A former insurance agent from Penn Valley, Calif., was convicted of one felony count of insurance fraud and three misdemeanor counts of petty theft for collecting insurance premiums from clients for commercial general liability and commercial automobile insurance and failed to remit the premiums to insurers. A former Allstate insurance agent was charged with a single count of theft, a Class D felony, after an investigation revealed that he had accepted and deposited his clients' checks without applying the funds toward their policies. A Louisiana-based agent was arrested, transported to jail and booked on four counts of insurance fraud and one count of forgery for altering insurance applications to increase the previously agreed upon premium amount, thereby increasing his commission. In one instance, he forged the client's initials to changes without the client's knowledge or consent.All three of these stories graced the news within a week-and-a-half, and are just a few that have recently made headlines. Independent agents seem to be finding more ways to commit fraud and practice unethical business--creating false insurance entities, fraud rings, misinterpreting policies and just flat--out stealing policyholders' money.

Fraud isn't new to insurance carriers--they've experienced it with their policyholders. And though insurers may experience more revenue loss with policyholder fraud, agent fraud and unethical practices produce a number of other problems and challenges, starting with the difficulty of managing a number of agents.

"I can see by the fact that the independent agents represent many companies, and an insurance company using independent agents has so many of those relationships--just by sheer volume, having to monitor that many more representatives is another dimension of the challenge," says Pam Ewing, senior product manager in the Insurance Compliance division of Minneapolis-based Wolters Kluwer Financial Services.

Donald Light, senior analyst with Boston-based Celent LLC agrees. "Independent agents have a more limited relationship with more companies than an exclusive agent, so the carrier is going to take a narrow and specific view of the agent's business actions, and whatever else the agent does [outside of business relating to the carrier] is not the insurance company's business," he says. "If the agent is a bad one--bad in the sense of committing fraud--there can be a horns-and tail-effect, and the company could suffer from image problems when an agent is found to be committing this fraud."

"When claimant or policyholder fraud is discovered, the insurance company probably gets a few positive image points--ABC insurance company reports that its doing its bit to hold down its clients' insurance costs by fighting fraud and putting these bad guys behind bars," says Light. "Whereas, they're less likely to say the same thing about their agents."


Unethical business practices on the part of independent agents also sour a carrier's reputation. Warren, N.J.-based Chubb Group of Insurance Cos. found a way to prevent unethical behavior among its 5,000 U.S. independent agencies. Chubb developed an ethics training program for its independent agents and brokers. Bob Hamburger, vice president of Chubb & Son and manager of agency services for Chubb, sits on a subcommittee for Chubb's educational program-the ethics education committee.

"We built a fairly robust internal educational offering for Chubb employees that is required to ensure that we're all aware of our business code of conduct, and a natural outcrop of that was coming up with an offering that would appeal not just to our internal employees but also to our external producers, because we think it's a very important topic," he says.

The program consists of a half-day ethics workshop, taught by David Schmidt, associate professor of business ethics at Fairfield University's Dolan School of Business. The Chubb Business Ethics Workshop provides participants with an ethical decision framework they can apply to difficult business situations and heightens their awareness of potential ethics issues through case studies.

The first series of seminars began in mid-2006 in different cities around the United States.

In addition to the classroom courses, which are by invitation only, Chubb developed an electronic newsletter on ethics and compliance, which is disseminated to 35,000 individual agency recipients every three months. It's a combination of repurposed classroom content, but the company also provides links to current events in the compliance area.

The line between ethical behavior and fraud is not a fine one. "This ethics class will give agents guidelines on how to make good business decisions," says Hamburger. "It is not a seminar that focuses on how to prevent fraud--the rules you have to follow in order to comply with the law. Some of the vignettes are potential areas of breaking laws and so as we talk these through, producers can see and hear how to handle these situations."

Chubb does make the distinction between compliance and ethics in its classes and e-newsletter. "Ethics is more the gray area," says Hamburger. "You have to have both. Neither unto themselves are sufficient; you can't be compliant without ethics; you can't say you're ethically clean without being compliant."


Many agree with Hamburger: Agents must be both ethical and compliant, because if they aren't, insurers have to pay--in a number of ways.

Respondents to an Insurance Networking News Web poll said loss of revenue due to fraudulent claims payout and carrier's reputation are the most significant downsides of agent fraud, however, the carrier's reputation grabbed the most votes (79%).

Celent's Light agrees. "The most important effect is one that insurance companies don't deserve; a lot of consumers, especially those purchasing personal lines coverage, do not have a clear idea that an independent insurance agent or broker is a different business than an insurance company," he says. "As fascinating as our industry is to ourselves, most people will not make that distinction. A bad insurance agent becomes a black eye for the insurance industry as a whole."

Light adds that even with exclusive agents, a carrier's image can be tarnished, but it is probably more unusual because the insurance companies will have a complete view into what's going on in the agency. "It's harder for the agent to escape the purview of the companies, but in that case you can argue that there is some actual responsibility of the company," he says. "From an ethical and image point of view, you can argue that there is some responsibility of the insurance company."

A more obvious cost of any type of fraud is revenue loss. Agent fraud is not exempt from this, especially because of the negative image it presents; carriers are more likely to spend more to quickly rectify the wrong, says Wolters Kluwer's Ewing. "The insurance company will move quickly to make good for the consumer-typically through paying a claim or refunding money that was paid to the agent but not remitted to the company," she says. "So the impact to the company here is they've assumed all or some of the obligations of having written the policy but they haven't derived any of the benefits that they're supposed to be receiving."


Rather than trying to recover expenses after the fact, most insurers are trying to prevent fraud on the front end. Sarasota, Fla.-based FCCI Insurance Group, an FCCI Services Inc. company, is one of those insurers. "From our perspective, we try to be very selective--in a geographic area, we don't hand out a lot of agency appointments," says Ned Wilson, assistant vice president for planning and treasury at FCCI, which writes business with 560 independents agents.

Celent's Light says the appointment process is where carriers need to start the fraud fight. Exclusive agents rarely collect premiums on behalf of the company, but carriers who use independent agent look to the agency as a means of getting a premium. "In that appointment most of the due diligence is in determining how much business they write, but you also want to conceivably do D&B checks on how financially sound the [agency's] business is. You can conduct credit checks, bank reference checks and perform background checks-has the agent been involved in lawsuits, been arrested, served time in jail?"

Ewing sees insurers conducting their own background investigations-criminal, financial, and license status checks, and relying on the state agency. "The state agency's typical process is to do a background check, which is often a criminal check only," she says. "The feedback we have from our customers says that's just not adequate. They would like to see the states implement renewal based background checks and do it more frequently."

After the appointment process, FCCI is careful with its relationship with its independent agents, Wilson says. He believes that giving its independent agents geographic exclusivity promotes franchise value and therefore the agents have more at stake and don't feel the need to do business illegally and unethically. "I think a lot of companies might be more inclined to shotgun, so there's one on every corner - a Starbucks approach," he says. "You're more likely to get in trouble, because then they're going to be competing with each other; they're going to have no loyalty to you because they'll ask, what are you doing for me?"


The fact is, there are carriers that rely on independent agents, and some independent agents commit fraud and/or perform unethical business practices. But proving agent fraud is more difficult than proving policyholder fraud. "In the agent world, it's hard to create models that will discover agent fraud, such as misappropriation of premium," says Light. "From an insurance company point of view, you might think you're going to get tens of thousands of dollars worth of premium revenue from the ABC insurance agency and suddenly you're getting 30% less. The agent says, 'well we're placing business with other companies because you're not competitive.' There's not a lot of ground where an insurance company can say 'well I don't believe you', or 'let me look at your total book.'"

Looking at patterns of behavior or financial transactions to determine abnormalities is one method of fighting fraud, says Light. If an agent has a particular pattern of submitting business to a carrier that starts to fluctuate up or down, especially down in a significant way, that could be a red flag, he says.

Wilson agrees that watching for patterns to emerge is important, and believes that FCCI's philosophy of fewer agents helps with that monitoring. "Companies that dealt with a lot more agents and smaller policies will probably have to watch for that pattern to emerge, but that all depends on being vigilant and being able to catch it," he says.

Fraud technology is available, though insurers use it mostly for policyholder fraud. But these technologies can be leveraged to discovering agent fraud. FCCI's analytics system (from Cary, N.C.-based SAS Institute Inc.) will find symptoms that look suspicious. "When we're investigating potential policyholder fraud, we bring the agent in to help," says Wilson. "We know the agents involved, so if we start seeing a recurring pattern, we'd go to underwriting."

Special investigative units (SIU) play a large role in all types of fraud--including independent agent fraud. Even Chubb will involve its SIU with its independent agents.

"These are independent agents and brokers, not employees of Chubb," says Hamburger. "So if we do something wrong we do a lot of self monitoring. If the agents and brokers do something wrong and it's brought to our attention, we enlist the support of our fraud investigation unit."


Independent agents can't steal money if they never get ahold of it. "We use almost all direct-bill--sending the bill directly to the policyholder," says Wilson. "Many companies, probably in personal lines, still do give agents a checkbook, and that's asking for trouble. The original notion was to improve responsiveness-personal touch out in the field--but with the technology and electronic funds transfer systems we can have money in someone's hands the same day if needed. As you have new automation and new systems to let you respond quickly and expeditiously and fill your policyholders needs, you don't have to have a checkbook out there. Use your technology to get rid of some of these archaic traditions."

But the fraud fight doesn't stop there. "Direct-bill will take that stream of funds out of the agents hands," says Light. "But an agent could still misappropriate: If that agent completely fabricates the relationship, the policyholder believes he/she has a policy but the agent never tells the insurance company, so the insurance company cannot set up a direct-bill arrangement because the insurance company does not know it has a policyholder. It's good for downstream control once a bonafide policy or relationship has been established."


Numbers aren't available so experts will disagree as to whether agent fraud and unethical behavior is increasing or decreasing, but some will agree that time has been good for agents. "Times are good right now in the property/casualty industry and generally criminal activity will increase during bad times, so my guess is that it's pretty stable or decreasing."

"With the hard market, for the same amount of work, writing the same exposures, premiums over the past 2-4 years have gone up appreciatively and commissions move from premiums," says Wilson. "Agencies are making darned good money. When times are good you don't need to cheat. That said the market is now softening. Carriers need to be more vigilant over the next year or so than they've been during the past 2-4 years. They shouldn't let this experience lull them into being complacent about being watchful as the soft market hits them."

Types of Agent Misconduct

There are many types of agent misconduct:

* Theft of premiums. An agent takes the premiums received from customers. The agent can then pay out any claims that arise from his own pocket or never pay out on claims at all.

* Unlicensed sales. An agent has no authority to sell a particular policy or product, and he/she pockets the commission and premium.

* Policy misrepresentation. An agent misrepresents to customers the limits and extent of policy coverage.

* Fraudulent writings. Since an agent takes care of the writing and filing, he/she has the opportunity to falsify claims and take the money themselves. The following usually happens in conjunction with one another:

* Forged applications

* Forged claims

* Backdating. An agent uses a customer's old accident and creates a claim for it.

Other unethical-though maybe not illegal-sales practices:

* Policy misrepresentation. Misleading a customer to purchase something other than what they are expecting. For example, representing a life insurance policy as a retirement savings account, so instead of receiving interest on a savings account, customers get stuck paying increasing premiums.

* Selling coverage policyholders don't need or want. Agents take advantage of the imbalance of knowledge between them and the consumer. This includes the following four techniques.

* Churning. Dishonest agents might convince people to use the built-up value of their current whole-life policy to buy a "better" policy even though their present life coverage is perfectly suitable.

* Sliding. An agent or insurer slips the customer extra coverage he/she didn't ask for-but does pay for. This can easily add hundreds of dollars or more to a premium. The extra costs can be explained away as simply part of a "package," or the agent doesn't tell the customer about the coverage at all. Motor club memberships, accidental death coverage and guaranteed renewable life insurance are three policies that crooked agents sometimes sell to unwitting policyholders.

* Twisting. An agent may urge a customer to change policies prematurely by "twisting" the truth about the downside. If the customer has an illness, injury or other medical condition, for example, will that "affordable" new health policy refuse to cover it because it's a pre-existing condition?

* Death Spiral. An agent induces customers with an initially low premium rate that increase over time, sometimes to the point were customer can no longer afford it.

* Worthless investments. A customer may be urged to invest in insurance-like instruments. One is promissory notes, in which agents promise quick, high and certain returns for investing, supposedly backed by insurance. Often the promissory notes don't exist; they're just a sham to steal money. Another worth- less investment is one that is guaranteed by offshore companies but doesn't actually exist.

Source: National Association of Insurance Commissioners

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