Betting on Lives – Trends in the Life Insurance Industry
As we begin 2023, Diligence is sharing some of their thoughts on what they saw in the past year and what they believe to be the issues for 2023. For those who may already know the trends, you may want to skip to the solutions provided at the end of this article but some of the trends may surprise you.
Wagering contracts are nothing new, but they have exploded in 2022. While the methods are evolving, wagering contracts are, at their core, simply an applicant fraudulently taking out a life insurance policy on another person hoping that they will die soon. These types of fraud are often carried out systemically by sophisticated and organized groups, and the crimes can involve forgeries, stolen identities, hybrid or synthetic identities, health and financial misrepresentations, and insurable interest misrepresentations. The cost to the industry is unknown, but based on the few high-profile cases prosecuted, it can easily run into the hundreds of millions of dollars. Organized groups have been known to have procured hundreds of policies on individuals before getting caught.
Methods vary and covering how wagering contracts are purchased by the fraudsters would be a lengthy article of its own. Suffice to say that credit records that rely on social security numbers (“SSNs”) are insufficient to identify fraudulent applications. In some instances, the SSNs are accurate, but other data on the application such as the insureds address is not. This allows some screening methods to miss significant health information. In many instances, the SSNs are falsified. Credit bureaus are required by law to create credit records on any unique social security number they receive. It is often only a matter of applying for credit a few times with the identifiers you want before a record is created. Once the records are established, low amounts of credit may be ultimately approved. Once the record is created, other collateral documents can also be obtained. This allows for a synthetic person to be created, and ultimately, “killed” years later. All one needs is a homeless deceased or someone who is unhealthy to assume the synthetic identity. Certain organized crime groups are known to swap identities as needed to cash in on previously issued policies on other identities.
Hybrid identities are essentially stolen identities with some of the identifiers falsified. The addresses and contact information for that person may be falsified so that, if an attempt is made to contact that person, the person trying to make contact would reach the fraudster. In one fraud ring Diligence recently uncovered, health care workers were stealing the information on patients and then applying for life insurance coverage on the patients’ lives. Addresses were changed so health records would not find the true health of the person being insured. Applications were clean-sheeted, and needless to say, the patients were not in good health.
Historically, organized crime groups had to solicit the assistance of an agent to purchase insurance. The digital age has made it easy to by-pass corrupt agents and to pose as the insured (whether a stolen identity, synthetic, or a hybrid) to obtain coverage. Contact information for the insured inevitably points back to the applicant, not the insured, so that communications can be monitored appropriately. One recent study found that wagering contracts from some of the more notorious crime groups average just under five years between the policy issuance and the date of death.
When it comes to claims, identities of a deceased and the insured are occasionally switched so it appears that the insured has died when in fact, the insured has not. Also, funeral homes are often the catalyst for obtaining death certificates, not hospitals or medical facilities. Key identifiers such as date of birth and SSN are most often provided to funeral homes by family members, and the funeral homes then apply for death certificates with this information. The States do not have to validate the information and it is generally presumed to be accurate. If a person dies in a hospital, the hospitals often only have the authority to provide input on the cause and manner of death but not the identifiers. Mismatches between the identifiers in the hospital records and the death certificates can be overlooked, or the hospitals may not have the authority to correct them. These are all situations Diligence has uncovered and are not hypothetical.
One form of wagering contracts that also seem to be increasing are the cases where family members know a child, grandchild, brother, etc. is involved in dangerous and perhaps criminal activity. They then take out a policy on their family member knowing the likelihood that the person will be killed is high. Diligence has uncovered cases where the insureds were in prison or were listed as missing persons at the time the applications were submitted. Several years ago, Munich Re did a study on the protective value of underwriting, and the only cause of deaths that were negatively correlated to underwriting were violent deaths. This type of wagering contract seems to be increasing.
Material misrepresentation of health is certainly present in systemic fraud, but it may also be the result of a reaction and opportunity to an adverse situation. These schemes are often individuals who are unhealthy who do not qualify for insurance, but they clean-sheet their application to obtain coverage for their family member. In today’s digital world where proxies are being used in place of medical records, the fraudster simply gambles that their true health will not be discovered at time of application and that they survive more than two years. In some instances, Diligence has seen applications taken out by family members on recently deceased persons. Prescription screens cannot catch all this due to timing, lack of 100% coverage, and off-label use of prescription drugs that otherwise seem benign.
Internationally, the world is in much more turmoil than any time in recent history. The war in Ukraine has caused energy prices to spike in price, particularly in Europe. Fallout has also affected food stores which has caused economic hardship throughout many reaches of the globe and especially those dependent of food imported from Europe. Economic hardship creates an environment where corruption can seep in and take hold even in areas typically not known for significant fraudulent activity. Diligence has seen more claims from Mexico and Latin America in general due to the rise in power of the drug cartels. Violence throughout the region often goes uninvestigated or unsolved due to the lack of police resources and fear of the cartels. Cartel members are not only involved in smuggling drugs across the U.S. border, but they are also involved in human trafficking which can also involve taking out insurance policies on unsuspecting, trafficked persons. Haiti and other areas have tremendous civil unrest which makes murder-for-insurance or faking a death easier than it has been previously. Documents throughout the globe are easily attained from legitimate government agencies due to corruption within the agencies themselves or the medical providers and / or the funeral homes who provide the data to the government agencies.
Another item Diligence has also noted an increasing number of policies issued to U.S. residents who are out of the country when policies are issued raising the possibility that either the insured is unaware of the policy being issued (see above section on wagering contracts) or the insured is not truly a resident of the U.S.
Fraud does not know political or geographic boundaries
It used to be that for a few dollars, one could go across the U.S. border into Mexico and purchase a “death claim kit” complete with all the documents to provide proof of death. Throw in a little more, and one could get a body to go with it. The truth is most legal and legitimate death certificates, regardless of the border, rely on the input from non-governmental people to supply the identifying information – even in the U.S., a properly registered death certificate is often issued based on the information the family provides to the funeral home or the information that is provide by a medical doctor. Nearly all fraudulent cases overseas will contain a perfectly legal and “legitimate” death certificate that was issued based on fraudulent data given to the registry office. Even in the U.S., Diligence has uncovered legitimate death certificates that contained fraudulent information because the funeral home was given the bad information. This was done by the fradusters so the certificate would match the fraudulent information on the application for coverage.
We are experiencing a major shift in immigration patterns from Latin America and Middle East into the United States and continuous migrations from Africa and the Middle East into Europe. This will undoubtedly impact the type of cases and potential fraud coming out of these regions as pre-immigration documentation is often nonexistent or easily falsified. One must be on a constant watch with continuous migratory and fraudulent trends. Many people from Ukraine have also fled into Europe, Turkey, and other regions in the Middle East. With the growth of the BRICS countries, we can expect an ever-changing evolution of socio-economic patterns. It will take skilled and experienced experts to keep abreast of all the coming changes and provide the support for its respective clients.
Fraudulent applications are always easier to decline than to void a policy once issued. Knowing your applicant is the first and perhaps the greatest tool to identify applications containing fraudulent data. This would prevent nearly all wagering contracts when the insured’s identity is stolen, or a synthetic / hybrid identity is used. Tracking agents and persistency is also key. Diligence has developed a suite of underwriting tools in its Prodigi software suite to help insurers instantly and positively identify their applicant. The tools within the suite can be used individually or collectively. These tools include biometric measures, geofencing, and unique database tools that prevent wagering contracts from getting on the books. Prodigi also cross-references key personal metrics to ensure that the applicant is as presented. Often, fraudsters will use the same key personal metrics for multiple insureds such as address when applying for coverage, and this is just one of the types of checks provided by Prodigi.
Once a policy has been issued, reviewing all claims within five years is critical - fast-tracking these claims will inevitably result in fraudulent claims being paid and delays in identifying linked fraudulent policies. Fraudsters are very aware of the two-year contestable period and that most insurance companies will not review cases that are outside of this threshold. In fact, they rely upon it. They know insurance companies are interested in streamlining and automating claim processing for claims that are older than 730 days. However, insurers in nearly every state have the ability to investigate and defend against fraudulently procured policies if there is predication to investigate and proof of fraud. Unfortunately, many insurance companies do not recognize this which gives fraudster a free pass after two years. Even if a fraudulently procured policy is discovered outside of the contestable period but there are insufficient defenses for that specific case, steps can be taken on other policies that may be linked and contestable to avoid future fraudulent activity. Reinsurers need to do their part too by pushing back on policies that appear to be fraudulent, on express processing of claims under five years, and requiring insurers investigate where there is predication to do so.
Outlook for 2023
Diligence continues to see wagering contracts as a significant issue going forward. The utilization of wagering contracts has expanded far beyond the groups that have traditionally been associated with them, and as success stories spread, so will the use of insurance for profit continue. What is unclear is whether insurers will accept these fraudulent payouts as part of the cost of doing business hence passing the cost onto consumers, or will insurers put more stringent measures in place to stop them. Diligence sees the adoption of Prodigi and its tools as a major step forward in the industry’s ability to defeat wagering contracts.
Global unrest is likely to continue, and many pendants are predicting a global rescission rivalling the 2008 recession. Diligence sees the economic pressures will continue to push people to take nefarious actions to survive that they otherwise may not have pursued. There is no end in sight to the strengthening of the drug cartels in Latin America, and with it, increased fraudulent activity that results from it. Many countries on the continent of Africa are also experiencing significant turmoil and violence, and this is expected to continue.
 Clean-sheeting refers to completing an applications without admitting to any adverse medical history despite the existence of adverse medical history. In essence, the health history is represented to be “clean.”
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