Quality of Business: Trust but Verify

1. Quality of Business: Trust but Verify Scott Grandmont CLU, FALU, FLHC, FLMI Assistant Vice President & Chief Underwriter Individual Underwriting & Issue

2. NEHOUA ANTI-TRUST STATEMENT Policy Statement of Anti-Trust Compliance The Northeast Home Office Underwriters Association (NEHOUA) is a voluntary association of individual members. The object of the association is to advance the knowledge of sound underwriting of life and disability insurance risks. Because of the nature of its business – bringing together competitors for the purpose of discussing important facts and issues in life and disability risk appraisal – NEHOUA and its members must at all times be sensitive to both the spirit and letter of anti-trust laws, which broadly stated, prohibit any activities that might lessen or tend to lessen the desirable competition of the Association’s constituents. It is the policy of NEHOUA to avoid all activities which could or might appear to violate any anti-trust competitive law. The NEHOUA will not, through its programs, policies or practices, suggest price fixing. Pricing suggestions which are prohibited include suggested extra ratings or proposed business actions regarding individual applicants for insurance. “Price Fixing” can be broadly interpreted and any semblance of it must be absolutely avoided.

3. Agenda • Quality of Business: Enterprise Strategy • Propensity to Cheat. • Data verification • STOLI • Questions • References & Acknowledgments

4. This was the signature phrase used by Ronald Regan when he spoke publicly with the Soviet Union. At the signing of the Intermediate-Range Nuclear Forces Treaty (INF), in 1987, Mikhail Gorbachev remarked that “You repeat that at every meeting," To which, Reagan answered "I like it!." “Trust, but verify”

5. Quality of Business Initiatives In this context we are talking about the QB in terms of fraud prevention. The goal of Quality of Business Initiatives is to ensure that risks we place on our books meet organizational expectations for quality and risk tolerance. As management of this risk doesn’t reside in one functional area, coordination of these efforts needs to reside with someone (or group) vested with the authority and capability to span all boundaries. Enterprise QB provides coordination, direction and the communication necessary to optimize the capabilities of individual QB efforts resident in each functional area.

6. Ease of Doing Business & Quality Assurance Our clients and producers are valued stakeholders in the enterprise. The quality vs. ease of doing business paradigm is at best, seen as a trade-off….and at worst, seen as a zero sum game. Additional requirements & processes come with benefits in the form of protective value and certainly costs in terms of actual study costs, lengthened underwriting time and potentially degraded Producer and customer experience. A carefully crafted approach to tactical QB efforts can help ease the tensions experienced in this trade-off. Transparency, stakeholder buy-in and communication is essential

7. The Power of Enterprise-Wide QB • Ensures that process and practices are in alignment with Company strategy. • Operates across functional silos • Leverages business intelligence and capabilities • Aggregates data, identifies trends and reacts • Sets policy and practice • Learning organization • Coordinates enterprise wide QB efforts in the most efficient, sustainable, agile, and adaptable manner possible.

8. QB: Synergy Among Units is Essential

9. Why consider QB Initiative? • Life contracts priced largely on the basis of statements of good faith • Experience demonstrates a certain level of both Medical & Financial Misrepresentation. • 2 year Contestability Period • Inappropriate Producer Activity • Reputation Risk • Anti-Money Laundering (AML) obligations • Gauge the effectiveness of internal processes and controls • Favorable impact on long-term profitability

10. What is it? Who does it serve? Visible statement of practices for internal and external constituencies Actionable Defined process Backed up with training and screening Benefits include: Bright-line understanding of company position Defined expectations Defined process Sentinel Effect. QB Should Include an Anti-Fraud Policy

11. Authority Commitment Clear guidance Transparency Communication Agility Vigilance A well orchestrated QB initiative offer a means to leverage the most benefit from the efforts of individual business segments. If properly calibrated, it serves to ensure that practices and processes are delivering on organizational expectations There is no silver bullet for QB organizations or Und Practices. Each require custom crafted solutions for your unique environment. Proper execution requires commitment, communication and continual process improvement. Making QB Initiatives Work

12. The Propensity to Cheat • According to a survey reported in FRAUD FOCUS (Winter 2008): The percentage of people who think it is unethical to misrepresent facts in an insurance application to lower premiums fell to 82% in 2008 vs. 91% in 1997. • Meaningful statistics on the prevalence of misrepresentation or other types of fraud are very sparse. • I would like to credit Jeff Shaw, Executive Director of the Life Insurers Council (LIC) with turning me on to the research performed by Professor Dan Ariely on the topic of cheating. Jeff has previously spoken to the industry on this topic.

13. Propensity to Cheat: Dan Ariely Professor of Behavioral Economics at Duke University, a visiting professor at MIT’s Media Laboratory, and a founding member of the Center for Advanced Hindsight.

14. Most people will “cheat a little” if given the opportunity

15. Most people will cheat more if compensated with something of “indirect value”

16. People did not cheat at all when asked to think of something honorable prior to testing When asked to write down names of 10 books recently read, cheating results were the same When asked to write down the Ten Commandments, results were identical to control group – no cheating When asked to consider a non-existent “Honor Code”, results were identical to control group – no cheating

17. Interesting. What Can We Do With This? • Study findings are compelling. • The data set in an insurance application is largely statements of good faith….we verify only a small subset. • Perhaps the incidence of misrepresentation can be partially mitigated by introducing the proposed insured to our “code of honor” prior to completion of the application. • Sentinel Effect.

18. 75 Year old male, 5 Million UL Comm IR: Confirms income & NW on the part one…but CPA refused to verify fin data A letter from a second CPA comes in, looks official, contains data…but short on credibility. Website listed on letterhead is not a valid address. CPA is not listed as licensed on state website The Not So Good: Pinch-Hitter/CPA Scenario

19. The Bad: Too good to be true-Scenario 70 Year Old Female, $5 million dollar UL for estate preservation. Cites $36 million dollar net worth Commercial IR: cites a $2.6 million dollar net worth with detailed asset class break-down financial data confirmed by CPA. Email from Producer: Client must have misunderstood the questions, additional details to follow Letter from Tax Attorney: compelling letter, long relationship, detailed description of assets and estate planning strategy. Coverage issued. During a subsequent book of business review on this Producer, it was discovered that the Producer and this Tax Attorney were systematically misrepresenting clients financial position.

20. The Ugly: Taken from the headlines 2006 – Two senior citizen women took out 12 life insurance policies worth $3M on two homeless men in California. The women listed themselves as the beneficiaries of the policies. The women then had vehicles run down the men in dark alleys at night, killing both of them. Both women were convicted in April 2008. http://articles.latimes.com/2008/apr/17/local/me-olgahelen17 Coalition Against Insurance Fraud, FRAUD FOCUS (Winter 2009)

21. So, now what? • If a suspicious case is identified, review the entire fact pattern in detail. • Seek amplified requirements & data verification where possible. • Look for trends: this case, this producer & beyond • Deal with producers that aren’t a fit

22. The Tools

23. This is what we get as underwriters • Application • Informal • Application • Paramedical Exam • Inspection Reports • MIB • Rx database search • APS • Brokerage statements • Financial Supplement • CPA Statements • Trust Documents • Producer • Producer information (i.e. reports) • Agent Cover Letters

24. Legal Name DOB SSN Primary address Telephone number Title to Real Estate Relative Value of Real Estate Motor vehicles Registered Income Assets Driving record Bankruptcy/judgments/liens Criminal records Professional Licenses Insurance Activity Prescription History (incl. md name and fill date) Affiliations News Articles This is what can be verified

25. Verify Everything on Every Case? Absolutely not! • Craft an amplified requirements and data verification strategy tailored to your unique environment (product type, demographic, face amount, distribution partner, etc…) • One strategy might be to deploy amplified requirements and data verification at larger face amounts…but default to this protocol when warning flags are hit (i.e. discovery of discordant medical or financial information). • Understand what you are pursuing and determine (in advance) what you are going to do with that information. • Understand the trade-off between what is gained in data verification and the impact from a cost, time and customer experience perspective.

26. Web Sites & Resources • GOOGLE.COM Multi-purpose • ZILLOW.COM Real Estate Values • ANYWHO.COM Phone Numbers & Reverse Lookup • WWW.AICPA.ORG Is your CPA licensed? • ACCURINT.COM (aka Lexis Nexis (AKA Choicepoint)) Public records of all sorts ($) • DnB.com (Duns & Bradstreet) Company research ($) HOOVERS.COM (a D&B company) Company research (some free info, $) Other Sources SEC (EDGAR) Google Earth Social Networking Sites Blogs Web Groups Rx databases ($)

27. Accurint - Comprehensive Report Information • Comprehensive Report Summary: (Click on Link to see detail)        Bankruptcies:          None Found       Liens and Judgments:          None Found       UCC Filings:          None Found       Phones Plus:          1 Found       Driver's License:          None Found       Address(es) Found:          0 Verified and 9 Non-Verified Found        Possible Properties Owned:          5 Found       Motor Vehicles Registered:          None Found       Possible Criminal Records:          None Found       Professional Licenses:          None Found       Possible Associates:          3 Found

28. Copies Of Individual Tax Returns Available On-Line Using IRS Form 4056-T

29. Example: The Trouble With Net Worth • Quantifying Net Worth can be difficult. • Not reported independently. • Recent incentive to inflate financial position • Strategy: build support for net worth through data collection, verification and inference • Ask: Does the data gathered on each of the following hang together? • Net Worth • Income • Primary Residence

30. Traditional Tools Application Commercial Inspection report Copy of the Needs Analysis Statement of Financial Position from CPA Financial Questionnaire Tax Returns or Financial Statements The value of verification Supporting documentation for assets Verify Real Estate holdings @ Zillow Verify CPA in good standing Secure Tax returns on-line Accurint Report Contestable Financial Supplement Sentinel Effect With Income, Assets and Real Estate verified you can make your decision with confidence Example Net Worth: Continued

31. My Obligatory STOLI Slide NAIC & NCOIL Model Acts (25 enacted, 13 introduced, 12 nada) Dead, Dormant or Seeking greener pastures? Convertible Term on older age clients (Term to Cash programs) STranger Initiated Reinstatement: (STIR) Do we have the right mechanisms in place to view and react to this?

32. STOLI Legislation Map

33. Conclusion: stunning or otherwise • A well orchestrated QB initiative offer a means to leverage the most benefit from the efforts of individual business segments. • If properly calibrated, it serves to ensure that practices and processes are delivering on organizational expectations • There is no silver bullet for QB organizations or Und Practices. Each require custom crafted solutions for your unique environment. • Proper execution requires commitment, communication and continual process improvement. "By failing to prepare you are preparing to fail."— Benjamin Franklin

34. Questions?

35. References & Acknowledgments • Risky Business, Suanne Musser, VP Claims & Liability Mgt Swiss Re LOMA Resource Magazine, June 2009 –background • Predictably Irrational, The Hidden Forces That Shape Our Decisions, Revised Edition, Dan Ariely, Harper Press 2009 • Jeff Shaw LOMA/LIMRA: background & guidance • Jim Davis, VP Underwriting, Phoenix: background & guidance • Jeff Backofen, AVP Underwriting, Mass Mutual: Frequent user of the “trust, but verify” phrase and Ronald Regan fan. • Richard Elomaa, SIU, Phoenix, background and guidance • Wikipedia: Regan quote and picture