Monday 30 July 2012

The Amount of Fraud in Ontario

The Auto Insurance Anti-Fraud Task Force delivered a Status Update to the government on July 23, 2012. I will be providing a review of the report on this blog. Today I will review the Task Force's efforts to estimate the amount of fraud in Ontario.

At the time of the Interim Report the Task Force was not sufficiently informed to make a quantitative estimate of the extent of auto insurance fraud in Ontario. It did conclude that the figure of $1.3 billion that has been used to describe the cost of auto insurance fraud in Ontario for some time cannot be considered a verifiable measure of the current extent of fraud.

Although not able to measure the extent of fraud, the Interim Report conceptually defined auto insurance fraud in three categories:

Organized Fraud: several participants with different roles within Ontario’s auto insurance system create an organized scheme designed to generate cash flow through a pattern of fraudulent activity;

Premeditated Fraud: a participant within Ontario’s auto insurance system consistently charges insurers for goods or services not provided, or provides and charges for goods and services that are not necessary; the participant is involved in a pattern of fraudulent activity, possibly at the expense of motor vehicle collision victims or possibly with their complicity; and

Opportunistic Fraud: an individual pads the value of his or her auto insurance claims by claiming for benefits or other goods and services that are unnecessary or unrelated to the collision that caused the claim.

The Interim Report reviewed trends in claims cost data and information gathered from industry stakeholders and regulators. This review led to the following conclusions:

  • auto insurance claims costs, specifically Accident Benefits claims costs, increased dramatically from 2006 to 2010, and this increase in costs had a direct impact on auto insurance premiums.
  • a large and unexplained gap exists between changes in Accident Benefits claims costs and changes in factors that would have been expected to influence those costs; this ‘unexplained gap’ amounted in 2010 to an average of $300 per insured motor vehicle in Ontario.
  • the most dramatic increase in costs has occurred in the Greater Toronto Area, where the ‘unexplained gap’ in 2010 amounted to an average of $700 per insured motor vehicle.
  • anecdotal evidence suggests that fraudulent activity, and in particular, premeditated and organized fraud may have accounted for a substantial portion of the ‘unexplained gap’.

IBC engaged KPMG Forensic to conduct a study aimed at estimating the extent of auto insurance fraud in Ontario. This study was provided to the Task Force and is available online. The Task Force also engaged Ernst & Young to provide the Task Force with an independent assessment of the KPMG methodology and results. Their study is also available online.

The KPMG study concluded that “there is insufficient information to provide a precise and statistically based estimate of auto insurance fraud in Ontario.” The study did, however, provide a wide range for the scope of fraud. It estimated that the cost could range from 9-18% of annual claims costs, which in 2010 would have amounted to between $769 million and $1.56 billion. KPMG calculated the impact of this estimate of fraud on the average auto insurance premium in the province to be between $116-236 in 2010.

KPMG primarily used the data analytics studies, which combine claims information from participating companies with highly sophisticated tools that can identify suspicious patterns between claims, to develop an estimate of the extent of organized fraud in Ontario. Their report notes that these studies were undertaken by insurers to test the use of fraud identification technologies in their businesses, and not for research purposes.

KPMG was able to extrapolate results from two of the three studies to estimate the scope of organized fraud. The design limitations, in KPMG’s view, made the extrapolations consistent underestimates of the true extent of organized fraud. While recognizing this problem of underestimation, as well as the importance of providing some quantification, KPMG noted that, on the basis of its review of these studies, organized fraud in Ontario was at least in the range of $175-275 million in 2010. The cost of Organized and Opportunistic Fraud could be between $769 million and $1.56 billion annually. KPMG indicated that their estimates are understated because industry-wide data was not used in the studies and excluded certain types of claims.

Ernst & Young has completed a preliminary assessment of KPMG’s report in which it also agrees that organized fraud is likely greater than the range estimated by the data analytics studies used by KPMG.

KPMG has not included Premeditated Fraud in their estimate of total fraud in Ontario.

In addition, Ernst & Young indicated that KPMG’s report may significantly underestimate the extent of overall auto insurance fraud in Ontario because it does not specifically address premeditated fraud, which, as Ernst & Young noted, could range between $130 to $260 million per year. Combining this estimate of premeditated fraud with KPMG’s understated estimate of organized fraud, creates a value of organized and premeditated auto insurance fraud in Ontario of between $305 to $535 million per year (which itself should also be viewed as an underestimate).

Conclusion

Judging from these two reports it appears that the $1.3 billion figure that has been bounced around for years may have some merit. When looking at the combined total of Opportunistic, Premeditated and Organized Fraud it may very well have been above billion dollars prior and up to 2010. However, there is no discussion on the impact of the 2010 auto insurance reforms on fraudulent claims in Ontario. Although it is still early to assess what impact those reforms have had on the sector.

3 comments:

  1. Let's say, for the sake of argument that the $1.3 billion fraud loss figure was/is accurate. In other words, let's accept that each and every year since 1992 the Ontario auto insurers have lost $1.3 billion to fraud. The legislation has been completely rewritten three or four times since 1992. The regulations and SABS have been tweaked and tinkered to death - so as to put ever more "tools in the insurers' "fraud-fighting toolbox". How can it be that nothing has changed this fraud loss figure? How can it be that all the "tools" have turned out to be completely useless? Some of the same people have been involved in designing, implementing and regulating this twenty year long war on Ontario auto insurance fraud. And still we are stuck with a $1.3 billion per year fraud loss - now maybe even $1.6 billion according to KMPG. If we need proof of the need for a fresh look at this endless war on auto insurance fraud - that the $11.3 billion fraud loss number has "merit" is that proof. If ever there was evidence that new eyes and new ideas are required - this is it. In short - if it is true that the Ontario auto insurance annual fraud loss hasn't changed since 1992 - we need a Public Inquiry to find out why - and to finally find a way out of this vexing mess. It is too easy, and glib, to blame "overly generous", "rich" benefits as the magnet causing the $1.3 billion per year fraud loss. Setting aside the debate as to whether in fact we do have "among the richest" injury benefits in all of NA - these benefits have risen and diminshed and risen and diminished again and again over the course of the last twenty years. It is plain to see that whether we have the richest benfits in N.A. or the worst in Canada - clearly they have no causal relationship to this perenial, unalterable $1.3 billion per year fraud loss figure. Do you think it is time to call for a full Public Inquiry. If not - why not?

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  2. I'm not sure anyone has concluded that there has been $1.3 billion in fraud annually for the past 20 years. It was been a frequently quoted figure that has achieved "urban legend" status.

    The KPMG makes references to earlier attempts to measure fraud including the 2007 IRC Report and the 2001 CCAIF Report which produced different results. In the end KPMG suggested fraud in 2010 was in the range of $800 million and $1.6 billion. In 2012 it would be a different figure because Ontario auto insurance claims costs have dropped over the past 2 years.

    The size and proportion of fraud within the system is not static but changes in response to product changes. It is possible that past reforms may have inadvertently opened the door to fraudsters. so hopefully the government has learned through this exercise that if or when it introduces future reforms it needs to consider how those changes will impact on the behaviour of those who will try to exploit the auto insurance system. No insurance system has completedly eliminated fraud but there are things you can do to control it.

    As for a Public Inquiry, I'm not sure what you have in mind. I see the Auto Insurance Anti-Fraud Task Force as an inquiry with the objective of tightening up the system. I'm not sure another review would be of much benefit and would only duplicate what the Task Force has done over the past 12 months. What you should be looking for is a quick implementation of the Task Force recommendations.

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    Replies
    1. W.H.- "I'm not sure anyone has concluded that there has been $1.3 billion in fraud annually for the past 20 years. It was been a frequently quoted figure that has achieved "urban legend" status."


      Jethro - Endless insurer insiders have quoted that fraud loss figure every year since 1992 - probably about 10,000 times by now. And it is still being quoted (just last week). Whether it is a fact that has "merit" or is an "urban legend" - it has been driving Ontario the auto insurance evolutionary changes since 1992.



      W.H.- "In 2012 it would be a different figure because Ontario auto insurance claims costs have dropped over the past 2 years."

      Jethro - So why is the press still quoting that same figure in the media but now attributing it to the provincial auditor instead of the insurance lobby - its original source?


      W. H. - "It is possible that past reforms may have inadvertently opened the door to fraudsters."

      Jethro - Over the long haul of the "evolution of reforms" from Bill 164 till McGuinty's 2010 gutting of injury benefits - how is it possible that the fraud loss number remained static. And given the benefits kept being reduced - why didn't the claimed (urban legend) fraud loss figure drop? Clearly - there is no causal relationship between gutting injury benefits and that unalterable, meritorious, claimed fraud loss figure.


      W. H. - "No insurance system has completedly eliminated fraud but there are things you can do to control it."

      Jethro - Yes, but the thing that the insurers keep doing and the experts keep recommending is to cut the "rich" benefits so the fraud will decrease. You have been advocating for that approach since Bill 164 and the public is still being told (by the provincial auditor no less) that the 2011 $1.3 billion fraud loss means we need to cut the "rich" benefits. You see no holes in this stance? Would new ideas from fresh eyes (a Public Inquiry) be helpful?


      W. H. - "I'm not sure another review would be of much benefit and would only duplicate what the Task Force has done over the past 12 months."

      Jethro - Isn't that what the industry and its consultants recently said about the Standing Committee? Following that logic the Task Force is only replicating the same "tightening up" of the system that has gone on for twenty years. In other words - it is merely duplicating the last twenty years of failed recommnedations put forward to reduce that $1.3 billion figure. And now, after twenty years of dubious numbers bases on legend we read in the press that Ontario auto insurance remains "vexed". How could a Public Inquiry hurt? What precisely is the industry's objection?

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