1 FOREIGN TRADE UNIVERSITY ECONOMICS AND INTERNATIONAL BUSINESS DEPARTMENT INSURANCE AND RISK MANAGEMENT LIFE INSURANCE FRAUD CASES IN US AND SOME RECOMMENDATIONS Nguyễn Phương Hoa 2012150034 V[.]
FOREIGN TRADE UNIVERSITY ECONOMICS AND INTERNATIONAL BUSINESS DEPARTMENT _ _ INSURANCE AND RISK MANAGEMENT LIFE INSURANCE: FRAUD CASES IN US AND SOME RECOMMENDATIONS Nguyễn Phương Hoa- 2012150034 Vũ Hải Bình – 2012150013 Đặng Lam Bình – 2013150004 Nguyễn Thị Huyền – 2013150024 Lê Hoàng Long – 2012150055 Sami Manninen – 2290102014 Nguyễn Hoàng Nam - 2013150035 Class: TMAE308.1 Lecturer: Hoàng Thị Đoan Trang TABLE OF CONTENTS INTRODUCTION THEORETICAL BASIS 2.1 Life insurance 2.2 Life insurance fraud RESEARCH PROBLEM STATUS 3.1 Overview of life insurance market 3.1.1 The history and development of Life Insurance 3.2 Overview of US Life insurance fraud 3.3 Two cases of liffe insurance fraud 10 3.3.1 Case 10 3.3.2 Case 18 RECOMMENDATIONS 26 CONCLUSION 29 REFERENCES 31 INTRODUCTION Life insurance is a contract between an insurer and a policy owner A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime Therefore, life insurance acts as a safety net to protect the insured’s loved ones who may financially depend on him after his death For example, life insurance policy can help pay financial obligations such as rent or mortgage costs, funeral and burial expenses, school tuition, personal debt such as student loans or credit cards, and even, supplement the lost income, to help pay for day-to-day expenses Despite the original purpose of life insurance, many people have taken advantage of it and treated it like an “investment” to gain profit Life insurance fraud can be in many forms, coming from both the agency and policy owners' sides It has unsurprisingly caused a huge loss to society Therefore, our group decided to choose the topic: “LIFE INSURANCE: FRAUD CASES IN THE US AND SOME RECOMMENDATIONS” To be more specific, this report will assess the life insurance fraud issues in the US market in general, investigate two notorious cases and then give some recommendations to prevent this problem We would like to give our sincere thanks to our lecturer - Ph.D Hoang Thi Doan Trang for your constructive feedback and continuous support for us to finish this report THEORETICAL BASIS 2.1 Life insurance Life Insurance can be defined as a contract between an insurance policy holder and an insurance company, where the insurer promises to pay a sum of money in exchange for a premium, upon the death of an insured person or after a set period In many cases life insurance can be neccessary for policy holders’ beneficiaries for their survival after a death occurs because the family might have for example a mortage that they could not afford to pay anymore after a death of one family member After receiving the insurance money, your beneficiaries can use the money for whatever purpose they choose Often this includes paying everyday bills, paying a mortgage, or putting a child through college Having the safety net of life insurance can ensure that your family can stay in their home and pay for the things that you planned for 2.2 Life insurance fraud General insurance fraud costs Americans approximately $40 billion every year But despite what you see in movies and read in headlines, sensational life insurance schemes involving faked deaths and murders are rare More common types of life insurance fraud include purposefully misstating application information to get cheaper pricing or altering someone else’s policy without their approval In less serious cases of fraud, you might be hit with higher policy premiums, a policy denial, or cancellation of coverage In more serious cases, life insurance fraud can be reported to a fraud bureau and brought to court There are four common types of fraud in life insurance: application fraud, death fraud, forgery, and phony policy fraud a Application fraud Application fraud is when you knowingly provide incorrect information to your insurance company while applying for a policy, to get cheaper premiums This can also be called material misrepresentation or concealment If you get caught doing this your insurer will either increase your final premiums or they will deny your insurance application b Claims fraud Claims fraud is more commonly known as death fraud which occurs when someone fakes their own death or the death of their loved one to collect a life insurance benefit For example, you take a life insurance for your spouse and then you guys together fake her dissapearence by reporting her missing and wait for few years until they get declared dead The time that it takes for a person to be declared dead after disappearance varies depending on the circumstances where the person went missing Some people have commited claims fraud is by making or buying counterfeit death certificates Policy holders' loved ones then use the fake death certificate to collect the money from insurance companies This way is considered more professional since faking death certificates is not an easy task Some criminals have made it their business to sell fake death certificates Another type of claims fraud is when a beneficiary kills the policyholder to get a payout Sometimes married couples may take life insurance for their spouse, only with the intention to to kill them, so they can collect the life insurance money later For example, a husband takes life insurance policy for their wife, and then kills them and collects the money, or the other way around c Forgery This type of life insurance fraud occurs when other parties, often a family member or spouse, access the policy and change its ownership or named beneficiaries Only the policyowner is allowed to change the details of a policy, and someone would need to forge documents or fake their identity to alter a policy owned by someone else You can have your claim denied and be prosecuted for forgery-based life insurance fraud d Phony policy fraud Scammers pretending to be insurance agents sometimes “sell” fake policies to unsuspecting customers and pocket the premiums The fraudsters say they work for a recognizable, established brand to earn your trust, then request cash or direct payments for a policy RESEARCH PROBLEM STATUS 3.1 Overview of life insurance market 3.1.1 The history and development of Life Insurance 3.1.1.1 The origin of Life Insurance in the world The history of life insurance can be traced back to ancient Greece and Rome between 600 and 100 BCE Gaius Marius, a Roman military general, was credited with coming up with the concept in ancient times: Should one of his fellow soldiers be killed in battle, the club's surviving members would come together to cover the cost of the victim's funeral, according to legend, which was conceptualized as "burial club", a type of health and life insurance While the concept was first solely used by soldiers at the time, it gradually expanded throughout ancient Rome and was embraced by common people Later, these organizations developed this idea to ultimately provide a financial safety net for the family members of those who fell in battle 3.1.1.2 The history and development of Life Insurance in the US The Presbyterian Ministers Fund was the very first life insurance firm in the United States, founded in Pennsylvania in 1759 with the primary purpose of assisting Presbyterian widows and orphans By the early 1800s, there were successful life insurance companies not only in Pennsylvania but also New York, Maryland, and Massachusetts It’s estimated that in the 1830s, American life insurance companies wrote policies totaling around $600,000 By 1850, that amount was nearly $100 million Things began to change in 1840 when the state of New York passed a legislation allowing a woman to independently purchase a life insurance policy on her husband The widow received a good deal of protection from creditors under the same rule As other states and insurance providers started to imitate New York's lead, life insurance in America quickly saw a growth boom Since then, the market has widened to include many more groups of policyholders and insurance issuers Over 340,000 people in the United States were currently employed by the business, which had total assets worth around $7 trillion in 2018 alone U.S life insurers saw their yearly direct life insurance premiums surpass $200 billion for the first time in history in 2021, according to an S&P Global Market Intelligence analysis of annual statutory statements The total amount of group and individual direct life premiums increased by 9.9% annually to $204.7 billion in 2021 Individual life premiums increased 10.7% across the board to $162.76 billion in 2020 from $147.01 billion in 2019 The regulatory statements are the sole source where premiums by policy type are available net of reinsurance The highest year-over-year gain in net premiums among the main individual policy types was recorded for universal life, which soared at around 60%, followed by variable universal life, which climbed to 23.8% Index, whole life, and universal life with secondary guarantees all experienced double-digit growth On the other hand, term life net premiums decreased by 5.8% Group direct life premiums grew by 7.1% in 2021, reaching $41.94 billion Source: S&P Global 3.2 Overview of US Life insurance fraud Insurance fraud, especially life insurance fraud, is among the most costly and damaging forms of fraud crimes in the United States and globally The 2016 RGA Fraud Conference attendants believe that insurance fraud (excluding health insurance) costs more than $40 billion each year or equally costs the average American household $400 to $700 in higher premiums every year (Turner, 2021) Life insurance fraud is estimated to approximately cost the life insurance industry as much as $10-20 billion each year, accounting for 12-25% of the total cost of insurance fraud in the U.S (RGA Annual Fraud Conference, 2016) The actual cost of fraud, however, is incalculable since it goes beyond the expense of paying inappropriate claims and the expenditures associated with setting up fraud prevention and detection units Fraud also stifles innovation and costs customers money and convenience Additionally, the earlier assessment of insurance fraud costs was based on a technique developed in the early 1990s that ignored the impact of inflation and other contributing variables (RGA Annual Fraud Conference, 2016) The 2022 estimation of the cost of insurance fraud in the U.S increases to $308.6 billion, in which $74.7 billion is the cost of life insurance fraud (The Coalition Against Insurance Fraud Report, 2022), accounting for approximately 25% of the total fraud cost Source: CSU Global The RGA further reports that, according to a study of life insurance firms, approximately 1% - 3% of claims are either subject to an investigation for fraud or misrepresentation or are rejected outright The contestability period, which varies from state to state but is typically one to two years, allows an insurer to reject a claim for serious misrepresentation and fraud According to internal RGA claims experience, over 20% of life insurance claims are canceled during the contestability period Policies with a simpler issuance and those given to younger insureds have a higher rate (RGA Annual Fraud Conference, 2016) There are several factors challenging the investigation into life insurance fraud cases in the U.S Firstly, the process of investigating is time-consuming and requires a lot of money which makes the related parties reluctant to take the court Secondly, the resistance from third parties such as claimants, doctors, etc to assist the investigation process is also considered as a barrier to the counter-fraud of life insurance Furthermore, U.S data protection laws and other regulations are also negatively impacting insurers’ ability to investigate life insurance fraud as there is a growing asymmetry of information between the insured and insurer 3.3 Two cases of life insurance fraud 3.3.1 Case Two Elderly Women Arrested in Deadly Scam of Life Insurance Case Summary: In 2008, in Los Angeles, two senior citizens, Helen Golay, 77, and Olga Rutterschmidt, 75, were convicted of murder They were both sentenced to consecutive life terms On two separate occasions, they had taken homeless men— Paul Vados and Kenneth McDavid—under their wings, housed, fed, and looked after them for two years, then killed them with cars, hit-and-run style They had also taken out millions and millions of dollars in dozens of separate life insurance policies on each man The men turned up dead in still- unresolved hit and run cases; the women were $2.2 million richer after collecting their life insurance policies 10 • Second defendant: Betty Mallay, 61, a Woodside woman General Information The following is a brief summary: a The murder of Vernon Peter In 1991, Mallay was a postal carrier for the United States Postal Service He was arrested and convicted of theft from the postal service He was sentenced to 15 months imprisonment While he was incarcerated, his mother died of a heart attack Mallay blamed these problems on Vernon Peter ("Dilly"), because Mallay believed Dilly assisted in the investigation leading to his convic-tion He then contacted his sister, Betty Peter, who was married to Dilly, and told her as much Mallay advised Peter to stay up-to-date on the insurance policies on Dilly's life because he intended to get even Following Mallay's release from prison in 1993, he had a conversation with Baskinand Motillal, his nephew Mallay gave Motillal what Motillal believed was an invitation for him to kill Dilly Motillal declined the offer However, Motillal subsequently introduced Mallay to Davindras Dass ("Dass") Mallay offered Dass $10,000 for the hit Dass agreed but said he needed money to purchase a gun; Mallay then gave him $500 Dass recruited his friends, Camuldeen Allie ("Allie"), "Barry" and "Fingers" to assist him Dass was to be the triggerman, Allie and Barry the lookouts, and Fingers was to be the driver of the getaway car When Dass procrastinated, Allie agreed to be the shooter instead On the morning of July 28, 1993, Das, Allie, Barry and Fingers drove to Dilly's home, using Allie's car Dilly came out of his home and Allie came behind him and shot him several times in the head The four then fled in Allie's car It was reported that someone saw the license plate of the get-away car Allie decided that he would burn this car and then tell the police that it was stolen In the process of burning the get-away vehicle, Allie suffered burns to his face and hands Allie told Dass he needed his share of the "hit money" immediately because his burns could link him to the arson and subsequently the murder Dass met with Mallay later that 20 ... the topic: ? ?LIFE INSURANCE: FRAUD CASES IN THE US AND SOME RECOMMENDATIONS? ?? To be more specific, this report will assess the life insurance fraud issues in the US market in general, investigate... feedback and continuous support for us to finish this report THEORETICAL BASIS 2.1 Life insurance Life Insurance can be defined as a contract between an insurance policy holder and an insurance company,... RESEARCH PROBLEM STATUS 3.1 Overview of life insurance market 3.1.1 The history and development of Life Insurance 3.1.1.1 The origin of Life Insurance in the world The history of life insurance can