We traveled a great deal this past year, visiting clients, potential clients and attending industry meetings. Along the way, the topic of fraud in the Life insurance industry came up quite a bit. In general, companies shared concerns that the amount of material misrepresentation and fraud by agents and proposed insureds has been steadily increasing in recent years, along with growing reputational risk to companies and the industry, as well as increasing financial risk. Our industry has not helped itself in these areas by often “punishing” offenders with a simple refund of premium. For those who think a more proactive approach to dealing with material misrepresentation and fraud is needed, we believe the following will be helpful.

QUICK TIPS TO AVOID MATERIAL MISREPRESENTATION AND FRAUD

AGENT RECRUITING

One of the easiest ways for companies to mitigate fraud is to require Marketing/Recruiting and Licensing personnel to embrace these protocols:

• Conduct in person interviews with General Agents and principals of marketing organizations before contracting.
• Conduct robust background checks that analyze potential financial concerns.
• Thoroughly review state Department of Insurance websites for past disciplinary actions.
• Do all of the above for agents who quickly submit large volumes of applications or a number of large premium cases.
• Work with your company to encourage no mailing or transmission of commission payments prior to the clearing of premium checks. Companies may want to reconsider the practice of annualizing commissions after receipt of one or two months’ premium. Annualized commissions can be a springboard for fraud.

Adopting the above best practices will improve the quality of a sales force and potentially reduce fraud and lost revenue.

APPLICATION DESIGN

• Application question design is essential in helping avoid material misrepresentation and fraud. Consider checking with your state Department of Insurance to see if they would consider approving an additional question along the lines of, “Within the past 10 years, have you had or used a different name or names other than that indicated in Question _____above? If yes, please list all names and dates used.” This would enable companies to potentially avoid fraud by obtaining underwriting information for each name as appropriate (e.g., running MIB checks, Pharmacy database checks, Attending Physician Statements, etc.). We have encountered cases where individuals have changed their names in an effort to hide criminal history.

• Be specific in designing application questions. For example, some companies ask if someone has “abused” alcohol or drugs. “Abused” may not be specific enough, as one individual’s “abuse” may simply represent another’s “enjoyment.” LabCorp recently announced an initiative to let consumers order their own tests. As of this writing, approximately 35 states allow consumers to order some (or all types) of tests without a physician order. In view of this, companies may want to check with their state Departments of Insurance to see if they would allow a question along the lines of, “Within the past five years, has the proposed insured had any self ordered or medical provider ordered diagnostic tests, such as an electrocardiogram (EKG), X-ray or lab work, other than those related to the Human Immunodeficiency Virus (AIDS virus)?” For any “Yes” answer, details may be requested, such as name, address and telephone number of the location where the tests were performed, and/or name, address and telephone number of medical professional or facility prescribing the tests, and dates of the tests.
• Consider partnering with a behavioral economist to help you design your forms. A behavioral economist can help frame questions optimally to minimize anti-selection and fraud. At a recent Gen Re Advisory Council meeting, attendees heard about a study that found placing the signature/attestation at the beginning of an application  contractual document is a stronger fraud deterrent than requiring signatures and attestations at the end of a document, as is the common practice in the Life, DI and CI industries. The use of a behavioral economist may be of particular help to companies considering expansion into the accelerated (simplified) underwriting market.