Avoiding Fraud - Life Insurance Sales Practices
Once in a great while you might come across a sales practice that makes you wonder; something about it doesn’t feel right. Less often you might actually think there is a real scheme. But some sales practices should raise a red flag: rebating and churning are two of them.
Rebating is like a “kick back,” directly or indirectly offering or giving anything of value as an inducement to purchase insurance that is not plainly specified in a life insurance policy. It is legal in some states yet may still be unfavorable to insurers. Rebating includes:
- Any agreement to pay any part of a policy’s premium.
- Any payment or gift offered as an inducement to purchase insurance.
- Offering any special advantage regarding the dividend, interest or other policy benefits, other than those provided by the terms of the policy Offering to buy, sell or give any type of stock, bond or property, or dividends or income from securities or property, for the benefit of a policy owner.
Rebating activity patterns may be seen in many early lapse situations, especially in cases where the agent commission is greater than 100% of the first year premium and no recapture of commissions occurs after a policy reaches its first anniversary or other defined commission period. First-year commissions might range as high as 135% of the first-year premium so an agent paying premiums for policy owners could conceivably make 35% on each policy written.
A sign of such behavior may be numerous MIB activity codes and Insurance Activity Index (IAI) hits, with no indication on the application of significant or any amount of current in-force coverage. A simple example is a case where the writing agent frequently replaces his or her own coverage with a new carrier every year. The first-year premium is offset by the new agent commission in year one. In effect, insurance carriers continually subsidize the agent’s insurance program, with multiple carriers losing money along the way. Carriers with commission structures similar to those noted above should have reporting in place to carefully study 13-month persistency, especially for newly-contracted agents.
Look out for these red flags for rebating activity:
- The mode on every application is monthly or quarterly yet the producer receives annualized commission and demonstrates frequent replacement or lapsing of policies two years old or less, or right after the commission recapture period. A pyramid-like scheme may be in effect.
- Trusts that are set up to own policies are domiciled in states different than the resident states for the agent and proposed insured.
- During a personal history interview or tele-interview, the client doesn’t know the trustee, face amount or the premium to be paid.
- The agent is new to your company and is also submitting a large amount of premium in a short period of time.
- A producer who hasn’t written any new business in years suddenly starts submitting large premium cases.
- Money orders, wire transfers or cashiers' checks are frequently used to pay premiums.
- Shortly after policy issue, a significant number of a producers' policies have address changes - all changed to the same address.
- Premium payments are set up to go to P.O. boxes or an agency's address.
- The same checking or savings account is used to pay premiums for multiple unrelated insureds or multiple family members of the producer.
- A pattern of brand new checking accounts with starter checks or low check numbers is used for premium payments.
Churning is another sales practice in which an existing in-force life insurance policy is replaced for the purpose of earning additional first-year commissions. Also known as “twisting,” this practice is illegal in most states and is also against most insurance company policies. The practice is particularly acute when the product being churned is a permanent plan of coverage for which the total commission payout is more than 100% of the first-year premium.
By definition, churning also has a direct effect on policy lapse rates. The new business acquisition costs, especially in the first policy year, are typically higher than the first-year premium due to the labor cost of underwriting and new business staff, underwriting requirement costs and agent commissions. While some lapse activity is inevitable and priced for, systematically planned situations - where the policy was never intended to stay in force beyond the first 12 to 15 months - are not.
Analytics to evaluate agent behavior are critical here. Companies need regularly scheduled reports sent to Marketing, Compliance and Legal associates to identify frequent replacements and persistency issues at an agent level.