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.

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