In reality, the insurance professionals and agents have a lot to do with the projection of a certain image toward the public. Mainly because the insurance professional initiates contact with a prospect, determines the prospect's need for insurance, recommends and then implements the proposed plan. The first impression is always the most lasting. Coupled with the opportunity for a long-lasting relationship with the client, the first impression becomes that much more critical.
The insurance professional represents an industry that is loaded with technical information. Public perception will be severely hampered by unethical agents. Just as we stated in the first chapter, the insurance professional has two basic ethical responsibilities to the public:
1. To inform the public about insurance with the utmost, highest level of professional integrity; and
2. To strive for the highest level of professionalism in all public contacts in order to create and maintain a strong positive image of the industry.
Throughout this chapter, we will focus on the above responsibilities and look at some of ethical practices, which have tarnished the industry. We will also discuss property and casualty insurance, and the manner in which it is marketed to the public.
Property casualty insurance is usually classified by several major lines of insurance: fire insurance and allied lines, marine insurance, casualty insurance, multiple line insurance and fidelity and surety bonds. Property insurance, such as fire or homeowners policies, covers the loss or damage to real estate or personal property from fire, lighting or other covered perils. Marine insurance (also called transportation insurance) covers goods in transit against pure risks related to transportation, whether those goods are shipped over land (inland marine) or water (ocean marine).
A broad field of insurance called casualty insurance encompasses almost everything not covered by fire or marine insurance: automobile insurance, general liability, burglary and theft, worker’s compensation, glass coverage and other miscellaneous lines
The agent may also sell multiple-line or package policies that combine property and liability coverages. Finally, an agent may sell fidelity and surety bonds that provide the insured with protection against losses caused by the dishonest or fraudulent acts of employees or that provide monetary compensation in the case of a bonded person’s inability to perform certain acts, such as the completion of the construction of a building.
PROPERTY – CASUALTY INSURANCE MARKETING SYSTEMS
Property and casualty insurance is marketed by independent agents, exclusive agents or captive agents, and brokers. Exclusive agents sometimes offer insurance from the insurer as a lower cost, due to lower commissions and reduced expenses resulting from centralization of underwriting, policy issuance and claims processing in the direct writing systems. Independent agents and brokers offer insurance consumers the most options, because they work with multiple insurers. The agents have a wider choice of coverages, prices and services for their policyholders. Historically, independent agents have been the predominant producers in this field.
Many agents belong to a marketing system known as the Independent (American) Agency system (sometimes called the Big I). The Independent Insurance Agents of America (IIAA) has helped consumers become familiar with the Big I through advertisements that tout the value of the independent agent as the more than one company agent. The independent agent may represent any number of insurance companies on a commission or fee basis for the business produced. These agents are not employed by the insurance companies they represent. They are independent business people who represent several insurance companies, pay all their own agency expenses and make all decisions about how their agency operates.
Consumers who purchase insurance through independent agents are considered by both agents and insurers to be the agents customers rather than those of the insurer, and the insurance company does not generally deal directly with the insured.
The exclusive agency system is prominent among large property-casualty insurance companies, exclusive or captive agents represent one insurance company or group of companies only. These agents are paid a salary, commission or a combination of both. Under restrictions imposed by the insurer, the insured is considered to be the companys client rather than the agents. Companies using captive agents own and control the account, policy records and renewals. If the agent relationship or employment of a captive agent terminates, the agent loses all rights and interest in the renewal business and related commissions.
A direct writer is an insurance company that sells its policies through employees or agents who represent it exclusively. These agents usually receive a salary, or a salary plus commission for the business they produce. Some insurers, such as specialty fire insurance companies that emphasize loss prevention in insuring large, well established industrial and institutional properties, negotiate their contracts primarily through salaried representatives in direct contact with executives of the business being insured. A direct writer maintains complete control and ownership of its policies and renewals.
Without reviewing the staggering dollar amounts that the insurance industry collects each year it is important for all insurance professionals to realize that insurance plays a major role in the lives of most people in the United States.
Life insurance attempts to protect the breadwinner of the family in case of a premature death of the breadwinner. Disability insurance protects the "money machine" in case of a living death. Property insurance protects homes and business from loss due to fire and natural disasters. Liability coverage protects individuals from loss due to accidents. Medical insurance not only provides a cushion against economic disaster, but in many instances helps speedy recoveries because patient's can focus on getting better and not paying expensive bills.
The uniqueness of the insurance industry is that, although insurance affects so many people, very few really know that much about it. It is this unawareness that has caused many consumers to become negative when it comes to insurance. By being ignorant as to insurance, consumers have "left the door open" to those unethical insurance agents who take advantage of people by simply inducing them to buy policies that are either unnecessary or do not live up to the agent hype.
In a way, this activity is a two-edge sword for the insurance professional. On one hand, the professional, since she/he works in the same industry, must be able to answer for the "sins" of their brethren; on the other hand, the professional insurance agent, by offering the public an honest and fair explanation of the policies and services that he/she represents, will certainly distinguish (and distance) themselves from the unethical agent. As the old saying goes "the cream always rises to the top!
There are two types of ethical problems that have been prevalent in the industry:
1. Deceptive use of advertising material, and
2. deceptive sales presentations.
Two facts cannot be denied about the insurance industry and the general public:
1. As noted, the average insurance buyer knows very little about insurance and relies on the advice and recommendation by an insurance agent.
2. By the time a consumer realizes that a policy does not quite live up to its advance billing, it could be too late to change.
The potential for deceptive advertising by both companies and agents is significant, with severe consequences to the consumer.
The states have enacted laws regulating insurance advertising. The foundation for many of these state’s laws is the NAIC Model "Unfair Trade Practices Act" which cites false advertising as an unfair trade practice and it is strictly forbidden. Advertising, includes print and radio material, descriptive literature, sales aides, slide shows, brochures, sales illustrations, policy illustrations, TV adds, etc. Any kind of communication or presentation used to promote the sale of an insurance policy would be included.
The purpose of the NAIC Model Act was to establish some badly needed guidelines to ensure that both insurance companies and their agents promote their products properly and accurately, without outlandish exaggerations. The act forbids any misrepresentations of the benefits, terms, conditions or features of any insurance policy, including dividends. It also bars any misrepresentation of an insurer's financial condition or its legal reserve system. It also prohibits the names or titles of insurance that do not represent their true character. Life insurance advertising cannot use the terms "investment,” "savings" or "profit" in a misleading way. Health insurance advertising must disclose provisions regarding renewability, cancellation, termination or modification of benefits.
The burden of compliance with state insurance advertising law falls on insurance companies, since most advertisements or promotional pieces, regardless of the writer or presenter, are considered the responsibility of the insurer whose policies are being advertised. In reality, most of the advertising and sales literature an agent uses is prepared by the insurer with the legal department's input. The ethical issue is not the material issue itself, but how the material is used.
The fact remains that many unethical agents still prepare their own promotional or advertising copy and use it in the marketplace. With the advent of sophisticated computer and printing systems, one can imagine the copy that is being used on the public. From the agent's standpoint, most home offices tend to be institutionalized, with little “sizzle”, therefore making insurer promotions useless. Also, when agents submit their own advertisements to the insurer, long time delays occur. As noted, the agent is under pressure for some level of production and therefore attempts to gain a competitive edge using his/her own devices. The fact remains that with the litigious society we all live in today, it is best to act ethically and use home office copy when marketing.
1. All insurance advertisements must be truthful and not misleading in fact or implication. Words or phrases that are clear only through familiarity with insurance terminology cannot be used.
2. All information required to be disclosed (i.e., exceptions, limitations of benefits and exclusions from coverage) must be printed conspicuously next to the statements to which the information relates and displayed in such prominence that it is not minimized, confusing or misleading (in short, no fine print).
3. Deceptive words, phrases or illustrations may not be used to describe a policy, it’s benefits, the losses to be covered or premiums payable.
4. Testimonials must be genuine, represent the current opinion of the author, be applicable to the policy advertised and be accurately reproduced.
5. Disparaging remarks or statements about another insurer, agency or agent of another insurer, their products and services may not be used in any advertisement.
6. The identity of the insurer most be clear in all advertisements, as well as the name, address and phone number of the agent placing the advertisement.
Deceptive sales presentations and bogus use of sales illustrations have created numerous problems for the industry.
The question remains. What constitutes a deceptive sales presentation? Any presentation that gives a prospect or client the wrong impression about any aspect of an insurance policy is considered deceptive. Of course, with such a definition, it is difficult for the presenter to anticipate the impressions one will receive with a particular presentation. The fact remains that an ethical insurance professional will implement the golden rule when making a presentation.
Probably the best way to determine if a presentation is deceptive is if full disclosure is not made. Any presentation that includes misleading or inconclusive product comparisons is considered deceptive. Deceptive sales presentations can be quite outlandish. For example, a comparison of a term policy and a whole life policy based on premium rates is misleading and incomplete. An example of a common deception would be explaining life insurance as a "tax shelter. Yes, the cash values will accumulate tax deferred, but failing to mention that premiums are not tax deductible leads to deception.
The health insurance policy that is presented by failing to explain conditions under which the policy is canceled and the premium increased is a form of deception. A popular form of deception is using a policy illustration that shows excessive projected dividends or totally unrealistic interest rate assumptions or presenting current value as if they were guaranteed.
Computerized policy illustrations have led to many deceptive policy illustrations. The easy wy in which variables may be utilized appear to be too much temptation for the unethical agent. In general, too many insurance sales are based on pie-in-the-sky numbers and assumptions instead of real needs and benefits.
The ethical agent will always attempt to perform a needs-based evaluation of a client's financial situation before running a series of inflated policy illustrations. When a policy illustration is used, the ethical agent will take the responsibility for knowing the assumptions it contains, and will be sure these values are realistic and credible before they are used in any presentation form.
Because of the growing problems with policy illustrations the American Society of CLU and CHFC developed specific guidelines for such use. The society maintains, and as ethical standards require, deceptive policy illustrations have no place in the insurance industry. The prospective insurance buyer is deceived. Such deception is revealed when that buyer makes a claim for benefits that turn out to be limited or nonexistent.
The past five years has seen numerous insurance scandals. The end result is diminished confidence in the insurance industry as a whole, which makes it very difficult for all to practice insurance. Another effect of such scandals is that increased legal actions by individual clients causes the entire industry to be further scrutinized by government, local state and federal.
In many instances, such scandals could have been avoided through client education.
In other instances problems could have been avoided through the adherence to the professional codes discussed earlier. A major problem in the industry is solvency. With recessionary forces impacting the insurance industry, some companies found it difficult to maintain business as usual.
It seems every night, a picture and interview of retirees losing annuity checks comes into our living rooms. Questions arose concerning the ethics of many agents. Did they use these companies because they paid higher commissions or rewarded such production with luxurious trips? Did the management of these companies invest wisely, or were risky bonds the primary cause of many insurer failures?
The solvency crisis had a profound effect on the public. Policyholders were forced to evaluate the stability of the insurance industry and the ability of the industry to serve their needs came into question.\
In some cases replacement has merit but these cases are not usually publicized. The public has heard of the situations where policy replacement was not in the best interest of the client. New terms became familiar public concerns, twisting, churning and piggybacking stories have been presented to the public. Unethical insurance agents seeking out policyholders who have build up cash value within older policies only to purchase newer, fully commissionable policies. The result was once again, government attention. State regulators are giving closer attention to the replacement issue. It seems that state governments are telling the insurance industry, "if you cannot police yourself, we will do it for you”.
Insurance agents have recently made the term financial planner popular. Instead of stating they are insurance agents, some have given themselves a promotion to financial planner or retirement representative.
These same agents have a tendency to describe their product as a "savings vehicle" or "retirement plan.
Such practices confuse consumers. These practices have created an onslaught of complaints to insurance departments with crackdowns by state regulators.
Most agents have the proper licenses for the products being sold. However, a few insurance representatives did not when they ventured into a new field, selling stock brokerage limited partnership products. The biggest problem was they did not understand the product they were pushing on an unsuspecting public. Many consumers were sold high-risk products although they preferred low risk investments. One can imagine the results when these investors discovered that valuable retirement savings had evaporated. The image of the insurance industry was further tarnished!
FRAUD
An age-old problem has always been forgery in the industry. Many agents have signed a client's name to some type of document in order to facilitate the approval process. Signing a client's name to a document is never proper. Throughout
time, this has been nicknamed "windowing. To say the least, this practice, which has been written about in various newspapers, has done nothing to help the reputation of the insurance industry.
NO NEEDS SELLING
Agents are failing to identify customer needs. Because these needs are not identified, customers are being sold products which just are not suitable for their needs. One of chief reasons for this misdeed is that agents just aren't educated enough. As noted before, education and increased technical skill will "professionalize" an insurance practice.
Another reason for the selling of unsuitable products includes trying to make the easy sale with a particular product simply because it has attractive benefits. Other agents sell unsuitable policies because of the high commission to be gained from such products.
REDLINING
Many insurers argue that they need to control potential losses and they should be permitted to limit coverage or even refuse to write homeowners coverage in areas where losses have been frequent or severe. However, under the provisions of the Fair Housing Act, a licensed individual or company may not refuse to provide homeowners or renters insurance solely on the basis of the geographical location of the insured’s property. Rejecting coverage solely because of a risk’s geographical location is known as redlining. The practice of redlining occurs when a company literally “draw a red line” around a specific geographical location and refuses to insure properties located within its boundaries.
When a coverage is issued in a redline area, another form of discrimination takes place that involves charging higher premiums for comparable policies, charging higher rates for inferior policies and refusing to provide replacement cost coverage on the structure and contents of home in minority neighborhoods. Some insurers and their agents justify their refusal to write coverage because the homes in these neighborhoods are too old or their value is too low.
The U.S. Department of Housing and Urban Development (HUD) prosecutes insurance companies that intentionally engage in practices that have the intent and effect of denying, limiting, or restricting home owners insurance for people living in minority neighborhoods throughout the United States.
As part of its ratemaking process, insurance companies use there past loss experience and industry statistics. For example, in addition to the insurer’s own loss data, industry statistics on hurricanes, tornadoes, fires, crime rates, the cost of living, etc. are also used as part of the data to establish premium rates for a type of insurance. Actuaries in property-casualty insurance have also used gender in determining rates for automobile insurance premiums. They contend that men and women should pay different rates because their loss experiences are different. Based on its statistics, the insurance industry contends that female drivers should pay less for their automobile coverage because they have fewer and less expensive claims than male drivers. However, some consumer groups, such as the National Organization for Women see gender-based rating as discriminatory, arguing that under this system women (who generally live about eight years longer then men) will naturally pay more for all forms of insurance over their lifetimes than men. They have proposed that unisex rating, which means that the pooled loss experience of both males and females, is used to calculate the rates charged, be used for all types of insurance.
Unisex rating is now used in many group life and health insurance plans that are experience rated.
Good business practices can be learned. A study of the recent scandals that have beset the insurance industry indicate that many times an agent failed to realize that his/her actions would be considered unethical. For example, a new agent, unfamiliar with the technical requirements, advises a client that a retirement account may be funded with unearned income. Bad advice? Absolutely! Done purposely? Probably not! Net result: The client could be called down for an audit, slapped with a tax bill and has nothing but ill feelings for the agent, insurance company and the industry as a whole. Was this action unethical? Yes. Even though it was not done purposely, it still was incorrect and quite unethical.
The point is that the agent should have called upon the agency or home office technicians for help in this case. Taking a retirement course would have helped also. An agent should recognize that instincts should not be the only guide in balancing customer needs. Agents should be familiar with professional codes and if needed, should seek advice on the application of ethical principles. Ignorance does not make one insulated from being unethical. Ignorance is only an excuse! Education adds to expertise. It also increases ones awareness of ethical questions that will arise in various situations that the insurance profession will encounter while building his/her practice.
There have been many studies performed by the insurance industry as a whole to determine the proper ways an insurance professional should deal with the public. We have narrowed the results to three basic obligations.
One. Place the client's interests above self-interest. Professionals are loyal to their clients and are dedicated to protecting their client's welfare. This means they remain independent and objective in their judgment and evaluations and recommend plans or policies that most benefit the client. When a policy-owner asks for help or advice, the agent is quick to follow up, embracing client service as an important responsibility.
Two. Being dedicated to the insurance industry and supportive of all its member companies and representatives. A true professional aligns himself/herself with colleagues and
competitors alike, knowing that all represent the same products and services, and that all should share a commitment to the purpose and goals of these products and services.
Three. The insurance professional is obligated to offer quality plans and represent quality companies. A professional agent represents only those companies with solid financial standings and accurately informs prospects and clients of an
insurer's financial position as part of the sales process.
The professionals obligation is not to make disparaging remarks about the competition, fail to be objective with others in business dealings, fail to provide prompt, honest answers to client's questions and fail to provide products and services of the highest quality in the eyes of the customers.
As we conclude this chapter, the insurance professional must remember that building a successful practice takes time. By making a long term commitment to the business and realizing that every business will have "peaks and valleys" the insurance professional will better adapt to the business. It is important to understand that the foundation of the business is the ethical behavior of the principals involved.
The American College's Charter Life Underwriter (CLU) pledges probably sums up this philosophy best as it states:
"In all my professional relationships, I pledge myself to the following rule of ethical conduct: I shall, in light of all conditions surround those I serve, which I shall make every conscientious effort to ascertain and understand, render that service which, in the same circumstance, I would apply to myself.
CHAPTER 4 - PRACTICE QUESTIONS
1. What is/are the main reason(s) the insurance professional has a lot to do with the projection of a certain imagine to the public?
A. The professional makes the initial contact
B. The professional determines the prospect needs
C. The professional implements the proposed plan
D. All of the above.
2. The insurance industry is loaded with:
A. Technical information
B. Unethical agents
C. Captive agents
D. Deceptive advertising material
3. The insurance professional has an ethical responsibility to the public:
A. To deceive the public
B. To out smart the public
C. To strive for the highest level of professionalism
D. To ignore the Unfair Trade Practices Act
4. The coverage that protects the breadwinner from premature demise would be:
A. Disability Insurance
B. Life Insurance
C. Property and Casualty Insurance
D. Health Insurance
5. One of the biggest problems in the insurance industry is:
A. Deceptive advertising material
B. Ethical agents
C. Too many products
D. Not enough agents
Unit 4 – Answers
1. D
2. A
3. C