more difficult. But I
think our states are all working together to figure how to
close that loophole.
And for a long time, some of the problems were the states
weren't cooperating with one another. So you have West
Virginia, and you can just go right across the river over to
Ohio or to Kentucky, and you're in the same thing, and that
problem is getting better. But we've got to have everybody, you
all at the table, and everybody at the table because this
problem is--the report that just came out, it's a preliminary
report from the President, says it's a national emergency, and
I believe that it is. And thank you all very much.
Senator Moran. Senator Capito, thank you for persistence in
regard to opioid abuse in West Virginia and across the country.
Let me tell my colleagues and to our panelists, we are
expecting votes sometime around 11. My intention is to conclude
the hearing when those votes are called. We'll wrap up here and
we'll not resume. So we probably have 10, 15 minutes left in
this hearing. Many of the questions that may be asked of you
will be submitted to you in writing, and we'll request a
response.
Let me say to you, Mr. Jay, in regard to your HIPAA
legislation, I'd be interested--I think I'm speaking to the
right person who raised this----
Mr. Jay. Yes.
Senator Moran. I'd be glad to hear more about that if you
would let our Committee staff know. It seems a place in which
there may be a role for Federal legislation.
And I generally would ask the question of all of you. We're
having a--we'll continue to have a health care debate. One of
the things I think that has been missing in this conversation
for a long time is, What do we do to reduce the underlying cost
of health care? We spend a lot of time on trying to figure out
who pays, but we're missing an opportunity that I think could
be very bipartisan in trying to get rid of the things that
drive up the cost of health care, and therefore, drive up the
cost of health insurance.
And one of the things that comes to me in the testimony
that I've heard from you is medical insurance fraud, which I
assume is both committed by the provider, the health care
provider, as well as the patient or consumer. I'd love to know
information about--that you all may have in regard to the
overall cost to the system that that kind of fraud creates. And
if there is a way we can address it, it could be one of the
things on a list I have of many that we could address in regard
to the cost of health care as we continue to try to figure out
who pays the bills.
Let me ask, Mr. Jay, I think this is directed at least
initially to you. There are a couple of things I want--I'm
going to ask you about your Coalition's 2016 annual report.
There is also a 2016 study conducted by the Coalition, ``The
State of Insurance Fraud Technology.'' I'd ask unanimous
consent that both of those documents be made part of the
record. Without objection, they will be.
[The information referred to follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Moran. In that 2016 annual report, it highlights
the use of technology to combat insurance fraud. Would you
elaborate on the increasing use of vehicle telematics, drones,
social media searches, insurance company databases, the
Internet of Things? The broad jurisdiction of our Commerce
Committee has a lot to do with these things, and I'd like to
hear how we can combat fraud and what you're doing.
Mr. Jay. Absolutely. And as we said before, the use of
technology and trying to uncover some of the suspect fraud
schemes has really just exploded over the last few years as new
technologies come online and as more players in the property/
casualty industry utilize some of these. And, frankly, I think
the Internet of Things, everybody is focusing on that right
now.
We recently had a case, and we had the prosecutor do a
briefing at our annual meeting in December, where a gentleman
was charged with arson with burning down his home. He happened
to have a pacemaker implanted in his chest. And the prosecutor
got a court order to force him to sit and so they could take
the data off his pacemaker, which somewhat demonstrated that
what he said as far as the arson could not have happened. And
the court just ruled in the last 2 weeks that the data can be
used in court.
And I think that's one of the extreme examples we're seeing
as far as use of data. But we're going to have a lot of these
examples come forth, and with that, I think discussions as far
as the privacy of Americans and, when is going too far even if
it's looking at criminal fraud schemes?
In another recent case in Arkansas, and it was a murder
case, they were able to take a look at the data in their Amazon
Alexa--and, you know, maybe some of you own these devices, but
you talk into it and it gives you answers, but all of the
questions are maintained in a cloud that can be pulled down and
listened to. And basically a woman was murdered in a hot tub,
and her husband said certain things about the incident. They
went back and got the data from Alexa, even though Amazon tried
to squash it, and they were able to show that the story he told
about her death was not true.
And so I think, as our cars have more computers, as our
homes have more computers, everything is hooked to the
Internet, as there are cameras everywhere in society today. The
generation that's coming of age is going to have much less
expectation of privacy than we have now, and that's a separate
issue, but it's helping fraud investigation to no end, and
that's only going to continue.
Mr. Doak. Chairman Moran, I may make a comment there.
Senator Moran. Please.
Mr. Doak. The NAIC has just formed an innovation task
force, which over the last several months we have been
listening to the emerging technologies in all different areas
that you highlighted, and it's one of something that the
regulators have a very focused effort to stay on top of,
whether it's cyber issues or the use of drones, telematics, big
data. We have a big data working group that many of the
commissioners are involved in. So I want to give you some
assurances that the National Association of Insurance
Commissioners are very focused on the emerging technologies and
the uses of those.
Senator Moran. I've seen evidence of this in the crop
insurance world where big data can mine information about
fraudulent behavior. And, again, you've testified today about
finding fraudulent behavior in one kind of insurance arena that
translates to the same kind of perpetration or the same
individuals perpetrating those kind of criminal activities
elsewhere. There's a lot of information out there. Does law
enforcement have the tools necessary to--are they behind the
curve in regard to this as compared to the insurance industry?
Mr. Doak. We partner with law enforcement on a regular
basis. We make any of the tools available to the
investigations, no matter which way we're going back and forth.
Mr. Lynch may have some comments related to that. But the
regulators, through proper procedures, we're embedded in my
state, as is the other states, to provide assistance, as a
state agency, to any law enforcement agency that might be
seeking some of that data, which is proprietary to an insurance
company.
Mr. Lynch. Mr. Chairman, yes, thank you. NICB is at the
very early stages of working on this issue. Given our
relationship with law enforcement, we're able to get into these
communities earlier than most. And we're at the forefront, I
think, of some neat things relative to social intelligence and
helping policyholders and law enforcement better detect fraud.
So I think more to come on that.
Senator Moran. Ms. Weintraub?
Ms. Weintraub. Yes. Thank you, Chairman Moran. I would like
to add that, of course, as new technologies emerge and help all
of the entities at the table and law enforcement, police, to
enforce fraud more aggressively and effectively, it should be
used. However, there should always be consumer protections as
well. And we know in terms of privacy, we know in terms of the
use of big data, being used to price for auto insurance, for
example, that it provides opportunities for other factors not
related to a safe driving record, but other aspects which are
not directly related to safe driving to be used that cause a
discriminatory impact on pricing for some especially low-income
consumers. So that needs to be taken into account as well.
Senator Moran. Thank you very much.
Let me turn to the Ranking Member.
Senator Blumenthal. Thank you. I'm going to try to be as
quick as possible, but perhaps with the Chairman's permission,
if we can take a break and then come back, let's see how far we
get. And I would just like to ask at the outset whether you are
available for another 20 minutes or so.
[Witnesses nodding yes.]
Senator Blumenthal. Well, let me see how far I can get.
Senator Moran. What you're seeing is the Ranking Member
trying to supersede the Chairman's intentions.
[Laughter.]
Senator Blumenthal. I am asking the Chairman's permission
to do it, but let me see if I can conclude before we go to
vote.
I don't know how many of you--I'm sure Mr. Doak has seen
the 60 Minutes piece on audits leading to life insurance
companies being discovered to have uncovered a systematic
industry-wide practice of not paying beneficiaries who were
unaware there was a policy, something that is not at all
uncommon. The 60 Minutes piece uncovered that insurers
routinely use the Social Security Death Master File, but only
to their advantage, to cut off annuity or retirement payments
once the policyholder has died.
When it came to life, insurance would claim that they had
no idea that a policyholder had died. Even worse, an insurer
would continue to pay themselves life insurance premiums out of
the dead policyholder's nest egg. To put it most simply and
bluntly, the insurer put the burden on the beneficiary to come
forward, but often the beneficiary had no idea that the policy
existed, and the insurer used that ignorance to its benefit.
They have acknowledged, some of them have, their
responsibility, and they have settled litigation, but some 35
still have not done so.
When one of your colleagues, Mr. McCarty was asked about
this practice, he said he would release, quote, the hounds of
hell on these insurers because, in effect, they were failing to
pay benefits to beneficiaries, and that misconduct, in my view,
was absolutely fraudulent.
We're here about insurance fraud, and I'd like to ask you
and Mr. Jay what you are doing to prevent this kind of fraud?
Mr. Doak. Well, thank you, Senator. I did have the
opportunity to see a couple of those segments, and we do know
some of the work that has been done by the NAIC and some of the
settlements that have been basically run by lead states in that
area.
One of the issues that the NAIC has recently put together
is called a Lost Life Policy Locator Service, which was
pioneered in a couple of states, and that has now gone
nationwide. And for the record, we would provide, through the
NAIC, an update to you on the actual stats of the findings of
beneficiaries through that.
Senator Blumenthal. I would appreciate that.
Mr. Doak. So the NAIC is continuing to work on those
settlements. And Commissioner McCarty is highly respected. And
Commissioner Altmaier is the Florida commissioner who is
continuing to work on some of those activities. So it has our
attention, and we are remaining vigilant to make sure that
those consumers get the monies that are due them.
Senator Blumenthal. For the record, about 35 insurance
companies still have not settled in that case.
Mr. Doak. Right.
Senator Blumenthal. Thirty-five major insurers have not
settled.
Mr. Doak. I would ask the----
Senator Blumenthal. So people are going without these
benefits as we speak.
Mr. Doak. Yes, and----
Senator Blumenthal. It needs to be a really urgent issue.
Mr. Doak. Exactly. And I would ask your permission to have
the NAIC put together some information on an update to those 35
insurers and follow up on that particular item. But I can tell
you it's a high priority. And we are having some success in
some other areas relative to finding beneficiaries, sir.
Senator Blumenthal. Thank you.
Mr. Jay?
Mr. Jay. We've looked at the issue, and I agree with the
Commissioner as far as it's a regulatory issue and
administrative issue for the insurance departments to oversee.
To my knowledge, in taking a look at the companies involved in
this, there was no criminal fraud. It may come in the realm of
abuse or certainly bad practices on the part of the life
insurance industry for not proactively trying to find when
benefits are deemed to be due. But we support the insurance
commissioners as far as their actions on the issue.
Senator Blumenthal. Well, perhaps in your further response
to my question, you can tell me what you're doing proactively
to prevent these kinds of practices in the future because, as
we all know, this kind of practice may not have constituted
criminal fraud, although as a former prosecutor, I would have
been interested to investigate it as criminal wrongdoing. Kevin
McCarty, the Insurance Commissioner, probably doesn't have
criminal jurisdiction, but I would respectfully suggest that
criminal authorities ought to have a real interest in it.
Mr. Jay. And we would support any attorney general,
insurance commissioner, or fraud bureau to investigate it, and
if they do find that there are criminal violations there, to
prosecute it to the full extent of the law.
Senator Blumenthal. Let me----
Mr. Jay. It's just not our knowledge that that's happened
so far.
Senator Blumenthal. I understand.
Mr. Doak. And I would make a comment that through the
process here, I think one of the things that I would like to
note about the Lost Life Policy Locator Service is that we've
had the opportunity to find these for Oklahomans, and it's a
very impressive chart since it has been rolled out by the NAIC
in assisting consumers.
But when the National Association of Insurance
Commissioners, to the best of my knowledge, like in Oklahoma,
when we find a beneficiary or match them up, there is no charge
to them. There is no reduction in those fees. And I do believe
that under some of the other circumstances, through the
treasurers' departments in certain states, that there is a fee
redacted. In my opinion, that's the wrong thing to do.
Consumers should get 100 percent of the money that's owed them.
Senator Blumenthal. I have one--I have a couple more brief
questions.
Senator Moran. To demonstrate my firmness, but also my
accommodation, the floor is holding the vote open an extra 5
minutes, so if you can wrap up in the next 5 minutes, we will
both accomplish what we want to accomplish.
Senator Blumenthal. This is bipartisan cooperation at work
before your eyes in real time.
[Laughter.]
Senator Blumenthal. I will have more questions for the
record. This area is very important to me. I want to commend
Commissioner Kevin McCarty, of Florida, and your colleagues who
have joined in the Task Force, as well as, of course, 60
Minutes for exposing this fraud. I don't use that word lightly,
it is a fraud, and exposure of it provides a tremendous warning
to others to avoid this kind of fraud.
And I think you and we have a special responsibility here
given that we're talking about life insurance. We're talking
about insurance people buy in the expectation their sisters,
their brothers, their children, and their spouses are going to
rely on it to survive, to live, and to reap the benefits of
that life.
A lengthy article in the New York Times last year detailed
a new and disturbing trend in the whole life industry. I'm sure
you're aware of it. Insurance companies have jacked up premiums
on whole or universal life policies and have shifted the burden
of dividend payments from the insurance company to other
policyholders. People who bought universal life policies in the
1980s and 1990s, some of which guaranteed annual returns of 4
percent or more, are seeing their premiums now soar.
So the new exorbitant rates have left many older Americans
with no choice but to drop coverage and lose, you guessed it,
the entire value of their policy after years and years of
investing in it.
And I am raising this issue. I know we're not going to have
final answers today, but I want to ask Ms. Weintraub, realizing
that many whole life policies were underwritten during a decade
of high interest rates that could support more generous
dividends. I also understand these insurance policies gave a
guarantee, and policyholders seem to have kept their side of
the bargain. Are these exorbitant increases in premiums fair
and justified, or are they simply a way for insurance companies
to reduce their liability and eliminate the most expensive
policies, I understand they're expensive, but don't they have
an obligation to do better?
Ms. Weintraub. It certainly seems unfair to a consumer who
has been paying into this policy and then only to find that it
is unaffordable for them and they can't get the benefit of what
they've been paying for. Certainly that has an unfair result.
It's entirely the reason why consumers have insurance to begin
with, and being unable to use it in the way that they've been
paying for, for years and years is certainly problematic. And I
would definitely recommend more research looking into how the
disproportionate effect it has on especially older Americans
and their ability to obtain coverage, and the investment they
put into it.
Senator Blumenthal. Thank you. I would invite other
responses. I know we're short on time. Perhaps others can
answer that same question for the record.
And again my thanks to the Chairman for his generosity and
indulgence. Thank you.
Senator Moran. Does anyone want to include anything?
Mr. Doak. I would just close by thanking you from the
National Association of Insurance Commissioners, the
regulators. We believe that state-based regulation is the best
place for insurance. We're the closest place to the consumer.
Like in my state, we've been regulating insurance since
statehood. And my colleagues that I represent, we're very proud
of the work they do protecting consumers.
So we appreciate the opportunity to be here. This is a
very, very timely topic and evolving topic relative to new
trends in fraud. So thank you, Senators, for having us.
Senator Blumenthal. If I may just make one concluding
remark. I sat exactly where you are, Mr. Doak. I don't know
whether it was 5 or 6 years ago, on a panel, actually I think I
sat where Mr. Jay is now, and to my right was the Attorney
General of New York, who argued that insurance regulation
should be turned over to the Federal Government. It has been,
as you say quite correctly, a state role and responsibility. I
said no, insurance regulation should continue to be a state
responsibility, but I said that the states have an obligation
to do better, to be more rigorous in their oversight and
scrutiny, and I would hope that they would be because I'll
continue to be an advocate of state regulation.
Mr. Doak. Thank you, sir.
Senator Blumenthal. But I would hope that we can work
together and improve the efficacy of the regulation.
Thank you, Mr. Chairman.
Senator Moran. I appreciate the cooperation from the
Ranking Member. And I appreciate the witnesses testifying. And
the record will remain open for 2 weeks for members to submit
questions. I will have some, and it appears that the Ranking
Member will, my guess is that other colleagues. We would ask
you to respond to those. And again we thank you for your
presence with us today.
The Committee is adjourned.
[Whereupon, at 11:15 a.m., the hearing was adjourned.]