Designing Our Future

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 person’s handshake was adequate to bind an agreement.  Today we want to see the signature on the dotted line. We no longer trust our fellow man’s word.

 

  It was not always necessary to consider a person’s ethics. An individual that failed to keep his word was not respected and it was unlikely that another would do business with him. A man’s 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 wasn’t necessary.

 

  But times change, banks no longer loan on the basis of a man’s 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 store’s error as our good fortune; we reelect our politician despite proof of dishonesty.  We complain about the unethical attitude of today’s society, yet as individuals, we seem unwilling to do anything about it.

 

  How have we digressed from accepting a man’s 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 public’s 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 won’t 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 someone else’s 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 (let’s 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.

 

 

  State insurance departments want ethical behavior too.  They want their insurance agents to care more about the state’s citizens than about their own commissions.  That’s 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 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 don’t look heavier when we actually think otherwise. Did we actually spare their feelings or do damage by not being honest?

 

 

  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 can’t say something nice don’t 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 person’s 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 professional’s 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.

 

  How can a state’s 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 person’s 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 consumers buy a life insurance policy, they anticipate it paying their beneficiaries 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 lays the ethical problem.

 

  Agents want to sell the insurance contract’s 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).

 

 

  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.  You’d 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 salesperson’s 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.

 

 

  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 client’s telephone call to researching an insurer prior to recommending it.

 

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 state’s 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 consumer’s 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.”

 

 

  Today’s 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 didn’t save enough for retirement? It must be the financial planner’s fault. Your mother ended up in a nursing home that consumed all her life’s 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 1970’s and 1980’s 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 client’s 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.

 

  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 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. 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. Rating firms must consider 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

 

  Other sources of information that agents should consult are the rating services, such as A.M. Best. This is not the only rating source and others should be considered also.

 

  A.M. Best was incorporated in 1899 and eventually became the first rating agency for insurance companies. The 1992 Life/Health and Property/Casualty Editions of Best's Agents Guide contain more than 1,650 and 2,450 companies, respectively. It is important to realize that the strength of a company is very important because, unlike the banking industry, there is no federal insurance program for insurers. Some states do have guaranty funds, which protect the consumers in those states.

 

  Rating services have not always given the public indications of trouble in a timely manner. Even so, it is important to seek out the information that they offer. A.M. Best states that the primary source of the information presented in their publication is obtained from each insurance company's sworn NAIC annual financial statement as filed with the Insurance Commissioner in the state in which the company is domiciled and licensed to conduct business. These financial statements are prepared in accordance with statutory accounting requirements established by the NAIC.

 

  Ratings reflect a certain amount of opinion regarding each company's financial strength and operating performance. A.M. Best is certainly not attempting to give any type of warranty. Neither do rating companies give any recommendations for any particular companies.

 

  The objective of the rating services is to evaluate the factors which affect the overall performance of the insurance companies. By doing so, they provide their opinion of the company's financial strength, operating performance and ability to meet its obligations to the policyholders. The procedure, according to A.M. Best, includes quantitative and qualitative evaluations of the company's financial condition and operating performance.

 

  Evaluating the financial condition of a company is subject to variations depending upon the person or company doing the analysis. This is especially true when it comes to evaluating insurance companies because so many of their assets are interest and economic sensitive investments. Many of these investments are based predominantly on actuarial projections of future claim payments.

 

  It has become increasingly difficult to predict the amount of loss reserves that must be held in order to maintain financial security. This is especially true for the property and casualty companies because of liberalization of insurance contract interpretations and the expansion of theories of tort liability. The insurance companies have the potential of much larger losses in today's world than was present in the past.

 

  In the life insurance industry, the cash flow and liquidity necessary to meet policyholder obligations has also seen an increase in the complexity of investment-oriented life and annuity products, interest rate volatility, the reduced certainty of future cash demands and growing policyowner and public perception. Today's world is simply more complex than was yesterday's world.  We also saw our banking system’s financial problems which added additional stress. As policyholders feel less secure about major institutions (including life insurance companies) more responsibility lands on our agents. All these factors have affected even well-established major life, health, property, and casualty insurers.

 

  There are several major financial services companies providing ratings of U.S. insurance companies. They include A.M. Best, Demotech, Fitch Ratings, Moody’s, and Standard and Poor’s. A.M. Best is the only one of these that does not also provide financial ratings for other types of businesses.

 

  The rating methodology is what credit rating companies apply when looking at insurers or other types of businesses. Each rating company will have its own way of considering the strengths and weaknesses of each insurer, but even though there may be some differences, the rating companies also have similarities in how they make their judgements. Rating companies are primarily looking forward when they rate insurers. They are trying to predict potential problems in other words, if any exist. While quantitative analysis and qualitative analysis is used, there are also opinions and judgments of industry experts involved. That is why it is wise to look at more than one rating service so that a more complete picture can be seen.

 

  While financial issues are certainly important to look at, other factors can also affect an insurance company. Factors such as company management, corporate governance, and accounting practices are important issues when rating a company. Even the insurer’s work environment can affect an insurer’s effectiveness. For example, a hostile work environment will result in constant employee turnover, so that long-term experience is not present.

 

  Past performance is important in an insurance company’s rating, but so is their approach to the future. Past performance allows rating companies to see how they have handled various issues, but if management changes, or there are significant legal changes, past performance may not be a guarantee for future decisions and performance. Rating companies try to look at expected scenarios for the medium-term and long-term performance of the insurer. In short, they try to predict the future.

 

  Some types of insurers are more difficult than others to predict future performance because it may hinge on unpredictable events. Certainly economic, social climates and natural catastrophes can affect a company’s financial outlook. Insurance companies must, for example, attempt to mitigate the ongoing effects of climate change that are currently causing, and will continue to cause, huge financial payouts as homes and belongings are lost or damaged by large events. This may be referred to as stress-testing analysis for risk assessment.

 

  While different rating firms will state their results in different ways, most look at the business profile of the insurer, the financial profile of the insurer, and the insurer’s operating environment.

 

Business Profile

  The business profile is pretty straight forward. It is evaluated on the basis of market position and brand, products, and diversification to minimize overall losses if one segment of policies is especially hard hit by an event. While other factors will affect the business profile (how well they have invested for example), the set-up of their business profile is important.

 

Financial Profile

  A financial profile includes (1) asset quality, (2) capital adequacy, (3) profitability, (4) liquidity and (5) asset to liability management. In some cases, it would also include financial flexibility. Although each rating company might make assessments different from their competitor, all of them will look at the complete set of facts and opinions.

 

Operating Environment

  This is the element of evaluation that can vary the most among rating companies since some parts of it can be subjective. It includes insurance risk, which is analyzed based on economic strength, the strength of the insurance field as a whole, and susceptibility to events.

 

  The company’s insurance market development also plays a vital role in the operating environment. Some companies are simply better than others at anticipating what the consumer will buy. Sometimes it is as simple as name recognition, but it can also be complex, especially with the consumer role that climate change brings. For example, if consumers recognize that climate change might affect their well-being, they are more likely to buy insurance products they hope will protect them. If the majority of consumers do not recognize climate change even exists, then their buying habits will remain constant.

 

  While rating companies vary in their approach to providing rating scores, generally an insurer’s business profile will be less of the equation and the financial profile will be more of it. For example, a rating firm might give the business profile 30 to 35 percent of the end rating but give the company’s financial profile 60 to 65 percent importance in the final rating. This is reasonable since financial strength plays a huge role when severe weather events occur, or other events cause unusual insurer losses.

 

  The operating environment plays a role too, but it is of lesser importance in the overall survival of the insurance company. The operating environment is evaluated based on the two sub factors:

 

1)     Insurance Systemic Risk, which is analyzed based on economic strength, institutional strength and susceptibility to event risk, and

2)     Insurance Market Development, which is analyzed based on insurance penetration and insurance density.

 

  Once a final score is reached by the rating company, there may still be adjustments based on facts that seem relevant, such as their ability to withstand a severe currently unknown event, or management strengths. Rating companies will then publish a score. Scores are the company’s way of stating the best to worst of the companies. One company might use an A, B, C basis while another uses AAA, BBB and CCC. Whatever format is used, it will show best, middle, and lowest financial ratings for each company.

 

  Before insurer scores are made public, they are surveyed to catch any elements that were wrongly assessed, as well as any special rating situations that might apply or could potentially apply in the future. Accounting procedures often become part of the equation at this point, since accounting formats can sometimes hide potential future problems.

 

  Consumers and agents need to realize that rating firms do not have the ability to predict the future and some types of insurance products present their own set of uncertainties. For example, when long-term care products first came to the marketplace, insurers had no background information relating to them (due to lack of data). One underwriter was quoted as saying he was “underwriting with a crystal ball” meaning he was guessing what their future losses would be. As a result, long-term care policies experienced huge premium rate increases as insurers realized their losses were much greater than anticipated. New state laws requiring greater coverage also played a role.

 

Market Brand and Position

  Some companies have greater public recognition than others. We all know the duck for example, so AFLAC has managed to create a symbol with instant public recognition. Because consumers believe they know the company, if an insurance need arises, that is the company they are likely to contact.

 

  Insurance companies have advertising budgets because they know name or brand recognition brings in premium dollars. Regardless of the type of company, market position, brand, and franchise strength are key factors for the company’s ability to develop and keep a competitive advantage in their particular market.

 

  Many insurers advertise only their key products, such as the case with AFLAC’s duck, relying on their insurance producers to sell other products that are not advertised as widely. Rating companies know that getting the call in the first place is key to remaining at the top of their markets. That is why market recognition is so important, even when it comes to ratings.

 

  Being known by consumers is never a guarantee, of course, that the company will remain financially sound. As a result of that realization, financial stability will continue to remain a key issue. Market superiority is measured in a complicated process that looks at operating expenses as a percentage of net written premiums (NWP). Product Risk profiles consider economic issues related to factors the issuing company might be dependent upon for long-term sustainability and related claims experience (typically over the last three years, but some rating companies look back further than that).

 

  Not all insurance companies have the same means for distributing their products, and this is also a rating consideration. Obviously, the more avenues through which policies can be sold, the better off the issuing insurer is. For example, although the majority of insurance companies rely on agent producers, not all do. Some insurance companies market only through the internet. This is neither good nor bad; it just determines the number of channels through which products are marketed.

 

 

Lines of Business as a Risk Factor

  The insurer’s chosen lines of business influence its risk profile and creditworthiness because individual product segments and classes of business demonstrate different volatility and competitive attributes. In other words, one type of policy may be more profitable than another type of policy. Some policy types might even have unusual factors that affect profitability. Policy risk can take multiple forms and have significant adverse effects on the company’s earnings and capital adequacy if an unusual major event occurs, such as climate change issues.

Insurer Assets

 

  Typically, insurance company assets are concentrated in high quality liquid assets that are low risk. This recognizes an insurers uncertainty of their future liability payout streams. An insurer does not know, for instance, if a hurricane will occur next month, so they must have ready cash available. We usually think of this in regard to property and casualty companies, but severe events can also claim lives and cause personal bodily harm, so even life and health companies can be affected, depending upon the event.

  Rating companies look at the assets insurers own because this is extremely important to their future financial health. Insurers must be able to pay claims and continue to cover their overhead, including paying commissions.

 

  Insurance companies also invest in longer term investments and even in higher risk investments, but this is typically a lesser amount than that put into shorter term low risk vehicles. Riskier investments must be monitored by rating companies on a continual basis since the insurer’s overall financial health could change rapidly in some cases. Agents and consumers, when consulting with rating firms, need to know how often the rating companies look at these issues.

 

  Reinsurance recoverables are mostly relevant for the rating of general insurers. A significant asset of uncertain values on the balance sheet of general insurers is recoverables/receivables from reinsurers. The extent to which reinsurance and are dependent on it varies by economic sectors and lines of business. Some insurers place little reliance on reinsurance companies, while other insurers manage their risk exposure extensively through the use of reinsurance.

  In the analysis of reinsurance, raters will look at the company’s reinsurance recoverables, its concentration or reliance on reinsurers (including how many reinsurers are involved), and the credit quality of the individual reinsurers being used. Higher-rated insurance companies tend to have lower amounts due from reinsurers, although there are sometimes reasons reinsurers are used that do not affect the final company ratings. Personal lines carriers typically use significantly less reinsurance, other than for their catastrophe coverages, than do commercial lines carriers. When evaluating reinsurance exposure ratios, many things are considered and having higher levels of reinsurance does not necessarily signify that anything is wrong, but at the same time, it must be considered.

 

Gross Underwriting Leverage

  As we know, insurance companies underwrite the applications they receive. Generally speaking, the higher an insurance company’s gross underwriting leverage, the more risk it is assuming and the greater the impact is on its capital position from variations in actual performance. Higher rated insurance companies tend to have lower gross underwriting leverage than lower rated companies.

  Gross leverage is the sum of the net leverage and ceded reinsurance leverage ratio of an insurance company. Underwriters and other industry professionals use this ratio to determine the insurer’s level of exposure to estimation and pricing errors and reinsurance companies.

  In financial terms, leverage denotes the technique used to multiply gains and losses and involves the use of borrowed funds to purchase high volumes of an asset in the belief that the income produced by the asset or an appreciation in the asset’s price, will be higher than the cost of borrowing.

  Insurance companies generally focus on two objectives: (1) limit risk from underwritten policies and (2) invest the premiums to generate profits.

 

  As it applies here, the gross leverage denotes a leverage ratio. It comprises the sum of the net premiums written ratio, the net liability ratio and the ceded reinsurance ratio. The desired gross leverage ratio is typically below 5.0 for property insurers and below 7.0 for liability insurers. Since the gross leverage ratio includes the ceded reinsurance leverage, it is higher than the net leverage of the insurance company.

  Insurers list their various financial ratios in their balance sheet that consumers and agents try to read and understand. Professional rating companies are likely better at doing so, which is why we turn to their ratings of the insurance companies.

 

  An insurer’s earnings capacity, both quality and sustainability, is a critical element of the insurer’s creditworthiness because earnings are a primary determinant of the insurer’s ability to meet its policy and financial obligations. Earnings are the primary source of internal income. Diversification, like in our personal households, enable companies to weather downturns. It results in a more stable level of earnings when income comes from varied sources. For insurance companies, diversification across multiple product lines and markets result in a more stable level of earnings, increasing the predictability of internal capital growth and strengthening claims and debt paying ability.

 

  In other words, an insurance company that sells a diversified array of products can weather a downturn in one product because it has other products still bringing in income, whereas a company that only sells one type of product could not weather a downturn in that product’s sales because they have no other type of product income.

 

  Financial flexibility is simply an important element in the financial stability of any insurance company. A full analysis of any insurance company is complicated, which is why we rely on others to do it. Few insurance producers are equipped to do a financial analysis, lacking the education or experience to do so. While there are some ways to recognize a faltering company, most people would not recognize the signs until it was too late. It makes much more sense to leave it to those who are well equipped with knowledge and experience.

 

 

Financial Flexibility

 

  Flexibility is important in many areas of life, and it is certainly important when it comes to rating insurance companies. Analyzing financial flexibility demonstrates whether a company can survive if one area of their income is threatened. Each company must be able to service its policies and obligations even when they are not generating additional income. Existing business is funded via internal capital generation. Insurers must be able to raise capital externally for additional growth or acquisitions and meet unexpected financial demands, regardless of what caused the unexpected demands. Flexibility is often measured by the company’s overall net effect of the current position of the various metrics. The metrics include, but may not be limited to, adjusted financial leverage, total leverage, earnings coverage, and cash flow coverage.

 

  Financial leverage measures the amount of a company’s capital base that is financed through borrowed money, short and long-term debt, and hybrid capital securities. Leverage may be adjusted by considering all forms of debt, including off-balance sheet liabilities. Shareholders’ equity in the adjusted financial leverage calculation includes other comprehensive income and the impact of changes in other income, primarily from changes in an investment’s values. These impact the markets’ perception of the insurer’s ability to access capital markets at attractive funding costs.

 

  The earnings coverage ratio considers consolidated earnings, including pre-tax, pre-interest expense and preferred dividend coverage. The focus is on coverage of interest expense and preferred dividends although the numerator and denominator may be adjusted for pensions and leases. Because there can be regulatory restrictions on dividend capacity from an operating company to its holding company, the earnings coverage ratio must be evaluated in the context of the insurer’s actual flexibility in terms of cash available to be moved to the holding company.

 

  The cash flow coverage ratio relates the recurring sources of cash to the company to its uses of cash. For cash sources, the maximum allowable dividends may be included from regulated subsidiaries, if there are any. For cash uses, interest expense and any preferred dividends may also be included.

 

  Analysts also consider the company’s liquidity, which we previously touched on, to the extent to which financial debt obligations, covering near-term debt maturities, interest expense, and preferred and common stock dividends are involved.

 

  For operating environments, firms conducting credit ratings of insurance companies focus predominantly on company-specific characteristics that may be different from other companies or even the same as other companies within the industry. They are looking at the business and financial parameters in the context of an insurer’s operations. They consider the extent to which external conditions, which is the operating environment, can exert a meaningful influence on the insurers’ credit profiles, even when it might be beyond the insurer’s control. Analysis of the operating environment shows relevant economic, social, judicial, institutional, and general business conditions in a particular country or in an area within a country. Geographical-area-specific information is often part of the analysis. Elements of a specified area can impact trends and developments over time, which might have a bearing on the insurer’s business income or expenditures. This might include economic issues (such as poverty), major social issues, or political developments.

 

  Most people may not realize the degree to which social, political, or economic issues may affect insurance purchase and other insurance related issues. If a neighborhood or county is experiencing unusual poverty, for instance, insurance sales are sure to decline. Poor people will buy food and pay rent before they buy a disability or long-term care policy. They may not even be able to afford minimum levels of car insurance when there is little household income.

 

  Even things like political atmospheres can affect the insurance policies that consumers buy. In uncertain times, people may be reluctant to spend any extra money until they are sure how the economy will affect them.

 

 

Corporate Governance

 

  Corporate governance typically involves a board of directors, but each company should be looked at individually. Management will bring with it the views and expectations of each person. Good management involves expertise and experience. The board hires the best people they can find to run the company, but independent reviews are important to the key financial reporting and risk management processes.

 

 

Special Rating Situations

 

  While most insurance companies are analyzed using standard measures, there may be cases where situations require something more. In a few situations, a single rating factor or sub-factor may be so important to the company’s financial health and solvency that it overrides all the other factors on the final scorecard. This might occur in highly adverse situations where the insurance company’s solvency or liquidity is at stake. Examples might include the breach of local capital-solvency or risk-based capital thresholds that precede regulatory intervention or concerns of a looming liquidity crisis. Perhaps a large debt is coming due that will absorb all liquid assets or perhaps a severe event has taken place that will exacerbate claims that were not expected.

 

  The general presumption is that management is competent, and governance and risk management controls are in place. However, when events or situations arise that were not anticipated the overall health of the insurance company can be compromised.

 

  Relevant and accurate information always plays a critical role in any financial analysis. Insurers prepare financial information under generally accepted accounting principles, whether developed in-house or based on international standards. In most cases, this enables insurance companies to prepare for debts coming due and the normal amount of benefit payouts. The federal and state governments also have guidelines for what is expected of insurance companies. Despite the many safeguards in place, insurers can still find themselves in an adverse financial situation. Of course, no insurer wants this to happen.

 

 

Insurance Companies and Climate Change

 

  Event risk generally applies to countries that do not have the development America has, so America does not experience the threat to the economy like lesser countries might. Even so, climate change may cause some to pause and wonder if America could become susceptible to event risk. Following so many devastating financial losses in the past few years, there is no doubt that the damages have affected many people.

 

  Many things could come under “event risk.” However, a major event risk that is often under-considered is climate change. Typically, event risk is defined as the risk of a direct and sudden threat to a country’s credit profile and exposures to financial, environmental, economic and political stress. While we would not expect that to happen in the United States, we might experience issues to a lesser degree from climate change and the resulting severe weather events.

 

  By its nature, the insurance industry is averse to risk. However, as climate changes and natural events such as floods, hurricanes, and fires increase in frequency and intensity, insuring residential and commercial structures in disaster-prone areas is a growing liability. Some providers are even opting to leave the market entirely due to the increased financial risk of providing protections in certain areas.

 

  Insurance companies are certainly aware of the potential losses severe weather events cause. While politicians argue about climate change’s existence, insurers are preparing for continuing high losses from fires, floods and other weather events. Some climate change experts are warning that rating agencies are contributing to inflated corporate valuations by failing to reflect the risks present in their credit rating assessments.

 

  It is possible that markets could find themselves caught off guard if suddenly the value of corporate bonds, particularly in the energy sectors, deteriorate dramatically due to climate change events.

 

  There are steps the rating agencies can take and probably will at some point. They include, but may not be limited to, the following:

1.     Assign accountability procedures for incorporating climate risks into assessments specific to the industry being addressed;

2.     Develop a transparent risk assessment methodology to identify current and emerging climate change issues, particularly as they might apply to credit risks. Most experts feel a timeline is also needed, such as ten years.

3.     Invest in forecasting capabilities to improve the accuracy of assessments.

4.     Require companies and insurers to disclose additional information on the impact of climate change on their business and future underwriting practices.

5.     Clearly communicate to the insurers and the public how considering these factors might influence rating decisions.

 

  These changes are not without cost. Although insurers are aware of their potential losses due to severe weather events climate change is bringing, American insurers are lagging in addressing climate change issues. European companies have done better at preparing than have American companies, but there is little doubt that all insurers will do what is necessary eventually.

 

  The increasing chance of extreme weather from climate change is causing insurance companies to adjust their models as they on increasing risk. Risk analysis groups have detected an increasing frequency of Atlantic hurricanes due to climate weather changes, making insurers rethink their models.

 

  When it comes to calculating the likelihood of catastrophic weather, the insurance industry has a huge financial stake in trying to mitigate losses. They cannot wait for politicians to stop trying to appease their financial backers; they must make necessary changes now.

 

  The people and companies that try to make the best possible risk assessments they can, with no vested interest, are neither pro- nor anti-insurance; they are neutral. A company that created software models to allow insurers to calculate risk, named Risk Management Solutions (RMS) says they are seeing something new in recent years. In the past they looked at history to make their assessments, but they are now finding that history is no longer reliable when predicting future weather events. In too many geographical areas today, activity is not the average of past history, as it has historically been.

 

  In 2013, RMS said that predicting models had become difficult due to weather changes, and that continues to be true today. The pronounced shift can be seen in extreme rainfall, drought, heat waves (causing fires in many cases), and windstorms. There is agreement that the reason is climate change, driven by rising greenhouse gas emissions.

 

  As we know, insurance is designed to spread out risk over coverage bought by many. We expect some people to have losses, but we also expect the majority to not have them. It is the old cookie jar example. Everyone puts one cookie in the jar; then a few people take two or more cookies out. Insurers use risk analysis to determine how many cookies need to be maintained in the jar to cover those that will be removed.

 

  As it pertains to fire insurance, most houses (luckily) do not burn to the ground. When there is fire damage, the home is usually partially damaged rather than completely damaged. Additionally, it is typically only a single house that is damaged, not an entire neighborhood. It is this scenario that insurers base their risk analysis: the past history of home fires.

 

  To further protect themselves, insurers often buy their own insurance policies from reinsurance companies, who make the same types of calculations for analyzing their risks.

 

  Determining how much premiums need to be charged to cover claims, personnel and overhead, including the claims for larger disasters, is what companies like RMS do. Basically, their job is to think of worst-case scenarios and work out the financial requirements to keep the insurer profitable while still paying all the claims filed.

 

  Historically, there was enough data to make these determinations. Today, that is not always easy. When we consider the massive fires experienced in California alone, the amount of money paid out in insurance claims is difficult to even comprehend. There have always been isolated events where hundreds of homes were destroyed by one event. What is different today is the number of severe weather events. Instead of maybe one every few years, these are now yearly events with multiple weather catastrophes occurring each year.

 

  The best strategy has traditionally been computer models, which simulate thousands of the most extreme weather disasters, including record-setting hurricanes just when the power grid is overloaded due to a heat wave. In other words, the worst-case scenarios. Despite their attempts to produce worst-case scenarios, however, Mother Nature is producing greater numbers of events than history can predict.

 

  After the 2004 and 2005 hurricane seasons, computer models were changed in an attempt to gain perspective on weather changes. At that time, they realized that historical averages no longer applied. Since insurance companies want to know what is happening next year, not twenty years from now, it is becoming much more difficult to predict what climate change will give us. It is easier to predict twenty years from now than it is one year from now.

 

  It is not just increased hurricane activity that we are seeing. There has been flooding where flooding was not traditionally a concern. There has been heat waves in areas that did not normally have them.

 

  On the whole, the face of risk analysis is changing. Those changes will affect premium rates and who or what can be insured.

 

 

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.

 

 

 

  In our case, United Insurance Educators submits a course for approval in our domicile state, which is Washington. Washington’s 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 Washington’s determination, most states will do so. A universal formula has also been developed which evens 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 are 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 state’s requirements).

 

  Some home study and internet courses are considered the equivalent of being in a classroom.  These 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, 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 instructor’s 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 changed the quantity of continuing education hours they required as a result of the Midwest Zone agreement. Agents in some states must now complete a greater quantity of credit hours than before, while agents in other states have a reduced requirement. The Midwest Zone agreement requires a continuing education requirement of 24 CE credits (each credit is equal to one hour of education) per two-year licensing renewal period. Of the required 24 CE hours, some portion of those must be in ethics. While it may vary, primarily states are requiring three ethic credits. Agents must be aware of their state’s requirements.

 

  Many states have other requirements too, such as a long-term care education for those who sell long-term care products. Many states have an annuity education requirement in order to sell annuity products. Many types of professions require specialized education as well, such as Certified Financial Planners.

 

An Agent’s Personal Responsibility

  Many types of careers have specific requirements. When education is one of them it is always the individual’s 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.

 

 

  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.

 

 

  Additional education is always beneficial, if only to improve one’s 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 agent’s 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 agent’s welcome could irritate a busy consumer.  When a sales presentation is 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.

 

 

 

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 person’s 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 consumer’s 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 we’ve seen on television, like putting a foot in their door so it can’t 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.

 

 

  Many years ago, when television was still fairly new, there was a television series named “Father Knows Best” starring Robert Young.  He played the starring role as the father everyone wished they had. He was also an insurance agent. Today’s 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.

 

  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 friend’s 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 can’t stop talking will miss many sales. How do we see agents on 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 doesn’t 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 agent’s 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 agent’s 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 agent’s 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).

 

 

  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.

 

  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 client’s 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 agent’s 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 agent’s 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 agent’s 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 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 insured’s 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.

 

 

  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 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.

 

 

  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 client’s 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.

 

 

  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 technology 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 the product is meeting those needs. This will require enough time to assess past goals, which should be maintained in the client’s 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.

 

 

 

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.[3] 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.

 

  Each type of agent has liability specific to the type of products they market. For example, a property and casualty agent are 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 doesn’t mean that he or she cannot 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 ensure 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 the insurer’s 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.

 

 

  Express authority refers to the legal 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 homeowner’s 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 Marge’s 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 Marge’s 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 it was reasonable to believe coverage existed. This is based on ostensible authority – not express authority. It does not matter whether the agent actually had such authority in the agency agreement. It only matters whether 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 insured’s 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’s 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.

 

 

  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 begun 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 client’s 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 agent’s 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 honesty and full disclosure, but it deserves specific mention.

5.       Due diligence in 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 insurer’s customer service number if the policyholder is not able to wait for the agent’s 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 as 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 insurer’s analysts.

 

  The insurance company insuring the risk must be able to determine when a loss has taken place. In the case of homeowner’s 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 1950’s were being paid in the 1970’s and 1980’s. 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 client’s dog or covering the client’s 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 two different organizations, errors and omissions claims against agents fell into these categories: the most claims resulted from failure to place and then maintain proper coverage for individuals (almost three-quarters), with many of those claims involving the agent’s failure to place any coverage at all. Lack of full disclosure also produced many E&O claims. This included making sure the buyer understood what they were buying. It also included communication regarding renewals and premium changes. Administration errors were also listed as a reason.

 

  Failure to send accurate client information to the insurer also resulted in E&O claims. There are three primary avenues of communication: agent to client; client to agent; and agent to insurer.

 

  Financial planners have more liability than agents and how this is state regulated varies. As a result, many agents make claims for more expertise than actually exists. Doing so 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-didn’t-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.

 

 

End of Chapter 9