Insurance industry experts differ on whether premium fraud is being addressed adequately on the enforcement side, but they do agree that it is a problem.
Few cases of premium fraud have been tracked and prosecuted, industry observers say.
Generally speaking, premium fraud occurs when companies withhold or falsify information to avoid paying higher premiums for insurance.
Loretta Worters, vice president of the New York-based Insurance Information Institute, estimates that premium fraud costs the insurance industry about $30 billion alone in 2004 -- the latest for which the group has data.
Her organization is a national nonprofit trade association serving the insurance industry.
Worters says it costs the insurance companies money to go after individuals and companies who have defrauded them and that cost usually gets passed on to the consumer.
"It adds more to the cost of doing business and that trickles down to the consumer," Worters says.
Alex Winslow, executive director of Austin-based consumer advocacy group Texas Watch, says insurance fraud of any kind is unacceptable and damages the market because it causes honest people to have to pay more.
His concern, he says, is that the insurance companies will use the bad practices of some individuals and companies as an excuse to not pay claims and to raise rates.
"Most people are honest and pay premiums and expect to get services in return," Winslow says. "Insurers need to crack down on these bad people."
Tiffany O'Shea, spokeswoman for Austin-based American Insurance Association, says this menace often flies under the radar but adds that it occurs in all lines of insurance -- both personal and commercial -- and is a serious problem.
"It is seldom caught. Carriers have frankly done a very poor job of detecting or preventing this form of fraud," O'Shea says. "Unfortunately, they devote wholly inadequate resources to the task."
Jerry Johns, president of Austin-based industry trade group Southwestern Insurance Services, says premium fraud happens more frequently in the area of workers' compensation insurance.
"I think it should be said up front that the insurance companies and TDI (the Texas Department of Insurance) take a very dim view of employers who attempt to falsify information to save money on premiums," Johns says.
All areas
Dennis Jay, executive director for the Washington, D.C.-based Coalition Against Insurance Fraud, says because there is little enforcement on the premium-fraud side, it is committed more frequently.
But Jay agrees that the workers' compensation market is prime ground for tilling the soil on premium fraud.
Workers' compensation rates, Jay says, are based primarily on three areas: 1) the amount of payroll; 2) the degree of risk -- construction work is riskier than secretarial work; and 3) the claims experience of the company.
"It's basically done by businesses that fail to disclose the true character of the risk they present," Jay says. "A company can lie about these three areas to try to reduce their overall premium."
Johns says premium fraud has been an issue for the insurance industry for years, but he believes it is not a growing problem.
"It's been around for a long time. But we're seeing less and less of it," Johns says.
Joe McCormick, spokesman for Northbrook, Ill.-based Allstate Insurance Co., says the insurer doesn't see premium fraud in significant amounts on the commercial side.
"Nor are we aware of any increasing trends related to commercial customers intentionally providing false information or withholding important rating information," McCormick says.
Leslie Leal, spokeswoman for Bloomington Ill.-based State Farm Insurance Cos., says premium fraud is less of a problem than other types of fraud, such as vendor fraud -- which involves billing insurance companies for services not rendered.
Fraud detectives
One way a business commits premium fraud, Jay says, is by creating a shell company and getting a new tax ID.
From the insurer's vantage point, the business appears new, with no claims experience. This enables the business, he says, to get a lower premium.
Detecting premium fraud, Jay says, depends on the insurer and where they are located.
"It isn't a very easy crime to prosecute," he adds.
Options that are available to the insurer who detects such fraud are to demand the money that is owed, cancel the policy, and report the company to the state's insurance fraud bureau.
Leal says this is what State Farm does.
"(Our internal investigation division) works closely with law enforcement, and local, regional and statewide public integrity units with the various district attorney's offices," Leal says.
McCormick says Allstate will perform Loss Control surveys, "where we meet with the customer to confirm accurate business description and risk operations. ..."
Ben Gonzalez, a spokesman for the TDI, says companies now have good fraud people in place to investigate companies that they suspect of fraud and will gather their own evidence.
"And then they'll bring it to us," Gonzalez says, adding that TDI has a separate fraud division with its own group of investigators to handle cases like these. "If we think it has merit, we'll do some additional investigating or take that information and try to get that to a prosecutor."
