Chapter 3 – New Business
Brokers and agents
· Agents – act on behalf of the insurance companies they work for or represent
· Brokers – choose among several insurance markets which they represent
· Both owe dual obligations to insurers and insureds alike
· Contractual agreements entered into b/w brokers and insurers affect the nature of their relationship
· Generally brokers and agents:
o Make inquiries into the nature of the risks to be insured
o Communicate the info assembled to the insurer
o Liaise b/w insurer and insured
o Respect the terms of any contract made w/ an insurer
· Customer service representatives – front line employees, also involved in insurance transactions w/ the public
· Producer – general term used to identify a broker or agent who is licensed to sell insurance
· It makes business sense to discourage fraud b/c it may:
o Lead to unacceptably high loss ratios
o Cause loss of premium income
o Tarnish the image and reputation of the producer
· Professional conduct – operating w/ utmost good faith and engaging in ethical conduct; operation w/ honesty and integrity
· RIBO regulations set forth how brokers should conduct themselves
· The basic functions of selling insurance include:
o Getting to know the client
o Determining insurance needs
o Giving advice on insurance protection
o Obtaining instructions from the client
o Providing quotes on insurance policies to the client
· More specifically to a broker’s function:
o Negotiating coverage w/ insurers
o Should a claim occur, facilitate the claim process as the situation demands
o Choosing the right insurer to tailor price or coverage to a customer’s needs
· Producers must acquaint policyholders w/ key info vital to controlling fraud:
o Info provided by prospective policyholders must be accurate. The consequences of misstatement or concealment are serious – coverage may be denied
o When consumers buy insurance they must be made aware that an investigation will be carried out to check credit history, references, claims history and prior carriers
Qualifications
· Individuals who sell insurance must be licensed to ensure that their insurance knowledge meets certain standards
· The RIBO Act provides that designated registered insurance brokers must:
o Pass the applicable examinations
o Be otherwise qualified under the Act
o Have received a certificate to this effect
New customers
· New customers represent the greatest degree of risk
· Strategies to prevent and control fraud:
o Adopt business practices to develop effective work processes and develop and maintain technical competencies. For insurers, u/w insurance policies to discourage fraudulent activities
o Develop and maintain professional standards of conduct to serve the public. Improve interpersonal skills
o Identify factors that characterize those who are intent on committing fraud. Use checklists of red flags to identify questionable risks
· Background red flags; the applicant:
o Has no prior
o Is new to the broker
o Is new to the area
o Is ‘walk-in’ business
o Is not known to anyone at the brokerage, agency, or insurer’s office
o Asks too many questions about claims process
o Is very knowledgeable about insurance terms or procedures
· Contact pattern red flags; the applicant:
o Is never available to meet – only deals on the telephone
o Come in at noon, at the end of the day or on a Friday when staff may be rushed
o Is in a hurry to complete the application and the interview
o Has never been insured b4
Applications
· A meeting b/w broker/agent and the potential client provides the best environment to:
o Discuss an applicant’s requirements in detail
o Gain some knowledge of the applicant’s background
o Explain why certain info is required
o Explain that misinformation or omission may jeopardize the insurance coverage
o Evaluate physical hazards
o Build rapport effectively
· Once rapport has been established important benefits can be realized:
o Quotes on new business
o Expanding an insurance portfolio
o Client referrals
· One of the most important functions that agents/brokers perform is to consistently elicit info and record it accurately
· Application red flags; the applicant:
o Does not live or work nearby
o Has an address that is not consistent w/ employment or income
o Records a post office box number as an address
o Lived at the stated address for less than 6 months
o Only has a cell #
o Does not have a driver’s license or other identification
o Requires high limits of coverage which are not consistent with income or lifestyle
· The circumstances dictate what question should be asked. Other questions should flow from answers the applicant provides
· Omission and unusual responses on an application should not be ignored
· Certain lines of insurance limits the type of questions that insurers can ask
· A fully completed application singed by the insured is an effective measure to counteract fraud
· Placing the risk entail approaching several insurers. Obtaining competitive quotes, and for larger risks, arranging coverage w/ more than one insurer, either based on proportional shares or based on primary and excess layers
· Specialized niche market players have experience to:
o Properly u/w certain high risk insureds or insureds w/ special needs
o Make the best recommendations
o Impose the right conditions
o Provide the right type of policy contract
Confidentiality
· The law also protects insureds specifically against info being used inappropriately
· Info about an insured’s business affairs should not be disclosed unless a court order demands it, unless if falls w/in the exceptions cited in the regulations
· Any improper conduct regarding maintaining the confidentiality of info could seriously impair a defense against a fraudulent claim
Underwriters
· U/w function – reviewing a risk objectively
· The pressure of time is an element fraudsters use to full advantage
· It is part of the u/w’s job to evaluate whether a potential insured is likely to cause a loss intentionally or otherwise defraud an insurer – test of moral hazard
· Careless attitudes towards security and loss prevention pose morale hazards. Example, leaving car unlocked or having many small accidents
· Each types of risk brings its own particular susceptibilities. For example, larger public companies are usually less of a risk in respect to arson fraud than the small business in which the owner is also the chief employee
· Loss history should be verified either through database files or by calling prior
· Business credit info to review include:
o Financial statements
o Payment records
o Public filings: law suits, liens, judgments, and similar events
o Historical info: on owners, current mgmt, and the company
o Receiverships or fines
· Financial red flags:
o Applicant is deeply in debt
o Trend of decreasing sales is significant
o Trend of decreasing profits is established
o Prior bankruptcy
· A newly formed company w/out a loss record might look attractive until it is known that the individuals who operate it have a problematic insurance loss record
· Critically evaluating a risk is an effective way to eliminate fraud
Binders
· Binding authority is subject both to a dollar limit and a time limit (usually 1 month)
· Any binding authority exposes an insurer to a potential claim from a risk which the insurer has not had the opportunity to examine closely and so it is important that brokers be diligent and thorough in assessing risks
Property inspections
· Inspections provide a method to verify the info contained in an insurance application
· It proves that property exists and it will shed light on its value
· Good security measures and fire suppression/detection equipment will deter insureds who are tempted to fabricate or stage a claim
· Property red flags:
o Housekeeping and cleanliness
o Storage and disposal of waste
o Storage of combustible material
o Obstructions on staircases and corridors
o Security systems
o Business operating from a home
· Location red flags; the area:
o Has newer more attractive retail space available
o Is isolated
o Is not located close to a fire station
o Is served by volunteer or a part-time fire department
· Business operation red flags; the business:
o Is less than fully active
o Has seasonal operations
o Has areas that are open to traffic but should be closed to the public
o Has a high rate of turnover in staff
o Is involved in employee disputes over working conditions
· The most effective protection systems usually include monitored alarms
Appraisals
· When specific insurance is placed on a specific piece of property often an appraisal accompanies the request
· Items are scheduled b/c they are:
o Expensive to replace
o Subject to low limits of insurance on standard insurance forms
o Insured only for certain limited perils
o Completely excluded on standard property forms
· Property that tend to be scheduled include cameras, contractor’s equipment, fine art, jewellery, and any other type of item that cannot be insured adequately under blanket forms of coverage
· Scheduling contractor’s equipment record the make, model and serial #
· Three basic facts should be established:
o The item exists
o The item has been fairly and accurately valued
o The item belongs to the insured
· Appraisers red flags:
o Is the appraisal signed by the appraiser
o Is the letterhead what you expected
o Are the appraiser’s qualifications mentioned
o Has the appraiser made a positive statement w/ respect to whether any conflict of interest exists
· In the appraisal the property to be insured should be:
o Described in detail
o Described as to its general condition
o Identified w/ a photograph – not standard practice especially w/ moderately priced items
· The extent to which an item is described and documented will depend on its value
· Hallmark – an official mark indicating a standard of purity. Example, gold and silver are usually stamped w/ a hallmark
· Appraisal report red flags:
o Fee was calculated based on the valuations amount – this would represent a temptation to the appraiser to increase the value
o Limiting conditions and basic assumptions are not stated
o The appraiser did not physically view or inspect the piece
o Valuation procedure is not described
o Valuation method is not stated (ex. Replacement cost, ACV or fair market value)
o An effective date is not stated
o The purpose of the statement is not stated
· Diamonds should be described in detail in an appraisal including:
o Type of cut
o Carat or weight
o Colour
o Clarity
Designing the right coverage
· Each insurer sets standards that risks must meet
· All of the info obtained about a risk influences the design of the policy and the premium charged
· By incorporating policy exclusions or clauses limiting coverage, the insurer attempts to control the moral hazards associated w/ the risk
· Tempting policyholders to commit fraud w/ the lure of large profits from inappropriately written polices must be removed
Named perils and all risks
· Limiting coverage for risks that do not meet certain standards may be an effective way to discourage fraud
· Named perils vs all perils
Replacement cost and actual cash value
· Technologically outdated equipment or equipment no longer used or equipment that is worn out should not be insured for replacement cost
· A building may be valued in different ways:
o The cost of replacement of a new building of like kind and quality
o A building insured for ACV can be determined by giving consideration to:
§ Replacement cost less depreciation
§ Market value – current selling price of comparable properties in the same area
§ Income approach – income produced as a rental property
· If the location is losing its appeal a tenant may decide to move out and a new tenant will be hard to find. There may be a temptation to make a bogus claim while it still has economic value
· The building itself, while still sound, may be surrounded by newer and more attractive retail space. The building is then in danger of losing its income potential and becoming a target for arson for profit
· Replacement cost coverage normally obliges an insured to rebuild on the same site, replacing the destroyed building with a similar structure to be occupied for the same purpose
· Insuring under ACV removes the temptation to profit from a claim by receiving ‘new for old’ under replacement cost coverage
Wreckage value
· Certain properties would not be u/w except as an accommodation for certain brokers
· Buildings that have very little monetary value for whatever reason, may still be commercially viable
· An endorsement can be issued to cover the cost of repairs or replacement as long as the work is completed w/in 12 months of the loss
· If repairs are not carried out then the claim will be limited to the market value of used materials comprising the building or structures
Valued basis and floater policies
· Valued policy – the insurer agrees to pay up to the full sum insured in the policy
· Standard floater policies – entitle the insurer to replace the articles insured or alternatively to settle for the amount it would take to replace the item
Automobile insurance
· In large urban centers the largest premium exposures for insurers are private passenger vehicles
· Fraudulent claims can flourish more readily in an atmosphere where anonymity prevails
· Automobile red flags:
o Applicant’s income is not compatible w/ value of vehicle
o Applicant has not owned a vehicle for any significant period of time
o Age of applicant suggests prior ownership of vehicle or property
o No previous insurance carrier or proof of prior coverage
o Full coverage is requested for an older vehicle
o No lien on an expensive vehicle
o An older vehicle is reported to have no existing damage
· Pre-insurance inspections is an initiative to reduce false and inflated claims regarding:
o Phantom vehicles – ones that do not exist or are already wrecked
o Non-existent equipment and accessories
o Preexisting damage
o Salvage schemes
o Import-export frauds
· Detailed descriptions may include:
o Vehicle description
o Unrepaired damage
o VIN verification
o Special equipment
o Photographs
· Inspections may be carried out by insurers, service providers, independent appraisers, garage mechanics, brokers/agents
Premiums
· Premium red flags:
o Cash payment made for insurance but only for minimum amount required
o Applicant wants to buy insurance and cost is not important
o Premium payment is late
Sample Review Questions - Fraud Awareness and Prevention
1. Both brokers and agents owe dual obligations to insurers and insureds alike. Generally, brokers and agents:
a. Make inquiries into the nature of the risk to be insured
b. Communicate the info assembled to the insurer
c. Liaise b/w insurer and insured
d. Respect the terms of any contract made w/ an insurer
2. Insurance agents and brokers should discourage fraud b/c it may:
a. Lead to unacceptably high loss ratios
b. Cause loss of premium income
c. Tarnish the image and reputation of the producer
3. The basic functions of selling insurance are:
a. Getting to know the client
b. Determining insurance needs
c. Giving advise on insurance protection
d. Obtaining instructions from the client
e. Providing quotes on insurance policies to the client
4. Three way front-line insurance personnel can prevent and control insurance fraud are:
a. Adopt business practices to develop effective work processes and develop and maintain technical competencies. For insurers, underwrite insurance policies to discourage fraudulent activities
b. Develop and maintain professional standards of conduct to serve the public. Improve interpersonal skills
c. Identify factors that characterize those who are intent on committing fraud. Use a checklist of red flags to identify questionable risks
5. Seven background red flags relevant to applicants are:
a. Has no prior carriers
b. Is new to the broker
c. Is new to the area
d. Is ‘walk-in’ business
e. Is not known to anyone at the brokerage, agency or insurer’s office
f. Asks too many questions about the claims process
g. Is very knowledgeable about insurance terms or procedures
6. Contact patterns that may indicate a potential fraud are:
a. Is never available to meet – only deals on the telephone
b. Comes in at noon, at the end of the day, or on a Friday when staff may be rushed
c. Is in a hurry to complete the application and the interview
d. Has never been insured before
7. It is useful to meet w/ a client b/c it is a good way to get to know a person and for commercial risks, a business of operation. It provides the best environment to:
a. Discuss an applicant’s requirements in detail
b. Gain some knowledge of the applicant’s background
c. Explain why certain info is required
d. Explain that misinformation or omission may jeopardize the insurance coverage
e. Evaluate physical hazards
f. Build rapport effectively
8. Specialized niche market players are often effective at curbing any potentially fraudulent activity b/c they have experience to:
a. Properly u/w certain high risk insureds or insureds w/ special needs
b. Make the best recommendations
c. Impose the right conditions
d. Provide the right type of policy contract
9. Information on an applicant that would prompt further information include, the applicant:
a. Does not live or work nearby
b. Has an address that is not consistent w/ employment or income
c. Records a post office box # as an address
d. Lived at the stated address for less than 6 months
e. Only has a cell phone #
f. Does not have a driver’s license or other identification
g. Requires high limits of coverage which are not consistent w/ income or lifestyle
10. If certain sections are left blank, if must be pursed until a satisfactory answer is obtained. Any incomplete section may indicate that the applicant is not comfortable answering the question.
11. Broker confidentiality in Ontario
12. U/ws need to review any moral and morale hazards in order to assess whether the applicant is a candidate to commit fraud.
a. Moral hazard – whether an insured is likely to cause a loss intentionally or otherwise defraud an insurer. Review all info about the insured’s character, business dealings, and financial condition
b. Morale hazard – careless attitudes towards security and loss prevention. Example, people who don’t lock the car or have many small accidents.
13. It is important to establish true ownership of property b/c the identity and history of the principals of a commercial risk must be checked. Individuals may have a history of unsuccessful business ventures and financial stability may be a concern.
14. Red flags associated w/ a person’s financial standings include:
a. Applicant is deeply in debt
b. Trend of decreasing sales is significant
c. Trend of decreasing profits is established
d. Prior bankruptcy
15. Binders represent a substantial risk to an insurers b/c it exposes an insurer to a potential claim from a risk which the insurer has not had the opportunity to examine closely.
16. Inspections are helpful to counteract fraud b/c it provides a method to verify the info contained in an insurance application. It prevents insurance fraud both directly and indirectly. It proves that property exists and it will shed light on its value. Good security measures and fire suppression/detection equipment will deter insured who are tempted to fabricate or stage a claim.
17. Shortcomings in a property that would be discovered upon inspecting it include:
a. Housekeeping and cleanliness
b. Storage and disposal of waste
c. Storage of combustible material
d. Obstructions on staircases and corridors
e. Security systems
f. Business operating from home
18. Factors concerning the location of a property that would make if vulnerable to fraud, the area:
a. Has newer more attractive retail space available
b. Is isolated
c. Is not located close to a fire station
d. Is served by volunteer or part time fire department
19. Someone would want to insure movable property b/c they are:
a. Expensive to replace
b. Subject to low limits of insurance on standard insurance forms
c. Insured only for certain limited perils
d. Completely excluded on standard property forms
20. The basic facts that must be established concerning an item of property are:
a. The item must exists
b. The item has been fairly and accurately valued
c. The item belongs to the insured
21. Information an appraisal report should contain concerning the appraiser are:
a. Is the appraisal singed by the appraiser
b. Is the letterhead what you expected
c. Are the appraiser’s qualifications mentioned
d. Has the appraiser made a positive statement w/ respect to whether any conflict of interest exists
22. Other red flags on a appraisal report includes:
a. Fee was calculated based on the valuation amount – this would represent a temptation to the appraiser to increase the value
b. Limiting conditions and basic assumptions are not stated
c. The appraiser did not physically view or inspect the piece
d. Valuation procedure is not described
e. Valuation method is not stated ie replacement cost, ACV or fair market value
f. An effective date is not stated
g. The purpose of the statement is not stated
23. The conditions of a replacement cost coverage that would help to deter fraud are: an insured is obliged to rebuild on the same site, replacing the destroyed building w/ a similar structure, to be occupied for the same purpose.
24. Wreckage value endorsement – an endorsement issued to cover the cost of repairs or replacement as long as the work is completed w/in 12 months of the loss on the same site or an adjacent site w/ materials of like kind and quality for the same type of occupancy.
25. A valued-basis policy could encourage moral hazard b/c the insurer agrees to pay up to the full sum insured in the policy. There is a motive for fraud when the insured can ‘make’ $2,000 by insured an article for $8,000 having only paid $6,000 for it.
26. Premium red flags:
a. Cash payment made for insurance but only for minimum amount required
b. Applicant wants to buy insurance and cost is not important
c. Premium payment is late
27. Automobile red flags:
a. Applicant’s income is not compatible w/ value of vehicle
b. Applicant has not owned a vehicle for any significant period of time
c. Age of applicant suggests prior ownership of vehicle or property
d. No previous insurance carrier or proof of prior coverage
e. Full coverage is requested for an older vehicle
f. No lien on an expensive vehicle
g. An older vehicle is reported to have no existing damage
28. Pre-insurance inspections is an initiative to reduce false and inflate claims regarding:
a. Phantom vehicles
b. Non-existent equipment and accessories
c. Preexisting damage
d. Salvage schemes
e. Import-export frauds
29. Info collected for vehicle pre-insurance inspection programs include:
a. Vehicle description
b. Unrepaired damage
c. VIN verification
d. Special equipment
e. photographs
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