Life Insurance Fraud: The Wolf in Sheeps Clothing

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Life Insurance FraudThe Wolf in Sheeps Clothing
Presented by Rick Gordon, FLMI 2nd Vice
President and Chief Underwriter for Midland
National Life and North American Company for Life
and Health Insurance. Mike Hagan, CFE
Forensic Investigator and Manager of the Special
Investigations Unit (SIU) for Old Mutual
Financial Network and OM Financial Life Insurance
Company.
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What is Fraud?

• fraud - an intentional deception made for
  personal gain and/or to cause another person (or
  company) to suffer a loss.
• Fraud always involves
• Intent
• Deception
• Confidence (trust)
• Trickery.

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Why Do People Commit Fraud?
The Fraud Triangle

• Perceived Pressure The person believes that
  they have a need to commit fraud.
• Perceived Opportunity The person believes that
  they have a favorable combination of
  circumstances to commit fraud.
• Rationalization Rationalize the outcome. No one
  will get hurt. Im only borrowing the money.
  Everyone does it.
• RE
• Albrecht, S Albrecht, C (2004), Fraud
  Examination Prevention.
• OH Thompson South-Western.

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Who Commits Fraud?

• A visual example.
• 2 people from the audience please

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Who Commits Fraud?

• No physical or mental trait to look for
• In a position of trust
• Better educated
• More religious
• Less likely to have a criminal record
• Have more optimism, kindness, empathy,
  achievement and family harmony
• A lot of people fit the fraud perpetrator
  profile. (They look like most people in this
  room!)

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What Are We Seeing Most Often?

• The rebating organization / group
• The group started in late 80's, early 90's
• Questionable Financials
• How it works

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The Rebating Red Flags

• Face Amounts typically 500K - 3MM
• California and Florida primarily (But have seen
  it in other states too)
• Pay annual target premium only
• UL Products
• No push back on rate class (the higher the
  better!)
• No renewal premiums paid
• Target on many UL products provides enough value
  for policy to stay in-force for at least 18-24
  months
• Multiple Appointments in same group of companies
• Replacements
• Difficult to uncover (They cover their trail)
• Agents trade-off case (make churning look like a
  competitive situation)
• Disguise of in-force (partial or no disclosure)
• Same bank account (funding company) paying the
  premiums.
• MIB IAI - identifiers

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Why Underwriters Should Care

• Underwriters are the first line of defense
  against questionable business practices.
• This situation is similar to black mold.
• Left untreated (or not investigated) this
  situation can have devastating results such as
• Becoming a target (magnet) for this type of
  business
• Decreased company profits
• Possible company downsizing due to a poor
  performing block of business

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The Cost to the Company

• Example The potential financial impact one
  company experienced over a 3 year period.
• 800 policies issued
• 19 million of target premium x 125 commission
• 36 month persistency is nearly zero
• Essentially, the insurance company pays the
  target premium plus 25 or more to the agent and
  up-line for policies that will stay in-force for
  18-30 months.

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Current Trends In Today's Market

• Free Insurance schemes.
• Religious organizations being targeted.
• Charitable organizations/Trusts being misused.
• Questionable financials Vast difference between
  application and inspection report.
• Occupation appears not to match the income.
• Questionable firms or individuals providing the
  financials documentation on the insureds.
• Not admitting to other insurance coverage.
• Premium financing.
• Terminated agents desperately trying to get
  reappointed.
• Ghost writer situations.

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What Can We Do About It?

• Data mine company records. Look for anomalies.
• Look for red flags or warning signs.
• View the entire block in a spreadsheet (The
  identifiers are more obvious)
• Stay vigilant. Dont let the red flags be
  explained away or swept under the rug.
• Verify the financials.
• Agent monitoring.

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What can we do about it? (continued)

• CA Proposition 103.
• The agent appointment contract.
• Educate others within your organization.
• It requires a multi-disciplinary commitment to
  eradicate.
• Its still there and it will come back again if
  not diligent in looking for the red flags.

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Think about this

• Its hard to be defrauded by a person you dont
  trust !

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Questions ?