NAIC
Fraud Meeting Remarks by Jo Ann Howard, Federal Insurance Administrator
Dallas, Texas Sunday, September 10, 2000 INTRODUCTION
First of all, I would like to thank Robert Ober for inviting me to speak
to you today. I would also like to recognize Ed Connor, our Industry Liaison
[and FEMA IG staff]. It is an honor. With fraud estimated to cost the property/casualty
industry more than $20 billion per year (Source: Insurance Services Office, Inc.),
preventing and combating insurance fraud is critical. It is central to protecting
our customers --- the over 4.2 million property owners across the country who
insure themselves against the devastating effects of flooding -- and the viability
of the National Flood Insurance Program. Today I would like to first talk
briefly about the challenges we face in fraud management; the systems we currently
have in place and what we are doing to improve fraud-fighting in the future. Then,
I would like to open it up for discussion about how we can work together to reduce
fraud. UNIQUE CHALLENGES The complex structure of the NFIP-the
largest single-line insurer in the world -- makes us subject to added risk and
provides some special challenges in fraud management. We don't just have to worry
about one company. Our program operates largely through 92 private so-called "Write
Your Own" companies under a partnership arrangement with the Federal Government.
The Mitigation Division sets the premium rates, but
relies on these private companies to use their marketing talents to sell and service
our flood insurance policies and adjust the claims. In return for these services,
the companies retain a portion of the premiums they collect. A small proportion
of our business - about 6% -- is conducted through our Direct Operations, in which
insurance is written by agents who deal directly with the Federal government. So
this is our challenge -- protecting ourselves against fraud in a program spanning
over 90 companies. And those bent on gaining from deception have used this to
their advantage. Many of the Write Your Own companies have excellent fraud
management programs. Fraud hits their "bottom line". However, unlike their other
lines of business, the Federal Government reimburses the private companies for
flood losses. There is limited economic incentive to reduce fraud in their flood
business. We are fortunate that from the inception of the program, Congress
provided us the means to borrow money from the U.S. Treasury to honor claims following
periods of heavy flood losses. But we share a common reality: the more fraud there
is, the higher the premiums have to be raised to cover the costs. TYPES
OF FRAUD EXPERIENCED We know we have a problem with fraud. Most of
the cases we see come up at the time of loss, the majority resulting from fraudulent
claims filed by policyholders. But occasionally, brokers, agents and adjusters
are investigated for wrongdoing. We have successfully prosecuted an insurance
broker who misappropriated $3.2 million in premiums. contractors who falsified
receipts. homeowners with multiple policies with different companies or who fabricated
claims or falsified documents or attempt to bribe adjusters. . agents who backdated
policies . . and adjusters who made fraudulent claims. We also have seen fraudulent
cash management practices. These are just some of our cases. CURRENT
PROCEDURES Our product - flood insurance - is a promise. A promise
that when floods drench our families or destroy their homes, we will be there. A
promise that we will deliver the best customer service - and preserve the highest
standards of integrity. But with promise, comes obligation. . Obligation
by our policyholders to furnish accurate information and comply with the terms
and conditions set forth in the policy . . Obligation by our Write Your Own companies
to report suspected cases of fraud to us . . and our obligation to make sure that
we have effective systems in place to prevent and detect fraud and aggressively
pursue the perpetrators. Our partners in fraud prevention and detection
are the Write Your Own companies, with their Special Investigative Units, which
serve as the foundation on which our fraud management program is built. Another
partner is the FEMA Inspector General, with whose Office we interface on a routine
basis. Preventing and detecting fraud, waste and abuse in Agency programs and
operations is a key part of their mission. The IG has Special Agents looking into
allegations involving many of the programs of the Federal Emergency Management
Agency, including the National Flood Insurance Programs. In addition to
the IG, FEMA partners with other Federal investigative and prosecutorial agencies
such as the FBI and the Department of Justice (U.S. Attorneys). Not all
investigations result in criminal prosecutions. Many times, and for many reasons,
the cases will not be prosecuted. They may involve a low dollar amount, have poor
jury appeal, or no prosecutorial merit. When criminal prosecutions are declined,
it doesn't stop us from pursuing the case. We work with the Inspector General
to recover funds and resolve the case administratively. Over the years, hundreds
of thousands of dollars have been recovered through this process. The Office
of the Inspector General maintains a toll-free fraud hotline (1-800-323-8603),
receives referrals from FEMA program staff in headquarters and in the field, and
receives, through the Mitigation Division, referrals
from insurance agencies and companies. The Inspector General even maintains
a separate Spanish fraud hotline in Puerto Rico. During a one-year period after
Hurricane Georges struck the island, they received almost 5,000 complaints on
that hotline alone. Many were from relatives reporting relatives, neighbors reporting
neighbors, and concerned citizens reporting everyone. Last, but certainly
not least, among our partners are the State Departments of Insurance. Our customers
are your customers. So we have a common interest in protecting them from fraud. FRAUD
MANAGEMENT INITIATIVES We are working to improve fraud management in
the National Flood Insurance Program. We have recently created a fraud management
task force to re-look our risks and identify any gaps in our systems and operations,
and changes needed to keep pace with the threats of today and reduce our vulnerability. Over
the next several months, we will be compiling the best practices of Write Your
Own company Special Investigative Units to see what we can learn and share with
other Write Your Own partners. We will incorporate what we learn in a Seminar
for the WriteYour Own companies and into our on-going Operational Reviews, which
will be expanded to incorporate fraud management concerns into the review of company
operations. Adjuster training will also help heighten fraud awareness and prevention. We
have launched a programmatic initiative that will help reduce our risks. Our repetitive
loss strategy, designed to reduce the over $200 million per year in losses to
repeatedly flooded buildings, will provide better oversight of our high-risk properties.
We are centralizing management of 10,000 of the highest risk properties into one
portfolio for more effective tracking and assessment of their risk. This will
allow us to improve our information about these properties, exert greater control
on underwriting the coverage and adjusting claims, and reduce the potential for
fraudulent claims on these high-risk properties. PROSPECTS FOR THE FUTURE
We are also looking to the future, and the role that financial incentives
in our WYO Agreement could play in providing an incentive for detecting and reporting
fraud. Technology is transforming the insurance business. Never in history
has a single technology-or even a new medium-taken hold so quickly or transformed
our economy so completely as the Internet. Technology is a powerful weapon
against fraud. Gathering information on the longitude and latitude of insured
properties, which we are doing for the 10,000 worst repetitive loss properties
and will have for the others in a couple of years, will cut down on duplicate
claims and help us identify patterns of claims activity. "Data mining",
taking advantage of the latest technological innovations to check for suspicious
patterns in claims activity holds out the promise for improved fraud detection. CLOSING
REMARKS So, each of us - and each of you -- is united in a common purpose.
We want to work with you to get your ideas on how to better enhance our fraud
management program. DISCUSSION QUESTIONS - How
many States have internal fraud units? How do they investigate? What is the mechanism
that they use?
- How do you see us interacting with one another
to reduce fraud?
- How can we work better with the Special Investigative
Units of the Write Your Own Companies?
- What are the opportunities
for us to share information, to detect fraud or patterns of fraud ? [For example,
running our data base of agents through the State Insurance Department data bases
to make sure they are licensed and check for any suspensions and violations.]
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