Change is afoot

There’s no debate that Underwriting is undergoing significant changes to meet market demands for fast and painless issuance of insurance products. Big Data and analytics are seeking to streamline processes in an effort to reduce human intervention and improve the customer experience. In the process, human interactions are decreasing, and insurers are becoming more distant from applicants whether due to new, automated underwriting processes or just the new norm of social distancing. With this distancing and emphasis on straight through processing, new fertile ground is being uncovered for fraud attempts which are expected to increase - we have already seen this. Underwriters are the Protector of the company’s bottom line, so the questions become what risks are being taken on with these changes and how can the industry best mitigate those risks. Without diligence in underwriting, earnings will suffer, criminals will prosper, and the public will pay higher premiums.

Underwriting Covid

As the US economy continues to grapple with the economic fallout from Covid, a bright spot is emerging in the life insurance market. With the most recent MIB reports indicating large increases in life insurance application activity for the months of July and August 2020 [1], it is clear that exciting opportunities may lie ahead for life insurers. A global pandemic may have been the nudge many consumers needed to finally take the step to acquire that life insurance policy they put off purchasing for so long.

With these opportunities, comes an equal share of risk for insurers as many applicants may have ulterior motives for their newly acquired insurance. As the pandemic continues and social distancing guidelines become the status quo, more applicants may be inclined to request fluidless exams and even less face time with agents. Although these requests for leniency may not be unwarranted, underwriters should take good care to ensure these easements are not being exploited by fraudsters highly aware of the life insurance underwriting process who know where vulnerabilities in the process exist. If an insurer has contemplated easing existing underwriting requirements in an effort to accommodate the situation derived from Covid, another contactless requirement can be implemented in an attempt to defend against fraudulent exploits

Best time to detect fraud

Fraud can occur at any time during a policy life cycle; however, it is most likely to occur and be identified at either the time of underwriting or claim. What we often see from fraud identified at time of claim is that the fraud could have been avoided “if only” a few additional measures had been in place or facts looked into a bit closer at time of underwriting. Unfortunately, once a fraudulent application becomes a policy, it can easily go undetected, and even if identified, defending the claim has its own set of risks. It is much better and more effective to keep the undesired and fraudulent risks off the books than it is to defend the claim.

Types of Fraud

We are seeing many types of fraud schemes at time of underwriting – some sophisticated and clearly intentional whereas others are less sophisticated. 

These schemes include:

  • Synthetic persons (the “insured” is non-existent)
  • Use of a stolen identity to purchase coverage
  • Withholding key information
  • Creating false medical or financial records
  • Foreign nationals

One alarming trend seen in recent years is foreign nationals applying for insurance who recently arrived in the country and are living and working under work visas as restaurant workers, manicurists and massage therapists. At first glance, these occupations may not appear remarkable and show no cause for alarm. However, through further scrutiny, an element of human smuggling may be at hand. During subsequent investigation of these policies, many of the applicants working as massage therapists were found to be working at massage facilities engaging in sexual activities, that is not only illegal but highly risky. Although the outcome of this investigation remains pending, it is suspected that these policies were taken out as a form of asset protection for the individuals who may have been illegally smuggled to the US and forced to work in poor and dangerous conditions. Further, the scheme may be a way criminals are using funds paid as insurance premiums as a way to launder money obtained from illegal activities.

Role of technology and fraud

Asymmetry of information has and always will be an issue for insurers – the insured has always known more about themselves than the insurer. Advances in technology and the availability of public information will undoubtedly make misrepresenting certain information more difficult for unsophisticated and simplistic fraud. For example, licensing checks may detect piloting activity, and Rx checks may uncover an undisclosed prescription drug use in most cases. Sophisticated criminals will know how to circumvent these checks.

New technologies and automation will create more opportunities to commit fraud. For example, the advancement in non-prescription, anonymous health screening kits will allow a potential insured to have an information advantage over the insurer. Automation and rules cannot replace the human mind, and distancing comes with more risks of missing clues that could uncover fraudulent behavior.

A possible scenario to contemplate concerning new technology that is being widely implemented and becoming more commonplace is the regular adoption and use of Virtual Private Networks (VPNs). Already commonplace with Account Takeover schemes, individuals outside of the U.S. can now apply for life insurance by using a VPN, which generates an IP address that gives the appearance of being from within the borders of the U.S., and in some instances, can stem from a specific city or state, further giving the appearance that the online application was completed in the state where the identity of a US consumer was stolen.

Many may view the advances in technology as a one-way street only benefiting the insurer / underwriter, but this should not be the starting point of the discussion on preventing fraud. Fraudsters are not to be underestimated in the complexity and the sophistication of their schemes. They operate with flexibility and can adapt to new changes and technologies with ease. They are not burdened by the same bureaucracies and slow moving nature of large insurers. A change that may take an insurer months or years to implement can be adapted to quickly by savvy fraudsters, who keep up with the pace of new technology and tools to carry out their schemes.

One may recall Frank Abagnale who was the basis of the movie “Catch Me If You Can” which highlighted Abagnal’s teenage life when he lived by forging checks and impersonated. He is someone intimately familiar with crime, fraud, and technology, and he has worked for over 30 years with the FBI in their efforts to prevent fraud. One of his talking points today is that “technology breeds crime – it always has and always will.” Many believe technology will make it harder to perpetrate crimes; however, experts, including Abagnale, differ.

Mitigants to fraud

Insurers will have to balance the benefits of automation and analytics against the mortality costs that may come from the leakage. Analytics are good at detecting patterns from past data, but this requires repetitive datapoints of prior frauds already on the books. Frauds can be perpetrated by an individual as a one-off situation (a recent poor medical diagnosis), or through sophisticated criminal activity that are more systemic in nature (nomadic activity). 

Some of the tools available to detect fraudulent activities include:

  • Scrubbing of public information
  • Rx checks
  • Licensing checks
  • Comprehensive inspection reports
  • Medical canvassing
  • Identify verification
  • Customer follow up

Highly synergistic to the existing trend of reducing customer contact and inline with a higher reliance on data, many fraud mitigants can be conducted behind the scenes and with no extra interruption to the life of the applicant.

A medical canvass is a highly effective tool that often uncovers unadmitted medical history. Even more beneficial, a canvass can be conducted quickly, and facilities and pharmacies can be narrowed based on provider specialty and geographic location, including facilities and pharmacies outside of the U.S.

Although not to be relied on solely or without proper verification, a scrub of public records can give tips and hints that can yield tremendous results for detecting and preventing fraudulent activity at underwriting. As more and more of the population utilizes online sources and continue to share more information about their lives on public forums and sites, significant information can be derived about an individual that may assist in corroborating the facts presented at underwriting. Through social media, blogs and online forums and self-help groups, among other public sources such as civil and criminal court records, valuable tips and leads can be gathered quickly and cost effectively in an effort to learn about your customer.

Case in point, postings are often located on online forums where applicants have publicly posted comments or questions about the fear of being diagnosed with a possible medical condition prior to taking out the application. Other information is regularly uncovered when consulting public records such as hazardous sport and aviation activities, as well as lifestyle indicators like tobacco and alcohol consumption.

As simple as it sounds, customer follow up or feedback can be a tremendous tool to deterring fraud at underwriting. Organized and sophisticated criminals will choose the path of least resistance, so asking for clarification or follow up can send the message that a breathing human is reviewing the information provided on the application and the information on the application is being carefully reviewed. If an organized group with the intent of defrauding an insurer has the choice between a carrier that asks questions and one that doesn’t, fraudsters will naturally go to the carrier that makes it as easy as possible. For products sold online, a randomized audit of applications may be conducted where feedback or questions are asked to the customer just to relay the message that the responses given are being reviewed.

Diligence is key

Ultimately, the key to successful underwriting is to know your insured. We know human nature has not changed: weaknesses in processes will be exploited by individuals and organizations for self-serving purposes. Technology will inevitably create opportunities and unforeseen consequences. Our challenge is to always stay ahead of the criminals and to quickly identify the schemes before they become liabilities. At Diligence, we have processes in place to assist underwriting in evaluating applicants to ensure that you truly know your applicants including comprehensive inspection reports, medical canvassing, and identity verification. Please let us know if you would like to have a more detailed discussion on the schemes we are seeing and our methods for ensuring applicants are who they purport to be.


[1]MIB Press Releases on Life Insurance Activity for July and August 2020

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