Insurance Fraud:Are Policyholdersthe Only Victims?

Conference of State Governments, Eastern RegionAnnual MeetingAtlantic City, NJ

July 21, 2012

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office: 212.346.5540 Cell: 917.494.5945 stevenw@iii.org www.iii.org

2

Beyond the Ones We Catch, From an Economic Viewpoint,

What is the Scope of the Fraud Problem?

3

Estimate of Annual Fraud, Assuming10% of P/C Claim Expense, 2000-2011

$30.2

$34.3

$30.9 $31.3

$34.8

$27.2$28.0

$28.7$30.1

$31.2

$28.7

$20

$25

$30

$35

$40

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

The cumulative total of assumed fraud over this 11-year period is $335.4 billion; the average yearly amount was $30.5 billion.

Source: Insurance Information Institute calculations and research from ISO/PCI Fast Track data.

$ Billions

4

Average No-Fault (PIP) Claim Severity, 2012*

$17,998

$9,804$8,259

$5,260$4,185

$3,095$1,981 $1,961

$38,693

$7,560$5,530 $5,304

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

MI NJ FL NY MN ND HI KY PA KS MA UT

MI, NJ, FL, NY, and MN appear to have severe and growing problemswith rampant fraud and abuse in their No-Fault Systems.

*Average of the four quarters ending 2012:Q1.Source: ISO/PCI Fast Track data; Insurance Information Institute.

The variation in no-fault claim severity is extraordinary.

MI is five times higher than MN.NJ is four times higher than PA.NY is four times higher than MA.

5

Increase in No-Fault Claim Severity: Selected States, 2004-2012*

*2012 claim severity figures are for the 4 quarters ending 2012:Q1. Sources: Insurance Information Institute research from ISO/PCI Fast Track data.

$38,693

$17,998

$9,804$7,560 $8,259

$5,871$5,198$6,674

$12,136

$24,385

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

Michigan New Jersey Florida Minnesota New York

2004 2012*

The no-fault systems in MI, NJ, NY, FL, and MN are under stress due to fraud and abuse, which leads to higher premiums for honest drivers.

+58.7%

+48.3%

+40.7%+46.9% +45.4%

In this time span, the price of medical care for the nation

as a whole rose 30%

We Focus on Medical Costs in PIP Because They Dominate PIP Claims*

Type of Loss:

82% 87% 87%

15% 11% 10%3%2%3%

0%

20%

40%

60%

80%

100%

1997 2002 2007

Medical Wage loss Other

*data for MinnesotaSource: IRC

7

NJ No-Fault (PIP) Average Claim Severity Has Trended Up Sharply Upward, 2000-2011

$1

3,2

90

$1

4,6

53

$1

6,0

75

$1

7,2

61

$1

6,4

68

$1

7,7

66

$9

,02

4

$9

,91

1

$1

0,1

06

$9

,96

6

$1

2,0

68

$1

2,4

55

$7,500

$10,000

$12,500

$15,000

$17,500

$20,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

The average amount of a PIP claim in New Jerseynearly doubled from 2000 t0 2011

No-Fault claim severity (average cost per claim) rose 7.9% in 2011

Source: Insurance Information Institute calculations and research from ISO/PCI Fast Track data.

8

NJ No-Fault (PIP) Claim Frequency Fell but Since 2007 Leveled Off, 2000-2011

1.34

1.201.15 1.17

1.25

1.17

1.801.74 1.75

1.65

1.50

1.33

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

1.90

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Rising PIP claim costs in NJ are no longer being offsetby declining claim frequencies

Source: Insurance Information Institute calculations and research from ISO/PCI Fast Track data.

315

340

365

390

415

440

465

490

515

540

04

:40

5:1

05

:20

5:3

05

:40

6:1

06

:20

6:3

06

:40

7:1

07

:20

7:3

07

:40

8:1

08

:20

8:3

08

:40

9:1

09

:20

9:3

09

:41

0:1

10

:21

0:3

10

:41

1:1

11

:21

1:3

11

:41

2:1

$5,600

$6,600

$7,600

$8,600

$9,600

Medical care index NY

Why Did NY PIP (Auto No-Fault) Claim Severity Growth Outpace NY Medical Care Cost Growth? Fraud Growth

Sources: Insurance Information Institute calculations based on ISO/PCI Fast Track Data

Medical Care Cost Index

Medical Care Cost Index

Average NY PIP Claim Severity

Fra

ud

Ga

p?

NY PIP Avg. Claim Severity

Big PIP Fraud case cracked

Percentage of PIP Claimants Who Have Chiropractic Treatment

15%17%

19%21%

22%23%23%

25%26%

30%31%

33%34%

36%

43%47%

42%

MichiganHawaii

DelawareSouth Carolina

KentuckyKansas

MarylandUtah

PennsylvaniaOregon

MassachusettsNew York

TexasNew JerseyMinnesota

FloridaWashington

Note: data are from states with at least 100 PIP claims in the IRC sample.Source: IRC study

It likely isn’t just a coincidence that the states with fastest

growing PIP claims are the ones with the highest

percentage of chiropractic treatments

Average Number of Visits per MinnesotaPIP Claimant Receiving Treatment

4

35

6

15

3

33

3

13

2

32

4

12

GeneralPractitioner

Chiropractor Orthopedist PhysicalTherapist

1997 2002 2007

Source: IRC

Average Total Charges by Provider Type, Minnesota PIP Claims

$572

$3,125

$1,921

$1,655

$771

$3,797

$1,830

$1,785

$529

$2,558

$2,341

$4,550

Generalpractitioner

Chiropractor

Orthopedist

PhysicalTherapist

1997 2002 2007

} 20%

Source: IRC

Distribution of Total Provider Charges byType of Provider, Minnesota PIP Claims, 2007

12%

11%

8%

6%5%

58%

Chiropractor

Other

Physical Therapist

General Practitioner

ER Physician

Orthopedist

60%

12% 12%9%

58%

13% 16%12%

56%

X-ray MRI CT

1997 2002 2007

+33%

Percentage of Minnesota PIP Claimants With Each Type of Diagnostic Procedure

Average Charge per Diagnostic Procedure, Minnesota PIP Claimants

$589

$1,191

$144

$1,117

$1,432

$239

$1,193

$1,812

$245

CT

MRI

X-ray 1997

2002

2007

} +27%

Distribution of Total Diagnostic Charges by Type of Procedure, Minnesota PIP Claims in 2007

7%22%

26%

45%

Other

CT

MRI

X-ray

17

Commercial Lines, such as Workers Comp,

are also affected

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

CPI-Medical % change WC Med Cost per lost-time claim

Workers Comp Medical Severity Growth vs.Medical Care Cost Growth? Fraud Growth?

Sources: BLS, NCCI

Fra

ud

Ga

p?

19

Legislation Can Change the Fraud Outlook…

20

New York State No-Fault AutoClaim Severity, 2001:Q1–2004:Q4

Sources: ISO/PCI Fast Track data; Insurance Information Institute.

$8,3

27

$7,8

88

$7,5

07

$8,2

34

$9,2

35

$8,7

27

$8,5

77

$7,7

73

$7,3

11

$6,9

58

$6,8

70

$6,1

56

$6,0

52

$5,8

20

$5,9

91

$5,6

15

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

1:01 1:03 2:01 2:03 3:01 3:03 4:01 4:03

No

-Fau

lt C

laim

Sev

erity

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

No

-Fau

lt Claim

Freq

uen

cy

Avg. Claim Severity

Frequency

Following Legislation in 2001, From 2002:Q1 to 2004:Q4, NY No-Fault Claim Costs Fell to Roughly Half of What They Were

21

…But The “Bad Guys”Can Change, too

22

New York State No-Fault AutoClaim Severity, 2001:Q1–2011:Q4

Sources: ISO/PCI Fast Track data; Insurance Information Institute.

$8,3

27$7

,888

$7,5

07$8

,234

$9,2

35$8

,727

$8,5

77$7

,773

$7,3

11$6

,958

$6,8

70$6

,156

$6,0

52$5

,820

$5,9

91$5

,615

$6,0

94$5

,914 $6

,250

$6,2

69 $6,5

30$6

,606 $7

,063 $7

,323

$7,3

61$7

,257 $7

,648

$7,7

08$8

,421

$8,1

73 $8,4

90$8

,015

$8,5

63$8

,726

$8,6

46$8

,830

$8,6

46 $8,9

90$8

,647

$8,4

07$7

,394

$8,2

85$8

,062

$7,9

60$8

,717

$5,000

$6,000

$7,000

$8,000

$9,000

$10,0001:

01

1:03

2:01

2:03

3:01

3:03

4:01

4:03

5:01

5:03

6:01

6:03

7:01

7:03

8:01

8:03

9:01

9:03

10:0

1

10:0

3

11:0

1

11:0

3

12:0

1

No

-Fau

lt C

laim

Sev

erity

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

No

-Fau

lt Claim

Freq

uen

cy

Avg. Claim Severity

Frequency

Average PIP Claim Costs Are Now Nearly Back to their 2002 peak.

Avg. Claim Severity

Peaked in 2002

23

Concluding Comments

Insurance Fraud Victimizes…

Policyholders, both Personal and Commercial

Customers of, and Investors in, Victimized Businesses

Investors in Insurance Companies

Taxpayers (lower insurer profits => lower tax payments)

www.iii.org

Thank you for your timeand your attention!

Download at www.iii.org/presentations

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