The life insurance industry incurs approximately $75 billion in losses annually due to fraud, misrepresentation, and anti-selection according to the NAIC. To gain deeper insights into this challenge, MIB and RGA have recently partnered to conduct a survey on fraud across the industry, building on initial research published earlier this year. When augmented by an analysis of data from MIB's In Force Data Vault, which includes active, terminated, and pending application information, the analysis offers new insights into anti-selection and the tools and services available to combat fraud.

During the RGA Fraud Conference last week, Julianne Callaway, Vice President and Senior Actuary, Strategic Research from RGA presented highlights from the study. Among them, are insights into the level of challenge by fraud type, additional details on stacking and churning, and the impact of accelerated underwriting on concerns about anti-selective behaviors. The presentation also covered the popularity of current tools available to detect and prevent fraud as well as interest in emerging tools.

Challenges by Fraud Type

Survey participants, including Chief Underwriters and other key personnel who deal with fraud, were asked to rank their level of concern about different kinds of fraud as well as their view of the difficulty and expense involved in identifying and combating each type.

The results show that medical misrepresentation has the highest level of concern and cost, while rebating has the highest level of difficulty to detect.

A Deep-Dive into Anti-Selective Policy Purchasing Behavior

Two types of anti-selective behavior that are both areas of concern and difficult for an individual insurer to detect are stacking and churning. Detecting these types of behavior patterns requires an industry-wide view in force, pending and terminated coverage levels across all carriers that can only exist if the industry collaborates together to share data. MIB, together with TAI, has developed the only solution in the industry with both the data and reporting capabilities needed to identify this type of fraud.

For the purpose of the discussion and presentation:

• Stacking is defined as a policyholder owning multiple policies to increase the amount of coverage with a lower level of underwriting scrutiny than if a single large policy had been purchased.

• Churning is defined as replacing an existing policy with a new policy for the purpose of generating additional commission revenue.

Some interesting findings on stacking and churning covered by the presentation include:

1. The prevalence of stacking varies by age band. Behavior patterns indicating potential stacking were observed disproportionately higher for Individuals aged 40+ (especially 50-59) relative to the total policies issued within the dataset examined.

2. Policies with less than $500,000 in face value posed the largest risk of stacking concerns. This is potentially due to lower prevalence of underwriting scrutiny at smaller face amounts.

3. Policies with $2+ million in face amounts produced disproportionately higher levels behavior indicating potential churning. Since churning is linked to agent behavior, these results could be driven by higher commissions for agents at higher face amounts.

A Growing Challenge as Automated/Accelerated Underwriting Expands

Based on the MIB/RGA survey, accelerated underwriting has increased the concern of anti-selective behavior. Respondents who primarily sell more accelerated business are much more concerned with stacking and churning than those who sell fully underwritten products.

Tools to Help Detect and Prevent Fraud

According to the study, prescription histories and the MIB Checking Service/IAI are the prevailing tools currently used to help detect and mitigate fraud in life insurance applications.

The latest innovation gaining traction is MIB’s In Force Data Solutions – a portfolio of services leveraging the industry’s largest in force, applied for and terminated coverage database. As the top tool that insurers are exploring to enhance their fraud prevention strategy, the MIB Total Line Service, part of the In Force portfolio, is quickly becoming key asset to the industry, offering substantial data and insights to help identify and prevent instances of non-disclosure, over insurance, stacking, churning and other agent/application behaviors.

A $500M Challenge

Many applicants are well intentioned individuals, and behaviors that cause red flags for potential stacking and churning may in some cases be justifiable and appropriate. However, the ability to monitor anti-selective behaviors so that carriers can research further and take action when necessary is critical. Based on an MIB analysis conducted with RGA of data in the MIB In Force Data Vault, we can estimate the total cost to the industry for stacking and churning nears $500 million annually. And it is likely to grown as automated/accelerated underwriting programs expand.

Not approving or rescinding policies where applicants exhibit stacking with the intention of bypassing medical requirements would save carriers millions in claims. The savings can be directly linked to a claim not paid if fraud or misrepresentation is identified before the two-year contestable period expires. Similarly, by addressing agent churning, carriers will avoid commission, underwriting and client acquisition costs, also achieving substantial savings.

A contributory database such as the MIB In Force Data Vault, represents an opportunity for the entire life insurance industry to come together to detect and prevent these types of adverse behavior patterns. As the partner the industry has trusted for over 120 years with application data, MIB is uniquely able to support the type of collaboration needed to collect in force, applied for and terminated coverage data and turn it back to the industry in the form of alerts and reports through the Total Line Service.

And while we have identified two specific behaviors in stacking and churning that cost the industry a half a billion dollars, the data from the MIB In Force Data Vault can be used to detect and resolve other behaviors such as lapse propensity, misrepresentation or nondisclosure, over-insurance and more.

The protective value that a tool like the MIB Total Line Service can provide to detect and prevent adverse behavior patterns like these is substantial. More information is coming soon from MIB with additional details, along with tools that will help individual carriers calculate their own return-on-investment for the service.

Contact us for more information about how MIB can help your organization advance your approach to fraud detection and prevention.