Insurance Fraud… What the Future May Hold

THE SURPLUS LINE ASSOCIATION OF CALIFORNIA Tuesday, April 18, 2017, Universal City Wednesday, April 19, 2017, San Francisco Introduction and Overview

The New …

• Predictive Modeling • Assignment of Benefits (AOB’s) • CEOs going to Jail for Fraud • Financial Fraud at the Corporate Level • Internal ID and Extortion Fraud • Internal Consultants and Internal Fraud • Social Engineering & Wire Fraud • When Good Employees go Bad

and the Mundane …

• Staged Auto Crashes • Arson

The Yates Memo • More Intrusive Monitoring - Claims data finds abuse, fraud, and waste

Arizona and California Auto Insurance Fraud Busts • Detecting red flags on a fraudulent auto claim • Interdepartmental Co-operation • New “Secret” Device

• According to NICB, testers were able to open 54% of the vehicles and drive away with half of them! • Of those driven away, 2/3 were then restarted using the device • Many time the owner believes the vehicle has been towed

Identify theft and loss of financial information is one of the primary concerns for those in the financial and retail industries

75% of companies surveyed had been victims of fraud in the past year—a 14- percentage point from three 2016 years earlier. 73 * 2015-16 Global fraud report by Kroll, Inc. 75 and The Economist Intelligence Unit

73% of finance 2013 professionals 61 reported an attempted or actual payments fraud in 2015. Victims of Fraud Attempted Fraud *The Association For Financial Victims of Fraud Attempted Fraud Professionals’ 2016 Payments Fraud and Control Survey Source: www.McKinsey.com

www.afr.com

The Automobile Club of The first radio impersonates Germany (ADAC) linked a the key fob and pings its pair of radio devices to wireless entry system unlock a new car

That signal is then relayed between the radios – for up This triggers a signal from to 300 feet – to complete the vehicle to seek a what they called the response from the key transmission “handshake” to unlock the car.

• Easily obtainable parts according to www.networkworld.com

• Power amplifier can be purchased on the internet

• New cars designed with remote key entry

• Owners now store keys to block signals

Identifying Fraudulent Auto Claims

Q p Staged accident with multiple claimants u o e l s i MEDICAL BILLS t c Financial issuesAND TREATMENT i y o n c Unusual insured behavior a o Service b v l e providers e r a g Burned to a Vehicle e ownership CRISP

Outrageous Frauds that Failed

Fraudulent fire kills two Crooked contractors caught when roof caves in

Slip-sliding away Broker creates paper empire

Contractor gets shingled Insurance broker has expensive tastes

From hero to heartbreak I love you … goodbye

Coach turns arsonist Ph.D. tries to steal $7.5 million

Suspicious auto insurance claims flagged to the NICB in 2012 were categorized as “Organized Group/Ring Activity”

One third “staged” for the sole purpose of filing a fake claim for damages or personal injury.

Characters in Insurance Fraud and organized crime

1. The Recruiter

Recruits and pays individuals to file claims Brings claimants together, orchestrates the “accident”, and steers claimants to professionals

2. The Professional

Provides medical care or legal representation

3. The Ring Leader

Owns or is connected to the medical clinic, billing operation, and is known organized crime gang leader

• Mikhail “Russian Mike” Zemlyansky— the largest no-fault auto insurance scam in U.S. history

• $279 million in false injury claims and an estimated $400 million in fraud of all types

• Bribed lawyers and doctors to stage accidents

• Recruiters paid $2,000 -$3,000 for each “patient”

• Zemlyansky used 3 billing companies just to handle the paperwork

• 9 clinics Bronx, Brooklyn, and Queens

• Billed excessive medical treatments including physical therapy, acupuncture, pain management, psychological services, X-rays, MRIs and other services

• Doctors acted as “straw owners” of clinics

• Lawyers sued insurers and coached crash victims

• Stolen insurance proceeds financed lavish lifestyles and international vacations

• 37 high-ranking members were indicted • including doctors, lawyers, chiropractors, and other professionals

Last year Zemlyansky was sentenced to 15 years in federal prison

MIKHAIL ZEMLYANSKY Release date 2027

A “low-risk, high-reward gambit” ? Think again!

• Some insurers pay suspicious claims…easier than fighting in court.

• But states are now enacting tougher fraud laws.

• What to watch for…

• Verbal vs. nonverbal cues when someone is talking. • The liar often says more than their actual words (I don’t understand what you are trying to say here). If a subject doesn’t answer the question ask follow-up questions • Build a rapport to create a baseline of honesty • The EYES—excellent indicator of how honest an individual is at any moment in time

www.theinquisitr.com

The Silent Talker Psychological Profiler (Lie Detector)

Developed at UK’s Manchester Metropolitan University between 2000 and 2002

The subject of the interview is observed by one or more cameras (e.g. head-and-shoulders, full body view, thermal imaging camera), which input the stream into a computer program that classifies answers as truthful or deceptive -- in real time

The computer detects and classifies the subject’s “micro-gestures” utilizing artificial intelligence (AI) to learn patterns, build profiles and, over time, spot who is lying or telling the truth

These micro-gestures are unconscious responses that Silent Talker picks up and indicate signs of stress, mental strain – or even the flash of a smile

One of the inventors described these micro-gestures as ‘tells’ that are extremely fine-grained and exceedingly difficult for a person being interview to control

The subject of the interview The computer detects and These micro-gestures is observed by one or more classifies the subject’s are unconscious cameras, which input the “micro-gestures” utilizing responses that Silent stream into a computer artificial intelligence (AI) to Talker picks up and program that classifies learn patterns, build profiles answers as truthful or and, over time, spot who is indicates as signs of deceptive -- in real time. lying or telling the truth. stress or mental strain .

Extremely fine-grained ‘tells’. Difficult for a person being interview to control.

• The continuous evaluation of every claim • Predictive analytics • Internal and external dataset usage • The application of usage watch lists and business rules • A seamless workflow integration • Special investigative tools: Telematics Wearables Drones Dash-cams New Devices and their Manipulation Data manipulation Analytics Algorithms Standard Procedures

Source: Wired, February 15, 2013

• Used to combat rampant insurance fraud and corruption • Inexpensive cameras • Flash memory and regulations • Interior Ministry in 2009 removed legal hurdles

“You can get into your car without your pants on, but never get into a car without a dash cam.” —Aleksei Dozoro, a motorists’ rights activist in Russia told Radio Free Europe last year, Wired

According to the World Health Organization, in 2007, Russia averaged 25.2 traffic fatalities per 100,000 people.

The U.S., by comparison, had 13.9 traffic fatalities per 100,000 people.

• 60% = insurers state that fraud has climbed over the last three years

• 75% = insurers deploy automated systems to detect false claims

• 40% = insurer use of rate-evasion technology since 2012.

• 90% = insurers adopting antifraud technology using business rules and red flags to auto detect suspicious claims.

• Automobile premium evaders are growing targets of antifraud efforts.

Technology Disrupting Fraud

Telematics and Sensors • Vehicle sensors now determine if the vehicle was driven instead of parked and where • Provide a timeline of claimed event accident

Wearables • Sensor-embedded clothing and self-tracking devices such as the Fitbit or Apple Watch can help reveal the truth behind injury claims. • 63% of insurers believe wearables will have a high or very high impact on their organizations in the future. • Smart workplace clothing can help track an employee’s whereabouts and activities throughout the day. • Sensors can prove whether an employee was at the loading dock when he claimed he injured his lower back.

Drones • Airborne eyeballs can unearth clues after storms or other natural catastrophes. • Verify workers’ compensation and disability claims • Can gather important ground level data immediately after a weather event, and forward it for real-time analysis. • Can provide high resolution, close-up views of roofs, siding, windows, gutters and other components • Provide answers to questions like: How damaged was a claimant’s house after a hailstorm? Was the damage preexisting? Did the damage happen at all?

Dashcams • Slowly gaining acceptance in the U.S. private-passenger market. • Great potential to head off set-up crash injuries and expensive bad faith lawsuits insurers can gain an objective car’s-eye view of road activity.

Pure Insurance: Inspections for underwriting, claims adjusting State Farm: Roof inspections Travelers: Roof inspections, underwriting, risk assessment, risk control and accident reconstruction AmFam: Catastrophe response USAA: Disaster and catastrophe events to assist members and communities Liberty Mutual Large structure/fire site inspection

Source: www.cbinsights.com

Source: Angie’s List

A routine check of an integrated home entertainment and security system connected to the same router revealed unusual log entries:

• At odd times, someone was remotely hacking into the system and turning on CCTV cameras and turning off the alarms

• A close inspection of the system revealed that when the router was first installed, no one changed the default password from “admin”

• More investigation showed similar activity through the zip code 90210

In suburban Cincinnati, data from a man’s heart monitor solved an arson… • After noting inconsistencies in the homeowner’s story after his house burned down, investigators obtained a search warrant for the data on his monitor • The man had told police he had packed valuables in suitcases after discovering the blaze, broken a window with his walking stick and thrown them out the window

The Insurance Journal notes:

“The deterrent effect may ultimately be the biggest thing IoT and telematics does … when people start to realize that all of their moves are being tracked [the data] will either support their version of events or completely turn it upside down.”

Fitbit Uncovers False Rape

• Florida woman files a rape claim. • Detective examines her Fitbit. • Data shows she had been walking around at a time she claimed to be asleep.

First Amendment and A.I.

• Data from Amazon’s Alexa subpoenaed in a homicide case in Arkansas. • Does the First Amendment cover devices and Artificial Intelligence used in them?

Predictive analytics

• Flag medical providers with suspicious billing activity or unusual treatment patterns Identify policies with discrepancies or irregular combinations • Automate and standardize traditional, manual, fraud-detection processes • Use rules-based workflows to spot trends or anomalies that manual processes might overlook • Neuro-network models or machine learning can use predictive analytics to alert users about suspicious transactions in real time

Internal and External Data

• Pulling data from public records and third-party data sources can shine new light on a claimant’s information. Examples -Late filed/reported bankruptcy -Prior felony convictions -Liens, judgments and lawsuits -Multiple claims with similar facts of loss in the past 12 to 26 months

Virtual explosion of data -Social media -Public domain -Claims processing now in the world of Big Data

Fraudsters are Big Data users

One auditor noted:

“We’re seeing more areas of cyber fraud emerge and they are getting very sophisticated …using data analysis to [see how] banks … identify fraudulent purchases and asking, 'What shouldn’t I do so I don’t get their attention?’ ”

Parsing text messages

• Identified collusion between insureds and their agents • Detected fraud among agents in eight major cases

Speech patterns

“submit the claim after…” showed a high correlation to claims identified as fraudulent

Protecting the source of the data to be “mined” is just as important for the companies using as it is for consumers.

• 10 percent of all property and casualty claims may be fraudulent • The same tools used by internet advertisers and merchandiser can detect issues in claims, social network analysis (SNA) • Predictive modeling used to spot suspicious activity before phone claims are paid • Deep dives of customer relationship management (CRM ) data are conducted of all claims—revealing hidden relationships among people, places, locations, accounts or to any other entity. • Running SNA after natural disasters [helps to] quickly deploy loss mitigation and recovery resources • Also examines data points (home and business addresses in common bank accounts; home and cell numbers; and so on) for fraud indicators.

• Provides nuanced view of network activity

• Claim payments more efficient

• Regulatory benefits

• Flags organized crime activity

• Increases ROI

Graph analysis and predictive analytics

Graph analysis tool created for British military in 1990 transformed law enforcement

The Link Notebook:

Software created by i2 Group •

• Ability to graphically present large amounts of disparate data

• Means to analyze data quickly for patterns

• Large datasets queried simultaneously by multiple investigators

• IBM acquired the company in 2011

Yates Memo will impact corporate investigations conducted across DOJ by emphasizing a focus on individual culpability, from healthcare fraud to export control, from the Foreign Corrupt Practices Act (“FCPA”) to the False Claims Act (“FCA”).

Bribery & Corruption in the Insurance Industry

Rules set forth by the DOJ:

1). “In order to qualify for any cooperation credit, corporations must provide to the Department all relevant facts relating to the individuals responsible for the misconduct”

2). Corporations may no longer receive partial credit for their cooperation in investigations. DOJ articulated— “corporations must provide . . . all relevant facts” However, this has not been further clarified by DOJ or tested in the courts.

3). “Criminal and civil corporate investigations should focus on individuals from the inception of the investigation”

4). “Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.”

5). “Absent extraordinary circumstances or approved departmental policy, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation.”

6). “Department attorneys should not resolve matters with a corporation without a clear plan to resolve related individual case, and should memorialize any declinations as to individuals in such cases.”

7). “Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.”

Loss Causes

• Event or Discovery Trigger? • “Consultants” Coverage • Social Engineering fraud-or Traveling Exec? • Payroll Services - Client Coverage • Mis-Appropriation • Phishing • Embezzlement

Is Coverage Applicable?

• Surety & Fidelity Bonds • Crime Insurance • Cyber Insurance • 3rd Party Liability Insurance

Zenefits, Inc…

Michigan Department of Insurance and Financial Service issued Cease and Desist Orders against a five entities for violating the Insurance Code.

DIFS said the entities were found to be selling, soliciting or negotiating insurance without the proper license : -membership plans that provide various coverage amounts against the cost of traffic tickets -coverage for funeral expenses through a “state regulated program -claiming to provide low cost auto insurance, but have no authority to represent the companies they have listed

Those who forget history….

• Between 1989 and 2004 hundreds of millions of dollars in premiums were siphoned from California policyholders into dubious offshore companies

• California and many other jurisdictions were known as “File & Write” states: NO Pre-Approval from insurance commissioners was required

• Without regulatory oversight, policies from offshore insurance companies with little or no assets – and no real intention to do anything other than collect premiums – were sold to unsuspecting buyers

• April 1994 and Emergency Regulation 2174

Where is Melchizedek again?

• The “floating” country of Melchizedek… -Passports, currency, banking and insurance licenses -Declared war on France!

• Melchizedek was the brainstorm of Mark Pedley, aka Branch Vinedresser -Mark Wellington and David Korem – a convicted swindler out on parole at the time

• Melchizedek spawned California Pacific Casualty Insurance A.V.V. and California Pacific Bankers & Insurance Ltd. Creations of Jeffrey H. Reynolds III, a now-convicted swindler

California Pacific Bankers and Insurance Ltd.

• California Pacific claimed balance sheet assets of $450 million – verified, of course, by an auditing firm in Melchizedek

• Independent brokers also sold California Pacific policies in New York, Canada and the Caribbean – at least $47 million by one estimate

• The policies included auto, marine and surety bonds

• In 1993, the California DOI finally took a hard look at California Pacific after numerous complaints about its auto policies

• The DOI discovered California Pacific had no assets and referred its findings to the FBI

• Reynolds was convicted and sent to prison

LASLI Carriers

*LASLI is a voluntary list and insurers may opt off the list

What brokers should know about LASLI carriers

• CDI's LASLI list is an optional listing brokers may rely upon for preapproved carriers

• California capitalization levels apply and quality of assets are pre-reviewed

• Officer and director backgrounds are pre-reviewed

• The LASLI list is updated and is posted on the CDI and SLA websites

Eligible Carriers

If a foreign insurer was listed on the California List of Eligible Surplus Line Insurers Carriers as of January 1, 2011 and did not have at least forty-five million dollars ($45,000,000) in capital and surplus as of January 1, 2011, then it must have at least thirty million dollars ($30,000,000) in capital and surplus. After December 31, 2013, such foreign insurers will be required to have at least forty-five million dollars ($45,000,000) of capital and surplus or satisfy the exceptions to capital and surplus requirements above. A non-U.S. domiciled ("alien") non-admitted insurer must be on the Quarterly Listing of Alien Insurers issued by the NAIC's International Insurers Department ("IID List").

What brokers should know:

• Eligible carriers do not need to file any documents with the CDI

• California capitalization levels apply (for U.S. domiciled insurers only)

• There is no CDI pre-review or approval of capitalization levels or assets

• CDI does not perform officer and director background reviews

• Different eligibility rules apply for U.S. domiciled and non U.S. domiciled carriers

• Non-admitted insurer must write on an admitted basis where domiciled that which they will write in Calif …… SLA Broker’s to be held accountable

• Lightly traded or nearly dormant “pink sheets” companies or “shells”

• A “consortium” of small insurance entities in North America and the Caribbean acquire a shell -immediately obtain two $25M credit facilities from private investors in the U.S.

• Hours after $50M is wired to the consortium’s bank, $37.5M is immediately transferred to accounts controlled by the top two executives

• Less than a year later, the consortium collapses – leaving unpaid policies, millions in debts and unhappy investors and employees on two continents …

Popular White A “consortium” of Hours after Less than a Collar Crime small insurance year later entities Lightly traded In North America $50M is wired to The consortium or nearly and the Caribbean the consortium’s collapses leaving dormant “pink acquire a shell bank, $37.5M is unpaid policies, sheets” immediately immediately millions in debts companies or obtain two $25M transferred to and unhappy “shells” credit facilities accounts investors and from private controlled by the employees on two investors in the top two executives continents U.S.

If anyone had looked closely…

• Copy Cat Schemes -Nearly identical scheme to one used during the heyday of the Offshore Insurance scandals

• Footnote -Buried deep in “unaudited” financial statements, indicating that the principal asset of the consortium was the “right to mine” a peat deposit in a small Central American country

• History repeats itself

• If the fraud works in one country, fraudsters are certain to try it in other places

• In the UK, each week more than 2,600 fraudulent claims worth more than $25 million are filed, -the staged auto accidents are a costly and common occurrence

• Growing problem of “crash for cash” scams, -Result—the UK Insurance Fraud Bureau created a national fraud registry

• It lists known first- and third-party fraudsters as well as professionals and suppliers who help them

The United States and the European Union negotiators have reached an agreement on reinsurance and insurance regulation:

• Reinsurance • Group supervision • Exchange of insurance information between regulators

“The agreement calls for an end to collateral and local presence requirements for EU and U.S. reinsurers. … The negotiators say that the agreement is “balanced, in the mutual interest of both the U.S. and the EU, and provides meaningful benefits for U.S. and EU insurance consumers and for U.S. and EU insurers and reinsurers that operate in both markets.”

Coalition Against Insurance Fraud offers these tips:

1. Be wary of door-to-door sales people or unsolicited sales telephone calls.

2. Keep personal information such as your social security number, bank account numbers and Medicare ID secret.

3. After a car crash, take photos of the vehicles, passengers and damage to help prevent fake injury and damage claims.

Coalition Against Insurance Fraud offers these tips:

4. Check out service providers before hiring them or paying any deposits. The Better Business Bureau, Angie’s List and other services can provide ratings and feedback on vendors

5. Contact the state insurance department or National Crime Bureau to report a scam.

1. Encrypt files 2. Use a Virtual Private Network (VPN) 3. Separate your personal and business life – and the machines in them 4. Do not keep critical files on machines that are easily stolen or misplaced 5. Restrict access to your business network – do not allow “guest” access 6. Follow secure backup and deletion protocols 7. Practice good “password hygiene” 8. Update your router 9. Invest in a robust firewall

© 2016 Fisher Consulting Group, Inc. Thank You All! ∗ Frederick J. Fisher, J.D. is currently President of Fisher Consulting Group, Inc. and was the Founder of E.L.M. Insurance Brokers, a Wholesale & MGA facility specializing in Professional Liability and Specialty Line risks. He is a Member of the Editorial Board for Agents of America; a Faculty Member of the CLM Claims College, School of Professional Liability, and a course designer and webinar Instructor for the Academy of Insurance (sponsored by the Insurance Journal).

∗ In 1995, he formed what is now known as ELM insurance Brokers, a firm that has acted as an MGA and Wholesale Broker of Professional Liability Insurance and Specialty Lines. He is the author of BROKER BEWARE, Selling Real Estate within the Law. He designed a program to conduct on site pre-underwriting risk management assessments of a clients' professional liability exposures. In 1989, he became a Founding Member of the Professional Liability Underwriting Society (PLUS), and was elected to the PLUS Board of Trustees in 1993. After serving in all Officer capacities, he was elected President in 1997. He remains a Special Materials Expert for several RPLU courses and is the Senior Technical Advisor for The Professional Liability Manual, first published by the International Risk Management Institute in 1990. He has taught over 100 CE classes and lectures. He testifies regularly as an expert witness in cases dealing with the duties and obligations of professionals as well as on coverage and claims-made issues. ∗ Mr. Fisher can be reached at 310/426-2105, Cell 310/413-6200, or [email protected]

∗ Michael G. Wagner: Michael Wagner is a veteran business intelligence expert who co-managed the Northern California investigations practice for PricewaterhouseCoopers in San Francisco along with W Group co-founder, Scott Wilcox. Mr. Wagner was also an associate managing director with Kroll Associates, the New York-based international investigations firm. ∗ Prior to entering the business intelligence world, Mr. Wagner was a national award-winning investigative journalist and editor with the Los Angeles Times, the Detroit Free Press, the Sacramento Bee, and other organizations. Mr. Wagner specializes in complex financial investigative projects and large-scale computer-assisted investigations. ∗ Mr. Wagner is a business journalism graduate of the University Missouri School of Journalism, and also studied at the New School for Social Research in New York. He is a longstanding member of the group Investigative Reporters and Editors (IRE). He can be reached at P. 562.433.4361 Email : [email protected]