No-Fault Auto Insurance Fraud in Florida

Trends, Challenges & Costs

Florida Insurance Market SummitOrlando, FL

January 13, 2011Robert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

Florida’s Auto No-Fault Fraud Problem = Florida’s Fraud Tax

Florida Has a Huge and Rapidly Growing Auto No-Fault Fraud Problem

The Cost to Insurers to Cover Out-of-Control No-Fault Fraud is Rising by 70% per Year

These Costs Will Eventually Be Passed Along to Florida Drivers

This Cost Constitutes a “Fraud Tax” that is Lining the Pockets of Certain Unscrupulous Medical Providers and their Attorneys and Will Ultimately Be Borne by Florida’s Drivers

If Nothing is Done to Address the Problem, No Fault Fraud Costs Will Approach $1 Billion in 2011

2

Florida’s Anti-Fraud Statute

Insurers required to investigate suspected fraud.

Florida Statute (Section 626.9891) requires insurers with $10 million or more in direct premiums annually to have either an in-house unit or contract with an outside entity to investigate possible fraudulent claims.

Insurers with less than $10 million in direct premiums must adopt an anti-fraud plan.

Insurers’ anti-fraud plans must detail procedures for:

Detecting and investigating possible fraudulent acts.

Mandatory reporting of fraud to the Division of Insurance Fraud.

3

Definition of a Questionable Claim

The National Insurance Crime Bureau (NICB) calls a questionable claim (QC) one that is referred to their organization for closer review and investigation based on one or more indicators of possible fraud.

A single claim may contain up to seven referral reasons.

Referral reason categories of claims— property, casualtycasualty, commercial, workers' compensation, vehiclevehicle and miscellaneous.

The NICB has more than 1,000 members, including property/casualty insurers, self-insured organizations, and transportation-related firms.

4

5

Florida Casualty Referrals for Fraud: 1st Half 2010 vs. 1st Half 2009

Sources: National Insurance Crime Bureau; Insurance Information Institute.

24%32%

64%70%74%77%

0%10%20%30%40%50%60%70%80%90%

StagedAccident

ExcessiveTreatment

Faked orExaggerated

Injury

Prior Injuries Billed forServices Not

Rendered

Solicitation

Questionable PIP claims involving staged accidents surged 52% in 2009. For 2010, early estimates suggest an even larger increase.

Staged accidents, excessive treatments and faked or

exaggerated injuries soared during the 1st half of 2010

Percent Change

6

Florida Staged Accident Questionable Claims by Loss Type: 2008 vs. 2009

Sources: National Insurance Crime Bureau; Insurance Information Institute.

776

652

240164

8168117142

377

509

$0$100$200$300$400$500$600$700$800$900

No-Fault (PIP) Bodily Injury Other Auto Collision PropertyDamage

2008 2009

Questionable PIP claims involving staged accidents surged 52% in 2009. For 2010, early estimates suggest an even larger increase.

+52%+73%

+69%+40%

+19%

7

Average No-Fault Claim Severity, 2010:Q3

$1

6,3

31

$8

,64

7

$8

,09

6

$5

,39

4

$5

,06

1

$4

,27

7

$3

,66

4

$3

,38

5

$3

,22

1

$3

,21

4

$3

,22

6

$2

,72

2

$2

,61

7

$2

,17

9

$1

,89

1

$3

6,4

63

$7

,64

3

$7

,36

4

$5

,39

5

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

MI NJ NY FL DE MN DC ND HI PA OR WA KY TX KS MD SC UT MA

Several States Have Severe and Growing Problems With Rampant Fraud and Abuse in their No-Fault Systems. Claim Severities Are Up Sharply.

Source: ISO/PCI Fast Track data; Insurance Information Institute.

MI, NJ, NY and FL currently are the largest states that have the most severe

problems in their no-fault system

FL has the 4th highest auto no-fault average claim cost (severity) in the US

8

Increase in No-Fault Claim Severity: 2004-2010*

*2009 figure is for the 4 quarters ending 2010:Q3.**Since 2006 the increase in Florida was 23.7% (average severity that year was $6,344). Sources: Insurance Information Institute research from ISO/PCI Fast Track data.

$35,865

$16,573

$8,776 $7,847$6,674$5,871

$12,136

$24,385

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Michigan New Jersey New York Florida

2004 2010*

The no-fault systems in MI, NJ, NY and FL are under stress due to rising fraud and abuse which will ultimately lead to higher premiums for drivers

+47.1%

+36.6%

+49.5% +17.6%**

9

New York State No-Fault Claim Severity, 1997–2010:Q3

Sources: ISO/PCI Fast Track data; Insurance Information Institute.

$5,6

75 $6,0

63$6

,699

$8,3

47$8

,327

$7,8

88$7

,507

$8,2

34$9

,235

$8,7

27$8

,577

$7,7

73$7

,311

$6,9

58$6

,870

$6,1

56$6

,052

$5,8

20$5

,991

$5,6

15$6

,094

$5,9

14 $6,2

50$6

,269 $6

,530

$6,6

06$7

,063 $7

,323

$7,3

78$7

,297 $7

,670

$7,7

40$8

,443

$8,1

77 $8,5

07$8

,025

$8,5

63$8

,726

$8,6

46$8

,830

$8,6

46 $8,9

90$8

,647

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

1997

1999

1:01

1:03

2:01

2:03

3:01

3:03

4:01

4:03

5:01

5:03

6:01

6:03

7:01

7:03

8:01

8:03

9:01

9:03

10:0

1

10:0

3

No

-Fa

ult

Cla

im S

ev

eri

ty

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

No

-Fa

ult C

laim

Fre

qu

en

cy

Avg. Claim Severity

Frequency

About 20% of No-Fault Claim Costs Are Attributable to Fraud and Abuse

No-Fault Claim Severity

Claim Severity reached a record high in 2010:Q2: $8,990

Avg. Claim Severity Rose 63% in 5 years

after 1997 Presbyterian

Decision

Avg. Claim Severity is up 54% since 2004:Q4

10

Florida No-Fault (PIP) Liability: Frequency and Severity Trends Are Adverse*

-3.70%

0.60%

-18.10%

16.10%20.70%

-6.8%

6.0%

-0.6%

12.6%

5.5%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2006 2007 2008 2009 2010*

Severity Frequency

.Source: ISO/PCI Fast Track data; Insurance Information Institute

Annual Change, 2006 through 2010*

Both the Number and Average Cost of FL No-Fault Claims Are Rising Rapidly

Fraud is causing costs to surge in Florida, leading to higher pressure on rates

11

Florida No-Fault (PIP) Claim Severity Is Trending Sharply Upward*

$7,566 $7,542

$8,035

$7,695

$8,096

$5,808

$7,048$6,738

$7,176$7,443 $7,535

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3

*Claim frequency is defined as the number of claims per 100 earned car years.Source: ISO/PCI Fast Track data; Insurance Information Institute

2008:Q4 through 2010:Q3

The Average Cost of FL No-Fault Claims Is Rising Rapidly

No-Fault claim severity (average cost per claim) is up 39.4% between Q1 2008 and Q3 2010 to a record high $8,096 per claim. No-

fault fraud and abuse is the main driver.

12

Florida No-Fault (PIP) Claim Frequency Is Trending Sharply Upward*

1.781.84

1.93

2.05 2.09

1.55

1.431.49 1.50 1.54

1.74

1.00

1.20

1.40

1.60

1.80

2.00

2.20

08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3

*Claim frequency is defined as the number of claims per 100 earned car years.Source: ISO/PCI Fast Track data; Insurance Information Institute

2008:Q4 through 2010:Q3

Both the Number and Average Cost of FL No-Fault Claims Are Rising Rapidly

No-Fault claim frequency surged by 46.2% between Q2 2008 and Q3 2010. No-fault fraud and abuse is the only explanation

13

Florida No-Fault (PIP) Pure Premiums Are Trending Sharply Upward*

$135.03$139.07

$155.18$157.57$168.89

$90.28$100.67 $100.21

$107.88$114.54

$131.31

$50

$70

$90

$110

$130

$150

$170

$190

08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3

*Pure Premium is defined as the premium that is required to pay the expected loss. It excludes expenses and other costs of doing business.**Figures are for the 4 prior quarters ending in the period.Source: ISO/PCI Fast Track data; Insurance Information Institute

2008:Q4 through 2010:Q3**

Both the Number and Average Cost of FL No-Fault Claims Are Rising Rapidly

The premium required to cover the expected cost of a no-fault claim soared by 87.1% between the beginning of 2008 and 2010:Q3. Fraud is driving claims frequency and severity upward, forcing up the premium needed to cover expected losses.

15

Florida’s No-Fault Fraud Tax: Estimated Cost per Insured Vehicle, 2009-2011F

$26.92

$48.62

$83.79

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

2009 2010E 2011F

*2010 estimate is based on data through Q3:2010. 2011 forecast is based on an assumed increase in pure premium of 25% (pure premium increased 27% in the 4 quarters ending with 2010:Q3). Source: Insurance Information Institute calculations and research.

Fraud Tax Per Vehicle

Unscrupulous Medical Providers and Attorneys Are Costing Honest Florida Drivers Hundreds of Millions of Dollars

In 2010, the average Florida driver’s fraud tax was $48.62 per vehicle.

This means that the fraud tax on a typical family with 2 cars was nearly $100 last year.

+80.7%

+72.3%

If nothing is done to address Florida’s runaway no-fault fraud problem, the fraud tax per vehicle could rise to $83.79 in 2011—an

increase of 72.3%

16

Florida’s No-Fault Fraud Tax: Estimated Aggregate Annual Cost, 2009-2011F ($ Millions)

$945.8

$548.9

$303.8

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

2009 2010E 2011F

Fra

ud

Ta

x (

$ M

illio

ns

)

*2010 estimate is based on data through Q3:2010. 2011 forecast is based on an assumed increase in pure premium of 25% (pure premium increased 27% in the 4 quarters ending with 2010:Q3). Estimates assume 11.288 million insured vehicles in FL in 2009-2011 (11.288 million is 2008 actual figure from AIPSO).Source: Insurance Information Institute calculations and research from ISO/PCI and AIPSO data.

Unscrupulous Medical Providers and Attorneys Are Costing Honest Florida Drivers Hundreds of Millions of Dollars

The total fraud tax levied on Florida

vehicle owners was and estimated $549

million in 2010.

+80.7%

+72.3%

If nothing is done to address Florida’s runaway no-fault fraud problem, the

aggregate fraud tax on Florida vehicle owners

could rise to $946 in 2011

17

Florida’s No-Fault Fraud Tax: Estimated Cumulative Cost, 2009-2011F ($ Millions)

$303.8

$852.7

$1,494.7

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

2009 2010E 2011F

Cu

mu

lati

ve

Fra

ud

Ta

x

Cumulative Fraud Tax

Unscrupulous Medical Providers and Attorneys Could Cost Honest Florida Drivers Billions of Dollars

The cumulative fraud tax levied on

Florida vehicle owners already

totaled $853 million by 2010

+80.7%

+72.3%

If nothing is done to address Florida’s runaway no-fault

fraud problem, the cumulative fraud tax on

Florida vehicle owners could reach $1.5 billion in 2011

*2010 estimate is based on data through Q3:2010. 2011 forecast is based on an assumed increase in pure premium of 25% (pure premium increased 27% in the 4 quarters ending with 2010:Q3). Estimates assume 11.288 million insured vehicles in FL in 2009-2011 (11.288 million is 2008 actual figure from AIPSO).Source: Insurance Information Institute calculations and research from ISO/PCI and AIPSO data.

Summary

18

No-Fault fraud is adding hundreds of millions of dollars in cost to Florida’s auto insurance system today.

If nothing is done to slow rapidly escalating fraud costs, auto insurance rates in Florida could rise sharply.

No-fault fraud has already cost Florida vehicle owners and their insurers and estimated $853 million since 2008. This total could rise to $1.5 billion if the problem is left unchecked.

The typical 2-car family in Florida could be required to pay what amounts to a “Fraud Tax” totaling nearly $100 based on estimated 2010 no-fault fraud costs.

Awareness among Florida consumers, regulators, legislators and law enforcement is low and must be raised in order to engage affected parties and combat fraud.

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwig

Insurance Information Institute Online:

www.iii.org

www.InsuringFlorida.org