Magicians have a knack for making people believe they see something that is not real through a little sleight-of-hand, an action to divert attention from the real action taking place, or props that are not as they appear. My favorite are mentalists who “magically” manipulate and control minds into selecting something the mentalist has pre-selected. Regardless of the magic act, the magician is ultimately a skilled performer who relies on trickery and deceit to entertain people into believing that something is real when it is not.
Fraudsters are like magicians in that they rely on trickery to deceive us into accepting something as real when it is not. Instead of entertaining us (although I have to admit that some of the attempted frauds we have seen have been quite entertaining), their acts are an attempt to receive something from us that they are otherwise not entitled to. Just like a magic act, once you know how the act is performed, it is more difficult to be fooled; however, even the most skilled magicians can still be duped, as seen in “Fool Us,” featuring the renowned Penn and Teller. Therefore, it is critical to stay informed on the trends and technologies used to mislead us so that we can more effectively identify fraudsters.
Underwriting is the most important phase in uncovering the “magicians” who are attempting to “fool us.” Our industry presents a target-rich and lucrative environment for fraudsters. Life insurance is a low-cost investment for fraudsters who are familiar with our industry, and they know that if they can get the business written, the cost of a few years’ worth of premiums is small compared to the eventual payout. Also, the rapid transition to contactless underwriting may create gaps that fraudsters can use to exploit the life insurance industry. This article examines some of the ways that fraudsters deceive some underwriting areas, how they can avoid some of the existing tools on the market today, and what we are doing to combat fraud at the underwriting stage to prevent it from ever getting on your books.
Forms of Fraud
Fraud at the underwriting stage can take many forms, ranging from something as common as a person who applies for a policy and does not disclose recent medical issues to more systemic fraud where applicants take out policies on others in wagering contracts. The former scenario is a more of a reactive fraud, as people with a recently discovered medical issue (or the propensity toward one) can simply try to circumvent the underwriting policies by failing to disclose their true medical history. In the latter scenario, fraudsters are more problematic and have developed effective methods to mislead us, such as placing the wagering contracts on unhealthy people who are likely unaware of the proposed insurance contract. This can be done through identity theft or by creating synthetic identities.
Reactive fraud is perhaps the toughest type to catch during underwriting, but it is also the least likely to cause ongoing losses. This type of fraud occurs when the proposed insured has a recent situation that requires them to obtain insurance, such as a grave medical diagnosis, financial issues, or another pressure being exerted upon them. The proposed insured may also feel the urgency to purchase insurance because of the results of home DNA tests that identified propensities towards certain illnesses.
Other than the non-disclosed information, the other metrics for the proposed insured are generally correct, such as the name, social security number, address, date of birth, etc., allowing these reactive cases to often proceed through the accelerated processes without raising any issues. Medical records and fluid collections have historically been successful at catching non-disclosures (excluding home DNA test results); however, the move away from obtaining records and fluids is creating opportunities for non-disclosures to go undetected. Data analytics and predictive models may not help with catching non-disclosures either since the proposed insured will likely look like a good candidate outside of the recent pressure being exerted upon them. One example is cancer. These conditions are rarely predictable except possibly through DNA testing, which is not allowed in underwriting.
If the proposed insured is able to get a policy approved and live beyond the contestable period, the likelihood of fraud detection is minimal. Even if it is caught, the standard solution is to refund premiums, which creates a no-lose situation for the fraudster. At this point, balancing the need for information against the protective value gained from further reviews becomes important. I recall a conversation years ago with a company that was at the forefront of accelerated processes. While the concept is terrific (who likes waiting weeks, if not months, for an underwriting decision?), they were appalled at their experience after the program had been in place for three years. Unfortunately, the actuarial area did not have visibility into the number of recissions within the first two years, and they were unsuspecting of the loss of the protection afforded by the contestable period.
For high-value policies, the need for accurate information may be more important than the need for quickly issuing a policy. Close attention should be paid to applicants who have a sudden need for coverage despite no prior need or desire for it. Life events such as births and marriages may prompt the need, but it could also be something intentionally hidden. Sources of income and financial records can also be important in finding potential over-insurance situations, which can be a flag of something deceptive happening. Validating employment and job information via third-party sources can be beneficial in uncovering financial issues, and checking criminal history, where appropriate, can reveal the sudden need for insurance.
At Diligence, we offer digital comprehensive background checks and record retrievals on proposed insureds to verify the data on the application and look at the person’s digital footprint, along with that of other parties to the contract, such as the beneficiary. We also complete medical canvassing to get up-to-date medical leads. These actions have proven to effectively defeat certain types of deceits. While not 100% foolproof, our clients have found this to be a cost-effective way to validate an applicant’s information and catch non-disclosures.
The more costly and sophisticated fraud schemes occur with wagering contracts. In these cases, the proposed insured typically does not know that coverage is being sought, but the applicant knows the proposed insured is likely in poor health. Often, the proposed insured is a real person, but their identity has been highjacked for the purpose of being the measuring life on a life insurance contract.
Unlike in more reactionary fraud cases, the proposed insured’s metrics, such as date of birth or social security number, may be subtly misstated in wagering contracts. Often, the perpetrator of this type of fraud has already established an address history for the proposed insured at the beneficiary’s address (or that of other accomplices). This can easily be achieved by putting utility or other bills in the name of the proposed insured at the desired address. At the same time, other identifying metrics may be only slightly different from that of the actual insured in order to confound investigations. Through these measures, other credit information is established, and the proposed insured appears to be associated with the address on the application along with the other metrics.
In a recent example of such a scheme, we found a couple of industrious fraudsters who took jobs as home health care workers, which gave them access to potential insureds’ names, dates of birth, social security numbers, and health information. The fraudsters then used the information to document an address change of the insureds to a new address that was instead associated with the fraudsters. They chose victims who were unhealthy but not enough to require assisted living facilities or to be in imminent threat of death. Once the new data was slightly aged, the fraudsters then clean-sheeted applications for insurance on their patients. Note that, undoubtedly, the fraudsters applied for coverage with multiple companies, and some companies defeated the scheme by asking a few questions. In those cases, there was no money exchanged hence no penalties for the applicant, and the defeating company may not have even realized how close they were to being a victim. However, some applications did get through with some companies. When this happens, only a few applications need to get through to be financially rewarding. If the insureds happen to live longer than the contestable period, the eventual payoffs are significant. Even if the fraud is caught, most companies simply return the premiums paid to the fraudster.
The question we are frequently asked is how fraudsters create or steal identities. While there are many avenues for this, the most common is to add the name of the proposed insured to a utility bill. Even if the person has no credit, it will not be a problem; after paying a small security deposit, the real or synthetic person is then associated with the utility address, which creates a credit record, social security number, and date of birth for that name. Occasionally, we see applications for small, secured credit cards with department stores to serve the same purpose. Once the credit history is established, getting insurance becomes easier.
One event that is making synthetic identities easier to mask is the influx of an immigrant population that has limited or no background information. This is a global phenomenon affecting not only the United States but also other countries that are seeing an influx of immigrants. This is not an indictment of immigration, and we are not suggesting immigration (or immigrants themselves) is inherently bad. On the contrary, it is the environment that inherently often lacks significant documentation for immigrants, which allows would-be fraudsters to create multiple identities. We have seen cases where immigrants have created multiple identities for themselves and then used those identities for nefarious purposes. It is not limited solely to immigrants, as we have seen other perpetrators who have taken advantage of similar situations in order to create multiple identities.
It is possible that claims will catch the bad risk, but it is more likely that they will not. Once the policy is on the books and the perpetrators have figured out how to circumvent underwriting controls, the company will likely see an influx of bad business. The best chance of identifying and stopping fraud that occurs at the time of underwriting is through the underwriting process. Once a policy is issued, the next best chance of stopping the fraud is if the insured dies within the contestable period. Often, contestable investigations can identify non-disclosures, and depending on the state and nature of the non-disclosures, they can then rescind the policy.
Once a claim ages past the contestable period, asking a claimant for an authorization to release information comes with risks of its own, and there generally needs to be predication to investigate. That is not to say that cases where there are grounds to suspect fraud should not be investigated, as they should, but when they are investigated, the company will have challenges to overcome, including obtaining cooperation from the beneficiary and facing potential litigation. Because of these and other challenges, we are seeing an increasing number of companies that are viewing the claim processing as merely transactional rather than a time to validate risks.
Fraudsters avoid detection at the time of claim in many ways. If the claim is within the contestable period, the fraudsters simply plead ignorance and hope the claims process does not uncover anything. Once outside the contestable period, many savvy fraudsters will challenge the collection of records. Without the records, it is often difficult to prove the non-disclosure even if the death certificate provides the duration of the cause of death. For stolen identities. For synthetic individuals, fraudsters may solicit coroners for unidentified bodies that they then claim as the insured. In these cases, the death certificates are real and properly registered, and all the identifiers will match that of the insured. In more outrageous cases, death certificates are forged, stolen, or modified to fit the needs of the claimant. Since it has become more common to accept photos as proofs, a decreasing number of companies are requiring original certified copies of death certificates, particularly for policies under $50,000 and over two years old. Ultimately, the claims process is certainly one of the lines of defense, but once the fraud is more than two years old, catching it requires time, skill, and training, and even if identified, it may go unchallengeable.
Diligence International Group, LLC’s founder, Richard Marquez, began in the life insurance industry by leading a Special Investigation Unit (SIU). While most people associate SIUs with investigating claims, which Richard certainly did, most of his work was spent transforming underwriting practices to identify fraud quickly and effectively, and these practices are now common in the industry. From those beginnings, Richard formed Diligence, and the work to identify fraud continues because we recognize that it is much easier to keep bad business from getting on the books than it is to get it off the books once premiums are exchanged.
The level of manual intervention that a company may want to invest in the underwriting process is often seen as a function of the size of the policy. We offer many companies comprehensive digital background analyses of applicants, along with routine medical canvassing for high-value policies, which we can complete in just a few days. However, consider if there was a tool available that could immediately confirm the identity of your applicant with nearly 100% accuracy. Better yet, consider the implications if this tool was an integral part of your application system and could create a profile for the applicant which can then immediately identify the applicant in subsequent transactions. This would not only decrease underwriting times, make manual reviews less relevant, and immediately identify potentially fraudulent applications, but would also decrease the time it took to identify your customer in future telephone calls, resulting in an improved and faster customer experience (and a more time and cost-efficient solution for your staff). This type of solution is critical today as the industry moves closer to instantaneous underwriting decisions. Diligence offers this product, and it is called Prodigi.
Our system was designed by insurance experts for the insurance industry and not as a by-product of other systems. We can show you how this could work for you to keep the fraud off your books before it becomes a liability. Contact Paul Marquez or Kevin Glasgow at the contacts below, and we will gladly show you what a state-of-the-art underwriting system can do for you.