CONTENTS

TOPICS COVERED PAGE

NUMBER

Introduction To Frauds 6
Insurance Fraud And Abuse 9
Schemes, Scams, Scammed 16
Real Eyes...Realize...Real Lies… 18
Itching To Know Who Can Help? 24
Division Of Insurance Fraud 25
Deceptive Life Insurance Sales Practices Continue 26
Viatical Settlements Investment Fraud 29
Case Study 32
Be Aware, Don’t Be A Victim 40
International Association Of Insurance Fraud Agencies(Iaifa) 45
Dealing With Fraud On The Net 48
Precaution Is Better Than Cure 52
Summary 56
Bibliography 58

1
Insurance – An Overview
In today's world we hardly come across anyone who is not familiar with the term
insurance. Our life is uncertain, we do not have any idea what will happen in our
future. But insurance has become one of the great ways to secure our future.
Getting the right introduction to insurance is important so as to get more familiar
with the term. Well, you get started the right way here.

The idea of insurance is very simple. It can simply be defined as an instrument

used for managing the possible risks of the future. Throughout our life we may
face many kinds of risks such as failing health, financial losses, accidents and
even fatalities. Insurance addresses all these uncertainties on financial terms. So
one should understand the importance of insurance in their life. With us, you will
get to know all the types of insurance plus the benefits.

As insurance covers risks against financial losses, it should not be taken as an

investment instrument. There a need of insurance in every stage of our life and
risks always increases with the changing environment of our life. Insurance is
essentially a mechanism that eliminates risks primarily by transferring the risk
from the insured to the insurer. It’s never too late to get insured. Insure now and
secure your financial future. Learn how to buy insurance online. Different types
of insurance companies discussed will broaden your horizon on insurance.

In the last few decades we have seen numerous changes in the insurance industry
since the need for insurance is more evident now than earlier. People's spending
patterns are changing and more & more resources are needed for immediate
consumption. So review your insurance portfolio from time to time. This site will
teach you everything you wanted to know about insurance.

History Of Insurance
The history of insurance is likely to date back to the very first human beings. In
the ancient times, if a person's house was burnt down, the other members of the
community helped to build a new one by contributing the necessary resources.

The history behind insurance can be traced to the early 3rd and 2nd millennia
BC, where Chinese and the Babylonian traders practiced methods of risk transfer.
The Chinese were famous for redistributing their wares across many vessels in
order to limit their loss that might occur due to ship sunk while traveling through
treacherous river rapids.

Babylonians also practiced insurance in the form of a system, called the Code of
Hammurabi, c. 1750 BC. It was practiced by the early Mediterranean sailing
merchants. When a merchant takes a loan to fund his shipment, he would also

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pay an extra sum to the lender to would guarantee him to cancel the loan when
the shipment is stolen or lost at sea.

History of insurance shows how Achaemenian monarchs of Iran were the first to
insure their people. They made it official by registering the process in
government notary office. Insurance was like a ceremony to them and performed
each year in Norouz, where the head of different ethnic groups presented gifts to
the monarch. The people of Rhodes invented the concept of the 'general average'.
Merchants whose goods were being shipped together would pay a proportionally
divided premium which would be used to compensate any merchant whose goods
were abandoned during storm or sinkage. This was an interesting phase in
insurance history.

The Greeks and Romans introduced life and health insurance in 600 AD. They
form an association called "benevolent societies" that took care of families and
paid funeral expenses of members upon death. "Friendly societies" also existed in
England in the late 17th century, where people donated funds to be used for
emergencies.

The concept of separate insurance contracts was introduced by the people of

Geneo in 14th century and the concept of marine insurance existed in a concrete
form at the end of the 17th century.

Modern concept of insurance history can be traced to the Great Fire of London,
1666 which destroyed 13,200 houses. In 1680, Nicholas Barbon of England
established the first fire insurance named 'The Fire Office' to insure bricks and
frame homes. United State's first insurance company underwrote fire insurance
and was formed in Charles Town, South Carolina, in 1732. Benjamin Franklin
popularized the practice of insurance, particularly against fire in the form of
perpetual insurance. He also established the Philadelphia Contributionship for the
insurance of houses from loss by fire. Insurance has come a long way today.

Going through the history behind insurance will give you a deeper insight in
insurance and as well as comprehend it as a whole.

What Is Insurance ?
Well it simply means protection against future contingent losses. The concept of
insurance is very simple; it involves paying someone to take on a certain risks.
An insurer is a company selling the insurance and the one who is buying the
insurance is called the insured or policy holder. Read on to know all about
insurance.

When you buy an insurance policy, you agree to pay a certain amount of money
called premium to the insurance company. The company, in turn, agrees to pay a
specified amount of money in case something covered by your insurance is
damaged, lost, or stolen.
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Insurance allows you to protect against any financial loss that can arise due to the
happening of any unexpected events in your future. There are two ways in which
you can insure in, one way is to visit an agent and consult him for the best option
you can avail for your situation. The other way is to research and choose on your
own, the type of insurance which will be best suited for your situation.

You can buy insurance to cover any risk, the risk that you will die, or that you
will become ill and require medical attention, or that you will have a car accident,
and many others. But before buying any insurance policy, it is necessary for you
to know about the different types of insurance. A thorough information on
insurance is important.

You will find a wide variety of insurances such as life insurance, vehicle
insurance, home insurance, health insurance and many others. But these
insurance policies vary and it depends on the insured which insurance to opt for.
Most of the insurance companies will have all these services enlisted with them.

In order to opt for a company that suits your needs, it is important that some
amount of research is done. You can consult your financial advisor so that you
get an insight of the insurance companies which will provide you the best deals.
Interact with genuine people, they will guide you and enhance your ability to
financially stabilize your self.

Get the right information on insurance and insurance companies so as to choose

the insurance policy that fits your needs and financial plans.

Buying Insurance Online

Everybody wants to secure their life for future. Insurance is one such good option
to do so. There are many ways to buy insurance. One method that is gaining
popularity is buying insurance online. Today, it has become the quickest and the
most effective way for many people to get insured.

It is important for us to know how to buy insurance online before we decide to

get into any insurance policy. When you shop for online insurance, you will
come across many insurance companies that will allow you many of the different
coverage's they can provide. Research on them and evaluate them against each
other and pick the one that most suits your needs.

You need to search around for the best price and also shop for the auto quotes
this will help you to find the right kind of insurance that is best for you. The
quotes online can show you how much each coverage cost. The insurance can be
viewed online and logged into after being purchased. Make sure that the policy
you finally decide meets all your needs and requirements in addition to being cost
effective. Well, buying insurance on the internet has never been so easy.
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When you decide to buy insurance online, you need read those terms of use.
Reading those small words can help you find the hidden fees and terms of use.
The further points given below are necessary to keep in your mind in order to
avoid getting into a raw share of the deal.

a) Before buying insurance on the internet make sure the company you choose is
credible and someone you can trust with your money. You need to check the
authenticity of the company or site of your choice before applying.

b) Use a web security check-site to verify the security of the website and some
other security checks to ensure the authenticity of the online company.

c) Contact the customer care service desk and check-in. Talk to them personally
before giving out your financial data like credit card info as there are many fake
companies online.

d) It is advisable to consult an experienced friend or person before buying

insurance online. Read the terms, conditions, exceptions, deductibles &
everything they offer carefully.

Types Of Insurance
As life is full of uncertain events; it is good idea to get insured. There are
different types of insurance provided by various insurance companies. You only
need to decide the perfect insurance that fits your financial plans. Given below
are different kinds of insurance. Choose the one that you require and need most.

Life insurance

Life insurance is one of the most well known and common insurance. This
insurance is taken against the risk of death. It provides cash benefits to the
decedent's family or other designated beneficiary and may specially provide for
burial and other final expenses.

Auto insurance

Another kind of insurance that is often required is auto insurance. It is typically

taken against the risks of road accident. It helps cover against theft, financial loss
caused by accidents and any subsequent liabilities.

Health insurance

Health insurance is taken against the risks of sickness and accidents. It covers all
the medical expenses incurred because of sickness or accidents.

Property insurance

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This type of insurance protects you against loss from risks associated with a
variety of types of property such as houses, cars, boats, businesses etc from fire,
theft or weather damage.

Disability insurance

Disability insurance provides financial help to the policy holder when he/she is
unable to work due to injuries or severe illness. It gives a monthly stipend that
replaces a portion of the disabled person's income.

Liability insurance

This insurance type covers legal claims against the insured. The protection given
by this insurance is two fold, a legal defense in the event of lawsuit commenced
against the policyholder plus indemnification with respect to settlement or court
verdict.

Business Interruption Insurance

Protecting individuals and companies against various financial risks, these types
of insurance also cover the failure of a creditor to pay money it owes to the
insured.

Pollution Insurance

This insurance kind consists of first-party coverage for contamination of insured

property either by external or on-site sources, arising from contamination of air,
water, or land due to the sudden and accidental release of hazardous materials
from the insured site. Covering the costs of cleanup, it may include coverage for
releases from underground storage tanks.

Purchase insurance

The purpose of these types of insurance is to provide protection on the products

people purchase. Purchase insurance can cover individual purchase protection,
warranties, guarantees, care plans and even mobile phone insurance.

Go through the above different types of insurance and choose the right insurance
policy that fits your needs.

Pre-tax insurance benefits

Pre-tax benefits are added advantages to the policyholders. These benefits help
them to save a large portion of their tax payment. When the tax-payment gets
reduced, their disposable income increases.

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Types Of Insurance Companies
Getting insured is one great way to secure your future. While shopping for
insurance you will came across many insurance companies. Getting a right
knowledge about the types of insurance companies is very important.

Different kinds of insurance companies can be classified as:

Life insurance companies

These insurance companies sell life insurance, annuities and pension products. It
mainly deals with long and short-term monetary investments, college plans, and
plans that mature and benefit your surviving family at the time of your death.

Non-life insurance companies

These are one of the different kinds of insurance companies are which sell other
types of insurance. These companies are mainly concerned with protecting
property from many risks and natural acts like fire, lightning, typhoon, flood and
earthquakes.

Composite insurance companies

These insurance companies types sells both life and non-life insurance.

Insurance companies are also classified as either mutual or stock companies.

Mutual companies are owned by policy holders whereas stock companies are
owned by stock holders.

Reinsurance companies

Another of different types of insurance companies is the Reinsurance companies,

which sell policies to other companies. This helps them to reduce their risks and
protects them from huge losses. The reinsurance market is dominated by a few
large companies, with huge reserves.

Captive insurance companies

These are other kinds of insurance companies that can be defined as limited
purpose companies. It is established with the main objective of financing risks
originating from their parent groups or groups. It can be said as an in house self
insurance vehicle. Captives also represents commercial, economic and tax
advantages to their sponsors. They help in risks management.

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Whatever insurance company you choose, it is always wise to get multiple
quotes. Have a quick look at the background of the company and make sure they
are legitimate and financially sound.

Important Insurance Terms You Should Know

Insurance is always associated with many unique terms. Hence it becomes
necessary for us to know about the important insurance terms before buying any
policy. Understanding these terms will help you to search affordable insurance
policy.

Here are some of the useful insurance terms and their definitions given below:

Actual Cash Value (ACV) : It is the value of an item at the time it was damaged
by the insured event. ACV is calculated as Replacement Cost Value (RCV) less
depreciation.

Claim: A request for an insurance company to pay for a loss. Claims to your own
insurance company are known as 'first insurance company' while claims made by
one person to another person’s company are called 'third party claims'.

Claimant: A person who makes a claim against a party based on legal liability.

Coverage: It is the range of protection that you are provided under an insurance
policy.

Deductible: It is the amount you are required to pay before the insurance
company begins to pay.

Depreciation : Decrease in the value of an item due to age, usage, wear and tea.
Most things decrease in value as they age.

Exclusive: Things that are not covered under the policy.

Grace period: It is the amount of time between the payment due date and when
the policy will be canceled if payment is not received.

Liability insurance: Liability insurance pays the loss of other people when you
are responsible for that loss.

Peril: It is the cause of the possible loss or damage.

Policy: Policy is the legal document issued by the insurance company that
outlines the general terms and conditions of the insurance.

Policyholder: The one who buys the insurance is called policyholder or insured.

Premium: It is the amount you need to pay to the insurance company.

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Introduction to frauds

In a broad strokes definition, fraud is a deliberate misrepresentation which causes

another person to suffer damages, usually monetary losses. Most people consider
the act of lying to be fraud, but in a legal sense lying is only one small element of
actual fraud.

A salesman may lie about his name, eye color, place of birth and family, but as
long as he remains truthful about the product he sells, he will not be found guilty
of fraud. There must be a deliberate misrepresentation of the product's condition
and actual monetary damages must occur.

Many fraud cases involve complicated financial transactions conducted by 'white

collar criminals', business professionals with specialized knowledge and criminal
intent. An unscrupulous investment broker may present clients with an
opportunity to purchase shares in precious metal repositories.

For example, His status as a professional investor gives him credibility, which
can lead to a justified believability among potential clients. Those who believe
the opportunity to be legitimate contribute substantial amounts of cash and
receive authentic-looking bonds in return. If the investment broker knew that no
such repositories existed and still received payments for worthless bonds, then
victims may sue him for fraud.

Fraud is not easily proven in a court of law. Laws concerning fraud may vary
from state to state, but in general several different conditions must be met.

One of the most important things to prove is a deliberate misrepresentation of the

facts. Did the seller know beforehand that the product was defective or the
investment was worthless? Some employees of a large company may sell a
product or offer a service without personal knowledge of a deception.

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The account representative who sold a fraudulent insurance policy on behalf of
an unscrupulous employer may not have known the policy was bogus at the time
of the sale. In order to prove fraud, the accuser must demonstrate that the accused
had prior knowledge and voluntarily misrepresented the facts.

Another important element to prove in a fraud case is justifiable or actual reliance

on the expertise of the accused. If a stranger approached you and asked for ten
thousand dollars to invest in a vending machine business, you would most likely
walk away. But if a well-dressed man held an investment seminar and mentioned
his success in the vending machine world, you might rely on his expertise and
perceived success to decide to invest in his proposal. After a few months have
elapsed without further contact or delivery of the vending machines, you might
reasonably assume fraud has occurred. In court, you would have to testify that
your investment decision was partially based on a reliance on his expertise and
experience.

The element of fraud which tends to stymie successful prosecution is the

obligation to investigate. It falls on potential investors or customers to fully
investigate a proposal before any money exchanges hands.

Failure to take appropriate measures at the time of the proposal can seriously
weaken a fraud case in court later. The accused can claim that the alleged victim
had every opportunity to discover the potential for fraud and failed to investigate
the matter thoroughly.

Once a party enters into a legally binding contract, remorse over the terms of the
deal is not the same as fraud.

The dictionary defines fraud as the intentional perversion of truth to induce

another to part with something of value or to surrender a legal right. Insurance
fraud can be “hard” or “soft.” Hard fraud occurs when someone deliberately
fabricates claims or fakes an accident. Criminals are using increasingly
sophisticated electronic schemes to defraud insurance companies.
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Soft insurance fraud, also known as opportunistic fraud, occurs when normally
honest people pad legitimate claims or intentionally understate the number of
miles they drive each year or, in the case of business owners, list fewer
employees or misrepresent the work they do to get a lower premium.

Those who commit insurance fraud range from organized criminals who steal
large sums through fraudulent business activities and insurance claim mills to
professionals and technicians who inflate the cost of services or charge for
services not rendered, to ordinary people who want to cover their deductible or
view filing a claim as an opportunity to make a little money.

Some lines of insurance are more vulnerable to fraud than others. Health care,
workers compensation and auto insurance are believed to be the sectors most
affected.

Hard vs. soft fraud

Insurance fraud can be classified as either hard fraud or soft fraud.

Hard fraud occurs when someone deliberately plans or invents a loss, such as a
collision, auto theft, or fire that is covered by their insurance policy in order to
receive payment for damages. Criminal rings are sometimes involved in hard
fraud schemes that can steal millions of dollars

Soft fraud, which is far more common than hard fraud, is sometimes also
referred to as opportunistic fraud. This type of fraud consists of policyholders
exaggerating otherwise legitimate claims. For example, when involved in a
collision an insured person might claim more damage than was really done to his
or her car. Soft fraud can also occur when, while obtaining a new insurance
policy, an individual misreports previous or existing conditions in order to obtain
a lower premium on their insurance policy.

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Insurance Fraud and Abuse:
A Very Serious Problem

Fraud and abuse are widespread and very costly to any country’s health-care
system. Fraud involves intentional deception or misrepresentation intended to
result in an unauthorized benefit. An example would be billing for services that
are not rendered.

Abuse involves charging for services that are not medically necessary, do not
conform to professionally recognized standards, or are unfairly priced. An
example would be performing a laboratory test on large numbers of patients
when only a few should have it. Abuse may be similar to fraud except that it is
not possible to establish that the abusive acts were done with an intention to
deceive the insurer.

Type of Fraud and Abuse

False claim schemes are the most common type of health insurance fraud. The
goal in these schemes is to obtain undeserved payment for a claim or series of
claims. Such schemes include any of the following when done deliberately for
financial gain:

• Billing for services, procedures, and/or supplies that were not provided.
• Misrepresentation of what was provided; when it was provided; the
condition or diagnosis; the charges involved; and/or the identity of the
provider recipient.
• Providing unnecessary services or ordering unnecessary tests.

Many insurance policies cover a percentage of the physician's "usual" fee. Some
physicians charge insured patients more than uninsured ones but represent to the
insurance companies that the higher fee is the usual one. This practice is illegal.
It is also illegal to routinely excuse patients from co-payments and deductibles.

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(A co-payment is a fixed amount paid whenever an insured person receives
specified health-care services. A deductible is the amount that must be paid
before the insurance company starts paying. ) It is legal to waive a fee for people
with a genuine financial hardship, but it is not legal to provide completely free
care or discounts to all patients or to collect only from those who have insurance.

Studies have shown that if patients are required to pay for even a small portion of
their care they will be better consumers and select items or services because they
are medically needed rather than because they are free. Routine waivers thus
raise overall health costs. They are considered fraudulent because averaging them
with the doctor's full fees would make the "usual" fees lower than the amounts
actually billed for.

Other illegal procedures include:

• Charging for a service that was not performed.

• Unbundling of claims: Billing separately for procedures that normally are
covered by a single fee. An example would be a podiatrist who operates on
three toes and submits claims for three separate operations.
• Double billing: Charging more than once for the same service.
• Up coding: Charging for a more complex service than was performed. This
usually involves billing for longer or more complex office visits (for
example, charging for a comprehensive visit when the patient was seen
only briefly), but it also can involve charging for a more complex
procedure than was performed or for more expensive equipment than was
delivered. Medicare documentation guidelines describe what the various
levels of service should involve.
• Miscoding: Using a code number that does not apply to the procedure.
• Kickbacks: Receiving payment or other benefit for making a referral.
Indirect kickbacks can involve overpayment for something of value.

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 For example, a supplier whose business depends on physician referrals may
pay excessive rent to physicians who own the premises and refer patients.
Another example would be a mobile testing service that performs diagnostic
tests in a doctor's office. Kickbacks can distort medical decision-making,
cause over utilization, increase costs, and result in unfair competition by
freezing out competitors who are unwilling to pay kickbacks.

Criminals sometimes obtain Medicare numbers for fraudulent billing by

conducting a health survey, offering a free "health screening" test, paying
beneficiaries for their number, obtaining beneficiary lists from nursing homes or
boarding facilities, or offering "free" services, food, or supplies to beneficiaries.

Excessive or Inappropriate Testing

Many standard tests can be useful in some situations but not in others. The key
question in judging whether a diagnostic test is necessary is whether the results
will influence the management of the patient. Billing for inappropriate tests—
both standard and nonstandard—appears to be much more common among
chiropractors and joint chiropractic/medical practices than among other health-
care providers. The commonly abused tests include:

• Computerized inclinometers: Inclinometers is a procedure that measures

joint flexibility. Inclinometer testing may be useful if precise range-of-
motion measurements are needed for a disability evaluation, but routine or
repeated measurements "to gauge a patient's progress" are not appropriate.
• Nerve conduction studies: These tests can provide valuable information
about the status of nerve function in various degenerative diseases and in
some cases of injury. However, "personal injury mills" often use them
inappropriately "to "follow the progress" of their patients.
• Thermographs: Thermo-graphic devices portray small temperature
differences between sides of the body as images. Chiropractors who use
thermographs typically claim that it can detect nerve impingements or

14
 "nerve irritation" and is useful for monitoring the effect of chiropractic
adjustments on subluxations. These uses are not appropriate.
• Unnecessary x-rays: X-rays examinations can be important to look for
conditions that require medical referral. However, it is not appropriate for
chiropractors to routinely x-ray every patient to look for "subluxations" or
to "measure the progress" of patients who undergo spinal manipulation.

Many insurance administrators are concerned about chiropractic claims for

"maintenance care" (periodic examination and "spinal adjustment" of symptom-
free patients), which is not a covered service. To detect such care, many
companies automatically review claims for more than 12 visits.

Personal Injury Mills

Many instances have been discovered in which corrupt attorneys and health-care
providers combine to bill insurance companies for nonexistent or minor injuries.
The typical scam includes "cappers" or "runners" who are paid to recruit
legitimate or fake auto accident victims or worker's compensation claimants.
Victims are commonly told they need multiple visits. The providers fabricate
diagnoses and reports and commonly provide expensive but unnecessary
services.

The lawyers then initiate negotiations on settlements based upon these fraudulent
or exaggerated medical claims. The claimants may be unwitting victims or
knowing participants who receive payment for their involvement. Mill activity
can be suspected when claims are submitted for many unrelated individuals who
receive similar treatment from a small number of providers.

Quackery-Related Miscoding

In processing claims, insurance companies rely mainly on diagnostic and

procedural codes recorded on the claim forms. Their computers are programmed
to detect services that are not covered. Most insurance policies exclude

15
nonstandard or experimental methods. To help boost their income, many
nonstandard practitioners misrepresent what they do. They may also misrepresent
their diagnosis. For example:

• Brief or intermediate-length visits may be coded as lengthy or

comprehensive visits.
• Patients receiving chelating therapy may be falsely diagnosed as suffering
from lead poisoning; and the chelating may be billed as "infusion therapy"
or simply an office visit.
• The administration of quack cancer remedies may be billed as
"chemotherapy."
• Nonstandard allergy tests may be represented as standard ones.

Viatical Fraud

In viatical settlement transactions, people with terminal illnesses assign their life
insurance policies to viatical settlement companies in exchange for a percentage
of the policy's face value. The company, in turn, may sell the policy to a third-
party investor. The company or the investor then becomes the beneficiary to the
policy, pays the premiums, and collects the face value of the policy after the
original policyholder dies.

Fraud occurs when agents recruit terminally ill people to apply for multiple
policies. They misrepresent the truth and answer "no" to all of the medical
questions. Healthy impostors then undergo the medical evaluation. In many
cases, the insurance agent who issues the policy is a party to the scheme. The
agent or one applicant may even submit the same application to many insurance
companies.

Viatical settlement companies then purchase the policies and sell them to
unsuspecting third-party investors. The insurance industry is the biggest victim of
this fraud and could incur huge losses within the next few years. Some investors
receive nothing in return for their "guaranteed" investment.
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Bogus Health Insurance Companies

There have been two reports issued concerning the sale of health insurance plans
that lack legal authorization. These plans place the buyer at risk for financial
disaster if serious illness strikes. One report focuses on consumer vulnerability.
The other notes that from 2000 to 2002, 144 unauthorized entities enrolled at
least 15,000 employers and more than 200,000 policyholders who got stuck for
over $200 million in unpaid claims.

The investigators found that many of the entitles bore names similar to those of
legitimate companies. In response to the report, the Health Insurance Institute of
America is again urging the National Association of Insurance Commissioners to
create an online database of licensed health insurance companies so that anyone
can easily check the legitimacy of companies offering health insurance products.
Meanwhile, the Coalition against Insurance Fraud offers a few warning signs of a
possible swindle:

• The plan readily accepts people with serious illnesses and other medical
conditions that other plans normally reject.
• The insurance has few or no underwriting guidelines—the agent or rep
appears almost too eager to sign you up.
• You're approached by an insurance agent, phone or direct mail. Honest
group plans normally are sponsored by your employer—and aren't sold
directly to individuals.
• The plan isn't licensed in your state, and the agent (falsely) assures you the
federal ERISA law exempts the plan from state licensing.
• The plan seems like insurance, but the agent or rep avoids calling
"insurance," and instead uses evasive terms such as "benefits."
• The agent or rep doesn't have clear answers to your questions, seems ill-
informed, or avoids sharing information.
• You've never heard of that health insurance company—and nobody else
has, either.
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• Your hospital keeps calling you to complain that your health plan isn't
paying your medical bills. Often the plan's reps keep making flimsy
excuses, or stop returning phone calls altogether.

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 Schemes, scams, scammed

Property/casualty insurance fraud cost insurers about $30 billion in 2004. Fraud
may be committed at different points in the insurance transaction by different
parties: applicants for insurance, policyholders, third-party claimants and
professionals who provide services to claimants.

Common frauds include "padding," or inflating actual claims; misrepresenting

facts on an insurance application; submitting claims for injuries or damage that
never occurred; and "staging" accidents. Prompted by the incidence of insurance
fraud, about 40 states have set up fraud bureaus. These agencies are reporting a
record number of new investigations, significant increases in referrals — tip
about suspected fraud — and cases brought to prosecution.

DEVELOPMENTS

 The hurricanes, especially Hurricane Katrina, are likely to result in a surge

in insurance fraud. In addition to the usual schemes, where homeowners or
renters make claims for stereos, televisions or other expensive items they
never purchased, and inflate claims for items actually destroyed, home
arsons are on the rise. Since many homeowners in the Gulf areas did not
have flood insurance, they may not be covered for some or all of the
damage caused by the hurricanes. Dozens of fires have broken out in many
affected communities, some of which may be the result of arson.

 . The NICB warns that flooded vehicles may be cleaned up, moved and
sold in other areas of the country by unscrupulous operators. Although the

19
 vehicles were totaled by insurance companies and identified as “salvage”
on their titles, which means they are not fit for any use except for scrap or
parts, they could end up on the market in states where it is relatively easy
to apply for a regular title. A database was created in which vehicle
identification numbers (VINs) and boat hull identification numbers (HINs)
from flooded vehicles and boats could be stored and made available to law
enforcers, state fraud bureaus, insurers and state departments of motor
vehicles.

 One in 10 paid bodily injury liability (BI) auto claims in California had the
appearance of fraud or misrepresented the facts of the claim, according to
the Insurance Research Council’s Fraud. More common is the appearance
of buildup, or the padding of claims, which was found in one in five
claims. It found that between $319 and $432 million in BI payments were
attributable to fraud and buildup.

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Real eyes...Realize...Real lies…

Short History of Antifraud Efforts

Fraud in insurance has undoubtedly existed since the industry's beginnings in the
seventeenth century, but it received little attention until the 1980s because law
enforcement agencies had other priorities and were reluctant to provide the
training needed to investigate and prosecute cases of insurance fraud. And, given
the fine line between investigating suspicious claims and harassing legitimate
claimants, some insurers were afraid that a concerted effort to eradicate fraud
might be perceived as an anti-consumer move. In addition, the need to comply
with the time requirements for paying claims imposed by fair claim practice
regulations in many states made it difficult to adequately investigate suspicious
claims.

But by the mid-1980s the rising price of insurance, particularly auto and health
insurance, together with the growth in fraud committed by organized criminals,
prompted many insurers to reexamine the issue. Gradually, insurers began to see
the benefit of strengthening antifraud laws and more stringent enforcement as a
means of controlling escalating costs — a pro-consumer move — and they found
ready allies among those who been adversely affected by fraud. These included
consumers, who were paying for fraud through their insurance premiums; the
people used by organized fraud groups to file false claims, often the poor, who
sometimes found themselves on the wrong side of the law; and chiropractors and
other medical professionals who were concerned that their reputation as a group
was being tarnished by organized fraud ringleaders who had recruited their
members to make fraudulent claims for treatment.
In their fight against fraud, insurers have also been hampered by public attitudes.
Ongoing studies by the Insurance Research Council show that significant
numbers of Americans think it is all right to inflate their insurance claims to
make up for all the insurance premiums they have paid in previous years when
21
they have had no claims, or to pad a claim to make up for the deductible they
would have to pay.

Antifraud activity on the part of state fraud bureaus and SIUs (special
investigative units within insurance companies) increased in the 1990s.
Heightened antifraud activity along with growth in funding for fraud-fighting
personnel resulted in increased prosecutions. Successful prosecution not only
blocks future fraudulent activities by individuals who are repeat offenders, but
news of prosecutions also acts as a deterrent to others who may be contemplating
committing fraudulent acts.

While the focus initially was on auto insurance fraud, antifraud efforts also
encompass workers compensation fraud, where investigations are directed toward
employers who, to obtain a lower premium, misrepresent their payroll or the type
of work carried out by their employees. These two factors impact premiums.
Payroll is important because workers compensation insurance provides for lost
wages and insurers need to know the maximum they would have to pay if all
employees were injured in the same accident; the type of work carried out by the
firm affects the likelihood of injuries. Workers that use cutting tools, for
example, are more likely to get injured on the job than office workers. Some
employers also apply for coverage under different names to foil attempts to
recover monies owed on previous policies or to avoid detection of their poor
claim record, which would put them in a higher rating category.

Fraud and abuse take place at many points in the health care system. Doctors,
hospitals, nursing homes, diagnostic facilities and attorneys have been cited in
scams to defraud the system. One huge area of fraud is the Medicare and
Medicaid systems. Health care is especially susceptible to electronic data
interchange (EDI) fraud. EDI is direct filing of claims — computer to computer
— and is widely used for Medicare claims.

22
In 1999, the Government Accounting Office released a study of the Medicare,
Medicaid and private health insurance sectors that confirmed that organized
crime is heavily involved in health care fraud. The investigation found that in
seven cases of health care fraud studied, about 160 health related groups —
medical clinics, physician groups, labs or medical suppliers — had submitted
fraudulent claims. The criminals identified in the report were not health care
workers but criminals already prosecuted for securities fraud, forgery and auto
theft. Apparently, these criminals had moved to health care because fraud was
relatively easy to accomplish.

Anti-Fraud Programs

Several large insurance companies have joined forces through the National
Health Care Anti-Fraud Association to develop sophisticated computer systems
to detect suspicious billing patterns. The Federal Bureau of Investigation (FBI)
and the Office of the Inspector General (OIG) each have assigned hundreds of
special agents to health-fraud projects. The Coalition Against Insurance Fraud, a
public advocacy and educational organization founded in 1993, includes
consumers as well as government agencies and insurers.

The Omnibus Consolidated Appropriation Act of 1997 authorized a Health Care

Anti-Fraud, Waste, and Abuse Community Volunteer Demonstration Program to
further reduce fraud and abuse in the Medicare and Medicaid programs. The
program enrolled thousands of retired accountants, health professionals,
investigators, teachers, and other community volunteers to help Medicare
beneficiaries and others to detect and report fraud, waste, and abuse.

The Inspector General's office has recovered over a billion dollars through fines
and settlements. Its Operation Restore Trust, which began in 1995, was a joint
federal-state program aimed at fraud, waste, and abuse in three high-growth areas
of Medicare and Medicaid: home health agencies, nursing homes, and durable
medical equipment suppliers. The questionable activities included:

23
 • Billing for advanced life support services when basic life support was
provided. Documentation may be falsified to indicate a patient needed
oxygen—which is a key indicator in establishing medical necessity for
advanced life support.
• Billing for larger amounts of drugs than are dispensed; or billing for brand-
name drugs when less expensive generic versions are dispensed.
• Billing for more miles than traveled for transportation.
• Falsification of documentation to substantiate the need for a transport from
a hospital back to the patient's home. Medicare will only cover transport
from hospital to home if the patient could not go by any other means.

Insurers’ Antifraud Measures

Insurance companies are not law enforcement agencies. They can only identify
suspicious claims, withhold payment where fraud is suspected and to justify their
actions by collecting the necessary evidence to use in a court. The success of the
battle against insurance fraud therefore depends on two elements: the resources
devoted by the insurance industry itself to detecting fraud and the level of priority
assigned by legislators, regulators, law enforcement agencies and society as a
whole to eradicating it.
Many insurance companies have established special investigation units (SIUs) to
help identify and investigate suspicious claims; some insurance companies
outsource their units to other insurers.

These units range from a small team, whose primary role is to train claim
representatives to deal with the more routine kinds of fraud cases, to teams of
trained investigators, including former law enforcement officers, attorneys,
accountants and claim experts to thoroughly investigate fraudulent activities.
More complex cases, involving large scale criminal operations or individuals that
repeatedly stage accidents, may be turned over to the National Insurance Crime
Bureau (NICB). This insurance industry-sponsored organization has special
expertise in preparing fraud cases for trial and serves as a liaison between the

24
insurance industry and law enforcement agencies. In addition, it publicizes the
arrest and conviction of the perpetrators of insurance fraud to help deter future
criminal activities. Insurance company surveys confirm that SIUs dramatically
impact the bottom line of many insurance companies.

In the mid-1990s insurers said that for every dollar they invested in antifraud
efforts, including SIUs, they got up to $27 back, but these returns have become
harder to achieve as the more apparent fraud schemes have been uncovered and
more effort is necessary to ferret out the sophisticated fraud that remains. A 2000
study by Conning Research & Consulting suggests that results vary widely.
Using the ratio of “claims exposure reduction” to the expense of running SIUs,
the study found ratios ranging from a low of 3 to 1 to a high of 27 to 1,
depending on the year and line of insurance. Although some insurers are cutting
back on fraud investigation by outsourcing investigations and dissolving their
fraud units, advances in software technology, especially programs that sift though
the millions of claims that large health insurers process annually, are proving
effective in fighting fraud. These “data mining” programs can uncover repetitions
and anomalies and analyze links to fraudulent activities or entities.

The consolidation of insurance industry claims databases has put a valuable new
tool in the hands of investigators. The Insurance Services Office Inc.'s system,
known as Claim Search, utilizes a data-mining program. Claim Search is the
world’s largest comprehensive database of claims information. The NICB has
developed a program called Predictive Knowledge that collects and analyzes
information which can be disseminated to insurers and law enforcement agencies
to detect, investigate and prevent insurance fraud. In addition, the NICB, in
partnership with iMapData Inc., introduced CAT fraud, to identify potentially
fraudulent catastrophe/weather-related insurance claims.
A national fraud academy — a joint initiative of the Property Casualty
Association of America, the FBI, NICB and the International Association of
Special Investigating Units — was designed to fight insurance claims fraud by
25
educating and training fraud investigators. It offers online classes under the
leadership of the NICB.
An emerging issue for insurers using data sharing services is their impact on
privacy. Financial institutions, including insurers, must respect the privacy of
their customers and protect their personal information, a practice that may deter
efforts to combat fraud.
Insurers may also file civil lawsuits under the federal Racketeering Influenced
and Corrupt Organizations Act (RICO), which requires proving a preponderance
of evidence rather than the stricter rules of evidence required in criminal actions
and allows for triple damages. Since 1997, some of the largest insurers in the
country, especially auto insurers, have been filing and winning lawsuits against
individuals and organized rings that perpetrate insurance fraud.

26
Itching To Know Who Can Help?

Insurance Agent Fraud on the Rise

At the age of 90, Thomas Pickering was doing the twist.At the behest of his
trusted insurance agent, Pickering was buying and selling one annuity after
another in a deceitful industry practice called "twisting." That's when dishonest
agents persuade clients to cash in one investment for another—against their
clients' best interests and for the agents' own financial gain.

In Pickering's case, he followed his agent's advice, sold investments before they
matured and lost 11,000/- in forfeited interest and penalties. He was about to lose
another 35,000/- cashing in one annuity to buy another,netting his agent 20,000/-
in commissions. When the company holding the annuity intervened. It suspected
Pickering was getting ripped off and called the authorities.An investigation led
Florida's Department of Financial Services (DFS) to revoke agent Peter Waldon's
license for fraud.

Barry Lanier of Florida's DFS says he's fielding more complaints about greedy
agents earning whopping commissions upfront by pitching unsuitable
investments like annuities to older people. But Lanier and other experts say some
annuities are not considered to be wise investments for most olders because
they're based on life expectancy.Growing concern over the sale of annuities to
older people prompted the National Association of Insurance Commissioners
(NAIC) to adopt regulations that assure that the annuities are suitable to the
buyer's needs.

27
Division of Insurance Fraud

The Division of Insurance Fraud was originally formed in 1976 to investigate

only fraudulent automobile tort claims. In the early years, investigators had arrest
powers but could not carry firearms. Today, the division investigates all types of
insurance fraud crimes.

Investigators are assigned to work general fraud cases, workers’ compensation

fraud, medical and health-care fraud, and agent and company fraud. Areas of
assignment may include:

• →Insolvency - Fraud committed by insurance companies that fail

financially due to internal fraud by owners and corporate officers.
• →Unauthorized Entities - fraud, both criminal and civil, committed by
insurance companies operating illegally in the state.
• →Health Care Fraud - focuses on organized medical and health care
scams.
• →Workers’ Compensation - investigates employers for workers’
compensation premium fraud.
• →Public Employee Fraud - investigates state and local government
employees for workers’ compensation claimant fraud.

28
Deceptive Life Insurance Sales Practices Continue

The life insurance industry has been hit with billion dollar verdicts and multi-
million dollar fines for deceptive sales practices.

The two largest companies, MetLife and Prudential, have each been hit with
billion-dollar-plus verdict.

Most major companies have also been sued for deceptive sales practices. The list
goes on and on, as successful lawsuits finally caught up with an industry that has
long bilked the public, misrepresented its product, and ignored the urgent need
for basic reforms to stop abuses.

With billion dollar judgments (and that is "billion" with a "b"), you'd think the
industry would learn its lesson. That's what you'd think but you'd be wrong.

The life insurance industry did establish the Insurance Marketplace Standards
Association (IMSA). Of course, there are now ads announcing that the life
insurance industry is committed to the fair treatment of policyholders. But early
returns on the industry's efforts suggest it is just a sham and a shell game
designed to prevent real reform by legislation and regulation.

Now a study by Professor Joseph Belth, publisher of the Insurance Reform, a

respected newsletter on the life insurance industry, finds the reforms are a sham.
I'd have to say as usual the life insurance industry wants to improve its public
relations, not its policy relations.

The Insurance Forum study correctly notes that much of the life insurance
deception comes about because the industry does not make full disclosure on
rates of return and prices necessary to sound decision making by insurance

29
buyers. By failing to disclose needed information, consumers are easily duped by
deceptive methods.

The Insurance Forum put the industry to a test by asking the chief executive
officers of 40 companies (31 of which are members of IMSA) for the kind of
information that should be freely and automatically available to prospective
policyholders.

Of the 41 companies surveyed, 27 did not participate. Only 13 companies (10 of

which are members of IMSA) participated in the study.

And some of the 13 participants provided deceptive information. Some provided

incomplete information. Some provided the kind of information that would not
be helpful to the typical consumer.

The Insurance Forum study concludes that IMSA will not bring about the needed
changes in the life insurance industry, but will simply delay their enactment.
Most industries prefer "voluntary" action, so the foxes can continue to guard (and
eat) the chickens, also known as policyholders.

What's more, after the great life insurance scandals of the 1980s and 1990s, the
industry is determined to perpetuate a system in which life insurance rip-offs by
major and minor companies alike will continue to be standard operating
procedures.

The bottom line is that the life insurance industry has practices that are precisely
the opposite of its proclaimed ethical principles.

Here are some examples:

IMSA has an ethical principle that says its company members will "provide
competent and customer-focused sales and services." The Insurance Forum
30
survey suggests that most companies will engage in business as usual, giving the
consumer no information, inadequate information or deceptive information.

IMSA has another ethical principle that says it will "engage in active and fair
competition." But by not providing information or by providing deceptive
information, it is clear that major segments of the industry will continue to
engage in competition by confusion.

As Bob Hunter of the Consumer Federation put it, "The proof of the pudding is in
the eating. It's hard to trust the life insurance industry, given its recent history.
They're going to have to reprove themselves as trustworthy."

Unfortunately, the life insurance industry is proving itself untrustworthy. And as

for the proof of its good intention being in the pudding, my advice is don't eat its
pudding. It's the same old stuff plus a phony sermon on ethical principles.

31
Viatical Settlements Investment Fraud

Historically, some insurance companies have offered an accelerated death

benefits option which allows the insured an opportunity to receive up to 80% of
the death benefit at any time within the last year of their projected life. The
remaining 20% is then paid to the insured's estate.

On the other hand, the business of viatical settlements involves the selling of a
policy death benefit, at less than face value, by a terminally ill person to a third
party. This is accomplished, for a commission, with the assistance of a broker
who offers the policies to settlement provider companies for bid, with the highest
bidder obtaining the policy for resale to investors. The broker receives a
commission based on the sale price.

Size of the Industry

Fraud in the unregulated viatical settlement industry has become rampant; as

much as 40-50% of the life insurance policies viaticated may have been procured
by fraud.

Clean Sheeting

Unscrupulous individuals in the viatical industry procure policies by a practice

referred to as "clean sheeting" which is the act of applying for life insurance
while intentionally failing to disclose the applicant's status as being terminally ill.
They can get away with it initially because most insurance companies avoid the
added costs and invasiveness of medical exams and blood tests by relying on an
honor system below a certain policy face value.

32
Many insurance agents and brokers assist and often encourage aviators in
committing the fraud because it not only provides more policies than would be
available though legitimate means, but it also provides a much higher rate of
return due to the fact they can be bought from aviators so cheaply.

In a legitimate transaction, the ill person usually receives 50%-70% of the face
value of the policy. However, a "clean sheeted" policy viaticated during the
contestable period may offer as little as 10% of the face value because it carries
the high risk of rescission, or cancellation by the insurance company, due to
fraud.

Wet Ink Policies

After the policy is issued, the insured person will sell his policy or multiple
policies from different insurance companies, sometimes within weeks, to a
settlement provider using a broker. This is referred to as a "wet ink policy"
because the ink on the contract is still "wet" when the policy is sold.

The odds against an individual finding out that he is terminally ill within weeks
of buying a policy are exceedingly high. To see that happen repeatedly within a
short period of time with the same broker or provider is strong evidence that they
are both well aware that the policies have been "clean sheeted".

To hide the fact that the policy has been viaticated shortly after issuance, con
artists will obscure viatication by simply changing the beneficiary to someone at
the settlement provider firm. A second way is to employ a "collateral
assignment" which is similar to where the insured seeks a loan from a third party
and secures the loan by pledging the death benefits of the policy. In fraudulent
transactions they pledge the death benefits but do not receive a loan.

33
Contestability Period

Finally, some settlement providers merely delay reporting that the policy has
been viaticated until the contestability period is over; falsely believing that it is
not a crime then. An indication of culpability is that virtually all parties attempt
to hide the viatication of fraudulently obtained policies from the insurance
company for as long as possible.

The contestability clause for life insurance lasts for two years after issuance,
during which time it may be rescinded by the insurer for fraud in the application.
After this period ends, the insurer is obligated to pay the death benefit, regardless
of any fraud in the application. Because policies viaticated during the
contestability period may be rescinded, they bring, as mentioned, a much lower
price in the market.

34
A Case Study

As an investor, you are offered the opportunity to purchase an interest in a life

insurance policy in which the insured is terminally ill (i.e., viatical settlement).

You are told:

that your investment will produce a 100% rate of return because you are
assigned a policy with a face value of twice your investment which you can claim
upon their death;

that you will have the option of reselling your policy once it becomes
incontestable (two years after the date the policy is issued) for 70% of the face
value.

and that if the policy is contested or canceled by the insurer, the promoters will
provide a replacement policy through a "replacement policy trust" managed by
them.

They say these are better investments than stocks, mutual funds, annuities, and
CD's because viatical investments have the following attributes:

→"Full liquidity at maturity from rock solid 'A' rated insurance

companies!"

→"Tax advantaged & hassle free! 100% fixed rate of return which is fully
secured."

→"Zero risk to principal, a totally safe investment with no load & no fees!"

→"Short holding periods with early buyout options available as well!"

35
→"No speculation, no interest rate risk, no market risk, no economic risk!"

In addition they say you will be making a "humanitarian investment" because the
terminally ill person will be able to use the funds to receive improved health care;
pay off debts; take a vacation, reduce family stress, and enhance their quality of
life. In exchange for your money you receive a Membership Certificate certifying
that you are a member of Viatical Funding LLC.

After deducting the fees paid to sales agents, viator agents, and other
intermediaries from your funds, you find that the ill person will actually be left
with very little. In this case only $5,400, which is only 12% of your investment
of $45,000, or 6% of the policy's face value of $90,000.

They fail to disclose to you that the insured was terminally ill prior to being
insured, that they concealed this fact on the application, and thus subjected the
policy to cancellation by the insurer.

Instead of being designated as the sole beneficiary you may find you share it with
creditors and family members, and that the option to resell the ownership
interests is not a guaranteed option, but rather an "assurance" that they will
"make an effort" to facilitate a resale.

In any event, you will not likely receive a promised 70% of the face value but
only the amount another investor would be willing to pay, less commissions,
which could be much less.

36
They also fail to mention:

the risk of the insured living much longer than the estimated life expectancy,
thereby greatly reducing the annual yield;

the risk of their becoming insolvent and unable to replace a contested or

canceled policy;

the risk of the life insurance policy lapsing, or that you will often have to pay
the policy premiums for the duration of the policyholder's life;

the 15% commission the sales agent receives from your investment;

who is responsible for monitoring the health status and location of the insured,
obtaining a death certificate, and making a claim to the insurance company.

Life Expectancy of the Insured

To determine their rate of return investors rely on a report which projects the life
expectancy of the insured, but there are no minimum requirements as to who may
generate these reports or projections. One company used a nurse and a plastic
surgeon but could have used the janitor.

Viatical investing is highly speculative and risky. Even when the policyholder
exists and is terminally ill, there is a high degree of uncertainty in predicting
when they will die. New AIDS drugs and cancer treatments have compounded
the risk for investors because they help policyholders live longer.

Viatical settlements are illegal under Canadian insurance legislation so Canadian

investors should not be involved in these schemes at all.

37
Not Enough Sick People

Financial Federated Title & Trust, and Asset Security Corporation pled guilty
after being charged with conspiring to recruit insurance agents to defraud more
than 3,000 investors while purchasing viaticated insurance policy investments
over a three year period.

Investors were told that their money would be used to purchase a beneficial
interest in viaticated insurance policies, and that medical overviews were being
performed on the insured persons whose policies were being bought.

Although at least $115 million in investor monies was taken in, the promoters
used only $6 million of these funds to buy insurance policies whose total face
value was just over $7 million. They used the balance of the money for purposes
totally unrelated to the purchase of viaticated insurance policies.

Industry Terminology

Cleansheeting: Refers to a fraudulent criminal act committed by a proposed life

insurance applicant, and by life insurance agents who knowingly assist or
conspire with the insurance applicants, by failing to disclose a pre-existing
medical condition in response to a question on a life insurance application which
would affect issuance of the policy.

Viator: A person who has a life threatening or terminal illness who sells or
assigns their life insurance policy.

Viatical Settlement: The life insurance policy of a terminally ill person sold or
offered for sale, generally at less than face value, through a viatical settlement
company.

Contestability: Policies are generally contestable for two years from the date of
issue and are subject to being rescinded by the insurer for cause, such as
application fraud and suicide.

38
Viatical Settlement Provider: A person who enters into a viatical settlement
contract with a viator. Often referred to as a settlement company or funder.

Viatical Settlement Broker: A person who, for profit, offers or attempts to

negotiate a settlement contract between a viator and one or more viatical
settlement providers.

Viatical Settlement Sales Agent: A person other than a licensed viatical

settlement provider who arranges for the purchase of a viatical settlement or an
interest in a viatical settlement from a viatical settlement provider.

Mortality Profile Report: A report based on a review of a viator's medical

history, which gives a prognosis of a viators life expectancy. Usually done by a
health-care professional and generally at the behest of the viatical settlement
provider to calculate the value of a viatical contract.

Viatical Investment Broker: Defines a person or entity other than a licensed

viatical settlement provider who solicits investors to purchase a viatical
settlement interest from a viatical settlement provider.

39
We Chose to Keep Your Money

Personal Choice Opportunities mislead investors when they sold viatical

securities in the form of loan transactions. Investors lent money to PCO in order
for them to purchase the benefits of life insurance policies from terminally ill
individuals on the promise that they would receive a return on their investment of
21-25% per annum.

The funds, however, were not used to purchase life insurance policies but kept
instead. Over 1100 investors nationwide are believed to have invested $80-100
million in these transactions in just ten months. No evidence of any valid life
insurance policies being purchased has been discovered.

Repercussions for the Industry

Life insurance premiums are based on actuarial tables which are worthless in
fraudulent applications. Insurance companies cannot afford to pay out large death
benefits after collecting small premiums for only a few years. Even if they don't
go bankrupt the added costs are eventually passed on to other policyholders.

The viatical industry as a whole must take steps to better police itself. If it does
not, it risks ceasing to exist as an industry either by being legislated out of
existence or by being pushed out of the market after destroying investor
confidence in its product. If this fraud is to be stopped, it will require the total
commitment of the insurance industry. The first step is for the industry to wake
up to the existence and scope of the problem.

40
Penalties

Currently a person charged with viaticating a fraudulently procured insurance

policy worth $100,000 face value, who stands to gain tens of thousands of
dollars, faces the same penalty as a shoplifter who takes a pack of cigarettes. A
mere sixty days in jail is an encouragement, not a deterrent which may be why
the industry watchdog has never received a single referral from the industry itself
reporting such fraud.

Life Settlements

Once thriving on those dying from a terminal illness, medical advances, which
are helping patients live longer, has caused the business to start targeting new
clients - usually seniors with high payoffs - who may be willing to sell their life
insurance policy to investors at a discount.

Life settlements, or the sale of a life insurance policy to a third party, are
sometimes referred to as "senior settlements" because most of the life insurance
policies purchased insure the life of a senior citizen.

The owner of the policy gets cash and the buyer becomes the new owner and/or
beneficiary of the life insurance policy, pays all future premiums and collects the
entire death benefit when the insured dies.

People decide to sell their life insurance policies for many reasons. Some
common ones are the changed needs of dependents, a desire to reduce or
eliminate premiums, and a need for additional cash to meet expenses.

State regulation of insurance generally does not extend to life settlements.

Certain aspects of these transactions may fall under the various Securities Acts so
there can be financial risks involved when entering into such arrangements.

41
You should consider contacting a professional tax advisor to find out the tax
implications as life settlement proceeds are generally not tax free. Also know, if
you are the seller that you will be required to provide certain medical and
personal information to third parties who will be paid the proceeds from your
policy upon your death. These third parties may sell your policy and pass along
your medical and personal information to other individuals.

Typically, life settlements are offered to buyers, for resale to investors, at a

discount from the death benefit. The discount is for the entire life of the policy,
not an annual rate of return. An annual rate of return cannot be guaranteed. Your
rate of return depends on when the insured dies, and no one can predict a person's
life expectancy. Keep in mind that a life settlement is not a liquid investment
because the return on such an investment does not occur until the insured dies.

Spreading the Risk

The Alabama Securities Commission issued a Cease and Desist Order against
Viatical & Elderly Settlement Providers, LLC (VESPERS) Washington, D.C.,
to stop conducting business in a few states after they received information that
they were engaged in the illegal offer and sale of investment contracts involving
fractionalized viatical settlement contracts there.

VESPERS, though not licensed to sell this type of security in the state, have
solicited independent insurance agents to sell interests in viaticals issued by
them with promises of low risk and high returns of 28-70 percent on two to five
year investments for a 10% commission.

42
Be Aware, Don’t Be a Victim

The Coalition Against Insurance Fraud (CAIF) is a national advocacy

organization of consumer groups, public interest organizations, government
agencies and insurers. Its website notes “insurance fraud is hard to measure
because so much goes undetected, and complete research has yet to be done.
Still, we have enough evidence to know that fraud is widespread — and
expensive.

National studies conducted by the Insurance Research Council (IRC) show that
auto insurance, workers’ compensation and health insurance are the lines that are
most vulnerable to fraud. The IRC estimates that one-third of all bodily injury
claims from auto accidents contain some amount of fraud, usually in terms of
padding or exaggerating a claim, but only 3% are totally fraudulent such as
staged accidents. Another form of fraud, lying on applications in order to reduce
premium, costs auto insurers $13.7 billion annually (Insurance Information
Institute, or III).

As to workers’ compensation fraud, one of the most common forms of workers’

compensation fraud in Maine is a faked or exaggerated injury, an area within the
jurisdiction of the Maine Workers’ Compensation Board’s Fraud and Abuse Unit
to investigate. There are, however, other forms of workers compensation fraud
are employers who misrepresent payroll or the type of business in order to reduce
their insurance premiums and real or bogus entities that purport to provide real or
bogus workers compensation coverage or “alternatives” to coverage to
employers.

In late 1999 the Governmental Accounting Office found that organized crime is
heavily involved in health insurance fraud and that the criminals identified were
not health care workers, per say, but individuals already prosecuted for securities
fraud, forgery and auto theft. With the enactment of HIPAA (Health Insurance

43
Portability and Accountability Act of 1996) detection and prosecution of health
insurance fraud received a boost. The Department of Justice calls health care
fraud and abuse its number two law enforcement priority, after violent crimes. In
1996, according to the FBI, Congress provided an added $54 million over seven
years for health care fraud enforcement.

Property insurance, based upon the Bureau’s data, had the third highest fraud
and abuse count by line of business at 165 reported cases. According to the
National Fire Protection Association, arson or suspected arson account for nearly
500,000 fires each year, or one in four fires in the United States. Arson and
suspected arson are the largest causes of property damage in the U.S.

Despite what may appear to be a bleak picture, a number of tools exist for
combating fraud. In addition to those Maine Insurance and Criminal Code
provisions, previously discussed, several federal laws are used to address fraud.
These include: The Federal Mail Fraud Statute, the Racketeer Influenced and
Corrupt Organizations (RICO) and the Health Insurance Portability and
Accountability Act (HIPAA). Also, the Violent Crime Control and Law
Enforcement Act of 1994 makes insurance fraud a federal crime when it affects
interstate commerce.

Certain state agencies work with insurers to address fraud, as well. The Workers’
Compensation Board’s Fraud and Abuse Unit tackles issues such as fakes or
exaggerated injuries, the Fire Marshal’s Office investigates possible arson, and
the Department of Human Services takes on Medicare and Medicaid fraud.
Recently, one DHS employee received the Office of the Inspector General
Integrity Award for her investigative and logistical support in a Medicare and
Medicaid fraud case in Bangor Federal Court.

Fraud has also gotten the attention of the National Association of Insurance
Commissioners (NAIC), which encourages the insurance industry to take a
proactive role in controlling fraud. The NAIC offers states support through their

44
Antifraud Task Force.
The mission of the Antifraud Task Force is to serve the public interest by
assisting state insurance supervisory officials, individually and collectively, in the
following fundamental antifraud activities:

• Promotion of the public interest through the detection, monitoring and

appropriate referral for investigation of insurance crime, both by and
against consumers.
• Provision of assistance to the insurance regulatory community through the
maintenance and improvement of electronic databases regarding fraudulent
insurance activities.
• Disseminate the results of research and analysis of insurance fraud trends
as well as case-specific analysis to the insurance regulatory community
and state and federal law enforcement agencies.
• Provision of the liaison function between insurance regulators, law
enforcement and other specific antifraud organizations.

Highlights of the 2004 charges of the Antifraud Task Force include: compile and
maintain detailed information on antifraud databases maintained by antifraud
organizations, financial regulators, and law enforcement; consider developing
further guidelines for use by the industry in determining when suspicious claims
should be reported; review industry compliance with antifraud initiatives;
develop methods to enhance the investigation and prosecution of financial
services fraud; and establish guidelines on the investigation and prosecution of
insider insurance industry fraud.16

Additionally, in 2005 the NAIC created a “Fraud Web line,” an online insurance
fraud reporting system located on the Web site of the National Association of
Insurance Commissioners (NAIC). The system allows consumers to provide
information anonymously.

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The new fraud reporting system was developed as part of the response by
insurance regulators to the national allegations about misconduct involving
compensation agreements between some insurance companies and brokers. The
allegations of improper activity spurred regulators to improve their abilities to
collect information from consumers, producers and insurance company
employees. Many places participates in the online fraud reporting system, in
conjunction with the NAIC.

The online fraud reporting system lets consumers anonymously supply detailed
information regarding suspected fraudulent activities to the NAIC where the
information is then forwarded to the appropriate state. Although consumers may
identify themselves, no personal identifying information is required to report an
allegation of suspected fraud. Consumers are required to designate the state
where the suspected fraud occurred and the name and address of the business or
individual. A text box is included for the consumer to provide the details of the
suspected fraud. Other optional fields on the form include phone number, date of
birth, date of suspected fraud, and amount of loss.

Despite the anti-fraud activities of state and federal agencies discussed above, the
Bureau notes that an enforcement and prosecutorial gap exists in current Maine
government operations insofar as no entity exists that is focused on investigation
and prosecution of fraudulent insurance acts and the crimes of insurance
deception and deceptive insurance acts. The American Insurance Association and
the Property Casualty Insurers Association and several of the individual fraud
investigators who commented as interested persons all noted the frustration when
hard work has been expended to develop a case and local prosecutors have
refused to prosecute or believe that it is not a serious crime meriting their
attention. The interested persons believe that a strong and effective insurance
fraud unit would be effective not only in punishing those convicted of insurance
fraud, but in deterring others.

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International association of insurance fraud
agencies(IAIFA)

The IAIFA and its members are continually working to improve the quality of
data available to members and break down the jurisdictional barriers by working
with regulators, companies and other law enforcement agencies.Those who break
the law are adept at using these jurisdictional boundaries as a protective shield.
IAIFA is trying to cut red tape involved in the various (often necessary)
jurisdictions' "privacy" laws in an attempt to track down crime and encourage
other enforcement agencies to share information to the mutual benefit of all who
are involved in assuring a high level of integrity throughout the insurance
industry.

Goals:

IAIFA's goal is "to co-ordinate the efforts, training and education of law
enforcement agencies, government bodies, and the insurance industry to move
more efficiently prevent and combat insurance fraud worldwide." IAIFA has kept
its focus on insurance fraud, which its members view as a crime against all
segments of society - not a victimless felony, as some would define it.

WHEN do they meet

IAIFA meets annually. The annual conference hosts eminent speakers whose
presentations update the members on critical developments. It also enhances
personal contacts and exchange of information between members throughout the
year.

IAIFA cooperates in regional seminars which focuses on such topics as how to

effectively use the laws to prosecute and recover assets gained by fraudulent
means. Added to this, these meetings have widened the network of contacts for

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members from Europe, Asia, Australia, the Caribbean, Africa, and North
America.

Between meetings, our newsletter keeps members informed of the various

projects undertaken by the Association and its members, as well as presenting
new trends in the field of insurance fraud, both from a criminal and law
enforcement perspective.

WHERE are they found?

International is the first word in IAIFA's name. That means what it says. While
IAIFA began in North America, the founders were not so insular to believe that
they had a unique place in insurance fraud. More than ever, sharing intelligence
and finding ways to successfully prevent and combat crimes is essential for the
members to do their job effectively.

This is why the IAIFA wants even more countries to join in this worldwide
effort. It is a classic case of the sum of the whole being greater than the sum of its
parts. The interchange of information is invaluable, and should be available to
everyone in their fight against sophisticated global fraud

WHO are the members?

It could be you and your organization. IAIFA's members include government
insurance departments and fraud bureaus, law enforcement agencies, respected
insurance companies, and related firms with a strong interest in combating
insurance frauds.

You may obtain the application by logging on the site or by contacting them for a
mailing of the application. Upon receipt, your application will be considered by
IAIFA's executive committee. If you are accepted, you and your organization will
have made a major step forward in beating insurance crime. This will be true not
only for you in your own jurisdiction, but for your colleagues elsewhere, who
will welcome hearing how you cope with escalating problems of insurance fraud.
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WHY were they formed?

Insurance fraud is recognized internationally as a multi-billion dollar problem.

IAIFA was created after a group consisting of the Directors of Insurance Fraud
Agencies from the U.S.A. and Canada met to confront this burgeoning problem
which is not restricted by jurisdictional boundaries.

It soon became apparent that if the agencies could share information they would
increase their degree of effectiveness. Rapid communication is of the essence in
catching fraud artists who know how to move money literally at the speed of
light. From those early beginnings in 1986, with only a handful of members in
North America, IAIFA now encompasses the Globe.

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Dealing with fraud on the Net

As time goes on, the number of attacks will only increase and network forensics
will become a part of our lives, who could put you on the track by helping record
and analyse previous security threats.

In a perfect world, network security wouldn’t be required. Unfortunately this

isn’t a perfect world, and even if there are many who will throw up a firewall and
other such security measures as solutions, this doesn’t stop the problem. No
firewall is impenetrable and there’s no such thing as a perfect security measure.
There’s always a way to get around them, and the number of people trying to do
that keeps increasing.

According to the US General Accounting Office, approximately 250,000 break-

ins were attempted into Federal computer systems alone in 1995 and this number
gets bigger every year. Only one to four per cent of these attacks ever get
detected.

Network forensics is the capture, recording, and analysis of network events in

order to discover the source of security attacks or other problem incidents. It
attempts to prevent hackers from attacking a system, and searches for evidence
after an attack has occurred.
There are three parts to network forensics: intrusion detection; logging (the best
way to track down a hacker is to keep vast records of activity on a network with
the help of an intrusion detection system); correlating intrusion detection and
logging.

The ultimate goal of network forensics is to provide sufficient evidence to allow

the criminal perpetrator to be successfully prosecuted. The practical applications
could be in areas such as hacking, fraud, insurance companies, data theft—

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industrial espionage, defamation, narcotics trafficking, credit card cloning,
software piracy, electoral law, obscene publication, perjury, murder, sexual
harassment, and discrimination.

Technical Challenges

IT managers, network consultants, auditors, software developers, and analysts

would all like to understand the data that is sent over their corporate networks.
Network monitoring is an essential tool for network optimization and security.
How much data was sent? When? What was sent? Current tools only answer the
first two questions, and have trouble with the third. The tools base their analysis
primarily on IP and TCP headers, which can be misleading or intentionally
falsified.

This leaves security consultants and network managers to manually sift through
raw network packet dumps, piece together data streams and undo transfer
encoding, and seek to understand the significance of a single connection. This is
tremendously time-consuming and since networks deal with one packet at a time,
this isn’t very useful or complete to someone trying to get a big picture view of
an employee’s suspected network abuse, or a deep-level view of an intrusion
attempt.

And yet the internet is critical, and we haven’t a choice but to connect internal
networks to the rest of the world — to link with customers, suppliers, partners,
and their own employees. Even if that connection brings in threats of malicious
hackers, criminals, and industrial spies. These network predators regularly steal
corporate assets and intellectual property, cause service breaks and system
failures, sully corporate brands, and frighten customers. Unless companies can
successfully navigate around them, they will not be able to unlock the full
business potential of the internet.

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Even enterprises with exceptional security have their front doors open to
employees sending and receiving data. Is there a user abusing the system for
personal reasons, or accidentally or maliciously releasing confidential
information? Unfortunately, the variety of data formats and sheer volume of
traffic make detailed network monitoring a major technical challenge. Traffic
monitors focus on bandwidth. Although some go so far as to keep basic statistics
such as web page hits and average visit length, they’re mostly useful for capacity
planning and simple web marketing. Port scans allow network security specialists
to find some vulnerability.

Intrusion detection systems scan traffic for known attack signatures. However,
because these tools base their analysis primarily on the IP and TCP headers,
which can be intentionally falsified or misleading, they are subject to incorrect
analysis and spoofing. Current tools can’t provide the information that IT
managers, network consultants, auditors, software developers, and analysts need
to know:

“Who is running an unauthorized web server on a non-standard port?”

“How long is it taking our e-commerce system to process a customer order from
start to finish?”
“What generated that huge spike of traffic between 5:35am and 5:40am this
morning?”
“Exactly what happened during – and before – last night’s attempted break-in?”

The fleeting nature of any kind of electronic data is such that its preservation, is
required especially for legal proceedings — the methodology can be broken
down into two key elements: acquiring evidence and analyzing evidence.
This information is required for dealing with a law enforcement investigation. It
involves capturing and storing every packet passing through wires and then
regenerating the sequence flow for analysis. If we are able to regenerate the
attack it can now be treated as evidence.
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Full-content network monitoring is no longer the province of spooks and spies —
it’s increasingly a practice that is an integral part of a multilayered defense
system that serves a variety of goals for both computer security and overall
network policy.

The solution is to follow a multi-layered security approach and a system that can
perform the following tasks: integrated network IDS/ anomaly detection /forensic
analysis; capture data at high speeds; run invisibly and capture packets from the
monitored network; assemble the collected packets into connection streams; read
the actual data in packets and categorizes it by type, rather than make
assumptions based on packet headers and port numbers; automatically determine
key connection attributes; operates at the level of complete, assembled data
streams, rather than arbitrarily mixed-together packets; search capability through
network traffic by keyword; protocol recognition capability and correlation
functionality.

As time goes on, the number of attacks will only increase and network forensics
will become a part of our lives. It has an ability to strengthen our securities,
check compliance against policies, and punish those that attempt to disrupt our IT
infrastructure. The future of information security lies in an organisation ability
to not only prevent malicious activity, but also investigate and prosecute the
perpetrators whether internal or external.

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Precaution is better than cure

Insurance fraud is not typically a violent crime, just a lucrative one. As

consumers, there are several common-sense steps you can take to help reduce
fraud and minimize its impact.

Be an Informed Consumer.

Insurance premiums are a significant expense for most of us. The premiums you
pay are based on your individual claims history and the degree of risk involved.
Generally speaking, the greater the risk, the higher the premium. For example,
the theft premium for a Honda Accord will be far higher than that of a Yugo quite
simply because more Honda Accords are stolen. Similarly, a tightrope walker
will pay more for life insurance than a librarian, all else being equal.

Comparison Shop.

Premiums can vary significantly from insurer to insurer so it pays to shop around.
To make comparison shopping a little easier, the Insurance Department publishes
consumer guides for auto, homeowners, long-term care and HMO/health
insurance that provide sample premiums for insurers that offer these coverage. In
addition, the Insurance Department's Web site is also the home of an Interactive
Guide to HMOs, which allows consumers to find information about HMOs
operating within their home county.

Know Your Agent or Broker.

Consumers can often be victimized by unscrupulous agents or brokers and

discover only after they file a claim that they are without coverage for their home
or their car. If an uninsured home is damaged by fire, the owner is solely
responsible for restoring it and paying back any mortgage holders. If a driver is
involved in an accident while driving an uninsured vehicle, any personal assets

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are subject to forfeiture if that driver is sued for damages. Deal only with licensed
agents and brokers. Agents and brokers must carry proof of licensure.

Where's the Proof?

Never pay for a premium in cash. Pay by check or a money order made out to the
insurance company directly or to the agency—not to the individual agent or
broker. In addition, always request a receipt.

Where's the Policy?

You should receive a copy of any type of insurance policy complete with
endorsements and declarations specifically outlining your coverage and its
limitations within a reasonable period after your purchase. If you do not receive
it, question your agent or broker. If there is no satisfactory explanation for the
delay, contact the New York Insurance Department immediately. You may not
have the insurance coverage you paid for.

Are You Being Billed for Services You Have Not Received?

If you have received medical or dental treatment that is covered by an HMO or

an insurance company, you will receive an "Explanation of Benefits" statement
listing the services for which benefits have been paid. Review it carefully to
ensure that your health care provider has not "bumped up" your claim (i.e.,
overstated services provided in order to receive a higher payment), or charged for
services you did not receive. Contact your insurer immediately if you feel there
are discrepancies. Fraudulent claims payments translate into higher insurance
premiums for all of us.

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What If You’re Involved in an Automobile Accident?

Call the police to the scene and make sure that the details of the accident are
documented and the identities of the occupants of the other vehicle are verified.
Be suspicious if the driver of the other vehicle insists there is no need to call the
police. That driver’s insurance card may be fraudulent and his car uninsured.

Auto Insurance Fraud is a multi-billion-dollar problem nationwide. Watch out

for these common scams:

The staged accident – A vehicle filled with people will stop suddenly in front of
you, setting you up as the cause of a rear-end collision. The "victims" will then
file costly multiple medical and damage claims using doctors and lawyers who
are part of the scam.

Steerers – These individuals will solicit the injured or allegedly injured parties
and direct them, for a "referral fee," to lawyers, doctors and/or medical facilities
that are part of the scheme. Be on the lookout for steerers at accident scenes and
don’t become their victim.

Inflated claims – If you are in an automobile accident, be sure you know the
extent of the damages to your own car and the other vehicle and carefully review
claims. Vehicle owners and body shops frequently inflate estimates for damages
and then either perform other repairs not related to the accident or simply keep
the extra money.

BE ALERT! IT’S YOUR MONEY.

Think twice before replacing an existing life insurance policy with a new one.
The new policy may have exclusions or waiting periods for pre-existing
conditions that are covered by your current policy. And premiums are likely to be
higher because you are older. The Insurance Department protects consumers by
requiring agents to provide prospective purchasers with pertinent facts when that

56
purchase will cause the buyer to surrender, lapse, or in any way change the status
of an existing life insurance policy. Department Regulation 60 requires this full
disclosure so that prospective life insurance purchasers can make decisions in
their own best interest.

Don’t allow high-pressure salesmanship to persuade you to sign up for a type of

policy or certain coverage that you are not sure you need. Take time to decide
what’s right for you.

Read your policy carefully before you sign. If you have questions, ask your agent
or broker, or your insurer. An additional source of information and help is the
Insurance Department’s Consumer Services Bureau.

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Summary

Insurance, a very well known concept today and many people could relate to in
more than one ways. This is the influence of the changing times that have
changed the concept of insurance in the minds of the young and the old. People
have changed their attitude towards insurance and accepted its new look from
being an entry of luxury to an investment and a necessity. The number of people
taking insurance has increased considerably in the past few decades due to the
entry of private players in the market.

One knows that every coin has two sides. Similarly, insurance also has two faces.
One of which is investments and getting regular returns from financial
institutions for oneself and for loved ones. The other, awfully, is of which people
deceive insurance companies for their undue advantage and cause intimidation to
many others.

Though, there have been many laws and agencies all over the world to impede
such criminal activity, it is not a full proof solution to all insurance frauds.

In a world today where every person seeks their right to information and
demands the same, it is very difficult to scam them. One must know all the loop-
holes of their business to scheme some one. This could be the act of some one
who is carrying on criminal bustle on the vigor of his acute knowledge about
their business. Lack of knowledge and not knowing ones basic rights on behalf of
the prey could land them in scrambled scam bisque.

There have been many institutions and agencies formed all over the world to
detect fraud and penalize the one conscientious for such mishaps. There is
Division of Insurance Fraud, International Association Of Insurance Fraud
Agencies (Iaifa), etc. through the enduring and conscious endeavor of these
institutions insurance fraud tempo has declined by an enormous amount. Several

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have studied preceding and enduring market conditions to identify with the
diverse frauds that take place and the reasons behind committing these frauds.

One cannot diminish frauds, schemes, swindles, scams but can positively be alert
of them so as not to be a victim of it themselves. Tumbling fraudulent situations
is a unremitting and collective effort of countless. One must be sensitive and
offer their helping as much as they can.

One can either grumble about how things are all going wide of the mark and
swallow the consequences. Or put their foot down and make an attempt to change
the immoral to the right. The wrong will change and everyone will see the bright
light of truth and right with the revolution of knowledge, awareness, an attitude
for change amongst the humanity.

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Bibliography

• BlueCross & BlueShield United of Wisconsin: What is health care fraud?

• Stern RA, Montana R.: Identify patterns of medical provider fraud through
data base graphic pattern. FDN Fraud Report

• Barrett S.: Chelation therapy and insurance fraud

• Private health insurance: Employers and individuals are vulnerable to

unauthorized or bogus entities selling coverage

• Scam alert.: Coalition Against Insurance Fraud Web site

• www.naic.org

• www.google.com

• www.yahoo.com

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