The Ontario Auto Insurance Anti-Fraud Task Force has taken preliminary steps to establish the scope and appropriate response to fraud.by Willie Handler
March 2012 issue of Canadian Underwriter
Recognizing the importance of preventing auto insurance fraud, the Government of Ontario appointed the Auto Insurance Anti-Fraud Task Force on July 29, 2011. Directed by a five-person steering committee, the Task Force is independent of the government. Its mandate is to:
• assess the extent and nature of fraud in the Ontario auto insurance system; and
• recommend actions to reduce the incidence of fraud for the benefit of policyholders.
The Task Force submitted an interim report to the government on Nov. 21, 2011. The interim report describes what the Task Force has learned during the four months since its appointment; outlines actions with short-term benefits that might be taken; and establishes an agenda for the balance of its mandate.
The final report of the Task Force is due by Fall 2012.
For some time, a figure of $1.3 billion has been used to describe the cost of fraud in Ontario, but the Task Force believes this figure is not reliable. The Task Force indicates in its report that a comprehensive research and analysis on the scope of auto insurance fraud in Ontario will be undertaken over the remainder of its mandate.
The Task Force has categorized fraud into “organized,” “premeditated” and “opportunistic.” These defined categories will create some controversy among auto insurance stakeholders, since some groups do not agree they all constitute fraud.
The Task Force defines “organized” fraud as an organized scheme designed to generate cash flow through either staged accidents or fabricated accidents. Individual claimants are not the organizers of these schemes: they generally rely on white-collar professionals to support the schemes. Stakeholders in the system completely agree that these activities constitute fraud.
Premeditated fraud is defined as continual pattern of charging insurers for goods and services that are not provided or that are unnecessary. A claimant may or may not be complicit in the fraud. As well, in this type of fraud, the participant is not dependent upon a larger organization. Some stakeholders do not consider that claiming for some of these goods and services to be fraud. Rather, they believe these are simply disagreements over what constitutes reasonable and necessary expenses.
Opportunistic fraud involves an individual claimant who pads the value of his or her auto insurance claim by claiming for goods and services that are unnecessary or unrelated to the accident. Again, some people will see this as a disagreement about what constitutes a reasonable or necessary expense rather than a deliberate, fraudulent “padding” of claims.
A significant portion of the Task Force’s interim report is dedicated to analyzing the costs structure and trends in the Ontario auto insurance system. Although the Task Force did not make a quantitative estimate of the extent of fraud in the system, it did make a number of interesting observations.
The Task Force identified a large — and as yet unexplained — gap between changes in accident benefits claims costs and changes in factors that are expected to influence those costs. The report notes that theses costs are concentrated in the GTA.
According to Exhibit 3 in the interim report, accident benefits claims costs increased by $2.4 billion or $370 per vehicle between 2006 and 2010. Exhibit 6 shows that $2 billion in accident benefits claims costs or $300 per vehicle is unexplained.
This gap was calculated by comparing actual accident benefits claims costs with projected accident benefits claims costs over that same period had they grown at the same rate as private health expenditures in Ontario.
Another concern for the Task Force was the increased frequency of accident benefits claims. Between 2006 and 2009, 6,400 fewer people were injured in auto accidents, based on Ministry of Transportation statistical reports. And yet, accident benefits claims increased by 14% over the same period.
The Task Force concluded that the fastest-growing categories of auto insurance fraud are premeditated and organized fraud. This is based on the belief that opportunistic fraud through the padding of claims could not have grown so quickly in such a short period of time.
Task Force Analysis
The Task Force spent a considerable amount of time collecting and analyzing available historical data. This gives us a very good perspective of how the Ontario system has gone off the rails over the past few years. However, the historical analysis is based on a system that no longer exists. Ontario’s auto insurance reforms, implemented in September 2010, dramatically changed the landscape of the province’s auto insurance system.
Prior to the reforms, the largest increases in accident benefits costs from 2006 to 2010 were assessments and examinations (228%), caregiver benefits (186%), housekeeping expenses (178%) and medical benefits (105%), according to Exhibit 16 of the interim report. All these benefits were affected by the reforms. Caregiver benefits and housekeeping expenses are now only paid to catastrophic claimants (about 1% of claims) and policyholders who purchased the optional coverage (also about 1% of claims).
Anecdotal feedback from health care professionals conducting medical assessments and examinations indicates business is down 50% since the reforms were introduced. Meanwhile, a number of insurers report that 50% to 70% of their claimants are being treated under the Minor Injury Guideline and are consequently subject to the $3,500 medical and rehabilitation cap.
And so, assuming most claimants no longer claim caregiver benefits and housekeeping expenses, if health professionals are conducting half the number of assessments as they did pre-reforms, and if at least half of insurers’ claimants are subject to the $3,500 cap, one would expect significant claims cost reductions since September 2010. I estimate this should work out to a reduction in costs of roughly $1.3 billion. This leaves about $700 million in current unexplained costs in the system. This is still a significant figure, and it speaks to the need to gain a good understanding of the extent and source of fraud in Ontario, particularly during the post-reform period.
The Task Force is already working on changes that should have a positive effect on the auto insurance system. These include working on optional e-learning for police officers; changes in Health Claims for Auto Insurance (HCAI), the electronic system health professionals use for transmitting auto insurance claims forms to insurers, that allow health professionals to check for unauthorized use of their identity, FSCO guidelines on health care billing practices; and new anti-fraud brochures and Internet material.
More substantive recommendations are still to come. The interim report highlights some of the possible recommendations including:
• licensing and/or regulation of rehabilitation clinics;
• enhancing regulation of the towing industry;
• establishing a dedicated fraud investigation unit; and
• developing a consumer engagement and education strategy.
Licensing/regulating rehab clinics
The Task Force indicated interest in the licensing requirements introduced by Hillsborough County, Florida in September 2011. Some of those requirements include:
• A physician must be responsible for operating a clinic.
• All persons associated with operating a clinic must submit 1) a copy of their state license; 2) a list of criminal convictions, if any; and 3) a set of fingerprints.
• A clinic must agree to inspections by county code or law enforcement officers.
These changes are new, so there is little experience to date regarding their effectiveness as an anti-fraud measure.
It is also difficult to determine what body in Ontario would take on this regulatory responsibility, which would include licensing, inspection and enforcement activities. Ontario is reportedly facing a $16-billion deficit and has appointed former bank economist Don Drummond to conduct a public service review. Under the current fiscal environment, don’t expect new money and resources from the Ontario government to regulate rehabilitation clinics.
Is there an alternative model? Well, there are the health regulatory colleges. But moving in this direction would require a substantial change in mandate to cover multidisciplinary facilities. In addition, the colleges have their own fiscal and resource restraints.
Regulation of the towing industry
Towing operators and drivers are currently licensed and regulated by a patchwork of municipal bylaws. Some are effective but many are not.
Regulation of the towing industry was proposed in a private members bill (Bill 147) introduced in the Ontario Legislature in April 2011. Bill 147 did not proceed past second reading before the fall Ontario election; therefore, it died on the Order Paper. Had the bill passed, it would have introduced a self-regulatory body, the Towing Industry Council of Ontario.
Don’t expect to see the bill revived under the current session, because the towing industry does not yet have the infrastructure in place for self-regulation. Government expenditure constraints will challenge the Task Force to develop a framework that will require minimal public resources.
Dedicated fraud investigation unit
The Task Force has shown interest in the U.S. National Insurance Crime Bureau (NICB). The NICB partners with insurers and law enforcement to identify, detect and prosecute insurance criminals. Data analytics is a critical tool of the NICB. The mandatory reporting of data by insurers facilitates the data collection. Introducing a similar model in Ontario would likely require legislation and engage some discussions about existing privacy legislation.
Where in Ontario would such a potential fraud investigation body be housed? Again, government financing constraints would likely be a factor. Building in some way on the experience of the IBC’s Investigative Services makes sense and more closely follows the American model.
Consumer education strategy
The Task Force concluded there is little public awareness of Ontario’s auto insurance system and existing types of fraud. Fraud organizers use this lack of public knowledge to their advantage. Some consumers participate in fraud schemes without their knowledge and without understanding the risks.
The Task Force believes fraud prevention includes a better-informed public. The extent of any potential public education campaign is unknown at this time. But if it happens, it will require funding. FSCO and the Ministry of Finance have no history of funding consumer education campaigns dealing with auto insurance, so expect the financial burden to fall on the insurance industry.
The Task Force’s interim report received almost no media coverage, but expect more interest when the final report is completed and released later this year. None of these issues are simple, so the Task Force has its work cut out for itself.