Chapter 15 - Red Flags, Anti-Selection, and Fraud

Question 1

Anti-Selection

Answer 1

A term used to describe a situation, either medical or financial, in which a proposed insured or agent conceal falsify, or materially misrepresent information at the time of application to detriment of the insurance carrier. This term also includes simple avoidance of detection if one party has information another party does not have.

Question 2

Fraud

Answer 2

Defined as deceit, trickery, sharp practice, or breach of confidence perpetrated for profit or gain some unfair or dishonest advantage

Question 3

Collusion

Answer 3

A secret arrangement, especially for fraudulent or treacherous purposes, created in order to cheat or deceive others. Collusion can occur anywhere in the sales process, and the underwriting must have solid training and critical thinking skills to be able to ferret out anti-selection practices.

Question 4

Flags at Underwriting

Answer 4

1. Extensive MIB Activity
2. Stacking of Coverage
3. Concurrent Application to Multiple Carriers to Avoid Additional Underwriting Requirements
4. Requests to Reduce Face Amounts
5. Excessive Sales Pressure
6. Lack of Candor
7. Requests not to Involve Reinsurance
8. Foreign Travel “Trip Insurance”
9. Self-Employment
10. Elderly Proposed Insured’s with little or No Medical History
11. Overseas Income, Assets, Liabilities, and Net Worth
12. Certain Irrevocable Life Insurance Trust (ILIT) Trustee Situation
13. Reinstatements at Older Ages

Question 5

Flag at Underwriting - Extensive MIB Activity

Answer 5

Should be vigilant to watch for

1. Stacking of coverage
2. Avoidance of Requirements
3. Early lapse or possible rebating scenario

Question 6

Flags at Underwriting - Stacking of Coverage

Answer 6

The planned purchases of multiple policies for smaller face amounts through multiple carriers rather than purchasing one policy for a large face amount from one carrier. This could be done over a few years to avoid requirements based on total amount of insurance applied for within a certain time period.
Often seen in simplified issue.

Question 7

Flags at Underwriting - Concurrent Applications to Multiple Carriers to Avoid Additional Underwriting Requirements

Answer 7

Akin to the stacking of simplified issue applications this red flag is often seen in fully underwritten cases for much larger face amounts of insurance.
The underwriter should consider adding the total face amounts for these concurrent apps and requesting underwriting requirements that would have been required had the proposed insurance applied for the total amount of coverage on one application with their company.

Question 8

Flags at Underwriting - Requests to reduce face amount

Answer 8

When speculation is present, a reduction in FA doe snot reduce the risk, even if the new request is in line with what the individual would have qualified for if that mount had originally been applied for. In addition, the decision to reduce the face amount can have an adverse effect on the company’s ability to present a contestability defense for material misrep at time of claim on the grounds that the underwriter was on notice at the time of underwriting. Another variation is to reduce while app is pending to avoid underwriting requirements.

Question 9

Flags at Underwriting - Excess Sales Pressure

Answer 9

Pressure to waive requirements or issue coverage at a more favourable rate class that is justified by the merits of the case goes beyond the underwriting/marketing relationship.

Question 10

Flags at Underwriting - Lack of Candor

Answer 10

When proposed insured’s knowingly omit significant information, a red flag is created, which is an alert to thoroughly investigate all aspect of the application, both medical and financial since there could be other misstatements.

Question 11

Flags at Underwriting - Lack of Candor (Examples)

Answer 11

1. a negative answer on the application to tobacco w/ positive cotinine.
2. negative response to questions about alcohol usage but significant alcohol criticisms or advice to seek treatment on APS.
3. Overstatement of income, assets or pnw vs info obtained.
4. Significant non-disclosure of medical histories including DM, CAD, or cancer discovered on lab or APS.

Question 12

Flags at Underwriting - Requests to not involve reinsurance

Answer 12

Since reinsurance is usually a transparent process to the proposed insured and can help to place a case, the agent’s or customer’s motivation not to utilize the reinsurance process can be a red flag.

Question 13

Flags at Underwriting - Request to not involve reinsurance - Examples

Answer 13

1. Other known applications if force, pending, or applied that exceed total line
2. The agent has reason to believe the reinsurers will underwriter the proposed insured more conservatory than the ceding company.
3. The reinsurers could already have adverse knowledge of the individual from previous submissions from other carriers or can have already requested add’l requirements on a FAC basis.

Question 14

Flags at Underwriting - Foreign Travel “Trip Insurance”

Answer 14

Upon the insured’s safe return the policy lapses since the risk being insured again has passed. In fact, if the free-look period has not expired, the full premium paid can be returned.

Question 15

Flags at Underwriting - Self Employment

Answer 15

Especially when the company operates out of the person’s place of residence. Ensure the annual income makes sense in relation to the nature of the business.

Question 16

Flags at Underwriting - Elderly Proposed Insureds with Little or No Medical History

Answer 16

“the basic course begins at age 40 and the advanced course begins at age 60. Prudence would dictate the elderly individuals have a routine wellness check at least once every one to 3 years. Most will not allow after the age of 60 or 70 without a recent/ongoing wellness check covered by the proposed insured.

Question 17

Flags at Underwriting - Overseas Income, Assets, Liabilities and Net worth

Answer 17

Should be underwritten with caution. This information can be hard to verify and expense and impractical to investigate. One would assume those who have immigrated would have moved all or some of their foreign worth over - if not, this should not be taken into consideration for estate planning purposes.

Question 18

Flags at Underwriting - Certain Irrevocable Life Insurance Trust (ILIT) Trustee Situations

Answer 18

1. The trustee is not well known to the proposed insured.
2. The trustee and possibly the agent live in a different state than the proposed insured
3. Multiple proposed insured’s from the same writing agent have the same trustee.

Question 19

Flags at Underwriting - Reinstatements at Older Ages

Answer 19

Greater potential for an adverse change in health since the original application was issued.
"why would an insured or beneficiary choose to reinstate a policy, especially after it lapsed a number of years, and pay back premiums, if currently the insured is in good health and would otherwise qualify for new coverage at an affordable rate class and significantly less cost?"

Question 20

Tools to be Used at the Time of Underwriting

Answer 20

MIB
Credit Reports
US Federal Income Tax Return
Pharmaceutical (Rx) Databases
Lab Sips
Social Security Number (SSN) Verification databases
Third Party Financial Records
US PATRIOT Act form 314b

Question 21

Tools to be Used at the Time of Underwriting - MIB

Answer 21

rfd@mib.com is similar in concept to plan F follow up code detail program. However, the difference is that rfd@mib.com is used to track insurance activity whereas Plan F is used to alert an insured company to medical information that was reported after the issuance of a policy.

Question 22

Tools to be Used at the Time of Underwriting - Credit Reports

Answer 22

Quickly obtains, are relatively inexpensive, and cannot be altered or forged. An independent, impartial snapshot of an individuals financial hx over a long period of time. Valuable information about current outstanding balances, past due amount, liens, and prior bankruptcy activity.

Question 23

Tools to be Used at the Time of Underwriting - US Federal Income Tax Return

Answer 23

Used to document a proposed insured’s financial income from multiple sources over a 12 month time frame. Common sense dictates that individuals generally will not overstate their income or understate their deductions on their tax return.

Question 24

Tools to be Used at the Time of Underwriting - Pharmaceutical and Rx Databases

Answer 24

Ferret out anti-selection. Protective information when utilized in conjunction with simplified issue applications as well as for individuals with little or no admitted medical history. Filed when a prescription is filled under a benefit program.

Question 25

Tools to be Used at the Time of Underwriting - Lab Slip

Answer 25

Can contain the names of multiple carriers who were not mentioned on the application to whom the lab results should be sent. Sometimes the signature can be different.
Be aware of a “ghost writer” a different advisors name on the lab slip then on the application - possibly to hide the business being done by that advisor.

Question 26

Tools to be Used at the Time of Underwriting - SSN/Verification Databases

Answer 26

Increasing identity theft. Further investigation is required if discrepancies exist.

Question 27

Tools to be Used at the Time of Underwriting - Third Party Financial Records

Answer 27

Includes a break down of assets and liabilities. However, the underwriter is sometimes challenged to determine whether or not the information received and the source of third party financial information being supplied is legitimate. Some red flags could be

1. No formal letter heard for the from or CPA
2. No printed name of the CPA under the signature
3. No professional credentials listed after the CPA’s name
4. No internet search engine information sound - such as a website.

Question 28

Tools to be Used at the Time of Underwriting - US PATRIOT Act Form 314b

Answer 28

U’wer should be aware of it’s existence. It can play in ferreting out the flow of money between customers, agents, trustees, and various financial institutions.
Allows insurance companies and other financial entities to track the flow of money when money laundering or terrorist activity is suspected.

Question 29

Sales Practices

Answer 29

Rebating

Churning

Question 30

Rebating

Answer 30

Directly or indirectly offering or giving anything of value, which is not plainly specified in the life insurance policy, as an inducement to purchase insurance.

Question 31

Rebating Examples

Answer 31

1. An agreement to pay any part of the policy premium
2. Any payment or gift offered as an inducement to purchase insurance
3. Offering any special advantage regarding the dividend, interest, or other policy benefits, other than those provided by the terms of the policy
4. Offering to buy, sell, or give any type of security (stock, bond) or property, any dividends or income from securities or property, for the benefit of a policy owner.

Question 32

Red Flags in Rebating Activity

Answer 32

1. Frequent replacement or lapsing policies 3 years or less
2. Trustee is in California or Florida where rebating is legal, and the agent or proposed insured resides in different states
3. Target premium being paid on all insured to max commissions
4. Proposed insured does not know the trustee, the face amount, or the premium to be paid
5. Agent is new to the insurance company and is also submitting a large amount of premium in a short time.

Question 33

Sales Practices - Churning

Answer 33

Also known as twisting, it is a practice in which an existing in force life insurance policy is replaced for the purpose of earning additional first year commissions.
It has a direct effect on a policy lapse rate.

Question 34

Premium Financing

Answer 34

Recourse Premium Financing
Non-Recourse premium Financing
Hybrid Premium Financing

Question 35

Premium Financing - Recourse Premium Financing

Answer 35

The applicant enters into a fully collateralized loan arrangement with the intention of holding the life insurance policy to maturity.
Most adventures form from an underwriting aspect because of the long term need and collateralization of assets provide more reassurance that renewal premiums will continued to be receiving while the life insurance policy is held to maturity.

Question 36

Premium Financing - Non-recourse premium financing

Answer 36

The borrow is typically an irrevocable life insurance trust (ILIT) or a limited liability company (LLC). Generally no recourse or liability to the underlying insured or their estate. The policy is generally the only collateral.
Can pose hidden tax and liability risks to the insured.

Question 37

Premium Financing - Hybrid Premium Financing

Answer 37

Partial recourse financing that is generally designed for short term horizon (2-5 years). Typically the proposed insured is required to refinance the loan at the end of the loan term into a longer term recourse loan.

Question 38

Fraudulent Activity

Answer 38

“Travelers”
Agent Identity Theft
Stranger Owner Life Insurance (STOLI)

Question 39

Fraudulent Activity - Travelers

Answer 39

Given to individuals with a lifestyle rooted in scam or con artistry for whom deception for profit is a way of life.
Most commonly involves the purchase of life insurance through various forms of concealment, substitution, or misrepresentation of material information.

Question 40

Fraudulent Activity - Travelers - Red Flags

Answer 40

1. Nomenclature - frequent last name that are seen
2. Occupations - Usually involves an earned income or net worth.
3. Medical Hx - Concealed or undisclosed. Often vague and impartial information is admitted.
4. Face amounts - are such so they don’t raise suspicion. Possibly stacking of coverage to various carriers.
5. Financial information - list income will be such that they generally meet most carriers’ multiple of income requirements for the face amount applied for to easily justify the purchase.
6. MIB
7. Geographic locations - specific locations in the US
8. Writing Agent distribution - the agent and proposed insured are well known to each other and work in collusion against the insurance company. Could have “stand in substitution” using health individuals for PM. Other is an agent from a call center and they are not known to each other.
9. Other deceptions - transposition of digits in SSN, DOB, or address.

Question 41

Fraudulent Activity - Agent Identity Theft

Answer 41

Theft and use of another agents ID with commission intercepted. Red flags include:

1. Newly appointed agents
2. Proposed insured tends to be listed as owner or self-employed.
3. Residence address, business, address, telephone numbers, and financial information do no match.
4. Agent contact information does not match with other third party data base searches.
5. The agent is difficult or unresponsive by phone
6. The case is withdrawn if verification of app info is requested or commissions held.

Question 42

Fraudulent Activity - STOLI

Answer 42

Red Flags include:

1. Requested to split up on large policy into several smaller ones with different owners and beneficiaries
2. Recent changes of payor, owner, or beneficiary activity to a completely unrelated business entity either shortly after issue or at the end of the contestable period
3. Elderly individual with impairments applying for large face amounts that appear inconsistent with previous buying patterns
4. Proposed insureds with previous life settlement activity.

Question 43

Basic Pricing Considerations

Answer 43

Assumed in pricing that standard rate class is slightly less than table 2, with the expectation that the overall mix of business will include risk that will have more favourable mortality than priced for to offset those risks that are closer to table 4,
Second assumption involve actuarial lapse rate assumptions
Final pricing assumption involve actual fraud and anti-selection