Chapter 9

Ethics and Other Myths

We hear a lot of talk about ethics these days. Everyone wants to have ethical repairmen, ethical doctors, ethical lawyers, and ethical politicians. There was a time when a persons handshake was adequate to bind an agreement. Today we want to see the signature on the dotted line. We no longer trust our fellow mans word.

It wasnt always necessary to consider a persons ethics. An individual that failed to keep his word was not respected and it was unlikely that another would do business with him. A mans word was considered a valuable asset – perhaps as valuable as money in the bank. People guarded their reputation. A handshake was just as good as a signature. Proof of repayment method or service delivery simply wasnt necessary.

But times change. Banks no longer loan on the basis of a mans promise. Service is no longer guaranteed, so agreements must be printed. There is no longer social status linked to solid reputations. In fact, our society openly accepts dishonesty. We know our children will cheat in school; we accept a stores error as our good fortune; we reelect our politician despite proof of dishonesty. We complain about the unethical attitude of todays society, yet as individuals, we seem unwilling to do anything about it.

How have we digressed from accepting a mans word to the trust-no-one mentality? It could be said that we lost our innocence through bad experiences. People were too often taken advantage off, or at least often enough to spoil their trust.

Is there any industry today that is considered consistently ethical? Probably not; even scientists may be shaky, according to a poll of U.S. researchers. They found that unethical practices are more common and widespread in science than anyone might have believed, with 15.5% saying they changed the design or results of a study in response to pressure from their funding source.[1] We no longer look up to those who are honest. Instead we worship rock stars, billionaires, and athletes. Admirable qualities in those we admire do not seem necessary (wealth is more likely to be admired than honesty).

Many industries seem to be trying to return to the days of honesty – at least in the publics perception of them. Some industries need to from a financial standpoint. For example, some law enforcement agencies have lost such vast sums in lawsuits that they must begin to change their public image in an attempt to stop the financial losses. The medical field has been so frequently targeted by lawsuits that they now use stacks of legal forms for everything, including surgeries and procedures (a handshake wont hold up in court).

Lawsuits have been the primary reason we have become a society of mistrust and preventative measures. Somewhere along the line we decided that no one was to blame for anything – it was always some one elses fault. From this attitude came a multitude of lawsuits. One might believe that only valid claims would be rewarded but that has not been the case. Juries are increasingly awarding vast sums to just about anyone for any reason. As a result, many professions have had to legally protect themselves through an endless stream of paperwork.

As people have won lawsuits, others have decided to join in the parade by suing anyone and everyone available. As lawsuits became more prevalent, some of our ethical standards have dissolved. We can no longer afford to base a business relationship on a handshake. Each of us must protect ourselves so we now require signatures on a contract that outlines everything from schedules to payments to faulty workmanship.

This does not necessarily mean we no longer have good ethical standards, but it does mean that we cannot consider our fellow man ethical. There is lack of trust and (lets be honest) most people will accept something more than they deserve without a guilty conscience. We put up a good front for honesty and ethics, but few of us actually expect to live up to what we ask of others. We may demand an ethical repairman, but that does not stop us from cheating on our taxes.

We put up a good front for honesty and ethics, but few of us actually expect to live up to what we ask of others.

State insurance departments want ethical behavior too. They want their insurance agents to care more about the states citizens than about their own commissions. Thats a big order. Just like other industries, it can be very difficult to monitor a large group of people working independently among our consumers.

As it relates to the insurance industry (and many other professional groups), ethics is defined as the formal or professional rules of right and wrong; a system of conduct and behavior. Much of this conduct and behavior is mandated by the individual states. While we refer to it as ethical conduct, much of what an agent may and may not do is actually based on state and federal laws. What does this mean to an agent? Agents who do not follow all legal requirements could be fined for misbehavior or even jailed if the action was considered fraudulent.

Ethics is defined as the formal or professional rules

of right and wrong; a system of conduct and behavior.

Ethics are a means of creating standards within our profession that give it honor and respect. Many community leaders are doubtful that a commission based industry, whether it is insurance or something else, can ever be ethical. Since income is directly tied to performance there is always going to be those who do not follow the rules.

Additionally, we tend to have layered values. For example, we value life but not evenly. People are the most valued with the various animal species falling into different layers of importance below us. Some philosophers say we can determine our level of compassion and ethics by studying how we treat our animals, including those we plan to consume.

Another example of our varying codes of ethics has to do with telling the truth. Most people would say they always speak the truth even though statistically people lie all the time. Most of us do not tell lies to hurt others. In fact, some lies are told to spare the feelings of others. We have all probably told someone their new hairstyle is attractive or they dont look heavier when we actually think otherwise. Did we actually spare their feelings or do damage by not being honest?

From a purely ethical standpoint,

a lie is always wrong regardless of the reason it is told.

Obviously, a hairstyle is not of great importance, but it demonstrates how we layer our values. From a purely ethical standpoint, a lie is always wrong regardless of the reason it is told. Perhaps that is why our grandmothers said: If you cant say something nice dont say anything at all. Of course, ethics are never totally black-or-white. Some may feel hurting another is wrong even if a lie must be told to prevent doing so. Ethics are about perceptions of right and wrong.

Each of us determines what is ethically right for ourselves. There are no hard facts that define ethical behavior. Ethical behavior is not uniform from country to country or even between family members (note the civil war). While the pure ethicist allows no shading of gray, most of us know that there will be differences of opinion, and we mostly accept those differences. When a difference of opinion adversely affects another, such as hate crimes, we have even put legal consequences in place. It may not change a persons view but we hope it will change their behavior.

The study of ethics is typically based on varying philosophies. In this chapter we will attempt to primarily focus on the rules and regulations that affect the insurance industry. From a practical standpoint, doing so is very restrictive since even current laws evolved from past incidents or practices. Most industry laws develop to protect consumers. Some felt it would be easier to banish the unethical agent from the profession; others hoped establishing rules of conduct would correct the problems. Many feel agents will be forced to conduct themselves ethically due to the standards required of insurers (who often have the task of enforcing insurance laws). Of course, for every problem we think is solved, another one pops up to take its place.

Industry Knowledge

Many industries require knowledge that would not be possessed by the average person. Professionals in these industries, such as insurance, have knowledge that other individuals must rely upon. Laypeople seek out these professionals in order to obtain products that benefit them and the goals they wish to reach. The consumer must rely upon the professionals honesty and integrity since the consumer would not know if the professional was lying to them. A feeling of ethical standards must exist. It is the potential for abuse of knowledge that provides a set of rules for ethical behavior in our industry. Most agents are ethical people; it is the few who are not that cause all of us to jump through the same hoops. Unfortunately, the few who are not can cause lots of problems for lots of consumers.

Codes of ethics may be either formal or informal. Formal codes are the laws that govern us while informal codes of ethics are those actions we know to be right, though not governed by law. Informal codes of conduct often end up becoming formal as individuals fail to follow them. There was not always a law against jaywalking. It was assumed that individuals would use crosswalks. When sufficient numbers of people failed to do so, causing automobile accidents, it became necessary to make a law forbidding the practice so that those who failed to follow the rules could be punished. An informal code then became a formal code in order to enforce the restriction.

Formal codes are the laws that govern us while informal

codes of ethics are those actions we know to be right.

If we fail to follow the informal code

it is likely to become law at some point.

How can a states insurance department enforce codes for selling and maintaining insurance contracts? Certainly the states can mandate how contracts must be written. Insurance is, in fact, the most regulated of all industries. Why was all the regulation necessary? Much of it came about because the public voiced its unhappiness at some event or circumstance concerning their policy, their insurer, or their agent.

Some insurance regulation comes about not because agents are unethical, but because our products might be used in unethical circumstances. An excellent example of this is the results of a two-year sting operation of money-laundering schemes involving Colombian drug money (approximately $80 million). It was realized that most insurance agents had no knowledge of money laundering procedures, so they were often the unknowing accomplices of such acts. In an effort to correct this situation, laws were passed requiring agents and others in financial fields to acquire such education.

It is important to understand how strongly insurance products affect a persons financial standing. There would be no reason to purchase a life insurance policy, for example, if there was no financial need for the settlement possibilities it provides. When a consumer buys a life insurance policy they anticipate it paying their beneficiary a benefit if the insured should die prematurely. Upon death, if the benefit is not paid, they potentially suffer a financial hardship. Therefore, the law must make sure that the contract pays as promised.

Parties do not always read a contract the same way. The buyer may think he or she will receive something that the seller does not believe is deserved. Contract language is a very important part of any agreement and insurance is no exception. As a result, contracts must be written in legal language, which can lend itself to misinterpretation. That is why the insurance industry has traditionally relied upon the agent to bridge the gap of policy interpretation. It is the role of the agent to explain in lay terms the conditions upon which a policy will pay a benefit. The agent must also explain in lay terms when a policy will not pay. Therein lies the ethical problem.

Agents want to sell the insurance contracts best points. What are the best points? They are always the conditions under which the policy will pay the insured some money. It does not matter whether that involves a health care policy, an automobile policy, or a life policy: the buyer only cares about what triggers payment. Anything that prevents payment is considered small print. Actually, law dictates that both conditions of payment and conditions of denial are in the same size font in the contract but consumers seldom believe this. If consumers would read their contracts they might understand what will and will not be paid, but policies are not always simple to comprehend even if read (few people actually do read their policies).

It does not matter whether that involves a health policy,

an automobile policy, or a life policy:

the buyer only cares about what triggers payment.

Agents generally do a good job of describing what the buyer is purchasing, but we must be realistic. The new car salesman does not tell his potential buyer: Yeah, it looks great on the lot, but as soon as you drive off it loses several thousand dollars in value. Youd be better off buying a car with a couple of years on it. His job is to sell new cars. If the salesman were to tell a few customers that he would not keep his job. No one would fault the dealership for firing him. It would be understood that he was causing the company to lose customers and the resulting income.

Americans understand that a salespersons job is to sell an item, whether than happens to be a car, a dress, or an insurance policy. So why are insurance salespeople so mistrusted? The answer is simple. If a saleswoman pushes her customer into buying a new dress, even if it is not right for her, the sale is not likely to cause future financial hardship (despite what her husband might claim). When a wrong insurance policy is sold there may well be future financial hardship.

For example:

Jose buys a life insurance policy with his wife, Maria, as the beneficiary. Jose believes he has bought a $100,000 life insurance benefit. When he dies suddenly Maria discovers that the policy is only worth $50,000. She knows he believed he had purchased a larger death benefit so she is confused about the lower payout and complains to the Department of Insurance in her state.

Since no one other than Jose and his agent was present at the time of sale it is impossible to know how the misunderstanding happened. Perhaps they talked about a higher benefit but settled on something less expensive. Perhaps the agent needed the commission and led Jose to believe he was purchasing something higher. It is impossible to know. However, if enough consumers complain the state will look at possible remedies. It may mean that agents must add a form to their stack of existing forms or it may mean a disclaimer will be used. Whatever remedy is selected, when multiple complaints come in, insurance departments will respond.

Agents do not have an easy job. People often believe that insurers are large uncaring institutions and their agents are out to get their last dollar. People feel pressured by the many types of products pushed at them. Some insurance, such as auto liability, may even be mandated by the state. As an added pressure, many agencies have a warfare mentality that they push on their agents (clients say no because they need more information). Many agents say they are made to feel like a failure if they produce less business than another peer produces. Brokerages say they are expected to manage the ethics of agents who work independently.

Most people are well aware of what it means to be honest.

Many states now mandate the topic of ethics as part of the overall continuing education requirement. It is hoped that agents will come to understand their ethical obligation. Most people are well aware of what it means to be honest. As with the jaywalkers, however, states must have the ability to enforce ethical behavior. By mandating ethics as part of their continuing education requirements, agents can no longer claim they did not realize they were behaving unethically. Of course, the honest agents must jump through the same hoops, but that is part of being an agent.

Due Diligence

Professionals of all types must practice due diligence. Diligence involves doing whatever is professionally required in a reasonably prompt manner. That can include everything from returning a clients telephone call to researching an insurer prior to recommending it.

Diligence involves doing whatever is professionally required

in a reasonably prompt manner.

Competency

Competency may be one of the most difficult areas for state insurance commissioners to deal with. Even when the agent is honest and has good intentions, an incompetent agent can be more damaging to the client than a dishonest one. A dishonest agent may be recognized in some cases by his display of greed. An incompetent agent thinks he or she is doing a good job; as a result he or she may not be easily recognized by a layperson. Of course, the agent that follows him into the house recognizes it immediately by the incomplete or wrong policies that have been placed. The real danger is not another agent finding his shortcomings but rather the failure to find out in enough time to correct the situation. By the time the policy is needed it is too late to fix.

Usually the first to recognize the incompetence are other agents. This brings up another problem in the insurance industry. Seldom will one agent report another. Not because he or she is protecting the problem agent but because it will appear to be industry squabbling. The competent agent is afraid that the state insurance department will think it has more to do with commissions than competency. To some degree this is probably true. Generally the complaint must come from the consumer who often feels he is being put in the middle of two agents who disagree over products. Only when the incompetency is quite obvious will the state become involved. It usually becomes obvious only when consumers have been financially harmed.

It is probably not possible for agents to police themselves since action must come from the states insurance department. While agencies can release those they feel are incompetent that does not prevent the agent from continuing to sell insurance as an independent or for another unsuspecting agency.

Understanding the Products

Agents are typically self-employed even if they work under an agency. Most agencies do give some type of training on the products they market, however. Independent agents must acquire their product knowledge on their own. Some agencies merely hand out product brochures expecting their agents to gather what is necessary from that and on their own. When errors are made, unless an agent is wise enough to carry errors and omissions liability insurance, he or she is also fully responsible for the mistake. There are times when an agency might also be held responsible, but agents are primarily on their own.

All insurers will send, upon request, a sample policy to their agents. The wise agent always requests one on any product he or she is not fully familiar with. While this may be a selling tool that can be used in the consumers home, it also allows the agent to fully read the policy prior to presenting it to their client. An agent who has not read the contract in its entirety may as well post a sign on their forehead that says: sue me.

Agents should always read a sample policy

of any new product he or she will be presenting.

Todays consumers are well aware of their legal rights. They will not hesitate to sue an incompetent or uneducated agent that does not perform their job appropriately. Even good agents that do their best could be sued. Doctors and lawyers would not think of practicing without liability insurance, yet agents routinely go bare, working without such a policy to protect them. Some do so because they are foolish enough to believe that they will not be sued. Some go without liability insurance because they do not want to pay the cost to obtain it. Some agents simply never consider the possibility at all, working with blind faith instead.

While all agents face the threat of lawsuit some are more likely than others to be sued. Those that advertise themselves as financial planners have a greater threat of lawsuit since that title implies greater knowledge. Cheryl Toman-Cubbage reported in her book, Professional Liability Pitfalls for Financial Planners, that she saw numerous complaints filed against financial planners during her years working for the International Board of Standards and Practices for Certified Financial Planners. Some of the complaints were valid and others were not, but either way the planner was required to spend his or her time responding – sometimes in court.

When life does not go as we anticipated we now live in a society that accepts placing the blame elsewhere. You didnt save enough for retirement? It must be the financial planners fault. Your mother ended up in a nursing home that consumed all her lifes savings? It must be the fault of her agent for not covering that cost. There was too little life insurance on your husband when he died? It must be the fault of someone else – someone that can be sued.

Attorneys look for new clients every day. In the 1970s and 1980s it became fashionable and acceptable to sue professionals for malpractice. Agents can be sued for malpractice just as a doctor can. While we felt lawsuits gave the so-called little man power that was equal to the powerful corporations (and this had many beneficial effects) it also allowed individuals to seek compensation for anything they found wrong in their lives. We have become a nation dedicated to suing anyone and everyone.

The scope of who was a professional broadened about thirty years ago to include agents, as well as architects, engineers, accountants, real estate agents, financial planners, and stockbrokers. Other occupations can also be sued of course, but these groups were hardest hit by lawsuits following their indoctrination as professionals.

While agents may have always considered themselves professionals having that legal definition means they are held to a higher standard of conduct. Agents know they must follow all laws, of course, but it also means that they are expected to perform in the clients best interest. Financial planners are especially burdened by the expected standard of performance since clients who lose money are bound to blame someone, whether it is their fault or not.

It is not enough to understand just the basics anymore.

Agents must completely understand how products work,

what they can and cannot accomplish

and who is most likely to benefit from them.

While no one can positively avoid lawsuits, one way to minimize the possibility is through knowledge of products. When an agent knows the products being sold he or she is less likely to make an error in judgment. It is not enough to understand just the basics anymore; agents must completely understand how products work, what they can and cannot accomplish and who is most likely to benefit from them.

Catastrophic Loss on a Large Scale

Life and health insurers face different issues than do property and casualty insurers. This is due to the impact that both natural and man-made losses can have. Hurricane Katrina demonstrated that large massive losses could occur beyond what any insurer is prepared for. While many types of losses can financially impact an insurer, no single event affects policyholder and debt-holder security quicker than catastrophes. Additionally, immediately following a significant event like Katrina, the company retains its exposure base and subsequent events can occur prior to implementation of risk mitigation strategies.[2]

There is concern regarding the rapid escalation in insured exposures taking place over the past ten or fifteen years. There are many factors that can affect the concentration of risk in specific areas that are at risk from natural disasters such as Hurricane Katrina. Rising property values are just one of the elements that are causing financial concern for insurers in some demographic areas where catastrophes are increasingly affecting risk for insurers. Another factor is the growing concentration of people and industries in some high-risk areas of the United States. People go where the jobs are; they live near their jobs. This can result in higher risk for insurers since natural and man-made catastrophic losses affect greater numbers of people and industries.

Greater concentrations of workers and business also impact such things as workers compensation, loss of business, and other related types of policies. If the United States were to experience another terrorist attack, for example, losses would be greater in areas of highly concentrated people and companies. While we certainly see this in our country, it is not isolated to the US. The same rising risk factors for property and casualty insurers are happening worldwide.

The combined frequency and severity of losses is on the rise.

The combined frequency and severity of losses is on the rise. These trends require insurers to find ways to improve their financial effectiveness in catastrophe risk management systems and controls and provide stronger capitalization to support the risk. Those in the fields of climatology and meteorology feel that global warming, a trend that earth has periodically experienced from the beginning of time, is contributing to the rising numbers of severe natural events we have seen. When we combine the increasing natural events and the rising likelihood of terrorist attacks it is easy to see why insurers and state insurance departments are concerned. In the past natural events and political events did not heavily impact insurers. Today those events tend to be insured.

Insurers utilize all the technology available in an attempt to provide loss estimates and insure risk accordingly.

Insurers utilize all the technology available in an attempt to provide loss estimates and insure risk accordingly. Rating firms must take into account the ability of insurers to utilize all the information that is available. Of course, rating companies must also determine if the information insurers use is reliable.

Insurer Rating Companies

Part of due diligence involves using insurers that are financially stable. As a professional an agent is responsible for correctly stating the strength or weakness of any company being recommended or replaced. Of course, this is also an ethical duty.

There are firms that provide financial ratings for insurance companies that allow agents to recognize a financially strong company without having to do the investigative work personally. Most professionals recommend that an agent consult with more than one rating company. There are multiple companies to choose from, including:

1. A.M. Best Company

Ambest Road, Oldwick, NJ 08858

(908) 439-2200

2. Standard and Poors

(212) 208-1199

3. Moodys Investors Service

99 Church Street, New York, NY 10007

4. Fitch Ratings

(312) 368-3198

5. Weiss Ratings, Inc.

(800) 289-9222

Each company will use their specific parameters for measuring the strengths and weaknesses of insurers. Bests financial strength rating uses an independent opinion, based on a comprehensive quantitative evaluation, of a companys balance sheet strength, operating performance and business profile.[3]

Evaluations from any company are not a warranty of a companys strength and no guarantees are made on the basis of their evaluation. It is still possible for an apparently strong company to fail to meet its obligations to their policyholders if circumstances suddenly changed. Agents should view the ratings of more than one rating company.

As consumers become aware of the importance of insurer ratings, agents must be prepared to share that information. The companys financial rating can impact whether or not a consumer purchases the policy the agent is recommending. An agent should never misrepresent a companys financial standing. It is both unethical, and also illegal to do so.

The companys financial rating can impact whether or not a consumer purchases the policy the agent is recommending.

Reports on insurers allow an individual to evaluate income statements, balance sheets and underwriting experience of primary companies and reinsurers. Since those who do not have a stake in the insurer gather the information, it is likely that it will be unbiased.

A.M. Bests Ratings

A.M. Best was founded in 1899 with the stated purpose of performing a constructive and objective role in the insurance industry toward the prevention and detection of insurer insolvency. A.M. Best is an independent third-party evaluation that subjects all insurers to the same rigorous criteria, providing a valuable benchmark for comparing insurers, even outside of the United States. While some rating companies rate multiple industries, Best rates only insurers, placing their full attention on that industry.

Ratings are independent opinions, with the operative word being opinion. No rating company can make guarantees. However, they do use information they feel is reliable to formulate those opinions. They use comprehensive quantitative and qualitative evaluations of the companys balance sheet strength, operating performance, and business profile.

Best assigns three types of ratings:

1. Strength ratings provide an opinion of an insurers financial strength and ability to meet ongoing obligations to policyholders.

2. Credit ratings provide an opinion of the insurers ability to meet its senior obligations.

3. Debt ratings provide an opinion for the credit marketplace as to the insurers ability to meet its financial obligations to security holders as they become due.

Best will use many quantitative and qualitative means, including comparisons to other insurers and industry standards. Also used will be assessments of an insurers operating plans, philosophy and management. Best, like other reporting companies, will send the current data to agents who purchase these reports. Many agents and agencies subscribe to various reporting companies, receiving reports and updates on a regular basis.

When Best decides to rate an insurer, they will use analytical components involving both quantitative and qualitative factors grouped into three categories of evaluation:

Balance Sheet Strength

Operating Performance, and

Business Profile

Expert members of their staff, such as Certified Public Accountants and actuaries, perform the analysis.

Analysis of property/casualty insurers may require different information than would a rating for a life or health insurer.

Each rating company has a specific rating structure. The information used will pertain to the type of policies the company issues. Property/casualty companies may require different information than would a rating for a life or health insurer.

Financial Strength Ratings (FSR):

Secure:	Vulnerable:
A++, A+ (Superior)	B, B- (Fair)
A, A- (Excellent)	C++, C+ (Marginal)
B++, B+ (Very Good)	C, C- (Weak
	D (Poor)
	E (Under Regulatory Supervision)
	F (In Liquidation)
	S (Rating Suspended)

Not Rated categories (NR) are assigned to companies reported on by A.M. Best, but they are not assigned a Bests rating:

NR-1: Insufficient data

NR-2: Insufficient size and/or operating experience

NR-3: Rating procedure inapplicable

NR-4: Company request

NR-5: Not formally followed

Rating modifiers and affiliation codes are also used. A rating modifier can be assigned to indicate that a Bests rating may be subject to near term change or are under review, that the company did not subscribe to Bests interactive rating process, or that the rating is assigned to a syndicate operating at Lloyds. Affiliation codes (g, p, and r) are added to Bests ratings to identify companies whose assigned ratings are based on group, pooling, or reinsurance affiliation with other insurers.

Rating Modifiers	Affiliation Codes
u: Under Review	g: Group
s: Syndicate	p: Pooled
pd: Public Data	r: reinsured

Bests interactive ratings (A++ to D) are assigned a Rating Outlook that indicates the potential direction of a companys rating for an intermediate period, generally defined as the next 12 to 36 months. Rating Outlooks include Positive, Negative, and Stable.

Financial Size Categories (FSC)

To enhance the usefulness of the Best ratings, A.M. Best assigns each letter rated (A++ to D) insurance company a Financial Size Category. The FSC is designed to provide a convenient indicator of the company size in terms of its statutory surplus and related accounts.

Many consumers today are concerned with the ratings insurers receive. Buyers want to feel secure that the company they select will have sufficient financial capacity to provide the necessary policy limits they require. Although insurers utilize reinsurance to reduce their net retention on the policy limits they underwrite, many buyers still feel more comfortable buying from companies having greater financial capacity.

Adjusted		Adjusted
FSC	Policyholders Surplus	FSC	Policyholders Surplus
I	Less than 1	IX	250 to 500
II	1 to 2	X	500 to 750
III	2 to 5	XI	750 to 1,000
IV	5 to 10	XII	1,000 to 1,250
V	10 to 25	XIII	1,250 to 1,500
VI	25 to 50	XIV	1,500 to 2,000
VII	50 to 100	XV	Greater than 2,000
VIII	100 to 250
Note: Ranges are in millions of U.S. dollars

Bests ratings are proprietary. They may be used only in a manner consistent with normal insurer purposes.

A.M. Best also provides Debt Ratings. Again, these ratings are not a warranty of a companys financial strength or ability to meet its financial obligations. They are the opinion of Best based on data it has received.

Ratings are not a warranty of a companys financial strength

or ability to meet its financial obligations.

Ratings from aa to ccc may be enhanced with a plus or minus (+ or -) to indicate whether credit quality is near the top or bottom of the category. A companys long-term credit rating may also be assigned an Under Review modifier, using u. This is usually event-driven and indicates that the companys Bests Rating opinion is under review, meaning it may be subject to change in the near future.

Long-Term Debt Ratings
Investment Grade:	Non-Investment Grade:
aaa (exceptional)	bb (Speculative)
aa (Very strong)	b (Very Speculative)
a (Strong)	ccc, cc, c (Extremely Speculative)
bbb (Adequate)	d (In default)
Note: Debt Ratings displayed with an (i) denote indicative ratings.
Short Term Debt Ratings
Investment Grade:		Non-Investment Grade:
AMB-1+ (Strongest)		AMB-4 (Speculative)
AMB-1 (Outstanding)		d (in default)
AMB-2 (Satisfactory)
AMB-3 (Adequate)

Bests long-term credit ratings (aaa to c) are assigned a Rating Outlook that indicates the potential direction of an insurers rating for an intermediate period, usually 12 to 36 months. Rating outlooks include Positive, Negative, and Stable.

Issuer Credit Ratings (ICR)

Long-term Credit Rating by Best is their opinion as to the ability of the insurer to meet its senior obligations. These ratings are assigned to insurers, holding companies, or other legal entities authorized to issue financial obligations.

Ratings from aa to ccc may be enhanced with

either a plus or minus to indicate whether credit quality

is near the top or bottom of each category.

Ratings from aa to ccc may be enhanced with either a plus or minus to indicate whether credit quality is near the top or bottom of each category. A companys Long-Term Issuer Credit Rating may also be assigned an Under Review modifier (u) that is often event-driven (positive, negative, or developing) and indicates that the insurers Bests Rating opinion is under review, so it may be subject to change.

It must again be noted that the ratings given are the opinions of those who perform the ratings. Of course, those who are issuing these opinions are well qualified to do so.

A.M. Best uses their Long-Term Credit Rating scale when assigning an Issuer Credit Rating.

Issuer Credit Ratings
Non-Insurance Company:		Insurance Company:
Investment Grade:	Non-Investment Grade:	Investment Grade:	Non-Investment Grade:
aaa (Exceptional	bb (Speculative)	aaa (Exceptional)	bb (Fair)
aa (Very Strong)	b (Very Speculative)	aa (Superior)	b (Marginal)
a (Strong)	ccc, cc, c (Extremely Speculative)	a (Excellent)	ccc, cc (Weak)
bbb (Adequate)	d (In Default)	bbb (Very Good)	c (Poor)
			d (In Default)

Short-Term Issuer Credit Ratings are also issued:

Investment Grade:	Non-Investment Grade:
AMB-1+ (Strongest)	AMB-4 (Speculative)
AMB-1 (Outstanding)	d (In Default)
AMB-2 (Satisfactory)
AMB-3 (Adequate)

Fitch Ratings

Fitch publishes a variety of rating opinions. The most common of these are credit ratings, but Fitch also publishes ratings, scores, and other relative measures of financial or operational strength.

Even though companies may receive the same rating symbol it is important to realize that differences still exist. Ratings are relative measures of risk. Ratings may not fully reflect other types of company differences, including small differences in the degrees of risk.

Fitchs credit ratings provide an opinion on the relative ability of a company to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counter-party obligations. Credit ratings are important to consumers since it is an indication of whether or not the insurer will be able to meet their financial obligations to their policyholders. Fitchs credit ratings cover the global spectrum of corporate, sovereign, financial, bank, insurance, municipal, and other public finance entities and the securities or other obligations they issue, including structured finance securities backed by receivables or other financial assets.

The different types of credit ratings vary based on their function: investment grade ratings indicate relatively low to moderate credit risk, while those in the speculative or non investment grade categories either signal a higher level of credit risk or that a default has already occurred. Credit ratings express risk in relative rank order. They reflect the opinion of the evaluator, who uses sets of criteria designed to give the most accurate ratings available. They do not predict specific frequency of default or loss. Ratings could be compared to weather prediction in that scientific methods are used to predict the financial strength of a company, but it is not a guarantee of performance (it could still rain on your parade).

Short-term credit ratings give primary consideration

to the likelihood that obligations will be paid on time.

Although there are multiple reasons to use a credit rating, in the insurance industry they are generally used to predict companies that are or may become financially unstable. Obviously an individual would want to avoid companies in danger of bankruptcy. Short-term credit ratings give primary consideration to the likelihood that obligations will be paid on time. Securities ratings, on the other hand, take into consideration probability of default and any losses that would result from default. Therefore, corporations and similar entities are given security ratings that may be higher, lower, or the same as the issuer rating to reflect expectations of the securitys relative recovery prospects and differences in ability and willingness to pay. Recovery analysis is always important throughout the ratings scale, but it is especially critical for below investment-grade securities and obligations, especially at the lower end of the non-investment-grade ratings scale (where Fitch often publishes actual Recovery Ratings) that are complementary to the credit ratings.

Structured finance ratings typically are assigned to each security or tranche in a transaction – not to the issuer. Each tranche is rated on the basis of various stress scenarios in combination with its relative seniority, prioritization of cash flows, and other structural mechanisms.

International Credit Ratings assess the capacity to meet foreign currency or local currency commitments. Both foreign and local currency ratings are internationally comparable assessments. Local currency is rated by measuring the likelihood of repayment in the currency of the insurers domicile jurisdiction, which would not take into account any difficulty that might exist converting local currency into foreign currency or in making transfers between sovereign jurisdictions.

National Credit Ratings are made in certain markets by Fitch. They are an assessment of credit quality relative to the rating of the best credit risk in a country. It will usually (not always) be assigned to all financial commitments issued or guaranteed by the sovereign state. In particular countries Fitch Ratings assigns National Insurance Financial Strength Ratings, using a scale unique to such ratings. It is not possible to use National Ratings to make international comparisons. A special identifier denotes the country they are intended for.

It is not possible to use National Ratings

to make international comparisons.

Country ceiling ratings are assigned internationally and reflect Fitchs judgment regarding the risk of capital and exchange controls levied by sovereign authorities that could prevent or materially impede the private sectors ability to convert local currency into foreign currency and transfer to non-resident creditors. This is called transfer and convertibility risk (T&C). Ratings at the country ceiling could cause a greater degree of volatility than would normally be associated with ratings at that level.

Fitch ratings are based upon information obtained directly from issuers, other obligors, underwriters, their experts, and other sources believed to be reliable. No audits are made to verify the truth or accuracy of the information obtained. Fitch does not state or imply any obligation or due diligence responsibility to verify information or perform any other kind of investigative responsibility into the accuracy or completeness of information provided to them or acquired by them.

At no time should anyone assume that Fitch ratings, or ratings by any company, is a recommendation to buy, sell, or hold any security. Fitch assesses only credit risk and there are certainly other elements that one may want to consider in addition to the ratings. Ratings do not deal with the risk of a market value loss due to changes in interest rates and other market considerations. Ratings from all companies are opinions based on available information. As a result, the ratings can only be as good as the information provided. A rating score is not described as being either accurate or inaccurate, but rather an opinion based on available data. No rating company would want to take on a due diligence or fiduciary responsibility.

Ratings from all companies

are opinions based on available information.

Rating companies may change their rating at any time. A Fitch rating may be changed, qualified, suspended, placed on Watch or withdrawn of changes in, additions to, accuracy of, unavailability of or inadequacy of information or for any reason they deem sufficient.

Fitch Ratings Actions

Affirmed: the rating has been reviewed and no change was deemed necessary.

Change: The rating has been changed or modified due to a revision in methodology. This value would only be used for Bank Support Rating codes.

Confirmed: Due to an external request or change in terms, the rating has been reviewed and no change was deemed necessary.

Downgrade: The rating has been lowered in the scale.

Expected Rating: A preliminary rating, usually contingent upon the receipt of final documents, has been assigned.

New Rating: A new rating has been assigned.

Paid In Full: This tranche has reached maturity, regardless of whether it was amortized or called early. As the issue no longer exists, it is therefore no longer rated.

Rating Watch On: The issue or issuer has been placed on active Rating Watch status.

Rating Watch Review: The rating has been reviewed and the Rating Watch status has been extended for up to six additional months. This value is only used for Structured Finance transactions.

Revision IDR: The issuer Long- or Short-Term Credit Rating has been changed to an Issuer Default Rating type. This does not necessarily denote an upgrade or downgrade.

Revision Outlook: The Rating Outlook status has been changed.

Revision Rating: The rating has been modified. This is usually the result of the introduction of a new scale, rather than a change in terms of credit quality.

Upgrade: The rating has been raised in the scale.

Withdrawn: The rating has been removed and is no longer maintained by Fitch.

Insurer financial strength ratings (IFS Ratings) provide an assessment of the financial strength of an insurance company. The IFS is assigned to the companys policyholder obligations, including assumed reinsurance obligations and contract holder obligations. These might include such things as guaranteed investment contracts. It reflects the insurers ability to meet their obligations (and meet them on time) and the expected recovery received by claimants in the event the insurer stops making payments as a result of either insurer failure or some type of regulatory intervention, usually by the state. The timeliness of payments is considered relative to both issued contracts and to policy terms. Delays due to circumstances beyond the insurers control, or circumstances affecting the entire insurance industry, would not necessarily impact the insurer rating.

Delays due to circumstances beyond the insurers control,

or circumstances affecting the entire insurance industry,

would not necessarily impact the insurer rating.

Expected recoveries are based on Fitchs assessments of the sufficiency of an insurers assets to fund policyholder obligations, when payments have been stopped or interrupted.[4] Expected insurer recoveries exclude the impact of recoveries obtained from a government sponsored guaranty fund and also exclude the impact of collateralization or security, including letters of credit or assets placed in trust.

Financial ratings can be assigned to both insurance companies and reinsurance companies in any insurance sector. Even managed health care companies may receive a rating. Insurer financial strength ratings do not address the quality of an insurers claims handling services or the relative value of their products.

Both International and National rating scales are used. International IFS Ratings can be assigned using the Long-term and Short-term rating scales, but National IFS ratings use only the Long-term scale. Although the ratings use the same symbols used by Fitch Ratings for its International and National credit ratings of long-term and short-term debt issues, the definitions associated with the ratings reflect the unique aspect of the IFS Ratings within the insurance industry.

International Long-Term IFS Rating Scale

The following applies to foreign currency and local currency ratings. Ratings of BBB- and higher are considered to be secure, and those lower than BB+ are considered to be financially vulnerable.

AAA: Exceptionally Strong

The AAA IFS ratings reflect a financially strong company. There is the least expectation of ceased or interrupted payments when this rating is received. Only companies with exceptionally strong capacity to meet policyholder and contract obligations on time receive this rating. It is unlikely that foreseeable events would adversely affect the financial stability of an AAA rated company.

AA: Very Strong

Companies receiving an AA IFS rating have a very low expectation of ceased or interrupted payments. There is a strong capacity to meet policyholder and contract obligations on time. This capacity is should not be significantly affected by foreseeable events.

A: Strong

Companies receiving an A rating have a low expectation of ceased or interrupted payments. There is a strong capacity to meet policyholder and contract obligations on time. This capacity could, however, be affected by changes in circumstances or by economic conditions that would not affect a company with an AAA or AA rating.

BBB: Good

Companies receiving a BBB rating have a low expectation of ceased or interrupted payments. The capacity to meet these obligations on time is considered adequate, but this could change if circumstances changed. Such companies are financially at risk when economic conditions change. IFS rating BBB is the lowest secure rating category.

BB: Moderately Weak

When a company is assigned a BB IFS rating there is the possibility that ceased or interrupted payments could happen, especially when adverse economic or market circumstances develop. Even so, business or financial alternatives may be available to allow for policyholder and contract obligations to be met on time. Obligations rated in BB categories and lower are considered to be vulnerable.

B: Weak

Companies assigned a B IFS rating indicate two possible conditions:

If obligations are currently being met on a timely basis, there is significant risk that ceased or interrupted payments could still happen in the future, although a limited margin of safety remains.

The ability for continued timely payments is contingent upon a sustained, favorable business and economic environment, as well as favorable market conditions.

When a B IFS rating is assigned to obligations that have already experienced ceased or interrupted payments, but with the potential for extremely high recovers, the obligations would have a recovery assessment of RR1 (Outstanding).

CCC: Very Weak

A company receiving a CCC IFS rating indicates two possible conditions:

Like the B rating, if obligations are currently being met on a timely basis, there is significant risk that ceased or interrupted payments could still happen in the future. Unlike the B rating, however, there is not a limited margin of safety remaining.

Continued timely payments are reliant upon favorable market conditions, with a sustained favorable business and economic environment.

When a CCC IFS rating is assigned to obligations that have experienced ceased or interrupted payments, there is the potential for only average to superior recoveries. These recoveries would have a recovery assessment of RR2 (Superior), RR3 (Good), or RR4 (Average).

CC

This rating indicates that, if obligations are still being met on time, it is probable that this will not continue. Obligations are likely to cease or be interrupted at some time in the future. If obligations have already experienced ceased or interrupted payments there is the potential for average to below-average recoveries. These obligations would have a recovery assessment of RR4 (Average) or RR5 (Below Average).

C

The C rating indicates that obligations either will not be met at some point or they already have ceased. If they are currently being met on time, ceased or interrupted payments are imminent. A C IFS rating assigned to obligations that have already experienced ceased or interrupted payments has the potential for below average to poor recoveries. It would be assigned an RR5 (Below Average) or RR6 (Poor) rating.

A + or - (plus or minus) may be appended to a rating to indicate the relative position of a credit with the rating category. These are not added to ratings in the AAA category or to ratings below the CCC category.

National Long-Term IFS Rating Scale

National IFS Ratings are applied to local insurance markets. National IFS Ratings are assigned to an insurers policyholder obligations and are an assessment of relative financial strength. Like other forms of National Ratings assigned by Fitch, National IFS Ratings assess the ability of an insurer to meet their policyholder and related obligations. The ratings are relative to the best credit risk in a specified country across all industries and obligation types. Comparisons between different countries National IFS rating scales or between an individual countrys National IFS rating scale and the International IFS rating scale would not be appropriate since different criteria is typically used.

AAA (xxx)

This rating indicates the highest rating assigned within the national scale for that specified country. The rating is assigned to the policyholder obligations of the best insurance entities relative to all other issues or issuers in the same country, across all industries and obligation types.

AA (xxx)

This national IFS rating denotes a very strong capacity to meet policyholder obligations relative to all other issues and issuers in the same country, across all industries and obligation types. The risk of ceased or interrupted payments differs only slightly from the countrys highest rated issues or issuers.

A (xxx)

The A national IFS rating denotes a strong capacity to meet their policyholder obligations relative to all other issues or issuers in the same country, across all industries and obligation types. However, the company could be affected by changes in circumstances or economic conditions that would affect their ability to make timely payment of policyholder obligations to a greater degree than for financial commitments denoted by a higher rated category.

BBB (xxx)

This national IFS rating denotes an adequate capacity to meet policyholder obligations relative to all other issues or issuers in the same country, across all industries and obligation types. Changes in circumstances or economic conditions are more likely to affect the capacity for timely payment of policyholder obligations than for financial commitments denoted by a higher rated category.

BB (xxx)

The BB denotes a fairly weak capacity to meet policyholder obligations relative to all other issues or issuers in the same country, across all industries and obligation types. Within the context of the specified country, payment of these policyholder obligations is not certain in. The capacity for timely payment remains more vulnerable to adverse economic change over time.

B (xxx)

The national IFS rating of B denotes two possible outcomes:

If policyholder obligations are still being met on time, the rating implies a significantly weak capacity to continue doing so relative to all other issues or issuers in the same country, across all industries and obligation types.

A limited margin of safety remains and capacity for continued payments is contingent upon a sustained, favorable business and economic environment.

A B national IFS rating is assigned to obligations that have experienced ceased or interrupted payments, but with the potential for extremely high recoveries.

CCC (xxx)

A CCC national IFS rating offers two possible outcomes:

If policyholder obligations are still being met on time, the rating implies ceased or interrupted payments are very possible.

Capacity for continued payments is contingent upon a sustained favorable business and economic environment.

A CCC national IFS rating is assigned to obligations that have experienced ceased or interrupted payments, but having the potential for very high recoveries.

CC (xxx)

If policyholder obligations are still being met on time, the CC rating suggests ceased or interrupted payments appear probable. A CC national IFS rating is assigned to obligations that have experienced ceased or interrupted payments, but with the potential for average to below-average recoveries.

C (xxx)

A C national IFS rating for policyholder obligations implies that ceased or interrupted payments are imminent, if that has not yet happened. Obligations that have experienced ceased or interrupted payments have the potential for below-average to poor recoveries.

When a plus or minus symbol is used with the rating symbol it indicates the relative position of a credit within the rating category. They are not used for the AAA category or for ratings below the CCC category.

What does the (xxx) indicate? The ISO International Code Suffix is placed in parentheses immediately following the rating letters to indicate the identity of the National market within which the rating applies. Therefore, since we are not indicating which National market is used, (xxx) is inserted in place of them.

The ISO International Code Suffix is placed in parentheses immediately following the rating letters to indicate the identity of the National market within which the rating applies.

International Short-Term IFS Rating Scale (ST-IFS Rating)

An ST-IFS Rating provides an assessment of the intrinsic liquidity profile of an insurers short-term policyholder obligations that are contractually due for payment within one year from the date of issuance. Fitch will only assign such a rating to insurers that have also been assigned a Long-term IFS Rating.

Ratings of F1, F2, and F3 are rated secure. Those of B and below are considered vulnerable. The following applies to foreign and local currency ratings.

F1: Strong

An F1 rating indicates the strongest intrinsic liquidity and capacity for timely payment of short-term policyholder obligations. There may be a + added to indicate any exceptionally strong credit features.

F2: Moderately Strong

An F2 indicates a satisfactory level of intrinsic liquidity and capacity for timely payment of short-term policyholder obligations, but the margin of safety is not as great as an F1 rating.

F3: Moderate

While capacity for timely payment of short-term policyholder obligations is adequate, the near-term adverse changes could result in a reduction to vulnerable, which is indicated by the F3 rating.

B: Weak

A B rating indicates a minimal capacity to meet short-term policyholder obligations, as well as vulnerability to near term adverse changes in financial and economic conditions.

C: Very Weak

There is a real danger of ceased or interrupted payment of short-term policyholder obligations. The capacity to meet short-term policyholder obligations is completely reliant upon a sustained, favorable business and economic environment.

RD

An RD rating indicates the insurer has ceased or interrupted payments on a portion of its policyholder obligations, although the insurance company continues to meet other obligations.

D

A D rating indicates the insurer has ceased or interrupted payments on all of its obligations. This includes insurance companies that have continued to make payments, but at less than full contractual amounts.

Standard & Poors

Standard & Poors rates many types of entities, with insurer financial strength being one of them. We will look at several of their ratings since they impact investments as well as insurers.

Insurer Financial Strength Rating Definitions

A Standard & Poors insurer financial strength rating is a current opinion of the financial security characteristics of an insurance organization concerning its ability to pay under its insurance policies and contracts in accordance with their terms. Health Maintenance Organizations and other managed care companies receive ratings along with insurers.

Insurer ratings are not specific

to any particular policy or contract.

Insurer ratings are not specific to any particular policy or contract. Ratings also do not address whether or not the policy is suitable to the person considering it. Insurer rating opinions do not take into account deductibles, surrender or cancellation penalties, timeliness of payment, nor whether payment of claims will occur smoothly. For organizations with cross-border or multinational operations, including subsidiaries or branch offices, the ratings do not take into account potential that may exist for foreign exchange restrictions that prevent financial obligations from being met.

Insurer financial strength ratings are based on information furnished by rated organizations or obtained by Standard & Poors from other sources considered to be reliable. No audits are performed in connection with the insurer ratings and may partially rely on unaudited financial information, meaning the information could prove to be wrong. Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of such information or based on some other circumstance.

Insurer ratings do not refer to an organizations ability to meet non-policy obligations, such as debt. Assignment of ratings to debt issued by insurers or to debt issues that are fully or partially supported by insurance contracts, or guarantees is a separate process from determination of insurer financial strength ratings. It follows procedures consistent with issue credit rating definitions and practices, which will also be included in this text.

Like all rating companies, Standard & Poors issues financial strength rating opinions and are not recommending an individual purchase or not purchase any specific policy. Nor are they recommending that anyone buy, hold, or sell any security issued by an insurer. A rating is not a guaranty of an insurers financial strength or security.

A rating is an opinion - not a guaranty of

an insurers financial strength or security.

Long-Term Insurer Financial Strength Ratings

An insurer rated BBB or higher is regarded as having financial security characteristics that outweigh any vulnerabilities that might exist. The insurer is highly likely to have the ability to meet financial commitments as they come due.

AAA

The insurer has extremely strong financial security characteristics. This is the highest insurer financial strength rating assigned by Standard & Poors.

AA

Under this rating, the insurer has very strong financial security characteristics, differing only slightly from the AAA rating.

A

Under this insurer rating, the company has strong financial security characteristics but is a bit more likely to be affected by adverse business conditions than those insurers given a higher rating.

BBB

This rated insurer has good financial security characteristics but is more likely than higher rated companies to be affected by adverse business conditions.

BB

An insurer with the BB rating has marginal financial security characteristics. Positive attributes exist, but adverse business conditions could lead to insufficient ability to meet financial commitments.

B

The insurer has weak financial security characteristics. Adverse business conditions will likely impair its ability to meet financial commitments.

CCC

The insurer has very weak financial security characteristic, and is dependent on favorable business conditions to have the ability to meet their financial commitments.

CC

The insurer with this rating has extremely weak financial security characteristics and is likely not to meet some of its financial commitments.

R

The insurer is under regulatory supervision due to its financial condition. During the pendency of the regulatory supervision, the regulators may have the power to favor one class of obligations over others or pay some obligations and not others. The rating does not apply to insurers subject only to non-financial actions such as market conduct violations.

NR

The insurer is not rated, so Standard & Poors has no opinion about the insurers financial security.

Ratings from AA through CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

CreditWatch

CreditWatch highlights the potential direction of a rating, focusing on identifiable events and short-term trends that cause ratings to be placed under special surveillance by Standard & Poors. These events could include mergers, recapitalizations, voter referenda, regulatory actions, or anticipated operating developments. Placement on Standard & Poors CreditWatch list does not necessarily mean the company will experience a change in their rating, just that it is a possibility due to an event or a deviation from an expected trend. A positive designation means that the rating could be raised. A negative designation means that the rating could be lowered. A developing designation means that the rating could be raised, lowered, or affirmed.

Placement on Standard & Poors CreditWatch list

does not necessarily mean the company will experience a change in their rating, just that the possibility exists

due to an event or a deviation from an expected trend.

Short-Term Insurer Financial Strength Ratings

Many of the following ratings are similar or the same as those for credit ratings on issues and issuers that will follow insurer ratings in this chapter. We have still chosen to list them individually since small details may differ that would change the meanings. However, the reader may feel as though they are reading the same ratings more than once.

A-1

This insurer has a strong ability to meet its financial commitments on short-term policy obligations. This is the highest rating available by Standard & Poors. Within this category, some insurers are designated with a plus sign (+), which indicates that the insurers ability to meet its financial commitments on short-term policy obligations is extremely strong.

A-2

The insurer has a good ability to meet its financial commitments on short-term policy obligations. This insurer a slightly more susceptible to adverse effects of changes in circumstances and economic conditions than those rated A-1.

A-3

The insurer has an adequate ability to meet its financial commitments on short-term policy obligations, but adverse economic conditions or changing circumstances are more likely to lead to a weakened ability of the insurer to meet its financial obligations.

B

The insurer is vulnerable and has significant speculative characteristics. The insurer has the ability to meet its current financial commitments on short-term policy obligations, but it faces major ongoing uncertainties that could lead to an inadequate ability to meet its financial obligations.

C

The insurer is regarded as currently vulnerable to nonpayment and is depended upon favorable business, financial, and economic conditions for it to meet its financial commitments on short-term policy obligations.

R

See the definition of R under long-term ratings.

Ratings from AA through CCC may be modified by the addition of either a plus or minus sign to show relative standing within the major rating categories.

As always, a rating on an insurer is not a recommendation to purchase or discontinue any policy or contract issued by an insurer. Nor is it a recommendation to buy, hold, or sell any security issued by an insurer. No rating or assessment is a guaranty of an insurers financial strength.

Financial Enhancement Rating Definitions

Standard & Poors insurer financial enhancement rating is a current opinion of the creditworthiness of an insurer with respect to insurance policies or other financial obligations that are predominantly used as credit enhancement and/or financial guarantees. Standard & Poors analysis focuses on capital, liquidity, and company commitment necessary to support a credit enhancement or financial guaranty business when assigning the rating. It does not consider every aspect such as market price or policy suitability.

Standard & Poors ratings are based on information furnished by the insurers or obtained from sources considered reliable. No audit is performed to assure that the information received is accurate. Insurer financial enhancement ratings are based, in varying degrees, on the following:

The likelihood of payment. This is the capacity and willingness of the insurer to meet its financial commitment on an obligation in accordance with the terms of the obligation.

The Nature and provisions of the obligations.

The protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors rights.

AAA

The insurer has extremely strong capacity to meet its financial commitments. This is the highest insurer financial enhancement rating assigned by Standard & Poors.

AA

The insurer has a very strong capacity to meet its financial commitments and differs only slightly from those rated AAA.

A

The insurer has strong capacity to meet its financial commitments. It is slightly more susceptible to the adverse effects of changes in circumstances and economic conditions than insurers rated AAA or AA.

BBB

The insurer has adequate capacity to meet its financial commitments, but adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the insurer to meet its financial commitments.

BB, B, CCC, and CC

Insurers rated with one of these are regarded as having significant speculative characteristics. Insurers listed under BB have the least degree of speculation and CC has the highest.

Ratings from AA through CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

R

The insurer is under regulatory supervision due to its financial condition. During the pendency of the regulatory supervision the regulators may have the power to favor one class of obligations over others or pay some obligations and not others.

NR

The insurer is not rated.

Credit Ratings

Like other rating companies, a Standard & Poors issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program, including ratings on medium-term note programs and commercial paper programs.[5] Standard & Poors ratings consider the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation. They also consider the currency in which the obligation is denominated since that can affect aspects of credit. As with other rating companies, the issuance of a credit rating is not a recommendation to purchase, sell, or hold a financial obligation, since ratings do not comment on the suitability of a product or other factors that should be considered.

Credit ratings consider the currency in which the obligation is denominated since that can affect aspects of credit.

Issue credit ratings are based on current information furnished by the obligors or obtained by Standard & Poors from other sources they consider reliable. No audit is performed in connection with the credit rating for accuracy of information, meaning there is no certainty that it is correct. However most rating companies are careful to use only sources that are considered reliable. Credit ratings may be changed, suspended, or withdrawn due to changes in, or unavailability of, information or based on other circumstances.

Issue credit ratings may be either long term or short term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the United States that means obligations with an original maturity of no more than 365 days, including commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor that incorporates features of long-term obligations. The result is a dual rating, addressing short-term and long-term issues. Medium-term notes are assigned long-term ratings.

Medium-term notes are assigned long-term ratings.

The reader will note that both Issue and Issuer credit ratings are included in this text. One is the rating of the investment and the other is the rating of the entity providing the investment.

Long-Term Issue Credit Ratings

In varying degrees, issue credit ratings are based on:

1. The likelihood of payment. The capacity and willingness of the obligor to meet its financial commitment on an obligation, meeting the terms of the obligation.

2. The nature and provisions of the obligation.

3. The protection afforded by, and the relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangements under the laws of bankruptcy and any other laws that could affect the creditors rights.

The issue rating definitions are expressed in terms of default risk. Therefore, they pertain to senior obligations of the entity. Junior obligations are generally rated lower than senior obligations to reflect the lower priority in bankruptcy. Differentiation would exist when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations. When applied to junior debt, the rating may not conform exactly with the category definition.

The issue rating definitions are stated in terms of default risk. Therefore, they pertain to senior obligations of the entity.

AAA

An obligation rated AAA has the highest rating assigned by Standard & Poors. The obligors capacity to meet its financial commitment on the obligation is considered extremely strong.

AA

This rating is very similar to the AAA rating, with only a small degree of difference. The obligors capacity to meet its financial commitment on the obligation is very strong.

A

An A rated obligation is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories (AAA or AA). However, the obligors capacity to meet its financial commitment on the obligation is still strong.

BBB

An obligation rated BBB exhibits adequate protection parameters but adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

BB, B, CCC, CC, and C

Obligations with one of these ratings are regarded as having significant speculative characteristics. BB indicates the least degree of speculation with C having the highest. While such obligations will probably have some quality and protective characteristics, those may be outweighed by large uncertainties or major exposures to adverse conditions.

BB

While a BB rating is less vulnerable to nonpayment than other speculative issues, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions. These could lead to the obligors inadequate capacity to meet its financial commitment on the obligation.

B

A B rating is more vulnerable to nonpayment than obligations rated BB but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions are likely to impair the obligors capacity or willingness to meet its financial commitment on those obligations.

CCC

This rating on an obligation means it is currently vulnerable to nonpayment, and is dependent upon continued favorable business, financial, and economic conditions in order to meet its financial commitment on the obligation. If adverse business, financial, or economic conditions developed, the obligator is not likely to have the capacity to meet their financial commitment on the obligation.

CC

An obligation rated CC is currently highly vulnerable to nonpayment.

C

A subordinated debt or preferred stock obligation rated C is currently highly vulnerable to nonpayment. The rating may be used to cover a situation where a bankruptcy petition has been filed or similar action was taken, but payments on this obligation are being continued. A C rating will also be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.

D

A D rating means payment is in default. The rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not yet expired. If Standard & Poors believes that payment will be made during the grace period, a different rating may be used. The D rating will also be used upon the filing of a bankruptcy petition or the taking of a similar legal action if payments on the obligation are jeopardized.

Plus or minus (+ or -)

The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

NR

This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poors does not rate a particular obligation as a matter of company policy.

Short Term Issue Credit Ratings

A-1

A short-term obligation rated A-1 is rated in the highest category available by Standard & Poor. The obligors capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign, which indicates the obligors capacity to meet its financial commitment is extremely strong.

A-2

This rating is more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations I higher rated categories, but the obligors capacity to meet its financial commitment on the obligation is satisfactory.

A-3

A short-term obligation rated A-3 shows adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

B

This rating is regarded as having significant speculative characteristics. Finer distinctions within the B category will be indicated by the use of B-1, B-2, and B-3. The obligor currently has the capacity to meet its financial commitment on the obligation, but it faces major ongoing uncertainties that could lead to their inadequate capacity to meet its financial commitment on the obligation.

B-1 is regarded as having significant speculative characteristics, but the obligor has a relatively stronger capacity to meet its financial commitments over the short-term compared to other speculative grade obligors.

B-2 is regarded as having significant speculative characteristics, with an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.

B-3 is a short-term obligation with significant speculative characteristics. The obligor has a relatively weaker capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.

C

A short-term obligated rated C by Standard & Poor is considered to be currently vulnerable to nonpayment and is depended upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.

D

An obligation rated D is in payment default. This rating category is used when payments on the obligation are not made on the due date even if the applicable grace period has not expired. If Standard & Poor believes the obligator will make the payments during the grace period they will not use this rating. The D rating will also be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on the obligation are jeopardized.

Active Qualifiers (Currently applied and/or outstanding)

i

The lower case i is a subscript used for issues in which the credit factors, terms, or both that determine the likelihood of receipt of payment of interest are different from the credit factors, terms, or both that determine the likelihood of receipt of principal on the obligation.

L

Ratings qualified with the upper case L apply only to amounts invested up to the federal deposit insurance limits.

p

The lower case p is a subscript used for issues in which the credit factors, terms, or both that determine the likelihood of receipt of payment of principal are different from the credit factors, terms, or both that determine the likelihood of receipt of interest on the obligation. The p subscript indicates that the rating addresses the principal portion of the obligation only. It will always be used in conjunction with the i subscript that addresses likelihood of receipt of interest. For example, a rated obligation could be assigned ratings of AAAp NRi indicating that the principal portion is rated AAA and the interest portion of the obligation is not rated.

pi

This rating subscript is based on an analysis of an insurers published financial information, along with additional information in the public domain. They do not reflect in-depth meetings with the issuers management, however, and are therefore based on less comprehensive information than ratings without a pi subscript. Ratings with a pi subscript are reviewed annually based on a new years financial statements, but may be reviewed on an interim basis if a major event occurs that could affect the issuers credit quality.

pr

The letters pr indicate that the rating is provisional, which assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful, timely completion of the project. It is important to note that this addresses credit quality subsequent to completion of the project, but makes no comment on the likelihood of or the risk of default upon failure of the completion. An investor must exercise his own judgment with respect to such likelihood and risk.

Preliminary

Preliminary ratings are assigned to issues, including financial programs, in the following circumstances:

Ratings may be assigned to obligations, most commonly structured and project finance issues, pending receipt of final documentation and legal opinions. Assignment of a final rating is conditional on the receipt and approval by Standard & Poors of appropriate documentation. Changes in the information provided to Standard & Poors could result in the assignment of a different rating. They reserve the right not to issue a final rating.

Preliminary ratings are assigned to Rule 415 Shelf Registrations. As specific issues, with defined terms, are offered from the master registration, a final rating may be assigned to them in accordance with Standard & Poors policies. The final rating could differ from the preliminary rating.

t

The lower case t indicates termination structures that are designed to honor their contracts to full maturity or, if certain events occur, to terminate and cash settle all their contracts before their final maturity date.

Inactive Qualifiers (No longer applied or outstanding)

*

This symbol indicated continuance of the ratings was contingent upon Standard & Poors receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows. Use of this qualifier was discontinued in August 1998.

c

Discontinued in January 2001, it was used to provide additional information to investors that the bank might terminate its obligation to purchase tendered bonds if the long-term credit rating of the issuer was below an investment-grade level and/or the issuers bonds were deemed taxable.

q

Discontinued in April 2001, the q subscript indicated that the rating was based solely on quantitative analysis of publicly available information.

r

The r modifier was assigned to securities containing extraordinary risks, particularly market risks, which were not covered in the credit rating. The absence of the r modifier should not be taken as an indication that an obligation will not exhibit extraordinary non-credit related risks. Standard & Poors discontinued the use of the r modifier for most obligations in June 2000, with the balance (mainly structured finance transactions) ending in November 2002.

Local Currency and Foreign Currency Risks

Country risk considerations are a standard part of Standard & Poors analysis for credit ratings on any issuer or issue, with currency of repayment being a key factor in the analysis. An obligators capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in local currency. This is due to the sovereign governments own relatively lower capacity to repay external versus domestic debt. These elements are incorporated in the debt ratings assigned to specific issues. Foreign currency issuer ratings are also distinguished from local currency issuer ratings to identify those instances where sovereign risks make them different for the same issuer.

An obligators capacity to repay

foreign currency obligations may be lower than

its capacity to repay obligations in local currency.

Issuer Credit Rating Definitions

The Standard & Poors issuer credit rating is a current opinion of an obligors overall financial capacity, which is its creditworthiness, to pay its financial obligations. Standard & Poors opinion focuses on the obligors capacity and willingness to meet its financial commitments as they come due. This does not apply to any specific financial obligation since it does not consider the nature or provisions of any particular obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability. Nor does it take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The issuer credit rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for any particular investor.

The issuer credit rating is not a recommendation to

purchase, sell, or hold a financial obligation

issued by an obligor, since market price or suitability

for any particular investor is not considered.

Counterparty credit ratings, ratings assigned under the Corporate Credit Rating Service, previously called the Credit Assessment Service, and sovereign credit ratings are al forms of issuer credit ratings.

Issuer credit ratings are based on current information furnished by obligors or obtained by Standard & Poors from other sources considered reliable. Rating companies, such as Standard & Poors, do not conduct audits in connection with any issuer credit rating, so it is possible that unaudited financial information may be used. Issuer credit ratings may be changed, suspended, or withdrawn as a result in changes in or availability of information. Issuer credit ratings may be either long term or short term. Short-term issuer credit ratings reflect the obligors creditworthiness over a short-term time period.

Long-Term Issuer Credit Ratings

AAA

The AAA rating indicates an extremely strong capacity to meet financial commitments. It is the highest issuer credit rating assigned by Standard & Poors.

AA

An obligor has a very strong capacity to meet its financial commitments. It differs from the AAA rating only slightly.

A

An obligor has a strong capacity to meet its financial commitments but it is somewhat more susceptible to any adverse effects in circumstances and economic conditions than those with AAA or AA ratings.

BBB

An obligor has adequate capacity to meet its financial commitments, but adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.

BB, B, CCC, and CC

Obligors rated with one of these four ratings are regarded as having significant speculative characteristics. BB has the least degree of speculation and CC has the highest. While such obligors will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.

Plus or Minus

Plus or minus signs may be assigned to ratings from AA to CCC to indicate relative standing within the major rating categories.

R

An obligor rated R is under regulatory supervision due to its financial condition. During the pendency of the regulatory supervision the regulators may have the power to favor one class of obligations over others or pay some obligations and not others.

SD and D

An obligor rated SD (selective default) or D has failed to pay one or more of its financial obligations (rated or unrated) as it came due. A D rating is assigned when Standard & Poors believes that the default will be a general default and that the obligator will fail to pay all or substantially all of its obligations on time. An SD rating is assigned when they believe the obligor has selectively defaulted on a specific issue or class of obligations on other issues or classes of obligations in a timely manner.

NR

An issuer designed NR is not rated.

Short-Term Issuer Credit Ratings

A-1

An obligator rated A-1 has a strong capacity to meet its financial commitments. This is the highest rating given to issuers by Standard & Poors. Within this category, some obligators may receive a plus sign (+), which indicates that the obligors capacity to meet its financial commitments is extremely strong.

A-2

This rating shows satisfactory capacity to meet its financial commitments, but the obligator is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than those in the A-1 rating category.

A-3

This obligator has adequate capacity to meet its financial obligations, but adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.

B

This rating is regarded as vulnerable and has significant speculative characteristics. Like the issue credit ratings, there are subcategories of B-1, B-2, and B-3 to indicate finder distinctions within the B category. The obligator currently has the ability to meet its financial commitments but it faces major ongoing uncertainties that could lead to inadequate capacity to meet the financial commitments.

C

A C rating indicates the obligor is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for it to meet its financial commitments.

R

The obligator is under regulatory supervision due to its financial condition. During the pendency of the regulatory supervision the regulators may have the power to favor one class of obligations over others or pay some obligations and not others.

SD and D

An SD (selective default) or D has failed to pay one or more of its financial obligations (rated or unrated) when it came due. A D rating is assigned by Standard & Poors when it is believed that the default will be a general one and that the obligor will fail to pay all or substantially all of its obligations as they come due. An SD rating is assigned with it is believed that the obligor has selectively defaulted on a specific issue or class of obligations but the obligor will continue to meet its payment obligations on other issues or classes of obligations as they come due.

NR

An issuer designated NR is not rated.

Rating Outlook Definitions

The Standard & Poors rating outlook assesses the potential direction of a long-term credit rating over the intermediate term, usually six months to two years. Consideration is given to any changes in the economic or fundamental business conditions that may exist. An outlook is not necessarily a precursor of a rating change or future CreditWatch action.

Positive means that a rating may be raised.

Negative means that a rating could be lowered.

Stable means that a rating is not likely to change.

Developing means a rating may be raised or lowered.

CreditWatch

CreditWatch highlights the potential direction of a short- or long-term rating. It focuses on identifiable events and short-term trends, such as mergers, recapitalizations, voter referendums, regulatory action, or anticipated operating developments, that could cause ratings to be placed under special surveillance by Standard & Poors staff. It could mean that more information is needed or that an event or deviation from an expected trend has occurred. Being put on a CreditWatch does not necessarily mean a rating change is inevitable. Usually Standard & Poors shows a range of alternative ratings that are possible. It should also be noted that ratings could change without ever having been listed on CreditWatch.

Weiss Ratings

Weiss Ratings offers a line of products designed to direct consumers and business professionals toward safe investment and insurance options while avoiding unnecessary risks that could lead to financial losses.[6]

Weiss issues ratings on more than 15,000 financial institutions, including banks, brokerage firms, HMOs, life and health insurers, Blue Cross Blue Shield plans, and property and casualty insurers. Two rating scales are used: Weiss Investment Ratings and Weiss Safety Ratings. The Weiss Safety Ratings assess the future financial stability of an insurer, bank, or broker. These ratings are derived without regard to the performance of the specific investment offered by the insurer or other entity. Weiss Investment Ratings evaluate the risk/reward trade-off of an investment in the specific stock or mutual fund. In stock ratings, the companys stability is an important component in the evaluation, but the focus is on the investment, not the company itself.

Like the other rating companies, a rating by Weiss is not a recommendation to buy or sell any product issued by an insurer or other entity. It is the opinion of the Weiss analysis as to the stability of the company relative to other similar type companies or investments.

Weiss uses:

A = Excellent

B = Good

C = Fair

D = weak

E = Very Weak

F = Failed

U = Unrated

Excellent and Good correspond to Weiss A and B ratings. Excellent corresponds to Bests A++ and A+ (superior) ratings. Good relates to Bests A and A- (excellent) ratings.

Continuing Education Requirements

Nearly all states require agents to complete continuing education credits each license renewal period. Some states have stricter requirements than others, but that is rapidly changing. In March 1998 the Midwest Zone Insurance Commissioners signed a reciprocity agreement on course approval practices for CE. The agreement provided that each zone state would accept the credits awarded by another zone state without re-reviewing the course. The majority of states have joined the Midwest Zone Agreement and agreed to participate in what is now referred to as the Continuing Education Reciprocity (CER) process.

The Midwest Zone agreement provided that

each zone state would accept the credits awarded

by another zone state without re-reviewing the course.

In our case, United Insurance Educators submits a course for approval in our domicile state, which is Washington. Washingtons insurance department reviews our submission and assigns continuing education hours based on the formula they normally use. While other states (even those who participate in the Midwest Zone agreement) are not required to accept Washingtons determination, most states will do so. Recently a universal formula has also been enacted which will even out how each state approves courses. This will level the playing field, so to speak.

For example:

State A uses a continuing education home study formula of 15 full pages of text (discounting pages that contain pictures or other non-text fill) per one hour of CE credit. A course that contains 45 full pages of text would, therefore, receive three hours of continuing education.

State B has no home study education formula. Whatever the education provider requests is given.

Obviously, education providers from State B have an advantage over those whose domicile is in State A. By mandating a specific formula that all states use education providers are fairly represented and agents know they can base their preference in companies based on the quality and presentation of the courses offered rather than the length of the course (since length will be equal to credit hours provided for all companies).

States can deviate from the recommendations of the Midwest Zone requirement for home study courses, but if all states are following the same formula this is less likely to happen. Even so, each state has the option of adopting only those portions of the Agreement that they concur with. Classroom continuing education will not have these issues since they are based directly on time spent in the classroom – not course quality or content (although the content must meet the states requirements).

Some home study and internet courses are considered the equivalent of being in a classroom. These are called classroom equivalent (CE) courses.

Internet courses considered the equivalent of seminars

are called classroom equivalent (CE) courses.

For classroom courses, all states have agreed to issue one credit hour for each 50 minutes of contact instruction. The minimum number of credits is one (1), meaning no partial credits for less than one will be issued. There is no maximum amount of credits allowed.

Each state will use its own criteria to determine if an instructor or a continuing education company is qualified to offer instruction. States will not review an instructors qualifications, but they may disapprove an instructor or company if that person or company fails to comply with state laws or regulations. No state is required to accept an otherwise unacceptable topic for credit. For example, most states do not approve credit for any course based on product marketing. In all cases, each state will continue to follow their own regulations and laws.

Many states have changed the quantity of continuing education hours required as a result of the Midwest Zone agreement. Some agents must now complete a greater quantity of credit hours, while agents in other states have a reduced requirement. The Midwest Zone agreement states a continuing education requirement of 24 CE credits (each credit is equal to one hour of education) per two-year license renewal period. Of the required 24 CE hours, some portion of those must be in ethics. So far, states are required between one and four hours of ethics, but this may eventually become standardized.

Many states have other requirements, such as a long-term care requirement for those who sell long-term care products. At least one state has an annuity education requirement in order to sell annuity products. Many types of professions require specialized education so it is not surprising to see this for insurance agents.

An Agents Personal Responsibility

Many types of careers have specific requirements. When education is one of them it is always the individuals responsibility to meet those requirements on time. It is not the job of their boss, secretary, or spouse to remind, monitor, or meet those needs on their behalf. It is certainly not the responsibility of the education company to provide special services for those who have failed to fulfill the responsibility in a timely manner. Following state laws is the legal obligation of each agent, including meeting their educational requirements.

Each education course will have a specific course number assigned to it. This course number allows agents to keep track of what they have completed. Most states forbid repeating a course within a specified time period so it is important to keep a record of courses previously completed and turned in to the state for education credit. It is not possible to track education by the course title alone since titles are often duplicated. For example, Health Insurance is probably the title of multiple CE courses, yet the course numbers are not necessarily the same. As long as the course numbers are different the agent may take more than one course titled Health Insurance. Multiple companies may offer the same continuing education course so again, it is always important to track by course number rather than by course provider.

It is not possible to track education by

the course title alone since titles are often duplicated.

Some states have requirements as to the subject type that a given license line may take. For example, it is common to require life agents to take only life context courses. Some states also mandate the level of difficulty that must be taken. For example, an agent who has been a producer for ten years or more may have to take a more difficult course than would a new agent. When this is the case, courses will be labeled according to their difficulty, using such terms as basic or intermediate.

Education providers will issue a Certificate of Completion each time an education course is completed. The Certificate may be issued by mail or online. Some states require the certificate, or a copy of it, be turned in with the license renewal fee. Other states merely require a listing of the course number on the renewal form. In either case, the agent must keep a copy (or the original if a copy is turned in) on file in case he or she is audited by the state. It is not the responsibility of the education provider to provide a certificate more than once. Most schools will charge the agent to provide an additional copy. Where Certificates may be downloaded from a website it is likely that no fee would be levied to download multiple copies.

We are seeing a greater quantity of career agents obtaining more education than actually mandated by the states. There are many schools that provide a higher level of learning, with some awarding specific designations. Agents may become a Certified Financial Planner (CFP), a Registered Health Underwriter (RHU), or similar designations of higher learning.

There are many schools that provide a higher level

of learning, with some awarding specific designations.

Additional education is always beneficial, if only to improve ones own professional standing. Agents often complain that it is difficult to find something to take on a new topic. This can especially be true when states mandate education based on license type. Additionally, there is only so much that can be said about automobile insurance. As long as it is a professional responsibility, however, it is the agents duty to complete the requirements of the state (and to do so in a timely manner).

Professional Representation

Agents have a duty to be professional at all times – whether presenting a policy or buying groceries at the local market. The woman checking out your groceries this morning may end up being your appointment tonight.

Professionalism means many things from dressing appropriately for appointments to returning telephone calls and answering emails.

Appointments

The hardest part of commissioned sales is finding a place to be. It is especially hard to find a place that is qualified to buy. If we want to fine-tune it even more, if that place is not only qualified but also willing to buy it becomes very valuable. What a shame it would be to show up at a qualified, willing appointment only to be turned away because the agent was not presentable.

Since agents are primarily self-employed there is no one to enforce a dress code or cleanliness standard. One would hope that an agent would simply understand the importance of it. Additionally, agents must avoid doing anything that might prevent a sale. For example, wearing perfume or cologne can be an error when the client has allergies. It is hard to commit to a policy once sneezing and swollen eyes develop.

Obviously, being on time for appointments is very important. Some agents also feel there should be a limit to how long the agent stays at the home. Most sales presentations can be accomplished within an hour. Overstaying the agents welcome could irritate a busy consumer. When a sales presentation goes longer than an hour it should be due to multiple questions from the client rather than wordiness on the part of the agent. Never should an agent spend his or her time boasting about personal accomplishments or embellishing.

When setting appointments most states have specific requirements. The agent must immediately identify who he is, which company he represents, and the purpose for his visit.

For example:

Good morning Mrs. Phillips. My name is Bill Maxwell. I am calling you regarding your automobile insurance policy. I represent XYZ Company and I am hoping to be able to save you some money on your policy. May I stop by next Tuesday or Wednesday to review the policy you currently have?

It is illegal to falsely state the purpose of the appointment or the company involved. We have all experienced the annoying telephone calls that tell us they are not selling anything – just conducting an interview by telephone. Most of us are smart enough to know that is seldom the case. While there may be some callers that actually are conducting some type of interview, most such calls are for the purpose of marketing some product or service, despite what the caller claims.

Insurance is a highly regulated industry. Even the initial client contact is regulated. Most states are determined to minimize consumer deception. The Medicare policy market had many problems a few years ago with deceptive practices. The results were many additional hoops for all to jump through in an attempt to remove those agents who were purposely misleading consumers. It is illegal to say or imply that you represent any government entity, such as Medicare. You must clearly state, if you sell Medicare or long-term care products that you represent an insurer – not Medicare or the government.

It is illegal to say or imply that you represent any government entity, such as Medicare, when in fact you represent an insurer.

Getting In the Door

Even when a pre-set appointment exists, consumers may change their mind when an agent shows up on their front porch. That is their right. Agents should never bully a consumer in order to gain entrance to their home. Even when an appointment has been pre-set, it is still necessary to identify yourself upon arriving at their home. Again, the agent must state within the first minutes of conversation who they are, the insurer they represent, and the purpose of their arrival.

For example:

Good evening Mrs. Phillips. As you remember, I called you a week ago and arranged to review your automobile policy this evening. My name is Bill Maxwell and I hope to save you some money through the company I represent, XYZ Company. May I come in?

Agents may cold call. This means they show up at a persons door without an appointment. In all cases, the agent must clearly identify themselves, the company they represent, and the purpose of their visit. If more than one company is represented, state the company you feel is most likely to be sold. It should be clear to the consumer that you do not represent the government or some organization other than an insurer.

For example:

Good morning. My name is Bill Maxwell. I am in your neighborhood today representing XYZ Company as their agent. If you own an automobile you probably have auto insurance. I am hoping to save you some money by reviewing your current policy, making some comparisons, and offering some personal advice. May I come in?

Please note how short the introduction is. It would be hard for a consumer to confuse the purpose of his visit. Bill identified himself as an agent, the company he worked for, and he said he wanted to compare their auto policy. The consumer has two simple choices: to allow Bill in to review their policy or to refuse Bill entry. Either way, Bill has used little of his time (a precious commodity in the commissioned sales world) and the consumer can say he is either interested or not interested. Bill should also present his business card at some point, even if he is not allowed entry.

If the consumer declines the offer, Bill should make a professional exit, never showing any hostility at the declination. He might hand the person his business card, saying: Okay, I understand how busy everyone is these days, myself included. Please take my card and feel free to call me if I can ever be of service.

It is important to be honest, even in small talk. Agents have heard that we must appear to be just like the consumer. If the consumer has a boat, we should love boating. If the consumer has a dog, we should also say we have a dog. If honesty is not part of the conversation it has no business being said at all. We do not have to share every quality with the consumer. Each person is different and each person brings his or her own qualities to the conversation. That is what makes it so exciting to be a salesperson. We meet new and different people every day. Why would we think we have to be like each of our clients in order for them to purchase a policy? Do not listen to those who advocate dishonesty in any form.

It is necessary that the consumer have a feeling of safety. If there is any indication at all that the agent presents a danger, he or she will not be allowed entry into the consumers home. Why would a consumer think he or she could be harmed? Usually it has to do with how agents present themselves. If the agent is too brisk or too pushy the consumer (especially older consumers) may feel threatened. It is best to stand back from the doorway, keeping space between the consumer and agent. Certainly we would not want to do any of the stereotyped things weve seen on television, like putting a foot in their door so it cant be closed. If the agent has a naturally loud forceful voice, he or she may want to modify it if possible. It should be no different meeting a consumer for the first time or meeting the next-door neighbor for the first time. Both are potential friends.

When an agent is too brisk or too pushy the consumer (especially older consumers) may feel threatened.

Many years ago, when television was still fairly new, there was a television series named Father Knows Best staring Robert Young. He played the staring role as the father everyone wished they had. He was also an insurance agent. Todays heroes are never insurance agents because somewhere along the line we became known as untrustworthy, pushy, or greedy. Of course, many industries have suffered this along with agents. Lawyers are commonly portrayed as unethical, yet we know the vast majority are good people. Law enforcement has had multiple incidents leaving people wondering if they should be trusted. Yes, agents have a lot of company in their declining public image.

Why has this happened? What has caused the image of the insurance agent to be so downgraded from the days of Father Knows Best? It would be impossible to single out a single reason, but much of it has to do with stereotyping. It only takes a couple of well-publicized problems to paint all of us with the same brush. The only way to combat this public image is by displaying professionalism at all times, even in our nonworking lives.

Making the Sale (Or Not)

It would be wonderful if every presentation of insurance resulted in a sale, but that is certainly a dream rather than a reality. We realize there will be many disappointments. Even so, it is possible to make a good living selling sound insurance products. People need multiple types of insurance and they buy from someone every day.

If the consumer does not see a need for the product,

there will be no reason to spend money to purchase it.

After agent professionalism, the product is probably the primary reason a consumer will either buy or not buy. If the consumer does not see a need for the product, obviously there will be no reason to spend money to purchase it. An insurance product (called an intangible item) brings no immediate pleasure. It would be unlikely to impress your friends if you waived the policy in front of their face. Even if the consumer realizes the usefulness of a policy, it brings him or her no particular tangible feeling of pride in owning it. There may be personal satisfaction but it is never the same as putting on a new coat, running your hands over the fabric, and standing in front of a mirror to admire how it looks. Nor can you drive an insurance policy to your friends house to enjoy his look of envy. Reading an insurance contract will never deliver the same pleasure driving a new car will.

Knowing this, agents must express the need for insurance in terms a layperson understands. While it is certainly necessary to cover all the key components of a policy, including what will not be covered, it is equally important to do so in a manner that is understandable to a person with no insurance knowledge. The explanation should also be as concise as possible. No one wants to spend his or her Saturday with an insurance agent that drones on and on. In fact, an agent who cant stop talking will miss many sales. How do we see agents on the comedy shows? The insurance agent is often portrayed as a person who bores everyone around him with constant insurance talk. It would seem that society in general considers anything insurance related as boring, and they are largely correct. That doesnt mean a policy cannot be concisely explained in clear language.

Consumers know they must insure their, home, auto (often required by state statute), perhaps their lives, and certainly their health. They will consider any policy they perceive to be of value. It is the agents job to show the value of that invisible product – insurance.

Product Over Commission

Have you heard the expression: He wore dollars on his sleeve? It means the individual was clearly thinking of his own financial gain. When an agent needs income, he or she may display this urgency conspicuously so that clients become uneasy about the agents trustworthiness. Few of us want to buy an intangible service oriented item from someone who seems overly anxious to make the sale. We may like seeing that on the face of the salesman who is offering us a new car (it may mean a better price), but when it comes to a product that will be used in the future we want to be sure we receive quality.

The sales presentation must always focus on the benefits of the product; commission should never be on the agents mind – never. Yes, an agent must pay his or her bills just like everyone else, but when the agent is overly concerned with the commission that will be made it may cloud judgment or cause the seller to make mistakes that could lead to errors and omissions claims. Consumers today are well aware of their ability to sue when the agent makes a mistake. A mistake is more likely to happen when an agent is focusing on the wrong element of the sales process (commission).

At no time should a financial planner

consider commissions rather than products.

Those in the financial planning field are especially vulnerable to lawsuits. Merely claiming to be a financial planner puts the individual in a higher level of fiduciary responsibility. At no time should a financial planner consider commissions rather than products. Of course, this is true for all salespeople, but those who have the highest threat of lawsuit must especially be aware of it.

When products are the primary focus of an agent, it is likely that this will show in their presentation. The client will have confidence that he or she is receiving what they want to buy rather than what the agent wants to sell.

Organization

A disorganized agent rarely looks professional. Organization is a primary part of professionalism. Briefcases should be organized and never appear messy to the client. Application packets should be complete, with all forms included, even those that are not routinely required. Some agents go through the packet forms and highlight in yellow or some light color each signature line. This prevents missed signatures that could result in a subsequent appointment to have the forms signed. This would delay policy issue which would clearly demonstrate to the client that the agent was either inexperienced or disorganized. Either way, the agent looks bad.

Many professionals like to use preprinted

sales presentation forms. This allows the agent to

check off necessary points as they are covered.

Sales presentations must be organized. While client questions may disrupt the presentation, it should never make it appear disorganized. Agents must know their presentation well enough to pick up at any point and move on. Many professionals like to use preprinted sales presentation forms. This allows the agent to check off necessary points as they are covered. This form should be kept and filed with the clients paperwork. If a lawsuit is ever initiated, the agent can then prove the points were covered. In financial planning fields, the agent often has the client initial each point as well.

Full Disclosure

It should not be necessary to say that honesty is required at all times but unfortunately this must be said. Most agents are very honest in their work and personal lives, but those that are not affect all of us. Many states now mandate that ethics be part of the agents required continuing education. The insurance departments realize that this education will not make a dishonest person suddenly become honest, but such education does prevent the dishonest agent from claiming he or she was not aware of their ethical requirements. It allows the state insurance departments to effectively and legally enforce an agents ethical requirements.

Insurance contracts are legal documents requiring legal language. As such, they can be intimidating to the layperson. Our clients may only want to know what claims will be paid, ignoring that which is not covered. It is the agents professional duty to fully cover all aspects of the policy, including policy limitations and exclusions. It is easy to bypass these, especially if the agent fears it will prevent a sale. This is unwise. Not only will the client not fully understand their purchase, but also the agent may find himself or herself in a costly lawsuit later on as the result of the omission. When a claim is not paid, but the purchaser knew it would not be, there is no problem. A problem will develop when a claim is not paid and the client expected it to be.

Product Replacement

Many types of insurance lines are a replacement business. While the states have been working to change this, it will never completely go away.

Some policies should be replaced because they are limiting or so old that they do not contain current language or coverage. However, even very old policies may be better than those currently available in some circumstances. For example, many old nursing home policies should not be replaced because:

The insureds age would cause a dramatic increase in premium cost.

There are health conditions that did not exist when the original policy was purchased.

Replacement would cause loss of tax benefits.

A new pre-existing time period has the potential of resulting in claims not being covered or only partially covered.

There may be other reasons not to replace an existing policy. If the existing policy offers more benefits than currently available, obviously it would not make sense to replace it. Just because a policy is old never automatically means replacement is advisable.

Specific policy replacement forms must be used

and signed by the insured.

States have laws regarding policy replacement. These laws have become necessary because too many policies were needlessly or harmfully replaced. Specific replacement forms must be used and signed by the insured stating that they realize replacement of an existing policy is taking place. These forms actually protect the agent as much as the consumer since consumer acknowledgement is part of the replacement process.

Policy Application

Each new policy requires an application. Some types of insurance allow the writing agent to bind the policy, while other types of insurance must go through underwriting before issuance is possible. Even when an agent has the authority to bind the coverage, generally an application is still filled out.

If policy replacement is taking place, it is extremely important that full attention be given to underwriting requirements. An existing policy should not be allowed to lapse until the new policy has been underwritten, issued, and reviewed for errors that could rescind the policy issuance.

Underwriters will use health and lifestyle questions to determine whether or not the insurer wishes to take on the risk of insuring the applicant. The writing agent should review any question that may not be fully understood or fully answered. The health questions must never be minimized or handled in a manner that leads the applicant to believe they are not relevant to policy issuance or payment of claims. If the agent notices indications of existing health issues that have not been acknowledged by the applicant, the agent must state so on the application or in an attachment to it. There is no point issuing a policy that will not pay claims when they are filed due to false information or information that was not disclosed.

When an agent knowingly presents an application that does

not disclose existing information it is called clean-sheeting.

In a desire to earn a commission it is not unusual for an agent to overlook existing health conditions. When an agent knowingly presents an application that does not disclose existing information it is called clean-sheeting since the agent is attempting to produce a clean application. Once an insurer realizes that an agent has a pattern of omitting or ignoring existing information they will red tag him or her. From that point on (if they accept applications at all) they will be thoroughly examined for omissions or falsehoods. The underwriters might even contact the applicant and go over each application question again. This will delay issuance of contracts and could also be embarrassing as consumers realize the company does not trust its own agent.

Product Delivery

Depending upon the product, the issued policy will either be mailed directly to the insured or it will be sent to the agent for delivery. If the agent receives the policy it is very important to deliver it as soon as possible. Delay of policy delivery could jeopardize the sale.

Upon policy delivery the agent would be wise to go over each page of the policy, stressing important points. Anything that is not covered by the policy should be pointed out. Many professionals carry a check sheet with them that mirrors the policy. As each section is reviewed the agent has the insured initial either the actual policy or their check sheet. From an errors and omissions standpoint, it would be best to have the client initial the check sheet. This form should be filed with the clients other paperwork and kept indefinitely. Relatives of the insured can file lawsuits, so even if the insured should die, the agent will want to keep the paperwork for a year or two longer. If someone should file a lawsuit, the agent will be able to better defend him or herself, based on the paperwork in the file.

This is also the time to review the copy of the application, which will be part of the issued policy. Any errors should immediately be corrected. Even the spelling of the name should be reviewed for accuracy. In some policies, age can be critical to issuance, so even the date of birth should be reviewed. Of course, any errors must be reported immediately to the insurer. If there is any chance at all that existing errors could affect the issuance of the policy, existing policies should not be allowed to lapse.

If there is any chance at all that existing errors

could affect the issuance of the policy,

existing policies should not be allowed to lapse.

Many professionals consider policy delivery just as important as the actual sales presentation. It is an opportunity to review what has been purchased and the importance of the protection. It is also an opportunity to cement the relationship between agent and insured. We all want to trust the people we do business with. When the agent returns with the policy in hand it allows the newly insured to breathe a sigh of relief since what the agent promised has been delivered (in person!).

The hour spent delivering the policy often leads to referrals. If that is the case, it is important that each referral be contacted within a few days. Otherwise, the importance of the contact may seem minimized, potentially embarrassing your new client. He or she may have called the referral, promising them the agent will call soon.

Yearly Reviews

Many types of products need to be reviewed periodically, especially if circumstances have changed. All insurance contracts will not need to be reviewed, but some that may include life insurance policies, auto or fire coverage, and many types of financial products. Why would a review be necessary? Divorce, marriage, adoption, births, or other changes within the family may affect policy performance or how beneficiaries would be protected. Changes in financial standing could leave assets unprotected as well.

Revisiting the Sale (Homework)

Generally agents maintain files on each of their clients. This allows them to refresh their memory on why certain products were selected, customer goals, and family circumstances. While some clients become friends as well as clients, the majority will only be seen annually so it would be unlikely that the agent would remember personal details about them.

Some type of system must be initiated to bring up clients prior to their policy anniversaries. In this age of computers that is fairly easy to do. Even a calendar system may be used, however. Renewals listed in a calendar format (month by month) can serve as a reminder of which clients are renewing each month. Of course, it must be constantly updated as new clients are added.

Each month clients would be contacted for the purpose of reviewing their current coverage. This provides an opportunity for the client to offer new concerns, new or changed goals, and changes in family circumstances. Yearly visits also allow your clients to feel connected to you as their agent, renewing business relationships.

Does the Product Still Meet Their Goals?

One of the primary purposes of yearly reviews is to address the needs of the client, including their goals, and assessing whether or not the product is meeting those needs. This will require enough time to assess past goals, which should be maintained in the clients file, consider new goals, and review how changes in family circumstances may have affected them.

Is there a new driver in the home?

Has the value of their home increased considerably?

Is a family member entering a new profession that might impact their financial situation?

Any type of change that affects the ability of their insurance to perform adequately should be addressed.

Errors & Omissions Insurance

Doctors and attorneys carry malpractice insurance. Securities dealers carry blanket bond policies. Insurance agents purchase Errors and Omissions insurance. In each case, the type of liability insurance purchased mirrors the risk it covers.

Some in the insurance profession feel it is an ethical duty to carry errors and omissions insurance (and they are probably right). Many insurers now require their agents to have such liability protection. It is not an unreasonable requirement. Consumers are increasingly aware of their ability to sue any time they are unhappy with the outcome of a financial situation. As agents, we know that our clients are not always happy about how their claims are handled or how an annuity pays.

Consumers are increasingly aware of their ability

to sue any time they are unhappy with the outcome

of a financial situation.

Agent Liability Risk

When an insurance agent is also a financial planner, a serious conflict of interest automatically presents itself. This conflict is particular to the insurance industry. An accountant who also advertises himself as a financial planner, for example, does not usually sell insurance products. Therefore, there is no question that he will be promoting products for their use rather than any earned commission. Of course it is possible that the accountant may also be a licensed insurance agent. If that were the case, he or she could also have a conflict of interest if insurance products were sold as the result of financial advice.

An agent and financial planner must be very cautious. While conflict of interest can exist for an insurance agent, the degree is greatly increased when an agent is also an active financial planner. The agent/planner must always place their attention on the advice given – not the products sold. Furthermore, he or she must fully document any advice given and any products sold. It must be clearly evident that the focus was on appropriate products rather than any earned commission. If it is appropriate, the agent/planner must forgo their commission and recommend a product outside of their ability to supply it. It is not advisable to recommend their clients go to any person that might be perceived as being a partner of the planner since a conflict could then still exist.

Insurance agents face similar professional liability problems as those faced by other professionals, such as accounts, lawyers, or others in the service fields. Statistically, negligence is the number one reason an agent is sued.[7] Negligence covers many areas, but it often relates to placing too much coverage, not enough coverage, or advising a client to invest in something with high risk. Furthermore, an agent can be sued for giving unauthorized instruction to insureds or unauthorized interpretations of coverage. While this sounds confusing it often relates to giving information they are not qualified to provide. For example, an agent who recommends a living trust may be sued for providing legal advice that he or she was not qualified by either training or experience to give.

Statistically, negligence is the

number one reason an agent is sued.

Each type of agent has liability specific to the type of products they market. For example, a property and casualty agent is expected to mention umbrella liability insurance when selling an auto or homeowners policy. Umbrella coverage does not pay particularly good commissions, so it is not a matter of agent income. Rather it is done to protect the agent in the event the insured suffers a loss greater than the amount of liability protection provided under the auto or homeowners policy. By having covered the potential need for umbrella coverage (and fully documenting it), the agent is protected from lawsuit. That doesnt mean that he or she cant be sued; it means the agent has the ability to defend him or herself in court.

Anything involving a financial investment brings about a higher potential of lawsuit, but all insurance activity presents risk. Was adequate life insurance recommended? Was appropriate health insurance put in place? Were application forms correctly filled out to insure the policy would not be rescinded?

Agents are liable not only to their clients, but also to the insurers they represent. Agents are considered representatives of the insurance company. Brokers are considered representatives of the insured. Both can be sued, however. Even so, the distinction is important if an insured decides to sue both the agent and the insurer. When a broker is sued, the insurer may be able to escape liability. It is more likely that the insurer will continue to also be held liable when an agent is sued. Even if the agent failed to follow insurer requirements the insurer may still be held equally responsible by a court of law. Considering this, it is easy to see why insurers require their agents to carry Errors & Omissions liability insurance.

Even when the agent failed to follow insurer requirements the insurer may still be held equally responsible by a court of law.

Express authority refers to the powers agents do have because the insurer has given it in the agency agreement or agency contract. Ostensible authority refers to those powers the public might reasonably expect an agent to have, even though they may not. It is ostensible authority that the courts often use when determining legal awards.

For example:

Marge buys a homeowners policy. Her house is 65 years old. The company her agent places her with does not insure any home that is older than 60 years, but he fails to realize the age of Marges home. Before the insurer can respond, her house burns down. Since it would not be possible for Marge to know that the insurer would not insure her home, she has a logical reason to believe her claim will be covered.

The insurer would be liable for Marges fire claim, even though they clearly state they do not insure houses that are more than 60 years old. The courts will base their decision on whether or not it was reasonable to believe coverage existed. This is based on ostensible authority – not express authority. It does not matter whether or not the agent actually had such authority in the agency agreement. It only matters whether or not the insured might logically believe such authority existed. In other words, Marge could logically believe that her agent had the authority to issue a policy through the insurer he selected.

Insurance companies have specific forms for legal reasons. It is necessary for agents to follow the insureds requirements to prevent misunderstandings. While the situation with Marge did not involve an agent overstepping his bounds, but rather an agent who did not consider the age of her home, insurers often end up responsible for agents who clearly know they are outside of the insurer requirements.

Insurers can demand payment from their agents when they clearly overstep their authority. It has become increasingly common for insurers to sue their agents for negligence. It has also become common to include a statement of consequences for errors or misconduct in the agency agreement.

It has become increasingly common for

insurers to sue their agents for negligence.

We know agents, financial planners, and brokers are required to act with reasonable care and diligence when representing a policyholder. Agents, financial planners, and brokers are also required to act with the same reasonable care and diligence when representing their insurance companies. They are legally required to follow the agency agreement and all insurer regulations regarding their policy procedures and requirements. There is an implied-in-law duty of good faith and fair dealing imposed on agents and insurers alike. When an insurer is sued for bad faith, the agent is likely to be named in the lawsuit as well. This is understandable since the error often originates with the agent in the selling field.

While many insurance agents manage to escape the consequences of their actions, it would be foolish to think this is always the case. Agents can be liable for both civil and criminal violations. Criminal violations may require a fine, imprisonment, or both. In recent years states have began to take a harder stand than they have in the past. Legislators have supplied the necessary funding to pursue criminal violations that may have previously been ignored. Some states allow a hearing before the state insurance commissioner rather than appearing in court. Depending upon the offense, the state may allow the agent to merely surrender their insurance license.

While negligence is statistically the most common reason for lawsuits fraud is the most common crime committed by insurance agents. Fraud can include many types of actions, including failure to turn in premiums, commingling premium dollars, turning in fraudulent continuing education certificates, or selling products the agent is not licensed to sell. These are not the only examples of fraud, but they are some of the most common.

Giving Our Clients What Is Due Them

Agents and their clients both have a business responsibility when purchasing and using insurance. While the agent has more legal responsibility than the client does, there are ethical responsibilities on both sides.

An agent owes his or her clients:

1. Professionalism and courtesy. At no time should an agent ever become rude even if his or her client is. A professional is held to a higher standard than a layperson.

2. A fiduciary duty. This is the most basic obligation owed by any professional to his or her client. Professionals have knowledge and experience not held by the general public. Therefore, the agent must act first and foremost for the clients benefit over his or her own interests.

3. Honest and full disclosure. Every client deserves to receive the full truth, not just partial truths. Each product should be fully explained, including negative aspects. If the agent makes a mistake, this should be stated and then corrected to the best of the agents ability.

4. Honest contract comparisons. Not only is it unethical to misrepresent an existing current policy, it is also illegal to do so. Policy replacement is not always beneficial for the client. This overlaps honest and full disclosure, but it deserves specific mention.

5. Due diligence on every product sold. While no one can correctly estimate every industry change, if proper due diligence is performed clients will probably be dealing with financially strong insurers.

6. Errors & Omissions insurance. When an agent carries liability insurance, serious errors or omissions may be covered even if the agent does not have the financial ability to do so personally.

7. An understanding of personal limitations. Few of us are able to be an expert in all things. Most agents have a few areas where we are especially trained or experienced. When a client needs information outside of our expertise, it is seldom wise to offer advice, even if requested. It is far wiser to refer them to a person who specializes in that area of services.

8. Appropriate customer service. No agent can do everything immediately for every client, but service should be given in a timely manner. It is not acceptable to wait a week before returning a telephone call, for example, unless the agent is ill or on vacation. Even then, an office staff member should call the client and explain the situation, offering the insurers customer service number if the policyholder is not able to wait for the agents return.

9. Current information. Nothing stays the same forever. Laws change, customs change, client goals change. Agents owe their clients current information. This is accomplished through insurer newsletters and brochures, attending seminars on new products, or acquiring continuing education through other means.

10. Periodic reviews. While it may not be necessary to review all types of policies, many do require periodic reviews in order to preserve the type of financial protection desired.

The insured also has a responsibility any time a contract is purchased. Unfortunately, few people consider an insurance policy a legal contract, even though it is. The insured has the following responsibilities:

1. Courtesy. Even though the insured may not be legally defined a professional, each of us owes others courtesy.

2. Honesty on the application. We realize that consumers often realize their need for some types of policies too late. Perhaps health conditions have developed, or a bad driving record exists. Whatever, the situation, honesty is not only expected, but also required by law.

3. Attention to the details. The consumer owes his or her entire attention during the policy presentation. It is their responsibility to pay attention. The agent is spending his time going over the aspects of the contract; the least the consumer can do is pay attention.

4. Notification if the policy explanation is not understood. Agents are not always accomplished communicators. We would hope they are sufficiently trained to deliver a clear picture of the product being presented. However, if the consumer finds he or she does not understand it, they have a responsibility to communicate this to the agent.

5. Realistic expectations. No policy covers everything. Some goals cannot be met through an insurance policy. Certainly, it is not possible to provide a secure retirement income if there is not adequate time or savings available. It would be unrealistic to expect the agent to deliver this without adequate funding or time.

6. Timely premium payments. When policyholders constantly allow a policy to lapse, the agent must spend his or her time getting it reinstated. There is generally no fee to do this service but it does take time away from activity that would produce income.

Criteria

Before an insurer will issue a liability product, such as errors and omissions insurance, there must be specific criteria for the risk. There must be enough people interested in purchasing the coverage to make the policy affordable. With insurers mandating E&O insurance, it is likely that enough people will buy the coverage. The number of exposure units must be sufficiently large to make the loss reasonably predictable for the insurers analysts.

The insurance company insuring the risk must be able to determine when a loss has taken place. In the case of homeowners insurance, it is the fire or theft that is insured. In the case of E&O liability insurance it is the loss in court. The loss must be definite and measurable. This means the insurer must be able to tell when a loss has happened and be able to determine the exact amount of the loss in dollars. The loss must also be accidental. No company would want to insure an intentional loss. Finally, it cannot be certain that a loss will take place; it must be an occurrence that may or may not happen. Usually, the loss cannot be catastrophic since most types of policies could not be profitable if that were the case. In fact, known severe catastrophic losses would probably be deemed uninsurable.

There are two types of liability insurance available: claims made and occurrence policies.

Claims-Made Policies

Claims-Made liability policies are the most common type available. In fact occurrence policies may be difficult to find and purchase. Under a claims-made policy, the insured is covered for E&O claims only while the policy is in force.

Occurrence Policies

Occurrence policies are the more liberal of the two types of liability policies. The insured, under this type of contract, is covered for any loss that occurs during the policy period, even if the policy is no longer in force. It does not matter when the claim itself is actually filed – only when the loss occurred. Since this type of liability policy is obviously best, it is not surprising that it is also more expensive to buy. Unfortunately, it is also difficult to find for purchase. Most companies now offer only claims-made policies.

Few insurers want to be liable forever, which would be the case with an occurrence policy. Those who insured employers under the claims-made policies found themselves paying thirty and forty years later for claims. A good example of this is the companies who insured the asbestos industry. Injuries from the 1950s were being paid in the 1970s and 1980s. Occurrence policies make it very difficult for insurers to determine amounts of future claims. There are many examples of claims that occurred years after policies had expired.

There is not always agreement on when a claim occurred. This can cause serious problems for insurers if the time of loss cannot be readily determined. For some financial vehicles it may be relatively easy to determine, but in many cases it could hinge on either the date of sale or the date of the actual financial loss, if that did not happen until after the sale.

Errors and omissions insurance pays on behalf of the insured legally owed sums on any claim made against the insured and caused by any negligent act, error or omission of the insured or their employees in the conduct of their business as general agents, insurance agents, or insurance brokers. It is important to note that only legally owed sums are covered. Feeling morally responsible will not obligate the policy to cover losses; they must be legally owed.

E&O liability policies typically exclude coverage for dishonest, fraudulent, criminal, or malicious acts of the agent, as well as libel and slander. This type of insurance does not apply to bodily injury, sickness, disease, or death of any person. Nor does it cover injury to or destruction of any tangible property, including the loss of its use. That means that other insurance should be in place to cover such things as running over the clients dog, or covering the clients knee injury when she fell over the box of files you left by the door of the office.

Policies vary in size. Just as your client can choose to cover one year of long term care in a nursing home or five years of care, agents can choose policies that cover only $25,000 in damages per claim with $75,000 single limit or as much as several million dollars in coverage. With the awards we are seeing today in court cases, agents should consider higher coverages. It is likely the policies available to buy will be claims-made rather than occurrence policies. An agent can be covered for liability to clients, to third parties, and to the insurance company he or she contracts with.

According to an analysis by Shand, Morahan, administrators of the National PIA Errors and Omissions Insurance, errors and omissions claims against agents fell into three categories: 44 percent resulted from failure to place proper coverage; 22 percent resulted from the agents failure to place any coverage at all; and 9 percent resulted from the agents failure to forward or process a policy renewal. Other claims were filed for the agents failure to advise the insured of a policy cancellation (7%), an insurers claim against their agent (2%), and dishonesty or fraud of employees (1%).

As we have mentioned, financial planners have more liability than would an agent, especially if the financial planner acts as both an agent and a planner. Any person wishing to bill themselves as financial planners should be sure to have the training and experience necessary to perform the service. Not all states have requirements limiting who may call themselves financial planners. As a result, many agents do so believing it will increase their image, and therefore, their sales. In fact, it increases their liability and their ability to be sued.

We give a lot of surface talk to ethical conduct. Each of us wants to be perceived as an ethical person, especially to our clients. We would like to believe that integrity and high performance goes hand-in-hand, but there is no evidence of this. A highly ethical person does not always earn the most sales or make the best financial decisions. In fact, some of the best con artists appear highly moral, which is why they are so successful at bilking others out of their money. Of course, we do have examples of highly moral people that do well financially, but it is likely they have the ability needed in their profession. These high achievers have sought the necessary education and communication skills and then merged it with their moral values. When an individual has ethical intelligence and the competency required to do a good job, they will always benefit the company they work for or the company they own.

Your state is mandating courses in ethical conduct for two primary reasons beyond the obvious one: seeking ethical performance in the insurance industry. By mandating courses in ethical behavior the state then has the ability to punish those who fail to act appropriately. The I-didnt-know defense does not hold up. Secondly, it is the hope of the state insurance departments that those who are pushed into conforming to state law and moral standards will eventually form the habit of doing so. Just as we develop many of our personality traits by repetitive actions, perhaps that will develop in our business lives as well.

Unfortunately, most societies value earning ability more than morality so we miss many of the daily examples of moral behavior all around us. Knowing right from wrong does not guarantee an individual will perform ethically. Most of us know right from wrong. The knowledge of morality is not the problem; the problem is acting morally even when there will be no visible reward for doing so.

This completes your course.

Thank you for using

United Insurance Educators

for your continuing education needs.

Telephone: (800) 846-1155

FAX: (253) 846-7536

Email: mail@uiece.com

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[1] National Institutes of Health, lead author Brian C. Martinson

[2] Methodology, April 2006 by A.M. Best.

[3] Bests Rating Center, www.ambest.com

[4] Fitch Ratings Resource Library 2006

[5] Ratings Direct May 2006

[6] About Weiss Ratings 2006

[7] Professional Liability Pitfalls for Financial Planners by Cheryl Toman-Cubbage