Testimonv regard in^ Insurance Fraud Legislation (House Bills 1737,1739.1740,1750~

July 16, 2009

Mr. Chairman and Members of the Committee:

My name is Richard Stokes and I submit our comments regarding the above-captioned legislation on behalf of more than 1,000 member companies of the Property Casualty Insurers Association of America, or PCI. Taken together, PC1 members write 37 percent of the property and casualty insurance in the Commonwealth, representing more than 7 billion dollars in direct written premium.

We are here today to provide comments on proposals that would impact the way insurers fight insurance fraud in Pennsylvania. PC1 and its predecessor organizations have long supported strong laws against fraudulent activity in insurance transactions and laws enabling insurers to detect such transactions, fight fraudulent claims, providing immunity for reporting suspected fraud to law enforcement and other anti-fraud organizations and allowing for sharing of information among insurers about potentially fraudulent activities against insurance companies.

There are four proposals under consideration today that we would like to comment on, with many positive elements that we can support. There are also some provisions of concern to our members that we would like to comment on as well.

We will begin our comments with House Bill 1737, a bill that would require health care providers to post a notice offering a reward for information leading to a conviction for insurance fraud. Public awareness of the issue is critical, so we applaud this effort, but would suggest that the language specify that the notice be posted in public areas of the healthcare facility, such as patient waiting rooms and private areas, such as staff break rooms to raise awareness among patients and health care staff.

House Bill 1740 is a measure that we support, providing for forfeiture of assets acquired in fraudulent schemes against insurers, and provides for equitable distribution of those assets, or the sale of those assets, to the defrauded insurer as restitution.

House Bill 1739 takes the current statute requiring the filing of motor vehicle anti-fraud plans and moves them to the insurance statutes and applies them to all insurers authorized to do business in the commonwealth. These kinds of plans already apply to Workers Compensation and Automobile insurers, but would represent an additional cost and expense for insurers that do not write those lines. We would question whether there is a need for all insurers to file an anti-fraud plan. We would also suggest that for some lines, it may be more appropriate simply to require the company to have an anti-fraud plan and available for inspection by the department.

28 W. State Street, Suite 719. Trenton, NJ 08608 Telephone: 609-396-9601 Facsimile: 609-396-9603 Web: w.pc iaa .ne t

Page 2 July 16, 2009

Additionally, we would suggest that the legislation provide a de minimis number of at least $1 million in written premiums before requiring an anti-fraud plan to be filed with the department. In many cases, there are companies that have obtained a license to sell insurance in the state but have either not activated their business plans or have a very small number of policies in effect. We believe this legislation should exempt these companies.

In addition, the measure would be effective immediately upon approval, possibly allowing little time for the development and filing of those plans. While we recognize that the legislation provides new insurers with 6 months to develop their plans, we believe similar accommodation should be made as this bill becomes effective. We would ask at a minimum that the Committee modify the legislation to provide us six months after signing before becoming effective. This will provide the insurance industry with sufficient time to allow for proper changes required by the legislation.

House Bill 1750 is an extensive rearrangement of the existing insurance fraud laws that broadens the definition of insurance fraud, moves the Insurance Fraud Prevention Authority statute in to the insurance code and makes new provisions for fraud reporting and anti-fraud plans.

The measure broadens the definition of insurance fraud to cover most any insurance transaction and broadens reporting immunity to apply to self-insurers and insurance licensees, both of which we view as positive measures. It also adds language applying to statements made to a person or the public; we believe the intent was to apply to those who make false representations to innocent parties in support of insurance fraud schemes, such as a medical provider that bills for care a patient never received without the patents knowledge which we believe is appropriate. We are concerned that the language could be interpreted as applying to insurers, their employees and agents, whose conduct is already regulated in existing unfair trade and claims practice laws. We would be happy to work with the sponsor(s) on crafting language that is consistent with what we believe to be the intent of the bill.

House Bill 1750 also takes the exiting lnsurance Fraud Prevention Authority statute and moves it in to the insurance code. It provides extensive definition of terms, including a clear definition of "identified fraud costs", which is helpful to insurers who must exclude such costs from their rating calculations. It also makes some changes to the assessment formula, providing for an additional 10 percent cap for life insurers and exempting several other lines of insurance from assessments. It appears that these changes would increase assessments on property casualty insurers in an inequitable manner. We would be interested to see any projections that the proponents of these changes may have that would address our concerns.

The third portion of the bill adds comprehensive new reporting and anti-fraud plan requirements. It includes many positive elements such as incorporating existing fraud warning requirements and allowing insurers to include expenses and costs associated with creating and implementing their anti-fraud plans in their rating calculations, placing an emphasis on detection and prevention that is appropriate. It also provides improved reporting immunity and confidentiality provisions.

As for several other concerns, one is that the measure does not address the existing fraud plan filing and reporting for motor vehicle insurers in Title 75. This legislation would appear to require for duplicate reporting for automobile insurers. We would ask that the Committee consider modifying the bill to clarify and prevent any sort of duplication.

We are also concerned with the very detailed and potentially costly reporting requirements of this bill. We would also question the need for the very costly penalty provisions of the legislation. We would suggest that the legislation include recognition of insurers' business motivation in fighting insurance fraud. We believe this last point is overlooked in the legislation and needs to be a basic premise of the legislation. PC1 members feel that Pennsylvania already has very effective anti-fraud efforts, but are concerned that these enhanced requirements will bring little value in the form of improved results.

Page 3 July 16, 2009

We would also like to comment on section 1157 (d) that includes a continuing educational requirement. While we agree that fraud investigators need a level of education and experience, we would submit that training and membership in various organizations can be very costly. This section requires an investigator to obtain within one year of employment a professional fraud designation. We would question the I-year requirement and urge the committee to make this three years. Completing these courses within I-year may be very difficult and has many challenges from a time perspective.

Also, there are a number of designations that do not require an annual Continuing Education, but are well recognized and difficult to obtain. We would recommend that investigators be required to attend a predetermined number of fraud training hours per year.

Finally, we would recommend that the legislation provide a grandfather clause for investigators who have been in their position for more than a predetermined number of years. We submit that to require investigators. who have been employed several years without having this requirement, to obtain this new requirement at this time is fundamentally unfair. This would also be consistent with the legislation itself in section 1157 (b) that requires investigators to have the education and experience.

On behalf of our members, I would like to thank the committee for the opportunity to offer comments on these proposals.

We stand ready to work with the sponsors and the Committee on these and other issues related to the bills

Richard Stokes Counsel Property Casualty Insurers Association of America 28 West State Street Suite 719 Trenton, New Jersey 08608