What types of fraud are trending upward?
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Fraud is a concern for life insurance companies, particularly with the shift toward digitalization and automation. In early 2024, Munich Re gathered insights from U.S. Life Insurance carriers through a survey about their experience with fraud. In the survey, fraud was defined as an intentional misrepresentation, deceit, or concealment of material fact known to one party with the intent to deceive another party for the purpose of wrongfully receiving life insurance benefits.
The results showed that the three types of fraud that have risen the most in the last five years, according to survey respondents, are: applicant misrepresentation, financial elder abuse, and data breach or improper use of data (Figure 1).
Insurance Application Misrepresentation
Material misrepresentation refers to an untrue statement or omission that affects an insurer’s decision to issue a life insurance policy and, if issued, what premium the insured will pay. Material misrepresentations present unique challenges in all types of underwriting situations, from traditional (fully-underwritten) to fluidless accelerated programs. Munich Re’s Accelerated Underwriting (AUW) mortality slippage study showed that tobacco misrepresentation in AUW programs has trended up across the industry and averaged over 40% (as a percentage of all tobacco users) in 2023.1
In a separate internal analysis, Munich Re has observed that products with limited underwriting requirements can make it easier for those with high Body Mass Index (BMI) or adverse medical conditions to apply without thorough scrutiny. We also noted an increase in material misrepresentation related to cancer and infectious respiratory diseases in fully underwritten cases, over the past five years.
Helpful tips to keep in mind:
At underwriting
- Ensure complete review of the application disclosures and the data vendor reports. Often with accelerated underwriting, information can be pulled from a variety of sources to put together a big picture of the risk. Engage those critical thinking skills!
- Consider careful use of credits, stretch criteria, and exceptions when issuing with limited underwriting requirements.
- Conduct additional due diligence when reviewing recommended tests. Investigate diagnostic tests like colonoscopies or mammograms, which are typically recommended from age 45 and 40, respectively. Further investigation is necessary if a younger individual has had or is scheduled for a colonoscopy. In addition, the timing of the visit and the application signature date should be analyzed.
- For prescription database checks, verify the prescribing doctor's specialty, particularly for multi-use drugs. For instance, it may be a red flag if an oncologist prescribed ondansetron (an anti-nausea medication), compared to an obstetrician/gynecologist (OBGYN).
When underwriting foreign risks in most non-sanctioned countries, utilize investigation companies to verify the credibility of CPA/accountants who provide third-party income verification.
At claim time
- Perform investigations on every case that is still in the contestable period, regardless of the manner of death.
- Investigate all aspects of the insurance application - medical, financial, social history, criminal, etc.
- Use vendor solutions for medical record retrieval, summaries, and foreign death investigations.
- Inform your underwriting area when underwriting issues result in having to pay what could have otherwise been a deniable claim.
Financial elder abuse
Financial elder abuse may encompass extortion/scams, theft, misuse of authority, legal document abuse, and manipulation. In April 2024, the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN) reported that financial institutions detect $27 billion in suspicious activity related to elder financial exploitation each year.2 This highlights the importance of safeguarding the elderly population from financial abuse.
Scams involve the transfer of funds to a stranger or impostor with the promise of a non-delivered benefit (e.g., telemarketing scams, romance scams, lottery scams, etc.)
Theft occurs when a trusted individual steals the elder’s assets, funds, income, or uses an elder’s checks, bank account information, or credit cards without permission. In life insurance, this often manifests as financial transactions – i.e., cash value withdrawals or surrenders, unauthorized changes to bank accounts, beneficiary changes, owner changes, and updating mailing addresses. Elderly policyholders may be victims of undue influence or intimidation. Those with dementia or Alzheimer's are particularly vulnerable to financial abuse. Unfortunately, family members are the most common perpetrators of elder theft.
The term, “Fraud Triangle” was coined by anti-fraud professionals to identify three conditions that contribute to the risk of fraud. These components are often at play in cases of elder abuse:
- Incentive: The offender may feel entitled to the funds.
- Justification: The offender may believe they need the money more than the elder does.
- Opportunity: The offender has the means to carry out the elder abuse, such as access to bank accounts, policy documents, or passwords.
Lack of proper controls, bypassing requirements, and ignoring red flags can enable the exploitation of the elderly. Here are some examples:
- Ignoring patterns of suspicious activity without investigation
- Failing to verify the identity of the person making changes to the policy
- Neglecting to obtain proper authorization before making changes to the policy
Helpful tips to keep in mind:
- Complete training on elder financial abuse. Employees interacting with customers and handling policy-related requests (e.g., beneficiary changes, policy cancellations, and policy loans/surrenders) should be trained in how to recognize red flags for financial abuse. Certain states now require such training.
- Implement a clear procedure for escalating matters to the Special Investigation Unit (SIU) when any suspicious activities are detected.
Data breach or improper use of data
Major cyber risks and trends
A practical framework for thinking about emerging cyber threats:
Find and classify your crown jewels: Enhancing visibility of where your sensitive data is located and labeling it according to its confidentiality level enables a more targeted and optimized security program implementation.
Identify and assess risks: Establish a methodology for identifying and calculating inherent residual security risks to support the prioritization of mitigating controls and investment decisions.
Prioritize and deploy security controls: Implement high-priority controls to improve access management, data security, and leakage prevention, system hardening configurations, log management, and other controls.
Enhance breach detection skills: Ensure assets are monitored to find anomalies, indicators of compromise, and other potentially adverse effects that would lead or indicate an undergoing data breach attempt.
Improve response and recovery: Establish and test incident response plans in coordination with relevant stakeholders once an incident is declared, including communication requirements and forensic analysis capabilities.
Above all, training employees in security best practices and encouraging incident reporting should be a top priority for all organizations.
Summary
References
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