The following article was written by Kevin C. Glasgow, FLMI, FLHC, CLU®, CFE & Paul Marquez, Vice President, Diligence International Group, LLC and was featured on the Coalition Against Insurance Fraud FraudBlog.

Fraud costs everyone, and especially the honest insured – the cost: $308.6 Billion in premiums that needn’t have been paid. Protecting applicants and claimants from high costs is the responsibility, and some would argue the legal duty, of every insurer. While it is often easier for a claim examiner or underwriter to say “yes” to an applicant, agent or broker, ignoring the red flags of fraud or having gaps in processes is not in the consumer’s best interest. Recent headlines of fraudsters who have made off with hundreds of millions in fraudulent payments, mostly on smaller-dollar life insurance policies, should be a wake-up call for all insurers. To properly safeguard against fraud, an insurer’s risk managers need to be tenacious and passionate about processing all business promptly, but also in identifying fraudulent business

Some have questioned “Isn’t the cost of fraud built into the actuarial experience tables? Why should we worry about it?” The cost of undetected fraud and material misrepresentation is certainly built into the mortality tables — there is no disputing that. It must be, or insurers would soon find the premiums charged for coverage to be inadequate to cover the cost of the benefits paid. However, the companies that do not actively validate data in applications, including the identity of their applicants, and the eligibility of their claimants will be targeted by those who are dishonest. The result will be higher-than-expected claim experience. Unfortunately, for life and health insurers whose contracts are often locked in for decades, it may take years for this imbalance between premiums and mortality to materialize. At that point, it is often more difficult and expensive to manage the business that is already on the books.

There is a solution. Insurers must strike a fair balance between speed of service and the need to confirm data. Consumers are demanding fast answers, which the industry is fighting to meet. The need for quick application decisions or claim validations has never been more important. Underwriting services that attempt to use surrogates for medical records, the gold standard for verifying health, are challenged to find solutions that have similar protective value. Wagering and third-party contracts and applications using synthetic identities have also never been more prevalent due to new, digital processes and dishonest agents. As a result, validating an insured’s identification at underwriting has never been more critical.

Unfortunately, at Diligence, we are seeing more claims that are the result of new underwriting processes that have not effectively caught policies issued with stolen identities and synthetic identities. Often, claims materialize after the policies have aged, and as a result, it is more expensive and difficult to identify and void the illicit policies. While the industry is seeking frictionless processes, so are the fraudsters — it just makes their illegal work easier. While the goal of frictionless processing is a worthy objective, it can leave gaps that can be exploited. Validating claims quickly is also a concern. The claim profession has historically been heavily regulated to ensure fair and prompt claim payments. Today, insurers are under pressure to process claims faster to improve customer experiences, reduce inventory, improve productivity in a tight labor market, and help manage the influx of new claims experienced since COVID. Claim professionals should work closely with SIUs to identify claims that require more scrutiny while also setting up warning triggers for claims that are paid with minimal scrutiny.

Fraud costs everyone, and the companies that do not actively pursue fraudulent submissions will experience more fraudulent attempts costing their company — and ultimately all consumers. As our processing paradigms have evolved, so have those who seek to exploit the changes. It is imperative that insurers evolve their fraud mitigation protocols to keep costs low for everyone involved. As stated by the Coalition Against Insurance Fraud, “lives, families, businesses, and careers are wrecked … Your money is stolen … Your insurance premiums rise. … People are maimed, crippled and murdered.”  Everyone has a part to play in stopping fraud.

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Evolving Life & Health Fraud Schemes
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