By Indrani Nadarajah    |    July 2018    |    13 minute read

In this trends paper, we examine types of insurance fraud, and how low consumer awareness of fraud and a common belief that fraud is not a criminal activity is problematic for insurers. We also look at the role lawyers potentially play in contributing to high claims costs. And in terms of solutions, we look at how some industry participants are calling for greater sharing of fraud-related data, and the potential for new technologies in vehicles to reduce fraud.

Common types of insurance fraud include:

1. Auto repair shops that intentionally cause additional damage to a vehicle that was involved in an accident, or bill several different insurers for repairing the same prior damage to a vehicle;

2. Medical clinics that ask claimants to sign blank accident benefit forms, then bill insurers for services never provided without the claimants’ knowledge;

3. Individuals who privately sell a stolen vehicle to an unsuspecting consumer after changing the vehicle identification number to mask its identity;

4. Collisions where a driver intentionally causes a collision with an unsuspecting driver;

5. Medical clinics that forge the signatures of medical practitioners and use their names and college registration numbers without their knowledge or consent on accident benefit forms. The clinics then bill insurers for services that were not provided.

6. Staged auto thefts, where the owner drives the vehicle to a remote location, or simply hides it.

The Ontario scenario

High auto insurance premiums continue to plague Ontario drivers. The average auto insurance premium of about $1,700 in Ontario is about 55% higher than the average premium in all other Canadian jurisdictions. Auto insurance rates in Ontario increased by 2% in the first quarter of 2018, putting the then-Liberal government further away from its 2013 promise to cut rates by 15%.

Fraud is cited as a major reason for the high rates. In a recent example, last year the Ontario Court of Appeal upheld a lower court’s conviction of a former Peel police officer, who was sentenced to five years in jail for creating nine false motor vehicle accident reports for a fee (see R. v. Watson). Insurers paid out almost $916,000 to the fraudsters and $272,000 in medical and legal expenses.

An Ipsos survey of Ontario drivers in early 2017confirmed there were several areas of concerns about drivers’ ability to recognize and report auto insurance fraud.

The survey, conducted for the Financial Services Commission of Ontario (FSCO), revealed that drivers aged 55 and over were most knowledgeable about insurance fraud (86%), while millennials aged 18‑34 were least likely to identify acts of fraud (56%).

Eleven percent (11%) of those polled were aware of a family member who has made an exaggerated or false claim.

The most popular type of admitted fraud was convincing an auto body repair shop to add in unrelated fixes and put the full cost through insurance (5%).

One in four (25%) of those surveyed were unaware that auto insurance fraud affects auto insurance premiums.

Thirty-five percent (35%) were also unaware that insurance fraud is a criminal offence under the Federal Criminal Code.

Nearly one in ten (8%) acknowledged they had submitted an exaggerated or false claim.

Society tolerates fraudsters

Equally concerning are the latest results of a survey that was undertaken on behalf of the Insurance Council of British Columbia (ICBC ). That survey, released in May, shows that 47% of customers feel that committing auto insurance fraud is an accepted practice in B.C.

It also found that 79% of respondents felt that up to half of all claims made with ICBC contain an element of fraud.

“Industry estimates suggest about 20% of all insurance claims costs contain an element of fraud,” ICBC special investigations unit senior manager, Chris Fairbridge said, adding the survey results are troubling. The ICBC recorded a $1.3 billion loss in 2017.

ICBC also said the cost of injury claims is closing in on $3 billion annually, and the number of large loss claims, with an average payout of $450,000, has also spiked by 80% in the last 12 months. PricewaterhouseCoopers has been tasked with conducting an audit of past claims. The Automotive Retailer Association has pushed back against allegations of fraud, saying that prices of parts have gone up, therefore increasing costs.

Latest fraud statistics

Insurance industry estimates suggest between 5 and 15% of premiums drivers pay for car insurance goes toward covering undetected fraudulent claims. Auto insurance fraud is estimated to cost taxpayers $1.6 billion annually, though insurers like Aviva Canada peg the figure higher, at over $2 billion.  

Aviva’s latest report on fraud (2017) showed that 77% of Canadians believe fraud is a big problem and more needs to be done. This finding is similar to the ICBC survey (above) where respondents believed up to half of all claims were not accurate.

A November 2017 investigation by the company aimed to demonstrate the scale of fraud in auto body shops in the Greater Toronto Area (GTA). Aviva simulated typical fender-bender situations involving private passenger cars by deliberately crashing 10 vehicles. The company then had its own assessors detail the damage and estimate repair costs.

The cars were fitted with hidden cameras and recording devices, and brought to different GTA auto body shops. While Aviva's experts estimated total damage for the 10 vehicles at about $30,000, the repair shops invoiced Aviva for about $61,000, the company said. The investigation was aired on an episode of the W5 program in March this year.

Some of the auto body shops disputed the allegations and noted that it was insurance company representatives who had assessed the cost of repairs, not the mechanics.  One report claimed that some of Aviva’s damage estimates were “questionable.”

“We were appalled by what often did seem to be fraud but wary of the notion that seven shops reflected the entire industry,” said John Norris, executive director of the Collision Industry Information Assistance.

Aviva, which has been very outspoken on this issue, insists that more has to be done to combat fraud. As a start, it wants governments to require insurance companies to report and share information when fraud is identified.

There is no doubt that sharing data can yield a more comprehensive picture of the extent of fraud.

Chris McKibben, a partner at Blaney McMurtry noted that since 2016, the Insurance Bureau of Canada (IBC) has been working with CANATICS (Canadian National Insurance Crime Services), a non-profit organization funded by nine member auto insurers representing about 75% of the market. CANATICS pools data from members and applies advanced analytics to identify suspicious activity. It then alerts IBC, which investigates the suspected fraudulent activity. The pooling of data from multiple carriers has benefitted each individual carrier significantly, McKibben said.

The UK Scenario

Overseas, the UK Insurance Fraud Task Force published a 2016 report summarizing a year-long review of insurance fraud, and concluded that data sharing among industry participants can be effective in combating fraud. 

For example, the UK Insurance Fraud Register, which has been funded by the industry to 2020, is a register of known insurance fraudsters across all insurance product lines in the UK. Over 80% of P&C insurers already participate, or plan to participate.

The Motor Insurance Anti-Fraud and Theft Database is a record of vehicles which have been stolen or damaged beyond economic repair.

The database contains insurance records for 38 million motorists. It is used to identify organised application fraud as well as the abuse of motor trade policies. Drivers can also go online to check whether their vehicles are listed in the database.

A report by the Association of British Insurers (ABI) shows that in 2016, the level of organised fraud fell by around 30% between 2015 and 2016, with 15,000 fraudulent insurance claims valued at £174 million detected in 2016. This fall reflects the work of the Insurance Fraud Bureau (IFB) and the Insurance Fraud Enforcement Department (IFED), the specialist police investigation unit, in exposing crash for cash staged motor accidents, and other organised frauds, such as criminals offering fake motor insurance, ABI reported.

The Marshall Report

David Marshall, former CEO of the Workplace Safety and Insurance Board, was appointed by the former provincial government in February 2016 to review Ontario’s auto insurance industry. He submitted his report, Fair Benefits Fairly Delivered: A Review of the Auto Insurance System in Ontario, in April 2017.

Collectively, Ontario drivers pay about $10 billion a year in automobile insurance, but Marshall observed that out of the $3.87 billion in costs for 2013 (combined accident benefits and bodily injury), only $2.5 billion went to claimants. The rest, approximately $1.4 billion, was directed to other parties. Over five years this amounts to almost $7 billion going to other parties, a sum Marshall describes as “staggering” and which is “threatening the very foundation of the system.”

Furthermore, the report recorded that each year about 23,000, or about 30% of all accident benefits claims, go into the dispute resolution system.  In Ontario’s auto insurance system, claims that go into dispute are almost always represented by legal counsel.

Marshall's study noted that the rates of road-related deaths and injuries in the province are among the lowest in Canada, yet this safety record is not reflected in the insurance premiums that drivers pay. Apart from fraud, Marshall also drew a link with the role lawyers play in the compensation process.

In the bodily injury system, data in Marshall’s report shows that out of about $1.5 billion in benefit settlement payments made by insurance companies, $373 million dollars went towards lawyers’ contingency fees, and a further $57 million were directed towards more medical tests and other experts to support the claims by accident victims against their insurers.

When including costs incurred by the insurance companies to manage and defend claims in the dispute resolution and tort systems, a further $500 million is added, which still does not reach the accident victim, the report concluded.

According to an Ontario Ministry of Finance press release, minor injuries account for between 70 and 80% of claims, while catastrophic injuries make up 1% of claims. Marshall’s report notes that between 25% and 35% of claimants engage lawyers to handle their insurers. An IBC commissioned survey also shows that two-thirds of Ontarians are likely to contact a lawyer to ensure a claim for a serious injury is settled to their satisfaction.

In recommendation number 12, Marshall advocates banning or restricting advertising and referral fees, and restricting contingency fees in personal injury cases.

Personal injury lawyers charge approximately $500 million in contingency fees annually. At the end of last year, Ontario’s legal regulator approved reforms to the contingency fee system to ensure greater transparency for clients, and help tackle the problem of unreasonable fees. (Contingency fees were introduced over 10 years ago to ensure equal access to legal representation by postponing legal fees until a settlement is reached.)

Lawyers respond

The Federation of Ontario Law Associations (FOLA) responded to the Marshall report in September 2017, pointing out that amendments to the Insurance Act (in 2015, 2016) have reduced entitlements to recovery and compensation. These changes included tightening the definition of catastrophic impairment and cutting the benefit levels under the Statutory Accident Benefit Schedule.

“When the Government of Ontario decides to cut medical/rehabilitation benefits in half from $100,000 to $50,000, to eliminate housekeeping claims for non-catastrophic injuries and continues income replacement benefits at $400 per week (the same level it has been at since 1996), it should have been expected that tort claims would have to offset those reductions,” FOLA remarked.

Other jurisdictions

Marshall’s observations on the role of personal injury lawyers in driving up costs are not unique to Ontario. The UK Task Force on insurance fraud found that, “Developments in the legal system in England and Wales since the 1990s have led to significant changes in the market for PI claims in England and Wales and how they are sourced, funded and dealt with.” Since 2010, the UK government has introduced a number of measures aimed at controlling the costs of civil litigation

Australia too recognized the sometimes negative role that the legal system played in driving up claims.  In 2001, the nation’s second largest insurer, HIH Insurance, collapsed, mainly due to poor management and skyrocketing claims. The following year, in 2002, the state of Queensland enacted the Personal Injury Proceedings Act, limiting advertising by personal injury lawyers. Claims also had to be submitted within nine months of the date of occurrence. Other states in Australia also introduced measures to restrict advertising by personal injury lawyers. (New South Wales, however, relaxed its previously strict regulations on advertising by personal injury lawyers.)

Blockchain and the role of technology in combatting fraud

Some pundits have suggested that blockchain technology, which was established in 2009, may be invaluable in combating insurance fraud. The technology, which has been described as a “digital ledger of transactions or records in real time,” increases the speed at which data/information can be shared among companies.

Blockchain is a string of data defined by three key characteristics.  Firstly, blockchains are distributed across a peer-to-peer network (without a central administrator) so there is no single master copy which can be manipulated.

Secondly, a single block in a blockchain cannot be deleted or changed without the key to amend the entire chain. The blocks are given a timestamp, creating a clear transaction history.

Finally, blockchains are only accessible with the correct permissions.

All transactions written to a blockchain are visible to insurers, brokers, third-party administrators, and service providers.  Blockchain can reduce fraud related to the integrity of a policy or claim or vehicle by minimizing counterfeiting, double booking, and document or contract alterations.

The uses of blockchain are myriad. Bosch for example, is developing a blockchain certificate to prevent odometer fraud by creating a ledger that will keep a real time, unalterable record of a car’s mileage throughout its lifetime.

According to an IBM paper, insurers can use blockchain technology to share fraud intelligence among institutions, but doing so will necessitate aligning industry standards for the process, data terms, contractual documentation and more.

Still, according to IBM, blockchain does not mitigate the risk associated with the majority of first-party and third-party frauds. Fraud detection and investigation systems will continue to be required.

Telematics

Increasingly, cars are becoming internet-connected. A "black box" can be found in millions of cars globally, as more drivers are choosing telematics insurance policies. These devices, which monitor speed, acceleration and braking, and provide feedback on how drivers interact with other drivers, are also helping insurance companies weed out fraudulent "crash for cash" and personal injury claims.

McKinsey Consulting notes that to ensure interoperability across the many platforms that currently or will soon offer telematics access, stakeholders (insurers and technology and services providers) need to establish and adhere to certain standards. These include data standards, as well as standards for key mechanical and electronic features.

Canadian insurers using telematics to determine auto rates include The Co-operators Group Ltd., Canadian Automobile Association (CAA)’s club in south central Ontario, Intact Financial Corp. and Desjardins General Insurance Group.

Conclusion:

The previous Liberal government in Ontario had announced measures to tackle auto insurance fraud – these included establishing a Serious Fraud Office and developing standard treatment plans for common collision injuries like sprains and whiplash. The government was working towards creating independent examination centres to provide neutral medical assessments for more serious injuries, and to ensure that contingency fees set by lawyers are fair and transparent. At the time of publication, it remains to be seen whether the current government will introduce any new measures to deal with the problem of insurance fraud.

For more information:

Insurance Crime – Insurance Bureau of Canada

Fighting Auto Insurance Fraud: What You Can Do - FSCO