Risks in Underwriting

Unquestionably the world is shrinking; some regions like China have been in an economic boom for the past decade resulting in more demand for U.S. investments and financial vehicles like life insurance. But what are the risks and perils that life insurers face? With the increased pressure to increase sales, grow premium, and streamline processes, is this possibly creating more opportunity for illicit actors to steal from insurers? Based on what we are seeing, the answer is undeniably “yes.” Applications on synthetic persons, money laundering from foreign criminal activities, wagering contracts, false claims, and unidentified political risks are just some of the perils with foreign national business we are witnessing at Diligence.

While there is a legitimate market for foreign national sales, the opportunities – and threats – from this market are the same as any other; illicit actors will exploit any perceived opportunities for their own benefit. Pressure on insurers to increase sales, keep underwriting costs low, and keep approval time low, and the challenges in collecting reliable data from overseas are just a few of the factors that contribute to the opportunity for illicit actors.  Another “opportunity” that foreign nationals exploit is the two year contestable period common in the United States. Once issued, many insurers do not look closely at the application process on deaths as long as the policy is over two years old and someone has died. Illicit actors know that the bar on voiding a policy for fraud outside the contestable period is much higher in the U.S. than other regions of the world.

In this article, we will highlight some of the attempts at underwriting fraud – and the unforeseen challenges - specific to the foreign national market based on the work we have been doing assisting insurers verify information on applications. These situations include illicit agents, foreign government spies, wagering contracts, lack of presence in the U.S., money laundering, and more. Knowing the pitfalls will help in deciding how to mitigate the risk while also taking advantage of the legitimate demand in this market. While any market is susceptible, we are seeing the majority of fraud in Latin America and China.

Illicit, perhaps state sponsored, agents

Often, but not always, we see agents involved in systemic fraudulent sales. Some of the agents may just be duped by the illicit players, or they may be an active participant. Take, for example, one of the cases we recently worked.

We were recently asked to investigate an agency that was submitting a high number of large face amount policies on foreign nationals. The insurer was suspicious that there may have been more to the agency than they were being told. The investigation included under-cover interviews of various agencies. We set up our investigator, using an alias and throw away phones, then visited the agency’s office inquiring about purchasing life insurance. Strangely, the agency’s office was very non-descript and were not very receptive receiving unannounced customers. When our investigator started to inquire about purchasing a policy, the front-person immediately flipped the questioning to the investigator and wanted to know how he learned of the agency, who put him in contact with them, and even requested the contact details of the reference. The investigator quickly became uncomfortable with the rapid succession of questions and ultimately excused himself. As soon as he left the building, he received a phone call from the agency asking more questions. Bear in mind that the investigator never took his phone out of his pocket, much less gave them his personal mobile number. Somehow though, the agency was able to identify the insured and his phone number very quickly and covertly.  The use of this type of sophisticated technology is not typical of the normal agency and it rings (no pun intended) of very sophisticated organized criminal activity, perhaps even state sponsored.

Presence in the U.S.

A resounding question surrounding many of the deaths we investigate overseas is whether the insured was ever actually in the United States, especially at the time of the application. Many of our investigations turn up that the insured was not in the United States at time of application.  Perhaps imposters are sitting in for the insured, or a Power of Attorney is being used to complete the application. As underwriting requirements often require that the sale take place in the U.S. and that the foreign national reside in the U.S., it is critical to confirm the proposed insured’s location at the time of the application and delivery. One of the ways an insurer can do this is by requesting all pages of the proposed insured’s passport, which should confirm the insured’s presence in the country. Other tools are also available to validate travel activity across borders in many parts of the globe and to help establish whether the  proposed insured has a footprint in the U.S. What we are seeing and hearing is that agents do not want to “trouble” insureds with providing the passport information. In any event, fact-checking residency is important. 

Just like with so many other underwriting requirements, the illicit actors will find the thresholds that they can fly under. The mitigant to this risk is to ask for solid documentation, and if in doubt, we can assist you through our tools and local resources.

Money Laundering

Many of the applications we see are for face amounts exceeding $5 million; some larger than $40 and $50 million. With these large amounts come large premiums – motivation for the insurer to issue the policies and start collecting premiums. But when the funds are coming from enterprises overseas, particularly private enterprises, steps should be taken to ensure that the funds are clean. We recently investigated a case where the applicant for a large-dollar policy was found to have an equally large criminal history. The investigation involved a policy issued a few years ago, and not only were the premiums from illicit activities, the insured was ultimately arrested and sentenced to prison in his country. The policy was most likely being used for money laundering purposes, and the insured was caught and convicted after the policy was issued. He is now serving a very long sentence in jail, and as one can imagine, prisons in some countries are unhealthy, particularly in communist countries, where prisoners are not given the same level of treatment that may expected in the US. Even in the US, studies have revealed that every year spent incarcerated, reduces life expectancy by 2 years.[1]

While making sure that premiums are not funded through criminal enterprises, the foreign aspect of verifying the facts makes it more challenging hence more opportunity for the illicit actor. In many instances, the illicit actors are counting on the carrier to proceed without proper verification, and it is often necessary to use local resources to gather intelligence on the business enterprises associated with the insured to protect against these exploits. Fortunately, we have vetted and propriety resources globally to assist with this type of local investigation.

Wagering contracts

Snakeheads is a term coined years ago to describe those who are bringing Chinese nationals into the United States for a fee. Once in the United States, the immigrants work as laborers in local businesses as part of the deal for bringing them to the States. As a way of protecting their “investment”, the snakeheads and others take out life insurance policies on the insureds and justify the policies by misrepresenting their relationship with the insured as well as the insured’s occupation, net worth, and health. Since they are new to the United States, medical records are typically non-existent (a common issue for any foreign national). When the laborer is no longer able to work, they typically return to China and often die an early death. Others collect on the insurance, further enriching the players with the funds to perpetuate their schemes.

Validating the insured’s identity and net-worth through reliable sources is critical to mitigate this type of scheme. Often though, the policies are less than $1 million which, in today’s environment, may not trigger a high level of scrutiny.

Additionally, a careful review of the proposed beneficiaries should be conducted to ensure proper insurable interest. Notably, on a recent case we conducted, a proposed beneficiary who was listed as the alleged adult son of a proposed insured was less than 10 years younger than the proposed insured. This is a common clue that the would-be beneficiary may be concealing their true relationship with the proposed insured hence indicating a possible wagering contract.

The intern spy

Fraud isn’t just about the applicant or the agent. We were recently asked to locate a former employee who was hired by a company about a year prior. He was a young and bright international student who interned for the company, and then was so well-liked, that the company hired him. After about six months of working with the company full-time, he suddenly had to return to his homeland due to an emergency. Unfortunately, he never returned to the U.S. The company learned that he also left the country with a USB drive with data on it.  They wanted us to locate the employee out of concern for his well-being, but also to ask for the return of the USB drive which was surely taken by mistake. Our local investigator located the employee and found more background information on him; however, we were not able to take this any further. The employee, as young as he was, was an agent for the country’s governmental intelligence agency. The employee was untouchable, and to take any further action would have been not only fruitless, but detrimental to the investigator’s well-being. Our understanding is that all students from certain foreign countries are required to maintain and submit contact information on the people with whom they interact. Once they leave the university environment, contacts may then be exploited.

Synthetic identities – a hypothetical discussion

Many of the amounts for insurance we are seeing in the foreign national space are exceedingly large, and for individuals who have relatively obscure backgrounds or footprints.  Using an extreme example, suppose someone like Jeff Bezos or Elon Musk submitted an application for life insurance. There would likely be little concern with their identities or net worth. However, oftentimes, the applicants and the business activities from foreign nationals are much more private and challenging to validate. Since we don’t want underwriting to become the “sales prevention department,” a balanced approach between the need to confirm data and the desire to issue the policy has to be reached. That said, assuming an illicit actor wanted to exploit an insurer’s willingness and desire for premium. Think of what a few $100 thousand dollars, much less $10 to $20 million would buy in terms of false documents, a shell business (including a fabricated website), and a synthetic identity. Then multiply this by many policies.  And if organized criminal rings are involved, the cost and ease of doing this just became more reasonable.

These are examples of real cases with the exception of our hypothetical discussion. The amount of money involved is tremendous and the gains to be made from illicit actors is truly unprecedented in our industry. Bad actors rarely go away. Rather, it is like a game of “Whack a Mole” where, once caught, they simply migrate their schemes to another insurer. Unfortunately, insurers rarely prosecute bad actors and simply terminate their association with those individuals, allowing them to freely continue their schemes with another carrier.

The increased pressure on insurers is creating an environment that invites, dare we say begs, illicit actors to exploit insurers. When the use of foreign assets are used to justify the large amounts of coverage, verifying the assets and identities is necessary to fight fraud. Privacy laws vary, and organized corruption is also in play. Let Diligence help you with your foreign national applications. We have resources in the United States and throughout the globe to assist in confirming the facts on these challenging cases.

[1]Prison Policy Initiative, Incarceration Shortens Life Expectancy

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