Fraud Awareness and Prevention C39

Chapter 4 – Renewals

Reviewing accounts

·         A renewal policy is a new contract, presenting an opportune time to reassess a risk

·         An u/w may modify terms of coverage, to adjust the premium or to declined the risk entirely

·         Areas to be analyzed in a review for potential fraud include:

o    Economy

o    Environment

o    Communication

o    Personal

o    Financial

o    Changes and new exposures

o    Claims

o    Coverage requirements

·         Renewals should not be done too early b/c events important to the u/w review may not have occurred but enough time should be available to conduct a proper review that would uncover any potential fraud-related elements

·         The only way to protect the broker, agent or insurer is to document all conversations – especially request for coverage deletions and additions

·         Suitable documentation can save a broker from an errors and omissions law suit

·         Automated renewal notices sent to a client may negate the voiding of a policy

·         A cancellation notice assumes that the policy existed in the first place

Economy

·         When policyholders are thriving economically we assume that the risk of insurance fraud is low

·         There is a correlation b/w the two

·         Even when economic conditions begin to improve the threat of increased fraudulent activity is still high

·         Changes in local economic conditions such as a particular neighbourhood or area must also be assessed

Environment

·         There is a heavy onus on brokers and agents to acquaint insured w/ appropriate options for coverage

·         They are expected to advise on coverages that are available but, at the same time, they have to respect that certain standards have to be met

·         A very competitive environment may adversely affect those writing insurance.  When very generous coverage benefits are sold, a risk may become a target for a fraud opportunist

·         The physical environment also potentially affects how susceptible clients are to fraud

Communication

·         During the course of the year brokers and insurers sent out newsletters to inform policyholders about important issues:

o    The connection of insurance fraud and increased premiums

o    The principle of indemnity and how insurance is meant to return people to the position they were in b4 the loss

o    Topical policy exclusions and how they operate

o    Additional coverages that can be purchased to counteract the effects of exclusions

·         Reinforce those messages if it is timely and appropriate to do so

Personal

·         Moral hazards may materialize b/c of the changed circumstances in a person’s life

·         Such a time of change is also a susceptible time for insurance fraud

·         Maintain a position against fraud in a social setting.  Communicate what standards must be met for your business dealing

·         If a client begins to discourse on how to manipulate insurance settlements steer clear of the conversation.  Moralizing does not effect change

Financial

·         Changes in financial position must be reviewed.  The attitude of the policyholder toward the problems may indicate whether the risk is still tolerable

·         A wealth, high-profile person is just as must at risk of committing insurance fraud as any other policyholder

·         Both commercial and personal insurance portfolios must be assessed together when considering how financial problems in business may make risks susceptible to insurance fraud

Changes and new exposures

·         New exposures must be made known to insurers

·         When a client knowingly and deliberately keeps important info from the insurer it may amount to fraud

·         Any situation that arises where coverage is not available creates the potential for insurance fraud

·         Most policies have conditions dealing w/ change that obligate the insured to report anything that is material to a risk

Claims

·         All claims made should go through a review process

·         All the insurance policies for a particular client should be renewed together

·         When claims rate on a policy is higher than average or when a pattern of claiming on multiple policies exists, it should be closely reviewed

Coverage requirements

·         Increases in amounts of insurance are cause for concern unless the amounts requested legitimately reflect a proper insured value for the property or the exposure

·         Even though a reason is given for an increase in insurance limits it must be critically evaluated.  A failing business, 3 or more mortgages, and the persistent submission of claims are reasons to give greater attention to a renewal policy.  Why would an insured pursue an expensive major renovation when they are short on cash

·         Indicators on renewal:

o    Economic downturn in the neighbourhood or the insured’s class of business

o    Major personal changes such as divorce or job loss

o    Policy has been cancelled several times for non pay

o    Number of claims on the account is higher than average

o    An increase in insurance limits is requested

o    Insurance is taken out on items that in the past did not warrant insurance

Sample Review Questions -  Fraud Awareness and Prevention

1.     Areas that should be considered when reviewing renewals are:

a.     Economy

b.     Environment

c.     Communication

d.     Personal

e.     Financial

f.      Changes and new exposures

g.     Claims

h.     Coverage requirements

2.     Economic conditions can affect insurance fraud b/c there is a correlation b/w the two.  When policyholders are thriving economically we assume that the risk of insurance fraud is low.  When an economic downturn occurs it generally takes some time b4 increases in fraudulent activity are reported.

3.     Things in the environment that can affect insurance fraud include:

a.     A very competitive environment may adversely affect those writing insurance.  It may encourage greater emphasis on writing the business rather than assessing its insurability.  When very generous coverages are sold a risk may become a target for a fraud opportunist.

b.     The physical environment also potentially affects how susceptible clients are to fraud.  Will newer business in the area or newer construction in the area have a positive or negative impact on a client’s business?

4.     It is important that brokers/agents are aware of changes in the lives of their clients on a personal level b/c they must be aware when a marital breakdown occurs or some other significant personal event occurs as such a time of change is also a susceptible time for insurance fraud.

5.     An example of change in exposure that can lead to insurance fraud: a couple spends 3 months in Mexico but does not take adequate steps to abide by policy conditions.  They did not arrange for a competent person to enter their house daily and ensure that heat was being maintained and water supply shut off.  The temperature freezes and then warms up causing water to escape all through the house.  They have experienced a severe financial loss but their insurance will not respond.

6.     It is important to review claims history when a policy is being renewed b/c some criminals earn a living through fraudulently obtained claim payments.  When the claims rate on a policy is higher than average or when a pattern of claiming on multiple policies exists, it should be closely reviewed.

7.     Insurers and brokers must carefully evaluate any requests for increases in coverage b/c it may be that a loss has already occurred or is being planned.  Increases in amounts of insurance are causes for concern unless the amounts requested legitimately reflect a proper insured value for the property or the exposure.