Insurance fraud in North Korea

The Washington Post describes how the North Korean kleptocracy has raked in millions of dollars through insurance fraud.

...the impoverished and isolated North Korean government has collected hundreds of millions of dollars from some of the world's largest insurance companies on large and suspicious claims for transportation accidents, factory fires, flood damage and other alleged disasters.

...For years, the U.S. government and law enforcement agencies around the world have documented what they describe as state-sponsored criminality in North Korea. They have linked the North to illegal manufacturing and trafficking of drugs ranging from heroin to Viagra, as well as to expert counterfeiting of $100 bills and the production of high-quality counterfeit cigarettes.

Much less has been disclosed about North Korea's international insurance claims, in part because they have been cloaked in legal settlements by firms with no interest in highlighting their losses.

The scheme involved reinsurers who backed up policies written by the state-owned Korean National Insurance Corporation (KNIC). Initial claims would be adjudicated in North Korean kangaroo courts and then passed on to the reinsurers. The KNIC appears to have profited through outright fraud and by skimming money that should have gone to victims. Those profits were then funneled to the North Korean regime.

The obvious question is how did the North Koreans lure the reinsurers in. A defector from KNIC explains.

While working for North Korea's insurance monopoly, Kim Kwang Jin said, he and other managers had a tightly focused mission: to find reinsurance companies and brokers in different parts of the world who would accept high premiums to reinsure KNIC's policies.

...According to Kim, KNIC would target a different potential disaster and a different reinsurance company each year. "We pass it around," he said. "One year, it might be Lloyd's; the next year, it might be Swiss Re; and the next, Munich Re."

A reinsurance expert added

"They pay good premiums, and they are very sophisticated, very clever," he said. "They would divvy business up into very small bites and use different brokers in different places. The division of losses was such that it would never be apparent to a prospective reinsurer just how bad the business was."

Thus, each reinsurer faced a high potential reward. And although each also faced an increased risk, the individual policies were small and diffuse enough to hide the risk.

Because of the publicity of some recent cases, reinsurers appear to be wising up. Nevertheless, stockholders and investors in reinsurance companies should insist that their companies cease all business with KNIC.