CHAPTER FIFTEEN
Without a doubt, the most important duty that an insurance professional has is to look out for the
welfare of his/her clients. Even though an insurance agent technically is an agent of the insurance
company, serving the best interests of the policy-owner does go hand-in-hand. These interests are
not in conflict. By recommending the various products offered by the insurance company along
with the promotion of the various needs-based selling, the policy-owner is best served by both
parties, the agent and the insurance company.
Before an individual becomes a policy-owner, he/she is a prospect. To convert the prospect to a policy-owner and then to a client entails three basic steps. First, the client must be sold to his/her needs, and not what the agent or insurance company desires to sell. Second, the agent must approach his/her profession as one of being more than a job, thus additional education is needed for the agent to be a true professional. Third, the agent must provide quality service after the sale in order to convert the policy-owner into a client.
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. The insurance professional has two basic ethical responsibilities to the public:
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.
The application process is an important first step in the selling of property and casualty insurance. All of the information submitted on an insurance application has a direct bearing on whether the policy will be issued as requested, whether the application will be rejected or whether another policy will be offered by the insurer.
Consider for example, a situation in which an agent does not disclose that the applicant for a homeowners policy is a retired bear trainer who kept a bear as a pet. The agent knows that if this information were revealed, the insurer would surely decline to issue the policy, leaving the prospect uninsured. Believing that it is in the prospect’s best interest to have the insurance, the agent completes the application without noting the bear’s existence. The agent explains to the prospect that omitting this “small detail” will keep the premium down and the applicant gratefully signs the application. Coverage is issued as a standard homeowner policy.
Six months later, a neighbor is attacked and injured by the bear. In all probability, the insurer will deny the claim, citing concealment. Rather than receiving protection under the policy, the homeowner is likely to receive a cancellation notice. What benefit did the policy provide? What service did the agent render?
This example illustrates the need for precision and accuracy in completing the application. It is vital that an agent understands this, and explains the need for full disclosure to a prospective insured.
ISSUING BINDERS
An agent who has been given binding authority may immediately bind the insurer on the risk. A binder is a written or oral acknowledgement that immediate coverage is temporarily in effect pending issuance of the policy. It has the full force and effect of the policy.
The binder will contain a time limit, the name of the insurer, the amount of insurance, the perils insured against, the type of insurance, a list of exclusions and so on. A copy of the binder should be sent to the insurance company immediately so there is no misunderstanding by either the insurer or the insured as to when coverage takes effect.
Every agent or broker needs to engage in some type of field underwriting, the process of screening, the process of screening out unacceptable risks.
Some agents have the authority to issue policies for the risks they have underwritten. Copies of the application, binder of insurance and the policy are sent to the insurer. Even though a policy has been issued, the insurance company underwriter may send a notice of cancellation if he/she finds that the risk was poorly underwritten and does not meet company guidelines.
Agents can build a higher quality book of business and establish sound relationships with insurers by engaging in responsible field underwriting. This involves analyzing risks and exposures, taking steps to avoid or reduce risks, considering loss control efforts and submitting risks to the proper markets. However, the agent cannot perform all the needed underwriting services. The insurer is in a better position to check financial information and driving records of applicants, for example.
As stated earlier, when a risk is submitted to an insurance company underwriter, he/she makes a final decision whether to accept or reject the risk. In order to do this; a number of factors must be evaluated. One of the most basic and important factors is whether the applicant has an insurable interest in the property to be insured. Insurable interest exists only when a person or an institution can suffer a financial loss if that property is damaged or destroyed.
There must be a greater interest in preserving the property then destroying it. If there is not an insurable interest, buying insurance is similar to gambling, and the contract of insurance becomes unenforceable in the courts.
Once insurable interest has been established, company underwriters consider a number of factors when evaluating a risk. They examine the nature of risk; what hazards are present? What outside factors might affect the risk and what past losses have occurred?
Some risks are class rated, which means that the loss history of a class of risk have similar characteristics (i.e., female drivers, age 23, jointed masonry building in a particular urban area, etc.) was used to develop the premium rate. Class rates may readily be applied to most dwelling and some mercantile establishments because of their similarity of construction and use. Underwriters usually have the option of applying rate modifications, based on the loss history or special characteristics of a risk. For example, risks may be experienced rated, which means the insured’s actual past loss experience plays a major role in the development of the rate. When an underwriter is familiar with a certain type of risk, he/she may use judgement rates, based largely on the underwriters knowledge and experience.
Unlike homeowners risks which are class rated, commercial risks, whether mercantile, manufacturing or mining, and institutional risks generally do not share similar characteristics. Because of this, specific rates are applied to business, establishments, and public buildings by using schedules to determine the relative risk involved. The individual risk is inspected and measured against a theoretical average, receiving credits for factors that exceed the average and surcharges for factors that fall below the average. Various items that contribute to risk of loss from fire or other perils are weighed by an established standard to determine a rate of premium. These items include the building:
For example, it is logical that occupancy as a cabinet making enterprise in an unprotected frame (wood) building would represent a different degree of risk that occupancy as a metal file cabinet manufacturer in a non combustible building and would, therefore, generate a different rate.
An insurance professional has one reason for calling on a prospect; to offer a needed product or service that will benefit the prospect. The obstacle that the agent faces is to find the need and then offer a solution. No one ever profits if the prospect is "bullied" or coerced into a buying decision. Misleading a prospect not only creates bad impressions but can also lead to legal problems. Chances are these types of prospects will lapse their policies and be sure to recommend to associates and friend not to do business with the agent.
Fortunately, most agents recognize that selling to fit needs is the best approach to offering valuable services and products to prospective clients. They know that specific types of insurance policies are designed to meet specific needs. Matching these policies to individual needs is the cornerstone of any successful insurance practice. Needs selling also involve the skills of problem analysis, action planning, and product recommendations and plan implementation.
The first step (after the prospecting phase) in needs selling is to use a thorough fact finder that will help determine the client's risk tolerance. Naturally, some clients will accept more risk in planning for their insurance coverages than others. By determining needs, goals and risk tolerance the insurance professional is provided with the valuable information necessary to make a recommendation. The insurance professional must remember one critical precept: not all clients will need the same product or service.
The bottom line in selling to the client's needs is to find out what those needs might be. Once again, the importance of a thorough fact finder cannot be emphasized enough.
In addition, it would be wise to back up the fact finder with a series of checklists. These checklists will help to uncover information not divulged on the fact finder, but, information that is needed to assist the insurance professional to make accurate and precise recommendation.
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 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 company’s client rather than the agent’s. 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 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:
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 there 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 way 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 become 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 have the policies “stripped” of their cash values in order to purchase newer, fully commissionable policies. The result was once was 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!
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.
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.
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 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 payless 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 a 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 professional’s obligation is not to make disparaging remarks about the competition, 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) pledge 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.”
Study Questions
1. The most important duty that an insurance professional has is:
a. Establish a large clientele
b. Look out for welfare of clients
c. Offer legal advice
d. Gain technical knowledge
2. All applicants should first be converted to ________ & then ________.
a. Policy-owners/clients
b. Partners/clients
c. Policy-owners/partners
d. Clients/partners
3. All of the following are basic steps to convert a prospect to a client except.
a. Client is sold according to needs
b. Client is serviced by an insurance professional
c. Client’s is sold unnecessary products.
d. The agent must approve his/her profession as a true professional
4. The underwriter, for Commercial Property Coverage, will consider all of the following EXCEPT:
a. Type of construction
b. Occupancy or use
c. Amount & type of fire protection
d. Age of the insured
5. The insurance industry is loaded with:
a. Technical information
b. Unethical agents
c. Captive agents
d. Deceptive advertising material
Answers to Study Questions
1a 2b 3d 4a 5a