Keeping Agents Honest—Legally and Ethically
Insurance Networking News, July 2007
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.
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"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."
ETHICS
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."
THE BIGGEST COST?
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."
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