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Fraud, Unethical, or Legitimate? The Problem of Evaluating Insurance Claims

April 1, 2008

By Ashley Killough

As part of a Texas Tour, Baylor co-hosted with the University of Texas in Austin the visit of Dr. Richard A. Derrig, President of OPAL Consulting LLC, last week.

Sponsored by Gamma Iota Sigma, Derrig spoke on the topic of "Insurance and Financial Fraud" in classes taught by Dr. James Garven, Frank S. Groner Memorial Chair of Finance and program director of Finance, Insurance & Real Estate.

To demonstrate the ambiguity of the term "fraud," Derrig started the lecture by discussing five real examples of fraud and then polled the students, asking if each scenario would be considered fraud, unethical or legitimate.

"The definition of fraud, and what it is or isn't, is not very precise," Derrig explained. He said that in order for a fraudulent situation to be considered a case, it must meet all four of the following principles: proscribed by law, obtained money or value, carried out under false pretense, and included a clear and willful act (intent). The failure of only one or more of these principles is what Derrig calls an abuse or ethical lapse.

Derrig said abuse legally falls under a gray area as a form of soft fraud, not criminal, and is considered unethical behavior. Abuse containment is a matter for the company and industry, not the legal system, Derrig said.

However, criminal fraud is increasing everywhere, and Derrig discussed the top ten defenses against the growing problem. Adjusters, computer technicians, criminal investigators, experts, lawyers, legislators and special investigators were among the defenses. Derrig said that legislators are the most important people in the protection against fraud, because they invent the system and hold power in prevention. Derrig went on to explain the technology of data mining, a process of automatically searching large volumes of data for patterns using data.

Derrig finished his visit to Baylor with a faculty seminar Thursday in the Southwest Securities Financial Markets Center, where he presented his paper, co-authored by Sharon Tennyson of Cornell University, titled, "The Impact of Rate Regulation on Claims: Evidence from Massachusetts Automobile Insurance."

Prior to forming OPAL, Dr. Derrig held various positions at the Automobile Insurers Bureau of Massachusetts and at the Insurance Fraud Bureau of Massachusetts over a twenty seven year period, retiring in January, 2004 as Senior Vice President at AIB and Vice President of Research at IFB. Prior to joining the Bureaus, he taught graduate and undergraduate mathematics at Villanova University, Wheaton College (MA) and Brown for a total of thirteen years.

During the spring semesters of 1994 and 2002, he was a Visiting Lecturer and Research Fellow in the Department of Insurance and Risk Management at the Wharton School at the University of Pennsylvania. Dr. Derrig was appointed a visiting scholar at Wharton for 2004/2007 and an adjunct professor for the spring of 2006. For 2008, Dr. Derrig has been appointed Visiting Professor of Risk, Insurance, and Healthcare Management in the Fox School of Business and Management at Temple University.

In 1998, Derrig was the recipient of the RIMS Edith F. Lichota Award for research on The Monday effect in workers compensation claims. In 2003, he was co-winner of the Casualty Actuarial Society prize for the best 2002 paper in JRI (Insurance Fraud Detection) and a Bowles Symposium/CAS prize (Equity Risk Premium). He is the co-editor, with J. David Cummins of the Wharton School, of Classical Insurance Solvency Theory (1988), Financial Models of Insurance Solvency (1989), and Managing the Insolvency Risk of Insurance Companies (1991), Kluwer Academic Press.

Derrig has lectured extensively on insurance topics to professional actuarial groups and to seminars at the Universities of Barcelona, Hamburg, Montreal, Tel Aviv, Pennsylvania, Illinois, Texas, Minnesota, Wisconsin and others in the U.S. He is a director of the American Risk and Insurance Association (1992-1995, 2006-2009) and a two-time recipient of the President's Award (1997, 2007).

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