ETHICS
AGENT DUE DILIGENCE
So many areas of ethical behavior are overlooked. One area that should not be overlooked deals with due diligence. We feel that the professional agent prefers to deal only with financially sound companies, but many agents may not know how to locate these companies.
There is both a technical way of locating sound financial companies and a common sense approach to it. Understandably, it is difficult for an agent to research each individual company, although that must be done to a certain degree. Sometimes, a common sense approach actually works better because much of the information that an agent may find on any given company will be outdated.
A certain amount of technical analysis of historical data is important, especially as a point of reference to start with. To spot a potential problem before it happens, however, a common sense approach is often more effective. Once a potential problem is identified, technical analysis is then appropriate again. The technical analysis will either confirm or deny the suspicion of a financial problem within the company.
Financial due diligence could also be called solvency appraisal. Traditionally, such an appraisal is done from a technical standpoint. It is true that if you told another agent that you simply had a "gut feeling" that a company is having financial trouble, you are not likely to be taken seriously. As a result, even if it is simply a gut feeling, you must be prepared to then proceed to the technical detective work that is necessary to validate your feelings. Many "gut feelings" originate from sensing that something has changed or is amiss. This might be something as simple as delayed claim payments. There are some problems or limitations to the technical approach:
1. First of all, agents rarely conduct their own technical analysis. Instead, we look at what others have compiled. It would simply be too time consuming to personally research each company we deal with and most agents are not willing to spend the amount of time it would require. In addition, few agents would even know where to begin such an analysis.
2. Most professionals feel that a true technical analysis requires historical data on the company in question. In the past such data was considered important, but with so many rapid changes occurring, the validity of such data may now be questioned.
3. Even though we do recommend that agents stay with "A" rated companies, there is evidence that the rating services are generally unreliable when it comes to predicting insolvencies. This appears to be true of both corporate bond rating services and insurance rating services. For example, the Baldwin United companies were rated A+ when they became insolvent. Executive Life was also carrying an A+ rating when it became evident that the company was in trouble. It should be pointed out that Executive Life did have substantial resources and has been able to absorb many of the losses. These resources are part of the reason the company carried an A+ rating. As these examples show, the agent cannot totally rely upon the ratings given by services.
4. One problem with technical analysis lies in the oversimplification of only a few indicators. Agents and consumers alike tend to lock in on only one element in the analysis. The public, for example, knows only about the rating systems and seldom understands precisely what those ratings really indicate.
5. Generally speaking, the management of a company determines its business practices. If the company is not a mutual company, who owns it becomes an important indicator. If the owners of the company are not the managers, then who is managing the company is also very important. Corporate values and culture can often be shaped by a single powerful person. Along this line, if the management of a company changes, the strength and weakness of that company can also change.
6. Product design is something that agents often do spot immediately, especially if the agent is experienced. Product design tends to be a mirror of those who are running the company. It is a fundamental extension of the leader's vision, desires, and values. Are there gimmicks or sound benefits within the product? Some products seem to utilize a "bait and switch" sort of theory. Common sense should also tell us that a product that puts out more than it takes in will not benefit the companies or its policy owners.
7. As we have discussed, replacement selling is more common than ever before. As a result, the risk of adverse news or competitive interest rates can cause disloyal policyholders. This makes distribution a point of common sense. A debt loaded volatile national and world economy does nothing to reduce the risk that could pull a company into insolvency. Distribution of products must, therefore, be considered. Stockbrokers are notorious for rolling their money quickly. If a company does a lot of single premium or asset intense products (such as annuities) distribution can become critical. Insolvency risk is much higher when insurance products are distributed through a limited number of non-insurance distributors.
To recap, the technical approach has some limitations:
1. Technical analysis is difficult and few agents know how to do it.
2. Historical data is not always reliable.
3. Rating services are useful, but not necessarily an indicator of insolvencies.
4. Technical data is often oversimplified or simply misunderstood by both the agent and the consumer.
5. The ownership and management of companies that are not mutual companies is an indicator of company practices. Few agents or consumers personally know who is in charge of the companies they deal with.
6. Product design is a fundamental extension of the company's management, but technical analysis seldom takes this into consideration.
7. Distribution is critical for the solvency of a company, but it is very difficult to know how products are distributed in technical analysis.
Despite these limitations, technical analysis is still useful as long as it is combined with the agent's common sense. There are many ways that an insurance company can get into trouble. Usually it is a combination of problems; seldom one problem alone. Instead of making little mistakes, the company might make one or more large mistakes that, of course, can have severe consequences. Perhaps losses greatly exceed gains and capital and surplus are consumed. When money goes out faster than it comes in, no business or individual can run efficiently. This is called a negative cash flow. A positive cash flow means more money is coming in than is going out. In addition, if one or more of these problems is made public, policyholders may begin to withdraw their money that only intensifies the existing problems.
Technical analysis is still useful as long as it is combined with common sense.
There are many ways that an insurance company can get into trouble.
Usually it is a combination of problems rather than one problem alone.
The old saying, if something looks too good to be true, it probably is, is a good common sense approach to insurance, as with so many things. The easiest product to sell may well be the very product you should avoid. It will save you future embarrassment and liability to avoid some products.
A common sense approach to due diligence is a practical way for many agents to spot potential trouble for themselves and their policyholders. The object is not necessarily to find those companies that are sound, but rather to avoid those companies that are not. Such things as ratings and historical data certainly do have their value, but they should not be the only indicators used.
An agent's personal liability in today's world is growing with every new product. In fact, any agent who does not have errors-and-omissions insurance is very foolish. Even the most careful agent can find themselves in the middle of a lawsuit. It may not even be initiated by the insured, but rather by their family after the insured has died.
Ethics is constantly a topic in regards to insurance, but few agents really know how to prevent client fears. There may be conflicting loyalties and the battle to reconcile personal values with financial goals is often a major industry ethical dilemma. Many people consider the phrase business ethics to be an oxymoron. Ethical insurance agents may never be able to convince some people that the words business and ethics go together. It is true that there have been multiple debates as to whether it is ethical for businesses to have any priority other than profits, as long as those profits are made legally. Are ethics and the pursuit of profits hopelessly at cross-purposes? It is an ethical requirement for any business to stay profitable for their shareholders, if applicable, and for their employees who rely on their incomes.
The insurance industry has suffered many image problems, some of them deserved and some of them not deserved. In public opinion polls, insurance agents routinely end up at the bottom of the list between attorneys and politicians. Consumers simply do not feel that insurance companies and their representatives consider ethics to be a high priority. In fact, many consumers feel that ethical behavior of any kind in the insurance industry exists only because the states mandate it.
Insurance professionals must deal with questions of ethics every day, many of which have no specific answer. For example, to whom does an agent owe his or her allegiance: the insurance company or the policyholder? It must be remembered that an agent represents both parties. Many agents have found that the insurance companies themselves do not seem to reward ethical behavior, but are more likely to reward the "high producer" instead.
For many questions of ethical behavior, there must be consideration of all facts involved since the deciding factor can vary from situation to situation. An agent must ethically give the insurance company all facts considering the insured that are pertinent to the issuance of the policy, but on the other hand, the agent also owes it to his or her client to give all the pertinent facts regarding the insurance company. In other words, the agent has an ethical duty to both the insurance company and the policyholder.
Most people consider loyalty to be an element of ethics. What does an agent do when he or she considers the agency instructions to be unethical? Since loyalty is a component of ethics, which point of ethics is more important to follow?
Marvin, an insurance agent, has worked for a particular agency for several years. The company has been very good to him and supported him in many ways, even when his production was down. Marvin has always prided himself on disclosing every element of the product and insurance company being represented. Lately, Marvin is again experiencing a low production (selling) rate. His supervisor, Darin, has agreed to listen to Marvin's presentation to see if he can spot the problem. When Marvin has completed it, Darin looks at his notes that he took during the presentation.
Darin: "You certainly know your facts and figures, Marvin, but it seems to me that you know them too well perhaps."
Marvin: "Too well? When I first entered this field we were told that it was important to know every element of the policies."
Darin: "Yes, that's certainly true. However, knowing every element and discussing every element are two different things. Marvin, you are confusing your clients. Just tell them what to take and tell them why. You don't need to cover every financial element of the company or the policy."
Marvin felt very confused. His presentations had always included facts, both good and bad, about the company being represented and the policy he was recommending. Marvin realized some people backed out of the sale because certain aspects worried them, but he had always thought he must ethically let people know everything up front.
Darin considers himself to be an ethical person. If you were to accuse him of being unethical, he would be insulted. Marvin also prides himself on being ethical. Which set of ethics is right? Is Marvin over-emphasizing negative points rather than looking (and selling) the positive side to the policies? Or is Darin leaving out important factors that need to be discussed with the clients? Darin feels too much information is just confusing and not actually helpful to the client.
On the loyalty issue, Darin is Marvin's boss. Marvin is supposed to do as Darin tells him. Marvin likes Darin and knows that he is truly trying to help Marvin improve his own financial situation. Marvin also likes the agency that he works for, but he realizes that the agency cannot (and will not) continue to support an agent that is not meeting his quota on sales. What are Marvin's options? If Marvin begins to leave out facts that he feels are important, is he behaving unethically? Since Darin would not feel that he was, is it all right to adopt Darin's set of ethics in order for Marvin to increase his sales? Whose set of ethics should take priority?
An insurance agent can find facts and figures to back up nearly any position that he or she wishes to take. Peter Lardner of Bituminous Insurance Companies cautions that giving clients too much information (taking it to extremes) is not effective. "We are so captivated by fully informing consumers that we totally ignore the fact that we are informing them far beyond their capacity to use the information we are giving them. We give them warnings on bottles and tell them the chemical names of things and it doesn't mean a foggy thing to them." Certainly Mr. Lardner is not advocating giving too little information, so how much is enough?
In the past, most agents felt that giving the financial rating assigned to a company by the A.M. Best Company was sufficient, but in recent years that has not proven effective. In one case, it may be sufficient, but in another it may not be enough. How is an agent to know when he has given enough information or too little? Must the consumer take more responsibility for looking up facts and figures on a specific company or is that the role of the insurance agent and his or her agency?
It is often said that the commission structure that has been set up by the insurance companies have been a primary cause for ethical problems within the industry. There are those that say a commissioned basis in and of itself fosters an "anything goes" attitude. That does not completely explain the problem, however, since many other industries also function on a commission basis without the negative image that has plagued the insurance industry. Most experts feel that commissioned sales, of any type, is ethically neutral although it is possible to have unintended results if it is not structured properly. It is not the commission pay system itself that causes problems. Rather, it is how people prioritize their work and their lives that bring out negative results. When making sales becomes the priority, without any other aspects considered, integrity can certainly suffer.
Any business, including ethical businesses have profits as a goal. In fact, being successful is not unethical, but rather an ethical aim of a business. It would be unethical to the owners or stockholders of a business to avoid profits. Being profitable, however, should not alter other ethical concepts within the business. Just as profits and ethics can work together, so can ethics and commissions if other ethical concerns are also considered.
It has been noted that Property & Casualty lines have little incentive to use one company or another on the basis of commissions, since they all tend to pay about the same. It is more likely to be an issue in the Life & Health field. Some advocacy groups are calling for the discontinuance of all commissioned sales people. Interestingly, few of the consumers themselves seem to view commissions as the root of the problem. Consumers are more likely to target the insurance company itself as the major source of dissatisfaction. Groups that are calling for the discontinuance of the commissioned agent force may not be taking into consideration the matter of customer service. While there are certainly a measure of agents and agencies that do not provide service, there are many who do. Without commissions, it is unlikely that service will get better. We have seen many industries that do not utilize commissions that have very poor customer service practices.
A basic question asked not only by the consumer, but by the agents themselves, is whether or not the insurance companies and management staffs actually value ethical behavior in their field force. While most people do feel that practicing good ethics is also practicing good business, many agents feel that there is little, if any, recognition for ethical behavior or practices. Certainly, underwrites value ethical behavior because it is necessary in order for them to underwrite the policies effectively. When an agent has a reputation for giving solid information, the underwriters are likely to do a better job for that agent in terms of time and judgments. On the other hand, when underwriters know an agent consistently omits needed information or is vague in the routine information given, then underwriters are much more likely to question every aspect of that agent's submitted applications. Certainly, in this area, ethical behavior is rewarded.
Clearly, the issuance of insurance policies is based upon ethical behavior. There is the general agreement that the insurance industry is founded on ethics. It would be impossible for the industry to operate without it. The risk-sharing mechanism is closely dependent upon the ethics of trust. The insurance industry depends upon the consumer to act ethically when disclosing personal information, it depends upon the agent to relay that information correctly to the underwriters and it depends upon the insurer to keep their promises that appear in the contracts. Even the claims that are submitted to the insurance companies depend to a certain degree on ethical behavior. Of course, we all know that many fraudulent claims are submitted each year, which drives up our costs for insurance protection. Such fraudulent claims are certainly unethical. Ironically, many consumers feel insurance companies have lots of money, which makes filing false claims, in their minds, acceptable.
There was agreement from those participating in the ethical review for Insurance Review magazine that encouraging ethical behavior, within any company, must begin with top management. A strong, understandable code of ethics must not only be a written doctrine, but also practiced by those at the top. The more massive a company is, the more a written code of ethics is needed since many of the employees may never have access to top management. When ethical codes are clearly stated and demonstrated by a company, the lower management and staff are more likely to behave ethically themselves because they know it is expected.
Of course, a written code of ethics that is buried in a company manual, but seldom discussed, is not likely to be taken seriously by the employees of the company. This is especially true when management does not appear ethical themselves. Employees certainly want to be recognized, so it simply makes sense for management to recognize ethical behavior. Such recognition will promote ethical behavior among the employees, which will benefit the company itself. On the other hand, if top management seems only to recognize sales without any concern as to how they are achieved, the message will be clear to the sales staff.
Some companies conduct ethic-training sessions. Questions that arise in the sales field every day are looked at for possible solutions, which are both ethical and sensible. Ethical competency often is simply a matter of education. It is also a matter of peer pressure. When coworkers expect ethical competency, others are more likely to act ethically competent. Ethics must be made a part of the decision making both by the company management and individually by the personnel. If employees are to act ethically, however, they must feel confident that their superiors will stand behind them.
In business, many ethical qualities simply do not equate into economic terms. When companies must pull potentially dangerous products, due to bacteria or a potentially dangerous issue, their first concern must always be for the safety of our citizens; economic concerns must be second. However, there is a financial issue as well. A company that does not do what is right for their customers is likely to experience liability lawsuits and customer dissatisfaction. Therefore, in some cases it may be a business decision that considers financial consequences as well as concern for product-users. Additionally, when conduct is considered right by consumers and the company’s social recognition is positive, employees begin to place a value on ethical behavior. This also tends to promote pride in their organization and ethical traditions.
We live in a society where rules and regulations seem to grow daily. With the abundance of rules and regulations, some people feel simply asking "is it legal?" is enough. Many salespeople do not realize that simply following the laws is the minimum acceptable level of ethical conduct. It is up to the business organization to set the actual ethical code of conduct that they require. Supposedly, that will be higher than is actually mandated by law. Of course, each individual must also set personal standards of conduct. We all know of individuals who do simply set the laws as their standard of ethical behavior. For these individuals, as long as they are not breaking the law, any behavior is deemed acceptable, regardless of how many other people are taken advantage of.
Doing the proper thing ethically is simple when the choices are clearly between an action that is right or wrong. Stealing or not stealing is basically a clear-cut choice, for example. Making ethical choices is not so easy when the decision is between two sets of action that may both be right or may both be wrong. This generally has to do with two "sets" of ethics, either one of which may be valid. For example, we have all probably lied to someone in order to spare their feelings. This may not necessarily make the action right, but the choice was made between truthfulness and another person's feelings. Both of those choices may be ethical (it is not right to lie nor is it right to hurt another person).
Ethical behavior tends to have long-range (versus short-range) benefits. In the short term, it is often advantageous financially to make the sale no matter what tactics are used. In the long term it is more advantageous to behave ethically even if that means forgoing the sale. When an individual is financially stressed, it is more likely that he or she will ignore the ethical requirements making the financial gain the top priority. In fact, this does not only apply to individuals, but businesses as well. When an agency or other type of business, is struggling, their first concern may be profits rather than ethics. That is why salespeople must use some thought regarding whom they choose to work for.
We have all heard of Regan's "trickle-down" economics; ethical conduct can be thought of in the same way. When those above us are ethical, we also tend to become ethical. When those above us stress financial goals, rather than ethics, we are likely to value financial goals above all else, too.
Ethical rewards follow the trickle-down rule too. Our rewards for ethical behavior are often not realized at the moment of the action. Rewards may come years later. Religious persons base many of their actions on the rewards they feel will be theirs after death.
Society as a whole has become much more demanding when it comes to ethical behavior. At the same time, we are living in an age when financial success is more likely to be admired. Often, we feel that others wish to be treated ethically, but others are not necessarily willing to do the same for you. Nearly everyone has, at one time or another, gone out of their way to do something for another only to be treated badly in return. Such a situation does not change what is ethical.
Sometimes ethical behavior is aided by our advancing technology. People may act more ethically simply because they realize that their chances of being caught in unethical actions are greater today than in the past. In the past, our technology often did not allow vital information to be brought out quickly. Today, with the aid of computers, information is much more available to a greater number of people. This brings up another question: when individuals act ethically not out of desire, but because they know they must, is that person still ethical? As we previously pointed out, sometimes we are only able to dictate a person's behavior, not their ethical standards.
Whether or not we realize it, each of us already has a public image, which is either good or bad. We sometimes make the mistake of believing only large companies must be concerned with public relations. It is doubtful that any other area is more important than how the public (the consumer) sees us. Having a good public image means that more referrals will be generated, more business will stay on the books and people will be more trusting of our advice. In fact, when businesses sell, it is often the public image of the company's name that raises the price. When a business has a reputation for excellent service or products, the business is simply worth more money.
We sometimes think of public images as having to do with advertising budgets, getting out in the "right" circle of people and so forth. Actually, our public image is simply how others perceive us. The definition of ourselves are seldom set down by us, but rather by others who we come in contact with. What we personally establish are the traits others will judge us by.
Nancy always dresses fashionably and is extremely conscience of her appearance. She would never go out in public if she were not well groomed. She can not understand how others can feel comfortable looking sloppy. Nancy assumes that others see her as sophisticated and attractive. In fact, others see Nancy as "putting on airs" because she does not just dress well: she also criticizes others who have less to spend on their appearance. Nancy's public image is one of arrogance and self-centeredness. She does not do well in her sales career, because consumers do not feel comfortable in her presence. Nancy is so busy looking her best and voicing her feelings about it, that others do not generally like her. Nancy makes others feel uncomfortable.
People are often wrong about the way others view them. When an individual makes their living in commissioned sales, such wrong perceptions can be very destructive to their livelihood. It is not difficult to find out how you are perceived by others (assuming people will be honest with you). Simply have your clients, and perhaps even coworkers, fill out a questionnaire. Remember that the ethics of others may not allow them to be fully honest. Even so, you may be able to open up your own vision of yourself. Some companies routinely send out similar questionnaires on their employees to see if the public is comfortable with them.
If you know someone who is associated with the media, it might be valuable to have them evaluate you. Such people may have had specialized training in the field of public relations. As a result, you may get some pointers that would not otherwise be available.
Perhaps most importantly, practice the basics of human desires. Everyone wants others to treat them well. This means listening to what they say and giving value to their opinions and feelings. It does not mean agreement, but, as the old saying goes, it does mean "agreeing to disagree." In other words, it means allowing each person to have their own opinion even if it is not your own. Ethics cheerfully allows others to have their own opinions.
The golden rule always applies: treat others as you would have them treat you. This can be called public relations, ethical conduct, or simply being civil. Whatever you choose to call it, it makes sense.
Individual ethics and business ethics are sometimes thought to be different things, but that is not necessarily true. Every business has a responsibility to develop a business ethic. Certainly, an insurance entity must worry about becoming the concern of a government regulator if legal ethics are not followed, but it really goes beyond that. Without clear principles within the business outlining what is acceptable and what is not, problems may easily develop, with both the public image and the legal continuance.
Many companies now understand the need for a clearly written, legally sound employee manual to prevent liability claims from their employers and customers. With the number of employee-related lawsuits being filed, employers simply cannot afford to ignore the need for a well thought out employee manual.
Experts note that a significant percentage of these employee-based lawsuits would never have stood up in court if the situation had been properly addressed in the manual and then emphasized at company meetings. Businesses that have not put together such a manual are definitely at legal risk. Besides lessening the likelihood of being sued, a well written (and followed) company manual can also improve employee morale as well as establishing what is expected of the employees by the employer.
Such things as churning policies (mentioned earlier in this text), misrepresentations of products or services, and outright fraud reduce the public's image of our industry. Of course, that ends up hurting every person within that industry. All of these issues need to be addressed in the company manual. Often, salespeople are hired as independent contractors. In other words, each salesperson is self-employed. An agency may do this for a number of reasons, but even if this is the situation, the agency would still be wise to formalize a manual on ethics in selling. It is simply prudent to do so.
DUE DILIGENCE IS A MATTER OF ETHICS:
It is common for agents to go to work for an agency and simply accept whatever companies and products are given to them to work with. While we would like to assume that an agency has done their homework, this may not always be the case. In addition, it is possible that the agency viewed the companies and products only from a profit point of view.
What responsibilities actually do fall on the selling agent? The answer to this question will certainly vary depending upon whom you ask. As little as twenty years ago, due diligence was something done by broker-dealers, people selling securities and by some home offices. Seldom was due diligence thought to be an agent's responsibility.
Now, however, agents are being told that due diligence is their personal responsibility. This statement is often the result of court actions. In other words, it is now being legally determined that individual agents are responsible for the recommendations they give, the products they sell, and the companies they represent.
What does the term, due diligence, actually mean?
For the agent, due diligence is the analysis of a particular company's products, performance and financial standing. Where life insurance is concerned, this is often done to determine whether or not there is a reasonable expectation that the illustrated values presented can actually be achieved. Life insurance is, in some measure, the business of making long-term promises to clients. It is vital to those clients that the company is able to keep those promises they are making. Due diligence is the agent's analysis of whether or not the company can, in fact, keep their promises. The term, due diligence, is primarily derived from the securities industry.
For the agent, due diligence is the analysis of a particular company's
products, performance and financial standing.
For the insurance company, due diligence is an ongoing process which insures that pricing objectives are being realized, and that integrity and consistency of internal procedures are being maintained. It is working with the agents and agencies, as well as their policyholders, to preserve fairness in all parts of the operation. An insurance company that is concerned with due diligence will treat its sales force and back-up members as well as they treat their policyholders. Company due diligence also means making investments that are sound and prudent. For life insurance companies, due diligence is not a new concept, even though it is for many agents.
It must be noted that the life insurance industry has moved their product design away from fully guaranteed values and benefits towards a dependency on current, sometimes more favorable parameters. This means more risk has been taken on by the consumers. The factors more often used these days also tend to be more volatile. In many cases, only the strength and the integrity of the company involved can ensure that projected, non-guaranteed elements of the policy are actually realistic.
As agents and the general public have become more educated on the variety of options available, insurance has seen a change in how it is perceived. While price has always been considered, additional elements are now commonly looked at as well. Consumers want to know if the company they are considering can manage its overhead expenses, mortality expenses and investment returns in a way that allows the company to make good on its promises in the contract.
In addition, the role of the agent has changed. Whereas the agent was typically thought of as only the salesperson, consumers now consider the agent to be someone who must give reliable information for the good of the policyholder. We no longer accept the view that the agent represents only the company. This change in the general perception of an insurance agent places greater responsibility, both legal and ethical, on the agent.
In the public's view, the level of service and quality of the advice given are linked directly to the insurance company and that company's performance. It must be noted that practicing due diligence makes sense from many standpoints, one of which is financial protection of the agent, as well as the consumer. When an agent takes the time to investigate his companies (agents should also document that investigation), he or she is also protecting their own financial future. Lawsuits are common and it is reasonable to believe that even a good agent can experience one. Due diligence is, of course, an ongoing process since companies can and do change how they operate. Due diligence might be considered as a method of self-protection through knowledge.
Many agents groan when due diligence is brought up. They picture hours of work put into a schedule that is already difficult. It should brighten their day to know that there are more answers than one might imagine at their local library. A morning spent looking up the companies they are representing, or are considering, is a morning well spent. There are several reasons for agents to do so:
1. To prevent lawsuits from angry consumers who feel they have been taken;
2. To protect the trust they have spent hours building up with their clientele;
3. To determine if the people associated with the companies they sell have the level of integrity they desire.
If an agent bases his or her company affiliations on commission levels, leads provided, or where the next convention will be held, he or she is in for a few surprises down the road. An agent should request a copy of the insurer's annual statement and pay particular attention to the interrogatories, because they are brief and speak to short-term changes from the previous report.
An agent needs to begin his due diligence process by gathering information on the major components of the company from as many sources as possible. This would include seeking information directly from the company. In fact, this is probably the first place to seek information. Generally, such information is readily available. The agent should not overlook another simple way to gather information: ask questions. Talk to your immediate manager or regional manager, the home office (especially the underwriting department), and even the company's competitor. Anytime an insurance company seems reluctant to provide information to their own agents, a red flag should go up.
Often, an agent can learn more than you might imagine from simply asking other agents who have been with the insurance company for a relatively long period of time. Find out about the speed of the company's claim service since this is often an indicator of company solvency. Find out if commission checks seem to be consistent, correct and on time. If a financial error is made, how long does the company take to correct it?
The agent should collect the three most recent sets of financial statements and study them. Does the company seem to making excessive profits? Does the company seem to be making minimal profits? Perhaps too little to ensure continuance? Compare the surplus in relation to the amount of business being produced. Ask the state Insurance Department to see if there are any watches or cautions outstanding. How many complaints from consumers has the company experienced in the past year? You may also wish to look at complaints over a three-year period to see if any pattern seems apparent. The agent may also want to watch for any shifts in the management of the company since this can change the philosophy of the company.
Once a measure of information is gathered, the agent must assimilate it in a manner, which is easily understood and assessed. There are several ways to assess this information, but often the agent simply looks at it from the standpoint of "Does it feel right?" With so many carriers to choose from, there is no need to represent any carrier that does not feel comfortable.
Other sources of information that the agent should consider are the rating services, such as A.M. Best. A.M. Best is not the only rating source and others should be considered also.
A.M. Best was incorporated in 1899 and 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 of 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.
Rating services have not always given the public indications of trouble
in a timely manner, but they should still be consulted.
It should be pointed out that the ratings still 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 that 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.
As we all realize, 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 certainly of future cash demands and growing policy-owner and public perception. Today's world is simply more complex than was yesterdays. The banking systems financial problems have added additional stress, as policyholders feel less secure about major institutions, including life insurance companies. All of these factors have affected even well established, major life insurance companies (some of which have ended up on the "watch" list).
A major element of due diligence is the full disclosure of insurer data. Having the information on insurers is merely the first step; the final step is informing the public when it makes ethical sense to do so. For example, a potential client that wants to buy a policy from the same company his parents used only makes sense if that insurer continues to be financially sound. If, over the years, it has sunk to a ‘B’ rating by the financial rating company, then this information must be relayed. It will still be the buyer’s decision, but at least he or she has full disclosure and complete factual information on which to base the decision.
End of Chapter 19
United Insurance Educators, Inc.