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INSPECTION PLAYS KEY ROLE IN AVERTING VEHICLE INSURANCE FRAUD
Inspection systems and advanced computer technology provide dynamic
tools to deter vehicle insurance fraud.
Senior Anti fraud Systems Advisor
CARCO Group Inc.
September 2003 In the 26 years since the first vehicle pre-insurance
inspection law was enacted, in New York, incremental improvements
have yielded dramatic advances in the core technologies and
management systems that are the foundation of pre-insurance
Breakthroughs in “imaging” technology and computer-based
processing have led to fast, reliable, and productive management
tools: the controls now available have broad scope, speed,
processing power and versatility, allowing the insurance industry
enforcement to keep up with the relentless efforts of criminals
who view insurance fraud as a profit-driven challenge.
But despite the progress that we’ve seen, vehicle insurance fraud still
thrives in many of the nation’s large, highly populated urban areas,
representing a multi billion-dollar enterprise in which a vehicle is now reported
26 seconds. It should come as no surprise that the type of criminals who created
the need for deterrent measures such as pre-insurance inspection, have also
benefitted from technology in their quest to beat the system. Technology has
to be a double-edged sword, giving equal access to clever criminals intent
on committing fraud to the same high-tech tools.
Notwithstanding the measures in place in a number of states to minimize vehicle
insurance fraud, the latest FBI “Uniform Crime Reports” shows those
property crimes involving vehicles represent more than half of all property crimes,
nationwide – more than $7 billion each year.
Of these “reported” crimes, law enforcement professionals feel
that between 25–30 percent involve fraud. In the long run – as
most law enforcement and insurance investigators agree – effective deterrents
are the only dependable means to fight fraud. Without impenetrable barriers
vigilance criminals, whose focus is on making fast money, will continue to
exact tribute from insurance carriers with the cost being passed along to honest
Although technology has played a key role in multiplying the benefits of inspection
programs by tapping the capabilities of computer technology, its efficacy is
in the simplicity of the concept. As technology breakthroughs have been made
in digital imaging and computer systems, they have been quickly applied to advancing
the capabilities and functionality of the inspection process, propelling pre-insurance
vehicle inspection from an inspired idea to a successful anti fraud system.
Perhaps the best way to appreciate the importance of vehicle inspection today
is to contrast the methods used in the early days with the reliable high-speed
technology-based systems now in operation in five states: NY, NJ, MA, RI, and
a limited program in Florida. The concept brought to fruition in New York in
the late 1970's because of skyrocketing insurance rates and a tidal wave of
public protests, marked the introduction of watershed legislation: Regulation ‘79,
also known as the “Photo Inspection Law.” From an anti fraud perspective,
a new era had begun in which a meaningful deterrent was introduced to mitigate
the seemingly unstoppable efforts of clever criminals and crime rings. It was
thought at the time that if a high percentage of fraudulent claims could be
reduced insurance rates could also be stabilized.
Since the most blatant and costly frauds prior to the introduction of the Photo
Inspection Law involved claims for nonexistent or “phantom”vehicles
whose only purposes were to initiate a fraudulent theft claim, and claims for
damage that existed before a policy was issued, the first steps were clear-cut.
The owner of a recently purchased used vehicle who applied for physical damage
coverage had to prove that a vehicle actually existed by having it seen, and
a representative of the insurer or an authorized inspector had to document
the physical presence, condition and identity of the vehicle. In this way two
problems were avoided.
Enabling the new law to produce the desired result required an organization that
could develop, implement and maintain a result-oriented system, establish a network
of inspection sites throughout the state, and create a computer-centric database
of the information obtained by inspection to serve the insurance industry and
law enforcement. Enter the CARCO Group, a pioneer in physical inspection systems
and arguably the leader in the field today. Formed in late 1977 to provide services
in New York, the company quickly established a network of more than 1,000 inspection
sites throughout the state; more than six thousand sites are now operational
in five states. An integral part of the services to be provided was the computer
processing and communication functions required to make the process work.
In the early days of the program, documentation was limited to a single black-and-white
photo of the inspected vehicle, a system with two serious flaws: only two sides
of the vehicle could be seen and, equally limiting, the vehicle appeared in black-and-white.
With the absence of color photos only black or white vehicles were seen. A few
years later, while the number of photos was increased to two black-and-white
images, the identification value of color was still lacking.
In 1986, the vehicle inspection program finally had the muscle it needed with
the advance to color photographs and the addition of a much needed third photo – a
close-up of the Federal Motor Vehicle Safety Standards Certification Label, most
often called the “EPA Label.” The combination of the inspector’s
information and color photos of the vehicle and the EPA label now constituted
an inspection file of enormous value.
Result-Oriented, Pro-Active Process
The photo inspection process has evolved over the years into a dynamic, result-oriented
process; the longevity and measurable achievements of the in-place inspection
programs are testimony to their productivity. The fundamental value of the system
is its ability to verify and record the existence, identity and condition of
vehicles, thereby eliminating opportunities to commit fraud that criminals can
profit from. And while its focus is to enable insurance carriers to take steps
necessary to dissuade criminals from committing fraud and to construct barriers
that deter them from doing so, inspection also provides useful investigative
Among the major changes between inspection systems of the 1970's and the present
is the level of technology, namely powerful high-speed computers, electronic
communications systems, improved database management techniques, and the shift
from conventional photographic documentation to digital imaging. Notwithstanding
the fact that a small percentage inspection sites still use instant photos, more
than 90 percent have shifted to digital cameras which capture images on floppy
discs instead of film. However, even in cases where color prints are submitted
rather than digital files, the photos are digitized [scanned] as part of the
data entry process and become part of the electronic file.
Similar Requirements Between States
Although procedural or mechanical requirements differ somewhat from state-to-state,
required, the process is basically the same: three digital or photographic
records are taken: two 3/4 oblique angle views showing the front and driver’s side
of the vehicle in one picture, and the rear and passenger side in the other.
The “third photo,” which is of the utmost value, is a closeup of
the EPA label located on the inside edge of the driver’s door or door
post, which includes the Vehicle Identification Number [VIN].
EPA Label: Important Investigative Tool
With the information on the label, or even evidence of data eliminated from
it by tampering, investigators can find clues in cases where fraud is indicated
and provide a tracking mechanism to detect salvaged and stolen vehicles. Because
it includes the VIN, the label also simplifies validating the vehicle's authenticity
and identifying imported “gray market” vehicles that are out of
compliance with U.S. safety standards. If an attempt is made to remove or alter
it undergoes a detectable physical change suggesting tampering of some type.
Altered or missing labels will generally trigger an investigation before a
policy is issued, which could show that the vehicle was in a prior accident,
stolen, or was a gray market car.
Examination of the electronic photo image files that are an integral part of
every inspection file can reveal counterfeit or altered labels: a label that’s
been tampered with may display physical damage or the wrong type of sticker
for the model year, or a background color shownthrough the data windows that
from the vehicle, or a VIN that does not agree with the specifications for
WHERE IT ALL BEGINS: THE INSPECTION PROCESS
When an insurance carrier receives a request for coverage of a newly acquired
used vehicle, or there is a change from one company to another, the applicant
is notified in writing that inspection is required within a specified period
of time, and is given a list of inspection facilities. If the vehicle is not
presented for inspection within the time period stated, coverage will be denied.
Inspection begins by an authorized inspector or representative of an insurance
carrier copying the Vehicle Identification Number from the VIN plate located
on the dashboard. The VIN’s 17-character encoded sequence is, in effect,
the vehicle’s birth certificate. The inspector also records the vehicle’s
make, model, year of manufacturer and odometer reading, and includes a description
of expensive options and accessories. Where applicable, pertinent notes are
made about the vehicles condition and damage observed by the inspector.
Reports Sent to Computer Processing Center
After inspection, the report and photos are sent to a central processing facility
such as CARCO Group’s New York-based computer center, where the information
is entered into the database of a “super computer,” an IBM I-Series
e-Saver AS/400 system, connected by a Local Area Network [LAN] to an IBM mainframe.
Equipped to access data from a “jukebox” optical storage device,
the system’s storage capacity – which can be expanded – is
1.4 terabytes [TB] or 1.4 trillion bytes. With its electronic “bridging”system,
it is one of the most advanced integrated systems of its type, now containing
more than 15 million reports.
When the report is received, it is reviewed to verify that the required information
and required number of photos have been provided and that no entry errors have
been made. At this stage and throughout the process, quality control measures
are continuous and thorough. If entries exceed programmed parameters a variety
of “Alert” codes may be entered by the data entry operator to indicate
a possible problem. The system is also programmed to automatically issue alerts
based on programmed search parameters. These warnings include underwriting premium-generation
and risk-evaluation alerts, and warnings relating to the vehicle’s identity – all
signs that an established search parameter has been exceeded and should be
reviewed. Alerts include: additional operators, garaging location, excessive
VINs, altered EPA labels, and even warnings that a vehicle was inspected more
than once during a specified period, which might suggest a multiple policy
fraud in the making.
The first phase in the data entry process includes logging in information such
as: date of inspection, insurance company’s code number, the reviewer’s
initials, report number, insurance identification number, presence of an anti-theft
device and number of digital or instant photographs taken. Information about
the anti-theft system is important in determining possible insurance discounts
and to help build statistical profiles when vehicles are reported stolen.
Alert messages and information about observed damage can be added by a data
entry specialist who can indicate up to three damage codes to prevent claims
indicated in the inspector’s report. To avoid potential tampering such
as backdating, reports are issued by the inspection site in sequential order,
in which the date and time shown must fit the sequence in which the reports
are issued. This establishes the time lapsed between the inspection date and
of the report at the computer center.
When the VIN is entered into the system, it is automatically checked for authenticity:
the VIN and vehicle must match. The computer will identify irregularities in
seconds, with a “Bad VIN” alert displayed in the event of a disparity.
In such cases the carrier is advised that further investigation may be needed.
The all-important VIN provides critical information about the vehicle and represents
a valuable investigative tool.
The inspection report and, where applicable, hard-copy photos are then scanned
and entered into the inspection database in a computer readable format. In the
case of digital images, on floppy disks, they are entered as part of the inspection
file and stored safely in a permanent electronic archive using WORM [Write Once
Read Many] technology. Once the report data and photos become part of the VIN-indexed
database information can be easily retrieved for routine claim-checking or investigative
purposes regardless of where and when reports were completed. To maintain file
privacy, insurance companies only have access to files of their customers.
Processing, tracking and communications features provide the ability to send
data the carrier by means of sophisticated, high-speed Internet-based data transmission
methods such as File Transfer Protocol. Using conventional telecommunications
methods, the carrier can receive the data in a PC-compatible format, making it
available to generate reports or for manipulation. Sophisticated image processing
capabilities facilitates the enhancement, and onscreen magnification, of subtle
details in an original photograph, such as making barely legible license plate
numbers easy to read.
EFFECTIVE DEFENSE FOR VARIETY OF SCHEMES
Included in the mix of fraudulent schemes and claims that can be deterred by
physical inspection are the following:
Phantom vehicle theft claims
Pre-existing damage claims
Paper Car and counterfeit title frauds
Multiple policy frauds
Duplicate car frauds using the same VIN
Duplicate title frauds
Theft of nonexistent equipment/accessories
Import-export frauds involving documentation for vehicles in other countries
Staged accidents and accidents that never occurred
extensive benefits provided by pre-insurance vehicle inspection,
owing in large part to the sophisticated computer
processing and database system
is now in place, represent significant savings for the insurance industry,
and the motoring public. With its dynamic, continuously expanding repositories
digital information related to the millions of inspection reports in its
database, CARCO Group represents a unique resource for insurance carriers,
organizations, and law enforcement. The company’s powerful integrated
database allows insurance industry clients and, where applicably, law enforcement
to access information in seconds with the ability to apply its unique resources
to winning the battle against vehicle insurance fraud.