What are challenges that you see at claim time involving underwriting practices?
The first thing that comes to mind is the importance of documentation and having consistent practices in place. As the gatekeepers at the back end of the process, we are often trying to put together pieces of a puzzle and this often happens years after the policy was underwritten.
Just as the claims handling is often scrutinized, so is the underwriting and the sale of the policy, so it’s important to clearly document the file of the risk assessment especially when waiving a requirement or not pursuing an APS, for example. Consistent practices and adherence to the company’s underwriting guidelines is particularly important when a claim is being contested. One of the more common causes of action in contested claims matters that we typically see is the allegation that the insurer did not engage in fair treatment or that it did not act in good faith in accordance with its policy provisions or established underwriting practices.
Since we obviously have 20/20 hindsight, upon review of the underwriting, sometimes it can look as though the underwriter was going down a certain narrow path and did not look at other more significant concerns. For example, focusing too much on the medical impairment of the risk and not enough on the applicant’s finances or the financial justification for the amount of coverage on the life.
Since misrepresentation or fraud often begins at the time of underwriting, it’s important to be mindful of common red flags that should not always be excused as innocent mistakes or omissions but may be a lack of candor on the part of the applicant and/or the agent/broker indicating possible anti-selection or fraud. It’s also not unusual to find some minor disclosure or hint of treatment or a condition material to the risk at underwriting that was not followed up on. In most instances, the company has waived its rights to contest at claim time.
What are some common elements of fraud and misrepresentation?
The burden is on the insurer and, in most states, the insurer must show that the statement was false, that it was material to the risk and that the insurer relied on the statement when approving and issuing the policy. The burden is a heavier one when the insurer must also prove fraud or that the false statement was made with the intent to deceive the insurer, as is the requirement in Texas, South Carolina, Arizona, Pennsylvania and a few other states.
I would also point out that certain states require that to contest a claim for misrepresentation, the insured’s misrepresentation must be related to the actual cause of death, referred to as “causal- connection.”. Kansas, Missouri, Arkansas and Oklahoma are a few examples.
What are some common claim trends you have seen in recent years?
Aside from the COVID-19 related deaths, we are seeing more suicide claims, homicide claims and deaths abroad/foreign death claims. These require more review and analysis. We have also seen an increase in older issue age claims as well as misrepresentation on applications and the litigation that often follows. As a reinsurer, we have also seen financial underwriting and over-insurance concerns, which includes jumbo limit breaches impacting automatic reinsurance coverage.
Although underwriting practices have been adjusted and tightened in recent years, I would also add that stranger-originated life insurance (STOLI) is still very much a concern at claim time. We do have some clients actively contesting (and winning) on claims outside the contestable period when in favorable jurisdictions, such as New Jersey and Delaware. A change in ownership to third party investors after the expiration of the two- year contestable period is one of the many red flags of possible STOLI.
Do you see any claim concerns regarding automated underwriting programs?
More analysis needs to be done, but we do have some reinsurance clients seeing poor experience in duration 3 and older claims. This suggests that many policyholders with unreported health concerns are able to “beat out the contestable period.”
There have also been some concerns about the underwriting engines used to flag inconsistent answers by an applicant. For example, suppose an applicant answers “No” when asked whether he/she has seen a doctor in the last year but reports being on a prescription medicine. That might prompt further review by an underwriter; however, the application was not kicked out for review.
As a final thought, I think it’s important that the algorithms for these automated underwriting engines get reviewed periodically to ensure they are working as intended. Experienced claims people should be involved in that review as well as the review of application questions, plan design and even policy wording.
