Fraud Identification and Mitigation Flashcards

An underwriter reviews a life insurance application for a large face amount from an elderly applicant. The applicant has a modest, fixed income, and the beneficiary is a trust managed by a third-party investor who is also paying the premiums via a non-recourse loan. Which of the following is the STRONGEST indicator of potential stranger-originated life insurance (STOLI) fraud?

Answer: The lack of an insurable interest between the applicant and the premium-paying investor.

The core of a STOLI scheme is the initiation of a policy for the benefit of a third party who has no insurable interest in the insured's life. [18, 19, 22] The combination of an investor paying premiums and standing to benefit from the death benefit, where no familial or financial relationship exists, is the most direct violation of this principle and the clearest red flag for this type of fraud. [16]

An underwriter evaluating a new personal auto application wants to verify the applicant's reported claims history with previous insurers. Which of the following is the most appropriate industry database to use for this purpose?

Answer: Comprehensive Loss Underwriting Exchange (C.L.U.E.)

The Comprehensive Loss Underwriting Exchange (C.L.U.E.) is a claims history database that enables insurance companies to access consumer claims information for personal auto and property lines when underwriting a policy. [24, 26, 29] The MIB is for life and health insurance, NCIC is a criminal justice database, and D&B reports are for business credit information.

Which of the following is a key mitigation strategy an underwriter should employ after identifying several significant red flags on a workers' compensation application, such as an applicant's use of a P.O. box and a history of frequent claims?

Answer: Refer the application to the company's Special Investigation Unit (SIU) for further review before making a final decision.

The standard and most appropriate procedure for handling a case with multiple significant red flags is to refer it to the company's Special Investigation Unit (SIU). [6, 8, 13] The SIU is a specialized team responsible for conducting in-depth investigations into suspected fraudulent activities, which is a necessary step before a final underwriting decision can be made. [10]

A restaurant owner applies for a commercial property policy. During the application process, the underwriter specifically asks if the property has any uncorrected fire code violations. The owner, knowing there is an outstanding violation for faulty wiring, answers "no." Based on this answer, the policy is issued. This owner's action is an example of what?

Answer: Material Misrepresentation

Material misrepresentation occurs when an applicant provides a false statement about a material fact that the insurer relies upon in its decision to issue a policy or set the premium. [7, 9, 11] By knowingly providing a false answer to a direct question about a critical safety issue, the applicant has committed material misrepresentation. [14]

An underwriter is reviewing a disability income application where the applicant's stated income seems unusually high for their occupation. The applicant has submitted tax documents that appear to have been altered. This situation is most indicative of which type of fraud?

Answer: Application fraud

Application fraud involves deliberately misrepresenting facts or providing false information on an insurance application for the purpose of financial gain. [1, 2, 3] In this case, the applicant is falsifying financial information during the underwriting process to obtain a policy or higher benefits than they are entitled to.

An underwriter observes a pattern where a single insurance agent submits multiple homeowners' applications in a short period. All applications are for high-value homes, list minimal personal property, use a post office box for a mailing address, and request the highest available liability limits. This combination of red flags most likely indicates a scheme to:

Answer: create "paper policies" to set up future staged liability claims.

This specific pattern of red flags—high liability, minimal contents, and an obscured physical address (P.O. box)—is highly indicative of a scheme to create policies on vacant or non-existent properties for the sole purpose of staging future liability claims, such as a slip-and-fall. [21, 23] The other options do not align as closely with this particular combination of indicators.