“There’s just one more thing…” This line from the popular television crime drama “Columbo” is among my favorites. Near the end of every episode, Lieutenant Columbo, a rumpled, trench-coat wearing police detective, would pause and ask the suspect just one more question. The answer to this apparently inconsequential “thing” inevitably would unravel the whole criminal scheme and send the suspect to jail.
Underwriters have a lot in common with Lieutenant Columbo. Like the detective, underwriters can be dogged investigators – and we are often the first to detect fraud. This matters more than ever: The Coalition Against Insurance Fraud estimates that U.S. insurers lose an estimated $80 billion a year to fraudulent schemes.
To find fraud, you first must define it. Considered any false representation of a matter of fact, insurance fraud can come in a number of guises. Perhaps the most common is anti-selection, in which the applicant withholds pertinent medical or behavioral information – from a smoking habit to a hazardous avocation – to acquire more favorable insurance rates. Other popular forms of fraud include:
- Ghost writing: An insurance agent, who may have had his or her license or appointments revoked due to fraud or other business concerns, partners with another appointed agent. The terminated agent submits the insurance application in place of the appointed agent and typically resumes the same poor business practices that led to his or her termination.
- Churning: A broker or agent conducts excessive trading in a client’s account to generate commissions.
- Twisting: A broker or agent replaces an existing policy with a new policy from the same carrier for the purpose of generating additional commission revenue. More often than not, twisting results in an additional cost to the insured.
- Rebating: An agent, after commissions are paid out, refunds a portion of the premiums back to the applicant in the form of cash or in-kind items. Though illegal in most U.S. states, this scheme is subtle and can take a year or longer to discover. Rebating burdens the insurer and reinsurer with high acquisition costs and excessive policy lapsation.
- False filings: This largely involves misrepresentation of the applicant’s business or personal financial status through document falsification. Examples include the use of unaudited Certified Public Accountant (CPA) statements and overstated income and net worth figures.
- Stacking: A policyholder pursues multiple small policies to increase coverage, while reducing underwriting scrutiny, by exploiting limited age and amount requirements.
- Travelers fraud: A conspiracy commonly pursued by a nomadic group called the “Travelers” to obtain life insurance policies by overstating a proposed insured’s income and net worth or concealing significant medical conditions during the contestability period to ensure the beneficiary receives an early-duration claim payment.
The definition of fraud is complex, but the victims are clear: the honest policyholders who must absorb premium increases to offset the expense of these schemes. Insurance underwriters play many roles, but I would argue that, first and foremost, we are detectives. In a world of express underwriting, we cannot forget the value of due diligence and critical thinking in protecting the industry and policyholders.
That brings me back to Columbo. This unassuming fictional detective used four practices that could help real-life insurance underwriters discover – and deter – fraud.
1. Never stop asking questions.
Columbo used little more than healthy curiosity and common sense to uncover falsehoods. Underwriters should never be afraid to ask for additional evidence or to speak up when they see the following signs of fraud:
- The agent and proposed insured live in two different states, or a medical exam is being performed in a different state.
- The application, exam, or inspection report have missing, unverifiable, or suspicious email or physical addresses, telephone numbers, or other contact details – or the application lacks personal physician contact information, a medical history, a driver’s license, or motor vehicle history.
- There is a mismatch in the application and driver’s license information, such as different dates of birth, name spellings, or the presence of an alias.
- The applicant’s social security number (or visa, green card, or permanent resident card numbers) or date of birth are incorrect.
- There is evidence of life insurance without any other types of insurance or unadmitted recent insurance activity, which could indicate “stacking” or excessive insurance, including multiple smaller applications to different carriers.
- The application reveals unusual beneficiary or owner arrangements, such as a child seeking a policy for a parent (especially when the parental coverage seems more appropriate for the child). An application on behalf of an elderly person may also indicate anti-selection for cognitive problems or other serious health issues.
- The proposed insured is not actively working, has unusual premium-to-income ratios, leaves net worth or occupation fields blank in the application, or lacks an apparent insurance need.
- The applicant uses unusual payment methods, including credit cards from an unrelated party (or the agent), new bank accounts (including starter checks), or money orders to pay premiums.
2. Trust, but check
Colombo never took any fact for granted. As insurers, we must trust agents and applicants, but we must also use available tools to verify the information they provide:
- Search social media sites and use search engines such as Google, Bing, and Zillow to ensure the applicant’s assets are worth the value professed in the application.
- Request address verification through a utility bill or lease agreement.
- Request a copy of a Social Security card.
- Request a Form 4506T-EZ, or a short-form individual tax return.
- Seek criminal history reports, an inspection report (telephone and electronic), credit reports, and fraud checks. A credit-based insurance score can provide a more holistic picture of each applicant’s risk profile and is useful in confirming identities.
- Notify a compliance or special investigations unit (SIU) of any suspicious activity.
3. Recognize that might isn’t right.
Powerful suspects often tried to intimidate Columbo, but he never backed down. While many agents and applicants can be legitimately frustrated by the insurance process, pressure to issue a policy can be a sign of fraud, as is reluctant and incremental disclosure. Agents or applicants who complain loudly and demand a phone call and faster approvals, but refuse to submit verifiable information in writing, are far more likely to have something to hide.
In many ways, Columbo never stopped talking. He conducted every investigation publicly, communicated openly, and always explained his reasoning. Insurers could learn from this approach. Because fraud impacts all areas of the insurance value chain, it is essential that underwriters, claims analysts, technology support teams, and SIU and compliance experts exchange insights and intelligence continually. Underwriters should seek to build strong networks, both internally and by participating in industry meetings and discussions. For example, RGA’s annual Fraud Conference is free and features expert speakers from a range of specialties, including law enforcement.
It is also important to be accurate, thorough, objective, and specific in all documentation.
- Do not draw conclusions, offer suspicions, or accuse any party of wrongdoing; remember, every written document has the potential to be discoverable in a legal dispute. Understand and adhere to your company’s document retention rules and guidelines and include instructions to locate all supporting materials in the file.
- Demonstrate a pattern of wrongdoing using spreadsheet software such as Excel.
- When referring an application to compliance or an SIU, remember that you are a highly trained underwriter: Share your expertise when it comes to understanding and assessing medical, nonmedical, and financial risks, and consult with your manager, chief, and/or SIU area to determine the next steps.
Although Columbo’s detective skills were successful, they were also quite remedial. Fraudsters are becoming savvier every day, and available technology only helps many commit their crimes more efficiently. The U.S. Federal Bureau of Investigation estimates that incidence of financial fraud, including insurance fraud, is increasing 15% annually and costs legitimate U.S. businesses an estimated $1 trillion every year.
While Columbo’s tools of the trade were a pen, papers, and keen ability to ask the right questions at the right time, modern underwriters must rely on a deep understanding of data trends, up-to-date training, and a constantly evolving toolset. Staying abreast of the latest developments and evolving technologies is essential to identify fraud at the earliest possible opportunity.
Common sense is critical, too. As underwriters, we need to question ourselves and our assumptions. Consider whether a submission makes sense, or has worrying inconsistencies. When we do find missing pieces, we need the support and the courage to seek the real story.
So the next time you’re confronted with a case that gives you pause, remember Colombo and ask for “just one more thing.”