BY KEVIN C. GLASGOW, ARA, ACS, FLMI, FLHC, CLU®, CFE | December 22, 2020
Synthetic persons, forged documents, bribery, murder, wire fraud and identity takeovers are just some of the fraud crimes besetting the life and health insurance industry.1
And the environment is ripe for the picking. Nearly $20 trillion of life insurance is in force in the U.S. (not counting disability and health insurance). Life insurers paid out over $130.9 billion in 2018 to policyholders and beneficiaries.2 Another $31.2 billion in disability and LTC claims were incurred in 2018. While the annual payout of life proceeds may be less than property-casualty coverage, the return on the dollars invested is much higher.
Often life policies can be obtained with an annual premium of less than a penny per dollar of benefits. This creates a lucrative, target-rich environment where the payoff is substantial, even after years of paying premiums. As the industry moves more toward automation, fraudsters inevitably will seek to exploit emerging gaps in the systems.
Weak fraud prevention and detection encourage more fraud, and are bad for the public. In most states, laxness runs counter to regulatory requirements. Every consumer pays more for their insurance due to fraud that goes undetected. While data from the American Council of Life Insurers (ACLI) show $600 million in disputed new claims reported in 2018, we do not know the amount that remained undetected. However, the average family pays $400-$700 a year in additional insurance premiums across insurance lines, the FBI estimates.3 While fraud losses are built into insurance premiums, insurers that lack diligent prevention processes will suffer more losses than were built into the product pricing because illicit actors will actively target these companies. The first step in preventing fraud is to understand the risks, mitigants and trends.
Fraud schemes are diverse gap
Fraud schemes take many forms and often involve multiple crimes. Some of the more-common fraud schemes are:
• Misleading or non-disclosure of material facts.
• Synthetic identities created to obtain insurance and file false death claims.
• Faking a death to collect insurance proceeds. This is often attempted through document forgeries, bribery and corruption.
• Switching identities with a deceased person.
• Identity takeover, which can involve a synthetic identity.
• Insuring people with the intent of killing them.
• Falsifying or inflating medical services for longterm care policyholders.
• Laundering funds through life insurance cash-value products.
Volumes can be written on life-insurance schemes and how they operate. This article focuses on three overarching themes: non-disclosure, false claims from foreign countries, and nomadic groups.
Non-disclosure of material facts
Some of the more-frequent fraud schemes involve a claimant or application failing to disclosure a material fact when applying for coverage, or providing false and misleading information. For example, an applicant may fail to disclose an adverse medical condition or fact such as grossly understating body weight or failing to disclose a recent cancer diagnosis. Another example is failing to disclose participation in hazardous activities such as motor vehicle racing. If disclosed, these examples could result in higher premiums or a declining of coverage.
This is a longstanding problem. The main mitigant is to verify the disclosures when the person applies for coverage, and use diligent claim adjudication.
What is new is that as life-insurance companies race to reduce the time from application to policy issuance due to changing consumer demands, insurers now rely less on the traditional means of detecting non-disclosure. For example, underwriters are relying less on paramedical exams and blood samples to evaluate risks. COVID-19 has also had an effect, which is discussed later. These changes leave gaps for illicit players to exploit.
Extremely important is that nearly every life and disability policy contains a clause limiting insurers from defending against non-disclosure beyond two years from the policy date. From a practical perspective, an insured simply has to outlive the two-year contestable period.4
Schemes in foreign countries
Faking one’s death to cash in on life policies bought in the U.S. remains an ongoing, complex and often dangerous problem. Two phenomena are emerging in recent years that are increasing the fraud risks.
First is greater pressure to issue more life policies — and policies of higher dollar amounts — to foreign nationals. Second, before COVID-19 struck, our world shrank as more people traveled abroad for work and pleasure. This brings more overseas deaths of insureds with U.S.-based policies. In 2019, the State Department reported 649 “non-natural” death claims of U.S. citizens, spanning 117 countries.5 This table shows the top locations of deaths. It does not include natural deaths or deaths of non-U.S. citizens.
Verifying information from foreign nations during policy underwriting and claims has many challenges, including:
• Privacy laws make it difficult to collect medical and financial records.
• Corruption in many countries is common, and official documents can often be purchased for small-dollar sums.
• Law enforcement and government officials also can be easily bribed.
• Language barriers.
• Cultural barriers.
The investigation’s value often depends on the knowledge and integrity of the investigator. We have seen many cases where investigators are approached with bribes to falsify investigation results. Diligence is required to conduct the investigation, and select the right investigator.
These challenges open more opportunities for illicit actors to falsify or hide information from life insurers. It is often difficult for underwriters to confirm or find information that is hidden, or even realize there could be hidden data. This is especially true when applicants are citizens of dictatorial, communist or developing countries, or in countries where corruption is high. Depending on the region, especially many locales in Latin America, drug lords may also be involved behind the scenes. This places a real risk to fraud investigators, especially if investigating a purported death.
We are seeing more applications for foreign nationals coming from Mexico and China, and significantly larger fraudulent claims from countries in Latin America. Historically, the three countries with the most fraudulent life claims are Mexico, Haiti and China. Relying on documents issued in foreign countries without properly verifying them with the source is a common mistake. Nearly every fraudulent claim contains official documents that were properly registered with the local authority. Let me repeat, nearly every fraudulent claim we have encountered contained documents that were properly registered with the local authority.
Foreign schemes in action
An application is submitted for a real or synthetic person.6 The applicant-insured may not even live in the claimed country, or be alive or real. Proposed insureds also may be human trafficking victims brought to the U.S. as cheap labor or sex workers. Verifying assets that are purportedly overseas is daunting, and can be forged to seem reasonable based on the amount of coverage being sought. The life policy then is issued. Depending on the scheme’s boldness and sophistication, policies may be in the millions of dollars. Policy applications by foreign nationals today can number in the tens of millions of dollars each.
Years later, the insured reportedly travels back to their home country and mysteriously dies. The purported circumstances of death vary based on the fraud’s sophistication. Some deaths are reported as natural, such as a heart attack. Other deaths may be supposed accidents such as a fiery car crash where the “body” cannot be identified. In reality, the illicit actors have returned to their country merely to set the stage.7
In many cases, this involves paying off a coroner or doctors for medical documents or death certificates. Other bad actors simply forge the necessary documents. Potential parties also are paid off to “tell the right story” if anyone questions the death. In other cases, accidents are staged with dead bodies that are falsely claimed as the insured.8
If needed, documents are taken to the local authority to record the death. The death is now in the official local “death register,” and a “legitimate” death certificate issued. Death certificates in many countries are easily purchased, even without backup medical or other documents.
If the insured is a U.S. citizen, the embassy is notified, the “official” death certificate presented, and a Report of Death of a U.S. Citizen document (RDCA) is issued. Fraud investigators should not be satisfied with the legitimacy of a death based on the local death registry or RDCA because nearly every fraudulent claim contains these.
More-sophisticated players will purchase graves and grave markers in case an investigator visits the grave site to help prove the death. Less-expensive options involve phony social media posts and publishing obituaries detailing the fraudulent deaths. Many claims adjudicators widely rely on these cheap postings as “evidence” to substantiate a death. Then the claim is filed after this stage is set. Potentially millions of dollars are collected for just a few years of premium payments, which is a small investment for the large death payout.
The above fraud scenario involves many themes in life insurance fraud — including corruption, bribery, forgery and possibly synthetic persons. Fake-death claims happen in the U.S. as well, but with minor twists.
U.S.-based schemes can encompass the same crimes as foreign nationals and foreign death claims. Yet tighter controls on government documents such as death certificates make it more difficult. Even so, death certificates can be stolen, bought through corruption, forged, or obtained illegally by substituting bodies.
Nomadic Traveler groups
Nomadic groups can often organized crime rings using fraudulently obtained insurance money as ongoing income sources. Nomadic groups fall into two main groups: those with most-recent origins in Romania (Romani Travelers), and Irish Travelers who immigrated from the U.K. around the 1600s. Each group is distinct, but the scams are similar. Schemes tend to use life insurance as a lottery system and identity-switching with applicants and deceased persons. The transient nature of many nomadic insureds makes it difficult to pin down facts needed to properly underwrite an application or evaluate a claim.
Their range of crimes is broad and involves all types of insurance, including property-casualty coverage as well as life insurance. While using life insurance as an investment vehicle ebbs and flows with time, many insurers see a recent increase in life insurance scams by nomadic groups, including higher-dollar policies.
Many nomadic groups are tightly knit, which can easily frustrate underwriters and claim examiners attempting to detect fraud. The Romani groups are especially challenging, given their unique language and culture. Solving a fraudulent claim can be like trying to solve a complex puzzle even for experts. Nomadic scammers can be master manipulators, and thoroughly versed in how insurance works. They use many methods, including switching identities and names. This can make it difficult to know who is applying for life insurance, or who the real insured is.
An example of a typical nomadic scheme may go as follows: A group member may be in poor health. An application is submitted to an insurance company without disclosing the poor health history. The names used by nomadic groups for the “outside” world are often commonly shared within the community, thus making a true identifying of the applicant confusing. Applicants also will often go by and share multiple names, dates of birth, and Social Security numbers. They may have slight but significant variations. Accurate medical records are often difficult to obtain due to the transient nature of the applicant, and the naming conventions used.
If the underwriter requires a medical exam, a substitute is fraudulently used. The application then gets approved based on a false application. Ultimately, a member of the community dies, and the deceased’s identity is linked to the insurance policy. The true insured may still be alive, but the nomadic community may falsely name the deceased as the insured. In some cases, there may not even be a death. Funeral homes also are active participants in schemes, making the fraud seem more legitimate.
Mitigating the risk of nomadic fraud involves knowing their culture, looking for common names and occupations, challenging questionable insurable interests, noting locations of applicants, maintaining databases of known fraudsters (including their insurance agents), and verifying the identity of the applicants.
At the time of a claim, even if the policy is outside of the contestable period, investigating claims that have common elements of nomadic fraud is important. Most states allow fraud as a basis to deny claims (as opposed to material misrepresentation) outside of the two-year contestable period. The investigation also may uncover other active policies involving the same nomadic parties, and which may be voidable.
COVID-19 and technology
Insurers are racing to figure how to quickly issue policies without drawing bodily fluids and obtaining medical records. The goal is to meet the market’s demand for faster, quicker insurance purchases.
Traditional underwriting thus is being replaced with a digital process, artificial intelligence and rules engines. Claim processing is also moving away from requiring traditional proofs of death such as death certificates — increasingly in favor of telephone calls and database death verifications.
Availability of vastly more data has improved insurers’ ability to underwrite without increasing risk in many aspects. The greater availability of prescription drug data, licensing data and even hazardous sports activities all are helping.
True artificial intelligence and machine learning, however, require vast amounts of data on fraudulent claims. It is unclear how AI will react to fraud schemes that have historically gone undetected. Rules-based engines can also be rigid. They can miss changes in behavior that will inevitably occur as illicit players learn how insurers operate. This change in human behavior is probably one of the most-underestimated challenges in identifying fraud through technology.
Another important factor is that many tech advances work to reduce the volume of applications and claims that humans must review. While a laudable goal, technology should not replace human intellect and should not be solely relied upon to prevent or uncover scams.
Many observers view advances in technology as a one-way street, only benefiting insurers. But this may not be the case. Recall Frank Abagnale, the basis of the hit movie “Catch Me If You Can.” As a teenager, he lived by forging checks and impersonating people, including pilots, doctors and lawyers. He is intimately familiar with crime, fraud and technology. Abagnale has worked with the FBI for over 30 years to help prevent fraud. One of his talking points today is that “Technology breeds crime — it always has and always will.” Many believe technology will make it harder to perpetrate crimes. However, many experts such as Abagnale differ.
Technology helps detect certain types of non-disclosure in that unsophisticated applicants often leave digital footprints that can easily be found by underwriting, or when the claim is investigated.
Prescription drug checks are relatively complete for most “normal” people. They are an excellent tool for underwriters, but not 100% perfect. However, non-disclosure of recent medical events can still be hard to find.
Asymmetrical information has always been an issue for underwriting, and some forms of technology may increase this risk. Advances in anonymous home-health screening kits and DNA testing give potential insureds an information advantage over insurance companies; this information will likely not be available in medical records or other sources available to underwriters. Persons taking such tests can then make insurance- purchasing decisions based on these test results, thereby creating the possibility for anti-selection.
Automation and rules cannot replace the human mind, and pandemic social-distancing comes with more risks of missing clues that could uncover fraudulent behavior.
While the life-insurance industry was already moving toward fewer human interactions between applicants and insurers, COVID-19 has accelerated this transition. The new norm of social distancing, along with reduced business capabilities, allows even fewer interactions.
Medical records have been more-difficult to obtain during COVID-19 lockdowns. Official documents such as death certificates are being delayed, and traditional paramedical exams are harder to schedule. When claims are filed, unavailable medical records have made validating disabilities, and in many instances even obtaining claim forms, far more difficult. Independent medical exams and surveillance are limited by travel restrictions in many cases, especially in foreign countries.
All of this leaves opportunities for fraudsters to exploit the pandemic with expensive life-insurance schemes.
Stay diligent in combating fraud
Despite all the societal advances we human beings can claim, our nature remains constant. Some people always will be motivated by greed, and have no moral issues with fraud and deceit. They will exploit changes in processes and technologies for their own self-serving purposes. Life and health insurance products are just a vehicle for illicit players who know how to manipulate processes, technology and people to achieve personal gains through fraud.
Technology may change how life-insurance schemes work; our duty is to stay a step ahead. Fraud schemes often are identified only after they are on the books. Thus ongoing dynamic data analysis, diligent process reviews of claims and underwriting, thorough staff training, and conducting complete investigations of suspicious or high-risk claims are imperative to stay ahead of the illicit players.
Continued use and development of data analytics and technology are equally important tools. But ultimately, technology should not replace human intellect. To avoid being targeted by illicit players and keep fair premiums that accurately cover true mortality and morbidity risks, life insurers must remain diligent in fighting fraud instead of accepting crime as simply a cost of doing business.
About the author: Kevin C. Glasgow, ARA, ACS, FLMI, FLHC, CLU®, CFE is Vice President, Investigation Solutions, for Diligence International Group.
1. For this article, life and health insurance are referred to generically as life insurance fraud.
2. According to ACLI’s 2019 Life Insurance Factbook, $19.57 trillion USD of life coverage was in force in 2018. 130.9 billion was paid to beneficiaries and policyholders in death benefits, dividends, matured endowments and other payments.
3. The FBI estimates that non-health insurance fraud is as much as $40 billion annually.
4. Nearly all life policies issued in the U.S. have a clause called the “Incontestable Clause.” It says a policy can contested only for non-payment of premium once the policy has been in force during the lifetime of the insured for two years from the effective date of coverage. To deny a policy for non-disclosure after two years, insurers must prove the policy is void ab initio by proving intent. Yet this is difficult because the main witness, the insured, is often deceased. Courts place a much-higher threshold for proving fraud beyond two years than most countries.
5. Death Abroad, U.S Department of State.
6. One notable case involving a synthetic person, multiple insurance companies and tens of millions in coverage is the Hasan Khan and Qurashi cases. Find more information at “
7. Death Abroad, U.S Department of State. Igor Vorotinov his ex-wife and son were convicted of staging his death to collect $2 million of life insurance. The insured reportedly spent years developing the plan before purchasing the policy. The plot included using a substitute body that has yet to be identified. This also underscores the need to diligently investigate high-risk death claims before reaching a claim decision.
8. Getting a human body to substitute for the insured is fairly easy in most regions of the world.