The PC Professional

Chapter 8

Ethics

As time goes by more states are requiring agents to acquire education in the subject of ethics.  Politicians always want to be perceived as ethical whether they are or not.  It’s good for their careers, but until the public actually wants ethical conduct it is unlikely that anything will change.

  Hello.  My name is Harry Bobs, and I will be narrating this chapter.  I’m an old duffer and my ethical expectations are probably higher than those of a twenty-year-old.  Why?  I have experienced too many examples of unethical behavior in the insurance industry, in politics, and from a few neighbors and friends.  Somewhere along the line we seem to have lost the expectation of ethical behavior; in fact, we seem to expect dishonesty and even tolerate it.  Yes, there are people and organizations that still want ethical conduct but overall, most of us seem to believe it just isn’t possible to achieve.  We have accepted a lower standard of performance from politicians, companies, and each other.

  There was a time when ethical conduct was expected as a matter of courtesy and good business; it was not necessary to apply legal enforcement.  Today the various states either are, or soon will be, requiring specific education on ethics for insurance agents and financial planners.  Some states dictate the content for their ethic continuing education requirement, while others allow general information.  Regardless of whether or not your state mandates such continuing education to renew your license, ethics should be part of your professional career.  We need to get back to expecting honesty from those we deal with and especially from ourselves.

Professional Conduct

  Professional conduct equates into ethical conduct.  This includes competence when demonstrating and recommending products, product suitability, agent conduct and follow-up services, and adherence to state laws.

  Ethics are the principles of honor and morality, and accepted rules of conduct, that an individual believes in. We do not necessarily all believe the same when it comes to ethics and ethical behavior.  Those who travel extensively realize that different cultures have different codes of conduct and ethics.  It is not possible to say one is right and the other wrong since ethics are based on beliefs.  It is possible to say that each person must have a code of conduct (ethics) if they wish to remain successfully in the insurance field.

  The Greek philosopher Socrates gave ethics its formal beginning during the fifth century BC.  The word ethics comes from the Greek word ethos, which means "character."  Our code of ethics certainly does establish our character.  An individual who is known to lie will be called a liar; an individual who is known to steal will be called a thief; we brand ourselves by our actions.

  Why does an individual believe one way or the other?  We learn much of our beliefs from our childhoods.  We generally adopt the beliefs and moral codes of those adults that cared for us and loved us.  If Mama and Grandma believed wearing jeans to church was wrong, we are also likely to believe that.  Ethical codes do not require facts, figures, or qualification; what we believe comes from within.

  Some types of ethical conduct have to do with compassion.  No one could consider an individual ethical if he or she abused animals or children, for example.  On the other hand, a scientist that found a cure for a human condition by using animals in the lab may still be ethical even though he or she may have caused animal suffering.  It is these fine lines that often pit one ethical group against another, with neither side necessarily being right or wrong. 

  We would expect the ethical scientist to do as much as possible to prevent animal suffering during his or her work.  In fact, many in the scientific field are actually working to eliminate the need for animals in the lab so clearly there is room to be both ethical and still meet individual goals.

  The study of ethics is complex since there are multiple views, but basically ethics is about the meaning of life.  It is the abstract view of what is right or wrong.  There are few absolutes and many varied definitions.  From the time human beings began living together codes of unwritten rules were necessary simply to survive.  Tribal rules established acceptable conduct necessary to keep the species alive.  No one considered whether the conduct was morally right, only if it was necessary for the group as a whole.

  Our lives today are much more complex.  It is no longer merely about keeping the species alive; it is about dealing with each other fairly without one group receiving better treatment than another.  It is about controlling greed and preventing power-seekers from abusing the rights and lives of others (often those unable to protect themselves adequately).  We now expect the weak to survive alongside the strong.  We expect the youngest and oldest members of our society to receive the same rights as those with the strength to take what they want. Women expect the same pay as men and the same job opportunities.  Minorities expect the same rights to housing and jobs as others receive.  We expect to be treated equally regardless of our gender, race, religion, sexual preference, or country of origin.  Of course, “equal” treatment seldom actually occurs except by law.  Why?  Because people determine equality.  The man behind the counter at the corner store cannot be forced to treat the individual of color the same as a white customer even though that is the law.  He will sell to the man of color, as dictated by law, but treatment is another story.  The woman with the apartment for rent can select her renter as she pleases regardless of what the law might dictate.  Although the gay man or person of color might believe he or she was discriminated against proving it can be difficult, maybe even impossible.

  It is our laws that insist upon the rights of the individuals.  If there was not the power of law, and the court system to back it up, few of our weaker members of society would ever receive equal treatment.  Yes, we have individuals that would always be fair but there are many who never would be (they prefer to receive special treatment).  We love those who do great humanitarian work; who could not love Mother Teresa, winner of the Nobel Peace Prize in 1979?  Yet how many of us would consent to walk in her shoes?  Years after her death her name remains well known, but that does not mean others want to seek her path.  It is difficult to do great things without receiving personal rewards; on the other hand, many people are willing to seek wealth and power because if they succeed, they receive special treatment and privileges.

  It is not my intention to persuade others to behave unethically; indeed, I am for ethical conduct.  It is my intention to point out that only the few will remain ethical when the opposite conduct provides special rewards.  Therefore, our country enacts laws to force individuals to do as they should.  The laws do not always work, but they are the only avenue we have to seek fairness.  Until our society places a high value on ethical behavior, this will continue to be the case.

  Although laws may mandate behavior, they do not mandate ethical codes.  We have many examples of this in our American history.  Even when laws attempted to enforce a specific belief, individuals did not always comply because they felt the laws were ethically wrong.  We saw this during slavery; although the law said it was legal, thus moral, many individuals disagreed.  It is important to realize that laws are considered to be “just” even when groups feel otherwise.  Of course, laws are made by man and many times there are ulterior motives behind the laws (generally financial gain). 

  Moral indignation can bring about changes in the law.  A good example of this was child labor.  It wasn’t until religious and other groups put extreme pressure on our government that laws emerged to protect our children from financial exploitation.  The American government had allowed child labor based on the concept that it was good for the American economy (ignoring the needs of children in favor of the financial needs of others).  Those in favor of child labor said the children were bringing in much-needed income, thereby improving the lives of their families.  Those against child labor said children were being used as a commodity to enrich others.  Was this an example of unethical behavior or merely a different concept of ethics? This is always the question we must ask ourselves.

  Prior to the seventies our country was overshadowed with antiwar sentiments and the civil rights movement.  Unfortunately, the antiwar movement also affected our citizens who were drafted and sent to fight a war they did not begin, could not control, and had no choice in their participation (except by fleeing the country).  Was it ethical to take out frustrations on soldiers returning from overseas?  Was it ethical to spit on our American soldiers returning from war, physically strike them, or demean them in any other way?  When emotions are involved, ethics can be thrown aside as frustrations take over and logic is misplaced or lost entirely.

  The Vietnam War was not the first-time ethics and logic was replaced by fear, panic, or self-purpose.  For example, the witch hunts pushed normally logical people into acts that can only be described as cruel and illogical.  Groups have often acted harshly and cruelly towards others in the name of religion or self-preservation.  All too often the underlying motive has been power or wealth or even fear of the unknown.

  Many of the issues America and her citizens have wrestled with are basically related to one issue: what is the right thing to do?  This simple question often has multiple answers.

What Can Individuals Do?

  As insurance representatives, we do not have the answers to the big problems, but we are often a mirror of what is going on in our neighborhoods.  If, as individuals, we are surrounded by people who are primarily concerned with themselves, then it is likely that we will have that same attitude.  If our employing agency stresses sales without any other input, it is likely that we will lose sight of the role ethics must play.  When ethical behavior is not deemed important by our immediate peers, it is not surprising that problems eventually materialize.  This is true regardless of the type of business.

The wise insurance agent or brokerage will make a point of following state regulations of course, but ethics goes beyond what is simply mandated by state or federal governments.  We live in a lawsuit prone society, so ethics are also a means of financial protection.  An agent who can demonstrate constant ethical behavior is less likely to be sued and less likely to lose a lawsuit that is filed.

  It has been said that legal authorities may be able to mandate behavior, but not ethics and this is probably correct.  A person who would like to steal may not do so because of the consequences such behavior would bring about.  Therefore, his behavior is controlled, but his ethics are not.  Although he does not steal, he would still like to.

  Controlling a person's behavior might protect the public (a difficult job for the state’s insurance department) even if it does not instill ethical standards.  Controlling behavior might even eventually create some ethical standards since it is not unusual for an individual to become the person they pretend to be.  A person who acts ethically, even if they do not desire to be, may eventually soak in the ethical behavior and adopt some of that potential.  In fact, since morality is about the way we live, we learn it over our entire lifetime.  To think that a person who is not ethical today will never be ethical is simply wrong.  It could go the other way as well; the person who is behaving ethically today may not do so tomorrow.

  Many Americans at least partially arrive at their code of ethics through their religion.  The Bible sets down many lessons for ethical behavior and is probably the best-known source of sound ethical advice.  Even so, not all have agreed with the concepts stated there.  Karl Marx, the father of communism, called religion the "opiate of the masses."  Even Sigmund Freud, the father of modern psychology, regarded organized religion as institutional "wish-fulfillment."

  Despite the individuals and groups that wish to eliminate religion in our society, it is likely to continue to play a role in how most people perceive ethical behavior.  As we have seen in recent years, some religions are not concerned with peace or ethics but appear to have more to do with control and hatred.  We must realize that ethics and some religious beliefs are not necessarily compatible.

  No individual is all good or bad.  Each of us has the potential for great deeds and for shady activities as well.  Therefore, each of us must make continual choices regarding our behavior.  Insurance agents (and all individuals working with the public’s money and trust) have the ability to greatly enrich a consumer’s life or destroy their financial futures.  The insurance departments try very hard to prevent poor agent conduct, but it is nearly impossible to prevent all unethical activity.  Only industry peer pressure is likely to succeed.  Let’s examine some hypothetical situations:

EXAMPLE #1

  Dan, an insurance agent, was having a hard time selling enough insurance to make ends meet.  Having a wife and small children, he sought out a company that might be able to offer him more financially.  Eventually, he ended up working for a firm that sold living trusts (primarily to retired individuals).  Dan knew very little about living trusts, but the firm would pay him $300 to $600 for every trust he brought in.  His pay depended upon what he charged his clients.

  In his first training session, Dan felt that he would probably learn all that he needed to know to feel right about selling the living trusts.  What the training session actually did was lay out the techniques to get people to buy.  Another agent in the training class seemed to know a great deal about trusts, so after the training class Dan made a point to talk to Joe.

  Dan: "Joe, you seem to know a lot about these trusts."

  Joe: "There's not much to them, at least not those that you'll be selling.  The people put whatever they have into it and when they die the trust distributes it."

  Dan: "I don't mean to sound stupid, but isn't that exactly what a will does?  They said in the class that these trusts will protect the people from probate and taxation."

  Joe (laughing): "Don't believe everything you hear.  Look, I've got to go.  You planning to pitch the trusts?"

  Dan: "Do you mean am I going to sign on?  I guess so.  Aren't you going to?"

  Joe: "Maybe.  The leads will be good for other things if nothing else."

  Dan now realizes that something must have been left out of the training class.  The money is needed, however, so he decides to go ahead and market the living trusts.  The instructor of the class encouraged the agents to also present them to their present insurance clients.  Dan has a fair amount of clients and has mentally calculated how much money he could bring in if only a fifth of his clients purchased the trusts.  Dan is now hoping to put his family in a better financial position.

  Will Dan be acting ethically if he persuades his clients to purchase one of the trusts?  As long as Dan states the presentation as it was taught to him, is he free from any ethical liability?  Is it really Dan's obligation to further investigate the validity of living trusts?  Is it Dan's responsibility to understand where a trust does or does not fit or is it the responsibility of the firm who trained Dan to make that determination?

EXAMPLE #2

  Dorothy, an insurance agent, sells long-term care policies.  She knows that the product is a good one, having investigated the company and its policies completely.  Sometimes Dorothy does get frustrated because so few people seem to understand the need of having such a policy.  Since Dorothy's own mother is in a nursing home, she certainly understands very well that such policies are needed.  Recently, Dorothy was having a difficult time getting a 76-year old man and his 73-year old wife to realize the need for such a policy.

  Dorothy: "Mr. James, even though the cost seems high to you, the cost will be even higher if you or your wife go to a nursing home."

  Mr. James: "Look, I know this is probably a good company.  You seem honest to me and I'm sure you believe in what you’re doing.  You just don't know me or my family.  My boys have already told us they will take care of us and I believe they are honest too.  I've already put the place here in the oldest boy's name; did that several years ago.  If I get sick, Addie [his wife] will take care of me and if she gets sick, I will take care of her.  If both of us get sick, our boys will step in.  The point is, I am not going to go to any nursing home and neither is my wife."

  Dorothy: "I know your boys are honest.  You are honest and I'm sure they learned it from you and Mrs. James.  Even so, we are not talking about honesty.  We are talking about health issues.  You've already told me that neither your boys nor their wives are medically trained.  It makes no difference at all that they have told you they would be willing to take care of you.  They simply cannot do it.  Oh, I'm sure they'll try to at first.  Your boys, and perhaps even their wives, will take turns coming by your home to do all the necessary things.  Won't it be great having your daughter-in-law give you a bath?  How will you feel when you hear your sons arguing in the next room about whose turn it is to stay all night?  You've given your home to the oldest son.  I guess the other boys will feel it is his responsibility to do the primary care.  After all, you have, in effect, already paid him to do so.  What if his wife becomes angry about the time, he must spend taking care of you?  That’s time away from his family.  As your medical condition worsens and he is no longer able to care for you who will pay for the eventual nursing home costs?  The taxpayers?  We already have enough to pay for.  Why should we pay for two more when you could have averted the entire situation?  Mr. James, this is not about the person you are now nor is it about what your sons have promised you.  This is about being a responsible person.  This is about taking financial care of yourself."

  Dorothy appears to be very tough.  The ethical question here has to do with that toughness.  Was Dorothy pushing Mr. and Mrs. James more than she ethically should have?  It is possible that her verbal attack may simply make them angry or it could push them into buying a policy.  Is such behavior ethical?  Even if Dorothy believes in what she is selling, is it ever ethical to treat others in the manner she treated Mr. and Mrs. James?

EXAMPLE #3

  Mike, an insurance agent, sells home and auto insurance.  He arrives at a potential client’s home to talk about her existing policies.

  Myrtle Todd: "Thank you for coming by Mike.  As you know, I just got your name out of the telephone book because I am shopping around, checking out the pricing.  I noticed that your office is fairly close to me."

  Mike: "I appreciate your call.  Insurance can be confusing and I know you must have lots of questions.  Since I am a specialist in the field, you called the right person."

  Myrtle Todd: "Actually I believe I understand my insurance fairly well.  I have been reading the information that came with the policies and I have spoken about this with my children.  My neighbor, Betty, has coverage with my company and she seems very happy with it."

  Mike: "When did she get her policy?  Was it recently?"

  Myrtle Todd: "She’s probably had it several years; why do you ask?”

  Mike: "Well, the thing is, Mrs. Todd, it is an out-of-state plan so there are always some doubts in that case.  If you have any problems, I’m not sure how the company could help you.  You will want to be sure the representative is local, but even then you might be on your own when it comes to any claim problems.  If your neighbor has not had any problems she is lucky, but it is just a matter of time.  Most of us eventually have some kind of claim during our lives. Have you ever handled claims before?"

  Myrtle Todd: "No, I haven't.  I am a careful person."

  Mike: "Well, unless you want to learn how to do claim work, you want an agent in your area.  Otherwise, when you have a major accident or fire, you are going to be swamped with paperwork at the worst possible time - when you might be injured in an auto accident or following some type of home damage."

  Myrtle Todd: "Perhaps you are right.  I never was very good at such things and you are close by.  Can I have the payments taken out of my bank like my plan is currently doing?"

  Mike: "Yes, you can but I will need an initial payment now to bind the policy."

  Myrtle Todd writes out the check and asks: "Who do I make this out to?"

  Mike: "Make it out to me so I can make sure this is done right away.  Your existing policy runs out soon and I don't want your new policy delayed."

  Because Mike is having financial problems, he deposits the check into his account and sends in a quarterly payment to the company.  Mike feels confident that he will be able to make up the balance for Mrs. Todd within the next month when he receives his renewal check.  In fact, Mike does send in the premium as soon as he can.  Since he was able to do so, neither Mrs. Todd or the insurance company discovers what Mike did.

  This example has several potential questions on ethical behavior.  Certainly, depositing of the check into Mike's personal account was neither legal nor ethical.  It is true that Mike did square everything financially, so Mrs. Todd was never actually injured by his actions.  Even so, there are valid reasons for prohibiting such activity.  Many things that could have gone wrong that would have caused Mike multiple problems (not only with the state regulatory agency, but with the insurance company, as well).  If he had been unable to pay the premium, Mrs. Todd would have gone without coverage; an accident or fire could have financially devastated her.

  The ethical question is simple: is it ever acceptable to deposit funds into a personal account or commingle funds?  We know that regulatory agencies say it is illegal to commingle funds, but the question goes deeper than that.  Is it ethical to do so even when there are extenuating circumstances?

EXAMPLE #4

  Shirley, an insurance agent, is completing her paperwork for a sale she has just closed.  While going through the paperwork, she realizes she forgot to get a signature on a required form.  Jerry, a coworker, suggests that she simply forge the signature.

  Jerry: "It's easy.  Just put it against the windowpane over the top of another signature.  Everyone does it.  Even this company knows that."

  Since Shirley does not wish to drive to her client's house or request that he come to the office, she does as Jerry suggests.  The ethical question is simple:  is it ever permissible to forge another's signature?  We know forging a signature is not legal, but beyond that is it acceptable in some circumstances?  As a parent, would we suggest to our child that he or she forge our own signature or that of a teacher?  If the insurance agency truly knows its agents are forging client signatures on insurance forms, is that agency then acting in an unethical manner?  Is the agency setting the scene for other unethical behavior?

  Looking at the conversation between Jerry and Shirley, is Jerry behaving unethically for suggesting Shirley forge the client's signature, or is Shirley the unethical person for acting upon his suggestion?  Or are both guilty of unethical behavior, each for their own part in it?

EXAMPLE #5

  Jean and George Wren are insurance agents.  They jointly own their own agency and they work out of their home. They use part of their garage that George converted into a room as their office.  When they do their year-end taxes, Jean states they use the entire garage area plus an upstairs bedroom for their office in order to get a larger deduction.  In addition, whenever possible, Jean and George hide income; they show less income than actually exists.

  As we know, trying to avoid paying taxes is a widespread American activity. The American people are painfully aware of the excessive spending habits and abuses of our politicians.  Taxpayers are, of course, shouldering the burden for the unethical behavior of our politicians.  Since our tax dollars are used in greedy, self-serving, politically motivated ways do we have an ethical responsibility to pay all the government says we owe?  In other words, since we are aware that our tax dollars are being wasted, does this free us from our ethical duty of paying the full amount?

  Ethical standards must be uniform, so what is right for one must be right for all.  It would be unethical to believe we have the right to cheat, for example, but no one else does.  There is little doubt that each of us is influenced by others.  Even so, for each path chosen, we alone must take responsibility.  Each of us has the ability to build or change our own character.  Part of our character is, of course, our ethical guidelines.

  It should be noted that no single act defines our personal character.  Each of us has likely participated in an act that was wrong.  That one action does not define our total character just as one kind act does not build our entire character.  Character is more a matter of adding and subtracting our actions and thoughts.  A good person can do something unkind, yet still be a good person.  A greedy individual can do something kind for another and yet remain basically undesirable in character.  We refer to these isolated deeds as being "out of character."  An action that is not consistent with normal behavior is not likely to form or change the character of a person (although that single action can affect another in either a positive or negative fashion).  A string of acts that remain primarily constant is what defines us.

The Professional

  There are many people wanting to be thought of as professional but unless he or she does what is necessary it is merely wishing.  With the current tendency to sue for everything and anything agents who announce themselves as more than they actually are may find themselves in court.  In many states, a person can give themselves nearly any title they desire.  The title may have nothing at all to do with either experience or training.  Some agents may print “financial planner” or “financial planning” on their business cards, for example, even though they have little formal training in the field.  This is a lawsuit waiting to happen.

  In recent years financial planners have especially found themselves the target of lawsuits as attorneys spread widening nets to catch as much potential business as possible.  It only takes a few minutes exploring the internet to find multiple advertisements by attorneys seeking clients who have lost money as a result of advice received from agents and financial planners.  Agents certainly know that they cannot guarantee the performance of any annuity or investment and that their clients must accept the risk that exists; that knowledge does not prevent a lawsuit.  It is never wise to allow any client to assume the agent or financial planner has more expertise than actually exists.

  Many states now have what is called “suitability” requirements for annuity sales and although many agents groan at the additional CE requirements this brings, it actually provides some measure of lawsuit protection, assuming the suitability requirements are followed.  It is the wise agent that strictly follows the mandates these suitability requirements contain.

  Not only consumers need to find professionals; agents often need the services of professionals as well.  Few consumers mind an agent saying: “I don’t know the answer to that question, but I have contacts that do.”  Agents who network with accountants, attorneys, and other professional career agents are more likely to succeed.

  Many consumers are now investing according to their ethical convictions.  Agents who scoff at this are behind the current financial trends.  One might assume that ethical investing would bring smaller growth, but this has not proven to be the case; in many circumstances ethical investments are outperforming traditional investing.  The first step for any ethical investor is to be sure that the professionals selected are themselves ethical.  That does not necessarily mean they must share the same ethical views on the environment, government, or community.  It does mean the agents and financial planners must be honest individuals.  Certainly, this means following all laws, but it also means performing their duties ethically.  Ethical investors do generally feel more comfortable when their investment advisor is like-minded, but this isn’t always necessary; simply being another ethical human being is often sufficient.

  Agents are likely to find many of their clients through referrals and professional recommendations.  These may come from other clients or from other professionals in related fields.  Professionals sharing the same ethical values are likely to refer their clients when special needs arise.  These professionals would include accountants, bankers, attorneys, or other trusted insurance agents.  Agents who belong to specific organizations with mutual ethical goals are an excellent referral source.  For example, if an agent were part of a group that worked with homeless people, fellow volunteers are likely to trust their ethical standards and seek them out when they need an insurance policy.  Fellow volunteers might also refer their friends or coworkers to the agent.  While the point of an ethics chapter is not to give referral tips, it does point out how ethical behavior often brings rewards.

Policy Suitability Standards

  Many states have instituted suitability standards or best interest for selling specific types of policies.  This seems to mainly apply to specific health and life products rather than property and casualty products but Colorado has instituted a homeowner’s CE requirement as well as other states requiring claims-made one-time.  Why would states need to mandate that agents sell some types of insurance products only to those who truly need and can afford them?  Wouldn’t an ethical agent understand the necessity of this without laws mandating it?

  In some cases, it is likely that agents truly do not understand who should purchase specific types of products.  In these cases, having guidelines makes sense.  A career agent with many years of experience probably knows the products well enough to have this knowledge without state mandates, but newer agents may need some guidance.

  What would an agent need to consider when determining product suitability for the situation?  It depends in part on the product, but some general guidelines can be followed, including:

· What is the client’s financial situation, including tax status?

· What are the client’s financial objectives?

· If product replacement will take place, does the new product have waiting periods or deductibles that did not previously exist?

· If product replacement will take place, will the applicant experience surrender or recapture charges?

· Is the applicant 65 years old or more?  If so, is the product suitable for an individual of that age?

· In the case of investment vehicles (such as annuities), will the applicant have sufficient funds to meet ongoing financial needs once the money has been placed into a long-term financial vehicle?

· In the case of investment vehicles, is the applicant tying up 50% or more of their net worth?

  While property/casualty agents would not typically be working with investment products this is an example of how suitability standards would be used.

Projecting an Ethical Image

  It is a natural and correct human condition to want to be an individual others look up to.  All of us need to receive recognition for who we are and what we do.  We spend years in school and then often years in a job that simply pays our bills.  Few of us spend any time determining what is important to us and what will give our life meaning.  Yes, we need to work to pay our bills, but does our work give us any satisfaction?  Some may not have many choices but often there are choices if we seek them.  Selling insurance is not always given the recognition it deserves; if there were not insurance policies (and agents selling them) many businesses could not exist, for example.  Insurance is an honorable field and one that often goes unrecognized as essential to the American economy.

  No individual may be considered honorable unless they are ethical.  Our attitudes and behavior certainly define us.  An individual is not defined by the policies represented (although they reflect one’s values), the employing agency, or their coworkers.  Each individual is defined by his or her own personal actions.  Even so, those we work and socialize with can affect how we are perceived and eventually may even affect our own personal actions if we are influenced by those who are not ethical.  In the end, each person makes their own decisions.  They are made on the basis of multiple factors, but they are made individually.

  Many people report they receive satisfaction from a directed life.  Perhaps that satisfaction springs from a sense of completeness or security.  Whatever the reason, any person in any line of work is more likely to feel happy when they understand the “why” of their profession.

  What do we mean by “the why” of the insurance profession?  Understanding why any profession is important to the community requires an understanding of the benefits that are provided.  If an agent has never considered why their job is important to their community and even to the United States, he or she cannot possibly understand the good they are doing.  Once an individual understands they are providing a service (not merely earning a commission) performing the job becomes much more satisfying.

  Simply performing a job is not enough; it must be performed completely and ethically.  This involves many aspects of the profession, including:

· Do you explain all portions of the policy?

· Do you return all phone calls promptly?  Some agents have expressed frustration over the number of calls they must return, but unfortunately this is part of the job.  Returning telephone calls can become an opportunity to seek referrals, cement a sale, or even have a brief moment of relaxation as the weather, personal lives, or social situations are discussed (which will also make your client feel like an old friend).  If you have never considered this point, it is time to do so.

· Is it exciting to go to a new prospect's home or do you dread the experience?  Meeting new people is absolutely necessary for an agent’s business to grow, so agents must welcome the opportunity to meet new people.  When an agent understands the importance of their work, each new meeting will become enjoyable, especially if it is treated as a social experience as well as a work experience.

· Do the companies you represent trust your work?  If this is not something you have previously considered important it is time that you do.  When agents routinely turn in low quality work insurers “red flag” their applications looking at them closely before issuing policies.  Companies cannot allow agents to work outside of the issuing requirements since it may eventually mean a loss for the insurance company.

· Why did you choose this line of work?  Would you choose it again under the same circumstances?  If not, it is important to determine why you wouldn’t and correct the situation.  Any individual in any line of work will certainly be happier if they enjoy their job.

  The vocation you have entered is what you do for a living, but your words and actions define who you are.

  There is little doubt that much to do with ethics is philosophical.  In philosophy, there aren't many interesting catchy phrases.  Perhaps one of the best known, however, is directly related to ethics.  It is: "ought implies can."  If I say you "ought" to do something I am presuming you have the ability and freedom to do so.  Freedom is an important aspect of ethics since the freedom to choose one’s own actions is essential to ethical behavior.  If a person is indeed free to choose their actions, then ethical behavior is possible and actions cannot be blamed on another.  Freedom to be a moral person means the individual is responsible for any and all actions that are subject to either praise or punishment.  Not only is the individual responsible for his or her mistakes, but for any successes as well.

  With this in mind, it is easy to see why one must understand their direction both in work and their personal life.  Each of us is the same person whether we are at our job or at our home; each of us may be influenced by both.  We may also influence others so being ethical may also mean those we associate with will become better people simply by knowing us (assuming ethical behavior).

  Many people are not aware of the extent to which their job may influence behavior.  We would each like to think we are strong enough to hold onto our identity as we see fit without allowing others to change it.  We have developed our personal character over the years and generally feel that our disposition towards our values and general personal makeup are permanently anchored.  Yet, without even realizing it, those around us do continue to mold who we are (just as we mold others).  Each of us may be highly influenced by what happens to us day-in and day-out in our jobs.  That is why it is so important to carefully choose where we work, with whom we work, the way in which we produce, and how we will be involved with our clients and coworkers on a daily basis.

  A work atmosphere that is kind and considerate, education oriented, and cooperative can go far in securing ethical behavior practices, but let's be realistic:  when an agency is investing heavily in its sales force, production is often major criteria for remaining employed there.  Certainly, there are agencies that do promote both sales and ethics.  If you are lucky enough to find yourself in such a work situation, it is likely that new agents become more ethical (just as others will become less ethical in the opposite type of atmosphere) just by being exposed to those who work there.

  While it is possible to change the attitudes of those in our workplace, it is more likely that those who were there before you will set the pace.  It is far more likely that you will be changed rather than the other way around.  Therefore, it is important to thoughtfully select our workplace as well as our friends.

  How do you know if the agency you are considering is right for you?  There are no sure guidelines.  You may even have to simply try the agency out for a month before you actually know.  You can, however, ask yourself a few questions:

1. Is the agency anxious to equip you to succeed?  In other words, do they have an ongoing educational program?  This is not referring to the required education the state demands, but rather a program that provides sufficient product training.  State mandated education does not allow product information to be included unless it is of a general nature, not on specific company products.

2. Does the interaction at the agency seem to be relaxed and positive?

3. Agents must feel the agency fits their needs; it is seldom wise to stay with a job that leaves the individual salesperson feeling uneasy.  We are often reluctant to consider whether or not a workplace will make us happy. Individuals that are not content with their place of employment are not likely to perform to their full potential in the sales field; agents may even be tempted to act unethically in order to maintain their job or their image as a good salesperson.

  If you really want to be recognized as successful, then be the person you really want to be; not the person your manager, your neighbor, or your coworker expects you to be.  When your life is nearing its end, chances are you will not be considering how you could have made one more sale if only you had tried harder or worked more hours.  Most of us will regret the things we did not take the time to do with our family, for the community, or for personal enjoyment.  What will be your legacy?

  There are many factors that go into successful selling that is related to ethical conduct; it is difficult to divide the two.  Ethical behavior could be considered a successful sales technique since people are drawn to positive ethical people.  If the individual is also good at their job success will follow.

Ethical Selling

  An ethical insurance agent that goes bankrupt because he or she could not bring in the earnings necessary to pay their bills is not likely to do the consumer much good.  Therefore, for the good of the consumer, it is not enough to merely be ethical.  The agent must be both ethical and skilled in his or her trade.  In fact, it seems probable that the financially successful agent is more likely to be ethical since there will be less stress involved, less desperation to make the sale.  Let us look at the steps involved in getting a sale from an ethical standpoint.

Setting Appointments

  First of all, even the best of agents will not succeed if they have no place to be.  Agents must have new clients to present their products to.  Although there are many methods used to obtain appointments, we will be considering two:

1. Setting appointments by telephone, and

2. Coming to a consumer's door with a mailed-in lead card in hand.

  Each state tends to have some type of requirements for the consumer's protection.  We are not able to address these requirements state by state and are not attempting to do so.  It is vital that each agent, if he or she is involved in soliciting business, be aware of their particular state's rules and regulations. Many agents purchase their client leads from insurers since the insurance companies will know each state’s laws and follow them during their solicitations.

  Desmond works for an agency that does mass mailings directed at senior citizens for the purpose of soliciting reply cards.  A senior citizen who wants additional information on the product offered fills in their name and address and returns it to the agency or insurance company.  This is a fairly common practice and most states have addressed the issue by restricting what can and cannot be said in the mail piece.

  Some of the agents where Desmond works call before going to the home, but Desmond prefer to drop by unannounced.  This method has been especially successful for him.  Desmond tells other agents that he gets fewer rejections in person than he would get on the telephone.

  When Desmond approaches the door, he has several options.  Which option would you select?

1. When his knock is answered: "Good morning Mrs. Green.  My name is Desmond Drake.  I represent XYZ Company and I am here in response to the card you directed to us.  Is this your writing or your husbands'?"

2. When his knock is answered: "Good morning Mrs. Green.  My name is Desmond Drake.  I am here due to the changes that have occurred with your Medicare benefits.  Are you aware of those changes?"

3. When his knock is answered: "Good morning Mrs. Green.  I am here in response to the card you sent to us for information on your Medicare.  As you probably know, some of your benefits may be cut next year.  Are you properly prepared for those cuts?"

4. When his knock is answered: "Good morning Mrs. Green.  My name is Desmond Drake and I am with your insurance company.  They have asked me to stop by and review your benefits with you and answer any questions that you may have.  May I come in?"

  You may have thought of other opening statements that might be made to gain entrance into the consumer's home. Which of these statements that we have offered would you feel is most ethical?  If you choose the first one (1), you are right.  Desmond identified both himself and the company that he represented.  He also noted how he happened to come to Mrs. Green's home (in response to the card mailed in).

  It is not unusual to hear numerous techniques that, while effective, are not exactly honest.  What many agents fail to realize is that the consumers have not lost sight of the fact that less than honest methods were used.  Even if the consumer does not openly say "You made it sound like you were from the state insurance department" that fact does not escape them.  On the other hand, when an agent represents him or herself fairly and openly, clients are more likely to send referral business with a statement of the agent’s honesty.

Getting in the Door

  Desmond identified himself and his agency when he knocked on the consumer’s door.  He also had the mailed-in card in his hand so that Mrs. Green could see that either she or her husband had sent in the reply card from the advertisement they received.  In addition, Desmond made a point of being professionally attired and presentable.  This does not necessarily lessen Mrs. Green's skepticism.  She is well aware that he is there to sell her something.  Even though they mailed in the card, she may decline to speak with him.  Every salesperson must learn to accept rejection, but that doesn’t mean it is easy.  Many people leave the sales field because constant rejection affects them personally.

  If you have been in sales for any length of time, you are aware of the numerous sales techniques promoted by agencies and recruiting personnel.  It has been our experience that simply being a good listener, coupled with honesty, works best. 

  Mrs. Green: "I know you're here to sell something and frankly I just don't feel like listening now."

  Desmond (noting the vacuum cleaner in her living room behind Mrs. Green): "I can see that you are busy and I don't mean to intrude.  Was it your husband that mailed the card in?"

  Mrs. Green: "Yes, he's always doing that sort of thing, but we have insurance and I am simply not interested in more."

  Desmond: "Yes, it is not even prudent, Mrs. Green, to stack your insurance, so I realize that simply putting more in place would not be fair to you.  I don't simply work for a living; I work because I know my trade and I know what works and what does not.  If there is a time that is convenient for both you and your husband, I really do feel that it is to your benefit to at least hear what I have to say.  You'll only be out your time and I promise not to take too much of that."

  Certainly, Mrs. Green may still turn Desmond down, but if she does listen, Desmond has already begun building a firm foundation of trust.  He has not tried the gimmicks designed merely to get to a presentation.  Desmond has been honest.  He has not used some of the "I'm not selling anything" routines that are so often promoted.  One sales manual actually states to handle this type of objection by responding: "I can appreciate you saying that, but as I indicated, I'm here to explain additional tax advantages that you may or may not be entitled to."  There is no doubt that this statement is a way of saying "I'm not selling anything" when, in fact, that is exactly the intent.

  It has been said that objections are merely the necessary steps to obtaining the sale.  A common quote says the salesperson should expect the client to say "no" five times before they finally say "yes."  Whether or not this is actually true is likely a matter of opinion.  Ethical behavior does not necessarily follow the types of manipulation used by sales promoters and is often more a matter of listening to needs, goals and concerns.  It is possible that those who get very good at manipulating the sale may initially write more applications than someone who does not employ manipulation.  I doubt there are statistics to prove one method over the other but qualified salespeople who make ethics part of their routine are likely more interested in promoting sound products that meet the client’s needs and goals.  When this is the case manipulation is not necessary.

  Many agents work with the "I am a friendly next-door-neighbor type of person" persona.  The agent attempts to be so friendly that the consumer cannot resist asking them in.  Actually, it tends to be fairly successful.  Since friendliness is neither ethical nor unethical, who are we to say that it is right or wrong?  In fact I like a friendly person myself and often find myself taken in.  In the end however even the very friendliest of people must know their profession and offer something of value.

  Communication skills are always an agent's best route and this is probably true for most lines of work, not just insurance sales.  So much time is taken by agency trainers on "techniques" that other skills become minimized.  It is a shame that more time is not taken on simple communication skills.  Perhaps it would be better to spend less time learning the "tricks of the trade", and simply learn the trade itself!

Explaining Policy Benefits and Limitations

  Property and casualty agents gain much of their business from those who call or walk into the office.  Life and health agents are more likely to go into the field seeking their clients.  Because of this difference PC agents must become very good at quickly providing the requested information in a short period of time.  Since many of their telephone calls are for prices it can be difficult to outline why their particular office should be used.  While price is certainly important to consumers, there is much more to insurance coverage than just price.  Even the service the agent provides can be important.  Ethics are part of all transactions, even when mere price is discussed, but it takes some additional contact for a consumer to know if ethical business practices are utilized by the agent.  Unless the agent has the opportunity to go beyond price statistics, he or she may never get the chance to display their expertise and moral conduct.  Therefore, PC agents probably rely on different types of contact than LH agents do to gain new customers (policyholders).  In fact, it is common for PC agents to acquire new policyholders based entirely on the location of their office; clients want convenience and a neighborhood office is appealing.  Agents selling life products seldom find their office location to be a deciding factor for the client.

  Once the consumer has agreed to hear the agent's policy explanation the agent enters into many possible pitfalls.  Policies can be very difficult to understand.  Most presentations involve a few set items, which include premium rates, benefits, agent services, and company stability.  Of these, the premium amount should be the least important, although our clients do not always allow this to be the case.  As a result, rates often take up the majority of the presentation, yet an Errors and Omissions claim has never occurred due to the premium quoted.  Probably 98 percent of the E&O claims filed relate to the benefits of the program and how those benefits were discussed (or not discussed, as the case may be).  According to the Professional Liability Pitfalls for Financial Planners, the most likely reason for a lawsuit against an agent is negligence.[1]  Failure to provide or recommend proper coverage, failure to properly advise of the company’s rejection or lack of coverage, failure to cancel a policy at the insurer’s request, and failure to fully disclose the nature of the risk is the most typical agent failures cited.

  The insurance contract can be very intimidating.  Technical in nature, complex in its subject matter and seldom read in full by either the insurance agent or the policyowner, it is bound to be misunderstood at some point by somebody.  It has been said that insurance contracts are the number one unread best seller.

  To our clients, the most important part of the policy is the part that begins, "We promise to pay."  In reality, all other parts are, of course, limitations and/or conditions on the policy and benefit payments.

  In some ways, life insurance policies are the easiest for consumers to understand.  After all, a person is either dead or alive.  If the insured dies while the policy is in force, the promise of a payment is kept.  Of course, life contracts are not so simple either but the concept of payment is simple compared to other types of insurance.  Property and casualty insurance contracts will have payment conditions, maximums, deductibles, and limitations.  Any contract can be confusing to the consumer; any policy contract can cause a misunderstanding.

  There are steps an agent can follow to minimize possible misunderstandings:

1. Full disclosure is always necessary in any type of policy being suggested to a client.  Where different interpretations are possible between a brochure and the actual policy, the policy is always the final authority.  A brochure is simply a selling tool; never the final answer.  The statement an agent receives over the telephone from the agency or home office also takes second place to the actual contract.  The policy is the final word every time.  An agent who has not read the contracts he or she is selling, is an agent waiting for a lawsuit to happen.

2. An agent should only replace an existing contract with the full understanding of the client.  Additionally, if any coverage is lost or reduced the agent must make every effort to inform the client of this reduction or loss.

3. Specifically, state policy coverage; outline what is not covered under the policy; also specifically state maximums and other limitations.

4. Specifically state why rates increase or coverage not renewed.  It is important that policyholders understand their responsibilities under the policy.

  The actual way in which a plan is presented can be very important since so many of the consumers will not understand industry terminology.  The weight falls on the agent to present the policy in such a way that understanding is possible.  Again, this often comes down to good communication skills.  It is often possible to tell your client does not understand merely by the expression on their face or from their body language.  Many people feel awkward saying they are lost.  This might especially be true if they feel their agent is very busy.

  There are some agents who cannot seem to resist being overly technical.  The agent may feel that such technical explanations are necessary, or he or she may simply want to impress the client.  While the agent may be extremely knowledgeable, such knowledge is only beneficial to the layperson if he or she can understand the policy explanation.  An ethical person will put a priority on client understanding.  If the agent, indeed, wants to impress the client, then we must ask the question, does ethical conduct allow for such self-serving purposes?

Allowing Misconceptions

  It would probably be surprising how many policies are sold on the basis of assumed facts and misconceptions.  Unfortunately, agents are not always aware of client misconceptions, but if they are aware and allow them to exist they are certainly wrong to do so.

  An agent relayed this story:

  I was sitting in the home of an older client who was interested in investing in an annuity product.  I was showing him several plans available.  One was paying a higher interest rate than the other two, and the consumer liked the higher rate.  I made a point of telling him the rating of the companies, carefully pointing out that the higher paying company only had a "B" rating from AM Best Rating Service.

  After a moment's pause, he replied: "Hell, I would have been happy with B's when I was in school."

  It is obvious that the consumer did not understand the importance of financial ratings.  It would have been easy to simply fill out the application and never address the obvious misconception on the part of the client; it would also have been ethically wrong.

  Any agent who has spent time in the field can probably tell their own stories of people who made incorrect assumptions placing a sale directly into the lap of the agent. Some misconceptions may simply be amusing, while others may cause serious legal problems.  Sometimes it can be so difficult to clear up a false assumption that the agent simply lets it slide by.  This is not wise.  It is always best for the client to correctly understand what he or she is buying.  The next agent in their home may clear up the matter, making the first agent appear either inept or unethical.  As one agent relayed, he hates coming into a home where he must spend most of his time correcting the false information left by the agent before him.  While this might cement the sale, it is also a waste of time and energy (and you may be the one losing the client due to misinformation given at the time of the sale).

Premium Rates

  Policyholders generally want to know precisely the cost of their policy.  That is true whether it happens to be an auto policy, homeowner’s policy, or disability income policy.

  When an agent fears he or she is losing a sale due to the amount of premium, it would be easy to quote a lower premium rate.  Since the rate of premium directly relates to the amount of coverage purchased, dropping to a lower rate obviously means less coverage in most cases.  Agents who represent more than one company may be able to produce a lower premium rate by changing to a different company, but any changes in coverage (benefits) or company stability must be clearly disclosed to the consumer.

  If a premium rate is misquoted by the agent, the mistake must be immediately addressed as soon as the agent is aware of it.  Even if it means losing the sale the agent has an ethical responsibility to disclose the error.

Providing Client Service

  The hardest policies to replace are those belonging to an agent that keeps in touch with his or her clients.  Many agents seem to enjoy keeping in touch on a regular basis; others merely realize it is part of the profession if they wish to keep business on the books for the long term.

  This often depends partly upon the arrangements made between the agent and his or her agency or insurance company.  Agencies realize that agents who spend time with existing clients are not out seeking new clients so they may provide office staff to handle claims and other client services.  Some companies provide separate servicing staff whose job is to perform the routine service work.  Even so, some agents may wish to add a personal touch by periodically contacting their policyholders.

Commingling Funds

  There is no reason for an agent to express ignorance regarding the hazards of commingling funds.  This is something every agent should be aware of from their pre-licensing insurance classes and industry directives.  While state laws vary, the basic concept remains the same: insurance funds and personal funds may never be mingled.  By this, we mean two separate accounts must be kept.  It might even be wise to go a step further and use two separate banks, one for the agent’s personal account and one for his or her insurance agency and trust account (if a trust account is applicable).  A trust account is used for funds that do not belong to the insurance agent but the insurer has issued a trust agreement.  The agent is allowed to deposit client funds into these accounts and send the insurer their portion of the premium payment.  This allows the agent to keep the commission portion.  However, if a refund is requested the agent must maintain enough funds to refund their portion in a timely manner.  An operating account is used for commissions that are due and payable to either the agent or the agency from the issuing insurer.  The insurance companies receive the full premium payment and issue a check to the agent or agency with the funds typically being deposited into the operating account if a direct deposit contract is in effect.  The operating account is used to pay the routine bills that come with running a business.  The trust account holds funds "in trust" for either the insurance company or the policyholder.

  Any agent that is not clear on this should contact their state's insurance department for that state's specific requirements.

Continuing Education to Meet State Requirements

  Most states and Canadian provinces require continuing insurance education be obtained in order to renew the agent’s license.  How much education is required varies although the states are now coming together in an attempt to have uniformity from state to state.  It is the responsibility of each agent to know and understand their state's requirements.  Each agency is responsible for promoting education as an important feature necessary for the welfare of both the agent and the consumer.  An agency should never resent the time an agent takes out of the selling field to acquire education.  In the end, the agency also benefits from better-educated field staffs.

  State mandated education must be obtained in a timely manner.  “In a timely manner" means the agent must complete and pay for their education within the time parameters allowed by the state; most states impose fines for education that is completed past license renewal dates.  It is very difficult to get all that is available from of a course if the agent must rush through it in order to meet a time deadline. 

  Since education is the mark of a true professional many agents acquire additional education from professional organizations, which may result in specific designations, such as Certified Financial Planner™.

  There are various types of professional designations available. Property-casualty agents might become a Chartered Property Casualty Underwriter (CPCU).  While professional designations do not necessarily mean the agent is wiser or a more skilled salesperson, they do show that the agent is serious about his or her profession.  Regardless of the line of work a person is in, additional education is always a sign of a true professional.  This is true of a teacher, a doctor, a lawyer, and an insurance agent.

  There is another side to education besides formal, credited courses. 

  Angie is a fairly new agent having only been in the sales field for about six months.  She works for a large agency with a very large field staff.  While the agency does hold product meetings, it is not unusual for new items to be added before they have been formally introduced in the product meetings.  As a result, Angie is often given brochures and applications for products that she is not familiar with.

  Angie's field manager, Reggie: "Angie, here are some brochures for a new accident policy we just got in.  It's fairly simple, but if you have any questions give me a call.  Just read the brochure.  That should do it."

  Angie reads the brochure and feels she understands the basics of what it is selling.  What Angie is not sure about is where such a policy fits and who might benefit from buying it.  Since Angie sells mostly property and casualty insurance products her understanding of other markets is not great (although she holds a life/health license in addition to her PC license).  Angie makes the determination that many people must not be covered for accidents.  Angie sells two policies in the first week and is highly praised by Reggie.  Being so new, Angie does not often get praise, so now she begins to make a special point of suggesting her clients buy the accident policy.

  The question here does not necessarily concern the value of the policy itself, but rather how Angie handled a situation concerning education.  Since Angie was not sure where this new product best fit in, what should she have done?  It was obvious that Reggie felt the brochure would answer her questions, and he did offer his assistance if she wanted it.

  What were Angie's options?

1. She could have called Reggie or cornered him at the office to ask questions.

2. She could have asked other agents more experienced than she.

3. Angie could have waited for the product meeting and asked questions.

4. Angie could have called the insurance company marketing the product.  Most companies do have a product support department.

  Did Angie need to do any of these things?  Since she was able to sell the product even though she was not sure who would benefit from it, did any questions even need to be asked?  Did her assumptions regarding the accident policy pose any consumer problems?  Is it possible she misrepresented the product due to her misunderstanding?  We know that Angie would not have purposely misrepresented the policies, but does this lessen her liability?  If Angie did misrepresent other plans, what will this do to her credibility if her clients discover her error?  If Angie did not bother to explore this product completely, is it possible that this is a work pattern that repeats itself with other products?

  Do agencies bear any moral responsibility for the conduct of their agents?   To what extent are agencies liable for the action of their agents?  Since agents are often considered to be self-employed, does this mean product education is solely the agent's responsibility and that anything the agency does is more of a courtesy than a responsibility?

  Many agents are self-employed without access to an agency staff, but if the agent is contracted with an agency it is likely that such issues are addressed in their employing agreement.  Even insurance companies have signed employing agreements that address these types of issues.

Due Diligence

  It is common for an agent to go to work for an agency and simply accept whatever companies and products are provided.  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.

  In more recent times, insurance producers are being told that due diligence is their 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.  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 and it may affect some lines of insurance more than others.

  For the property/casualty fields due diligence often means suggesting adequate coverage and changing amounts of coverage as necessary.  For example, despite record flooding across many states, a survey in 2018 by the Insurance Information Institute Pulse found that 15 percent of American homeowners had a flood insurance policy and in 2020, that number rose to 27 percent although a higher rate than estimates cited by the NFIP and other observers. Today government programs attempt to educate consumers regarding the need for acquiring flood insurance but it is still the insurance producer’s duty to recommend appropriate coverage.

  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. 

  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.

  The role of the agent has also 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 (and 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 full.  There are multiple resources online to obtain this information and even subscribe to the latest information gathered.  A morning spent looking up the companies they are representing, or are considering, is a morning well spent.  There are several reasons to do so:

1. To prevent lawsuits from angry consumers who feel they have been financially hurt;

2. To maintain their client’s trust; and

3. To determine if the people associated with the insurers they represent have the level of integrity desired.

  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 of your immediate manager or regional manager, the home office (especially the underwriting department), and even the company's competitor.  If the insurer seems reluctant to provide information to their own agents, a red flag should go up. 

  Agents can often learn much by 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 or even minimal profits?  While no one wants a company to overcharge, it is essential that enough profits exist to allow the company’s 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 that can be easily understood and assessed.  There are several ways to assess this information, but often it is easiest to simply look 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.  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 but generally these funds are not great enough to ensure financial safety.

  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.

  It must be noted that the ratings still reflect a certain amount of opinion regarding each company's financial strength and operating performance.  Rating companies are 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).

  There are specific areas that must be looked at in order to understand a quantitative analysis of a company.

1. Profitability: It should come as no surprise that profit is a measure of the competence and ability of the management of any company.  This is certainly true of insurance companies as well.  Profit is the result of the management to provide viable insurance products at competitive prices, which maintains a financially healthy company.  Operational profitability (underwriting and investment income) is the single most recurring and important source of surplus growth for an insurance company.  Surplus represents additional security for the policyholders.  It is protection against events that negatively affect the company.

2. Leverage: A company typically has exposure to some risks.  Leverage measures the exposure of an insurance company's surplus to the various operating and financial practices.  A highly leveraged company can show a high return on their surplus, but may also be exposed to a high risk of instability.  A conservative level of leverage enables an insurer to better withstand adverse changes in such things as underwriting results, investment returns, regulatory, or economic conditions.  This is generally at the cost of lower returns on surplus.

  While leverage may be generated from several different sources, there tends to be four typical types:

· Current writings;

· Reinsurance;

· Policy or loss and loss adjustment expense reserves; and

· Investments.

  It should be noted that leverage is a relative measure.  Each company may have unique features that affect the end result.  Some of these features may include such things as:

· Spread of risk,

· Soundness and appropriateness of the reinsurance program,

· Quality and diversification of the assets, and

· Adequacy of loss or policy reserves.

3. Liquidity: We are all familiar with the term liquidity.  Liquidity measures a company's ability to meet its anticipated short and long-term obligations, which includes policyholder claims.  Each company must have liquidity to some degree.  The level of a company's liquidity depends upon the degree by which it can satisfy its financial obligations by holding cash and other investments, which are sound, diversified and liquid.  If a company experiences unexpected obligations and does not have enough liquid assets on hand to meet those obligations, it might then be forced to sell other less liquid assets at a bad time which might result in investment losses.  The company might also be forced to borrow funds or sell long-term investments too soon.  A high degree of liquidity enables the company to meet those unexpected obligations without adverse effects on their general investment portfolio.

  Besides the quantitative analysis of the company's financial performance, A.M. Best also performs a qualitative analysis.  This includes such things as the company's:

1. Spread of risk,

2. Quality and appropriateness of the reinsurance program,

3. Quality and diversification of assets,

4. Adequacy of policy or loss reserves,

5. Adequacy of surplus,

6. Capital structure,

7. Management's experience and objectives, and

8. Policyholders' confidence in the company.

  There may be additional elements studied if other factors seem to apply.

The A.M. Best Rating System

  It should be pointed out that there are several service companies rating insurers.  We are not implying A.M. Best is either the only company, or necessarily the best company at rating insurers.  We recommend that all company rating services be looked at since each company’s rating process may be different; as a result some companies may uncover elements missed by another rating service.  The various rating services may give the same insurer different ratings due to the procedures used to rate them.  Viewing various rating companies provides a better financial perspective of insurers.

Additional Agent Due Diligence

  So many areas of ethical behavior are overlooked; one area that should not be overlooked deals with due diligence.  Professional agents prefer to deal only with financially sound companies, but many agents may not know how to locate these companies or may not realize the importance of company stability.

  There is both a technical way of locating sound financial companies and a common sense approach.  It can be 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.  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.  While few people would rely on an agent’s intuition or “gut feeling,” usually such misgivings arise from noting specific actions or policies that do not appear sound.  As a result, even if it is simply a gut feeling, agents must be prepared to then proceed to the technical detective work that is necessary to validate their feelings.  Intuitions often originate from sensing that something has changed or is amiss.  This might be something as simple as delayed claim payments or a combination of many things.  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 agents often recognize 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 policyowners.

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 and professional experience.  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. 

  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 commonsense 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. 

  The agent's 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.  Lawsuits are often initiated by members of the insured’s family that were not present when the policy was purchased and have no personal knowledge of the agent’s actions; they merely know the insured lost money in some way.

  Some people consider the phrase business ethics to be an oxymoron.  Ethical insurance agents may never be able to convince those that believe this that the words business and ethics do go together.  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.  This might especially be true if there are stockholders.  Ethics and the pursuit of profits coexist.  If the business does not make a profit, it cannot continue operating.  If the business must close it likely means jobs will be lost.  Clearly, we want our nation’s businesses to continue operating and paying wages, so profits are desired.  There is nothing unethical about operating profitably.  It could even be said that it is unethical to operate at a loss since bills might go unpaid.

   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.  Little wonder that ethical professionals feel the stress of their profession.

  The insurance professional 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 an ethical person and would never give advice that he thought was anti-consumer.  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 policy aspects rather taking a positive selling approach?  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.  Marvin believes he must cover every detail.

  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 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?

  Ethics are entirely about perception.  To be ethical one must act according to one’s own perceptions of right and wrong.  Even though Darin believes Marvin is saying too much during his presentation, if Marvin feels otherwise, he must follow his own perceptions of right and wrong.  On the other hand, if Marvin does not believe this is an ethical issue he may follow Darin’s advice and still be ethical.

  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 one of the insurer rating companies 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.  Some individuals feel any commissioned industry promotes unethical behavior, even from those that otherwise would not be unethical.  Why?  Because financial stress (earning too little) might push an otherwise ethical person into performing unethically.  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 acquiring sales becomes the priority, without any other aspects considered, integrity can certainly suffer.

  A profitable business is always the 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 work together, so can ethics and commissions if other ethical concerns are also considered.

  It has been noted that property and 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 and health insurance 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.

  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 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 driving up our costs for insurance protection.  Such fraudulent claims are certainly unethical.  Ironically, many consumers feel insurance companies have lots of money so they rationalize filing of false claims is acceptable.  In fact, filing false claims is not only unethical but illegal as well.

  There was agreement from those participating in an 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. 

  We live in a society where rules and regulations seem to grow daily.  With the abundance of rules and regulations some people feel making sure it is legal is enough.  Simply following the law is the minimum acceptable level of ethical conduct; ethics require going beyond the letter of the law.  It is up to the business organization to set the actual ethical code of conduct that they require.  Ideally that will be higher than is actually mandated by law.  Of course, each individual must also set personal standards of conduct. 

  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 primarily a clear-cut choice, for example.  Making ethical choices is not so easy when the decision is between two sets of action that may be both right and 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).  Another example might exist if a child were hungry; most parents would steal to feed their child.  While stealing is not ethical, a parent’s need to feed their child is likely to outweigh the ethical question of stealing.

  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.

  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 in return.  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, but it may change our willingness to offer favors to others.

  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 is seldom set down by us, but rather by others 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 cannot 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.

  Everyone wants to be treated with respect.  Those who routinely treat others with respect are most likely to receive it in return.  Most of us will become more courteous when we are in circumstances that clearly warrant it.  When we are in the company of an individual that clearly considers courtesy important we tend to perform as expected.  It is reasonable to assume that those in the company of an ethical individual will perform ethically in response.  It may not always happen but certainly the level of ethical performance is likely to increase.

  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.

Business Ethics

  Individual ethics and business ethics are sometimes considered separately but businesses are made up of people; it is the people that run the business who reflect corporate policy.  Every business has a responsibility to develop a written ethics code.  An insurance company must worry about becoming the concern of a government regulator if legal ethics are not followed, but it really goes beyond that.  Companies who have a formal code of ethics for their employees are less likely to have legal problems concerning employee conduct.  Numerous companies have been sued by employees who felt harassed by management or other employees.  A written code may not have prevented the problem but it would have made boundaries clear and may have prevented or lessened the legal problems that occurred.

  Experts note that a significant percentage of employee-based lawsuits would never have stood up in court if the situation had been properly addressed in the company manual and 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 establish what is expected of employees and improve employee morale.

  Such things as churning policies, misrepresentations of products or services, and outright fraud affect the industry’s public's image and affect all those who work within it.  All of these issues need to be addressed in the company manual.

Taking the Ethical Path

  Each of us probably likes an occasional challenge.  Ethical investing can be a fun and fascinating experience because it brings about the challenge of finding out which companies or products share the same ethics as the investor.  Investing for others is typically part of the life agent’s or financial planner’s activities; property and casualty agents are seldom involved unless they also carry a life and health license.  Even so, since the company an individual works for invests for their investors it still might be advisable for PC agents to understand how their insurer invests for its own profits.  Insurance companies invest funds for the company’s growth and maintenance so it actually does involve the PC agent since company stability and its ethical stance can be important to the products the PC agent sells.  Even though it requires a fair amount of research, the work can be exciting.  As we learn which companies tend to run outside of the law again and again, which companies continually violate environmental issues and so forth, we find excitement in meeting the challenge of knowing which companies and products we can really believe in and which companies and products have fooled us over the years.

  It's hard to know what questions to ask of ourselves and the companies, but as we work with our investments, the questions do come easier and faster.

  For example, you might consider these questions:

1. How much are the top officers in the company paid?  Do they get additional money in the form of bonuses?  How does this relate to what the employees are paid?

2. Were employees asked to forego a raise or to even take a wage cut while the top officials continued to receive their wages and bonuses?

3. Does the Board of the company have lots of insiders?  Insiders are those who also work for the company but in a different capacity than regular employees.  Lobbyists would be an example of an insider.

4. Have there been very many disputes among the board members?

5. Have consumer complaints been a problem within the company?

6. Are any lawsuits pending and, if so, what are they regarding?

7. How much business is dependent upon government spending?  In what areas is government spending taking place?  Is it weaponry?  Is it nuclear?

8. Has the company purchased any shares from individual or corporate investors at higher-than-market prices and, if so, why?

9. How many minority or women employees are in company policy-making positions?

10. Have the employees experienced any job-related diseases during the past year?  What is the company doing to promote safety on the job?

11. Does the company make charitable contributions?  To who are they made?

12. How much does the company contribute to PACs (Political Action Committees)?  Do you agree with their choices?

13. Does the company have any policy regarding the hiring of older people or those with handicaps?  Is the workplace built to accommodate handicaps?

14. Have there been any disagreements with the company's independent auditors?

  These are just a few questions that might be asked.  Depending upon the company and its area of work, there are many more that are possible.  Questions should be geared towards your areas of concern whether that is the environment, human rights, animal rights, safety or some other topic.

  Many people say they begin to choose specific companies and products because of specific concerns they personally have.  As time goes on, however, they report that researching ethical companies actually becomes a fascinating hobby.  Besides the serious nature of ethical concerns the investigative work that is necessary brings out the detective side in the individual and becomes a challenge.  For the investor, it can also bring financial rewards since ethically sound companies often do well.

  Self-interests are commonly seen in areas where large amounts of money or some type of financial gain is concerned.  Economics, politics, cultural patterns, and simple actions of every day life can affect the financial world.  Amy Domini and Peter Kinder state in their book, Ethical Investing, "Understanding the interrelationship between social and political action and investment gives the ethical investor focus and makes ethical investors good investors."   While the PC agent may not necessarily be involved in investments for others, he or she is an investor in a way since the company they work for involves their future and their income.  That certainly is an investment of time and reputation.

Obtaining Investigative Knowledge

  To link investments and insurance companies to one’s personal code of ethics some assumptions must be made:

1. Every insurance company and every major investment has some sort of ethical dimension;

2. Commissioned agents as well as hourly employees have the ability to apply their personal standards to the companies they choose to represent;

3. Investors can (and perhaps should) apply their ethical standards to their own investment strategies; and

4. Investors who apply their ethical criteria may even be more successful than those who do not.  Agents who apply their ethical criteria to the insurers they represent will never need to apologize to their clients; service is likely to be good (bad service is unethical after all) and their products will reflect the attitudes of management.

  It is likely that all of us have complained at some time about the amount of junk mail that we receive.  Even our email address is now the focus of advertisers.  Insurance producers receive advertisements regarding our industry; they may be promoting a type of product or an insurer looking for new recruits.  Many of the advertisements can provide information that is useful to the agent seeking ethical companies and products.  While nobody wants to read through all the junk mail they receive, it may be advisable to briefly scan each piece to select those that offer valuable information regarding the company’s business procedures and investment strategies.  All the mail will not be informative but by glancing through the pieces, agents will find many sources that may be beneficial in some way.  In fact, there are increasingly more information sources available to the ethical investor (and agent) as companies become aware of the numbers of investors seeking vehicles relating to their personal values.

  Researching companies online is the easiest way to check financial strength through companies likes A.M. Best.  For those who like the old school method, the library is also an excellent source of information.  It is also generally possible to request specific books or source material; most libraries will borrow them from another library for the reader.  A full-service brokerage is also an excellent source of information.  The brokerage may have unpublished research reports on companies that are useful in the agent’s research.

  Brokerage firms also offer their clients investment reports on the companies recommended.  These reports can be very brief or quite lengthy.  Be aware that these types of reports tend to be optimistic so the agent must still back up the facts presented with personal research.  After all, they concern companies that are being recommended.  Even so, they often contain valuable information.  Wall Street companies compete to find established companies whose financial condition and management are impeccable, but whose stocks have not yet peaked.

  There is also investment data that is produced on a regular basis.  Some are better known than others.  For example, we are generally aware of Moody's and S&P Global (formally Standard & Poor’s). Both have a good reputation for providing unbiased information.  Most libraries carry both these publications.

  There are other publications, as well.  For example, the Concerned Investors Guide gives much valuable information for ethical investing.  It may be obtained from the Resource Publishing Group, Inc., P.O. Box 390, Arlington, VA. 22201.  This publication deals with the New York Stock Exchange and reports on hundreds of companies.  It looks at each company's performance in relation to various issues including the environment, product safety, occupational safety and health, nuclear issues and specific current world issues.

  Of course, periodicals and newspapers are often an excellent up-to-date source of good information.  As we know, the Wall Street Journal is an excellent source of information, but there are others as well.  Look for articles that concern specific companies or products the agent is interested in.  Many times, the article's view will differ from those given by the brokerages.  Differing views are vital if all angles are to be fully understood before becoming involved with an insurer or prior to investing.

  It is very important for the ethical agent to develop a reading routine or habit; what is true today may not be true tomorrow.  Maintaining an ethical code in our lives is not for the lazy.  Agents are likely to see changes in companies they are currently licensed with but since most agents will take on new companies, he or she cannot assume that nothing has changed since they last researched the insurer.  Ethics, whether for investing purposes or product representation, depends upon continual knowledge.  In fact, isn't that true for most things of importance?  Since an individual’s finances and employment are surely one of the most important areas in life, it should be given enough time to enable the individual to handle them responsibly.  It has been said that most people spend more time researching choosing a new television or automobile than they do their own retirement plan; apparently current enjoyment is more important to them than their future financial security.

  Regardless of the company the agent chooses to represent or the products he or she decides to sell, it is vital that the ethical agent fully understand what is involved.  If an agent represents some types of vehicles, such as annuities, he or she must understand the mechanics of the investment vehicle prior to selling it.  For example, a client that wants to invest for income and favors corporate bonds must understand more than the mechanics of bond trading (so the agent must also understand in order to properly and ethically make their recommendations).  The agent and investor must understand the state of our economy.  The portfolio's value depends on what interest rates are doing and interest rates depend on many things.  Therefore, the investor would want to gain an understanding of what fuels the rate of interest including factors that bring down investment values.

  It is not wise to limit one's reading to publications that cater to particular concerns.  Just as agents sell to their clients, companies sell to those who will represent their products and company.  In order to have a wider focus, successful agents and investors must read a variety of publications regarding a variety of financial matters.  At the very least, the individuals should read the daily Wall Street Journal and their local paper's business section.

  Many small investors do well because they invest in areas they know and understand.  Agents should not assume the big traders on Wall Street necessarily know more than they or their clients do; big traders do tend to stay educated, however.  The agent must also remain educated on the products and companies that he or she represents.  It is always necessary to make reading a part of the daily routine.  Agents who have worked in a particular industry or have used a particular product extensively or simply recognize a product many people do or will need can be one of the best indicators of stock growth.

  Insurers often provide information packets about themselves.  Of course, we all realize that the brochure's aim is to sell the consumer or agent on the company and their insurance products.  Even so, these packets can be very useful.  Typically, the brochures refer to a specific insurance product or line of products and recent publications or articles on the company.  This may be a starting point for agents investigating a company’s ethical standards.  Smaller companies are especially likely to have these information packets.  Shareholder service departments may also provide lists of brokerages that have issued reports on their companies.  This information can save hours of individual investigative work.

  Sometimes, it is possible to simply pick up the phone and call a specific company directly.  You might be surprised how many companies are willing to talk with an agent and provide specific information he or she is requesting.  Insurers that pride themselves on their ethics will especially be willing to do so.  Insurance producers should not be hesitant to ask specific questions that are relevant to their beliefs and ethical views.  While not every company may be willing to discuss issues the agent feels are important, a surprising number of them will since ethics is becoming a consumer issue as well as an agent issue.

Property, Life and Casualty Fraud

  In California, the Property, Life and Casualty Fraud Program accounts for approximately five percent of the Fraud Division's allocated budgetary resources. The funding stream for this program is generated by a $5,100 assessment for each certificate of authority in California. These funds are nonrestrictive and can be used to support all other Fraud Division program areas if needed. There is no local assistance component to this program.

  This general program handles criminal investigations involving staged commercial and residential burglaries, life insurance fraud (which includes murder for profit cases), fraudulent natural disaster claims (wildfire, flood, earthquake, wind), slip and fall claims, internal embezzlement cases, false food contamination claims, and false marine claims. Criminal investigations in this program area can involve millions of dollars in loss (especially in life insurance fraud cases), and multiple claims for the same loss perpetrated by multiple suspects. Many of these cases have been jointly investigated in cooperation with local and federal law enforcement agencies and have been prosecuted at the local, state, or federal level.

  During Fiscal Year 2020-21, the Fraud Division identified and reported 4,657 suspected fraud claims. The potential loss of these referrals amounted to $307,738,239. The FBI notes: “The total cost of insurance fraud (non-health insurance) is estimated to be more than $40 billion per year. That means Insurance Fraud costs the average U.S. family between $400 and $700 per year in the form of increased premiums.” [2]

  The National Association of Insurance Commissioners (NAIC) defines insurance fraud: when an insurance company, agent, adjuster or consumer commits a deliberate deception in order to obtain an illegitimate gain. It can occur during the process of buying, using, selling, or underwriting insurance. Insurance fraud may fall into different categories from individuals committing fraud against consumers to individuals committing fraud against insurance companies.

  Many insurance contracts state that misrepresentation of a material fact, concealment, or fraud will void the contract. This condition may be added to the contract as much to serve as a warning to the insured as it is to state a condition that would be enforced by the courts even if the policy said nothing about it.

  The FBI noted several schemes:

Premium Diversion

• Premium diversion is the embezzlement of insurance premiums.
• It is the most common type of insurance fraud.
• Generally, an insurance agent fails to send premiums to the underwriter and instead keeps the money for personal use.
• Another common premium diversion scheme involves selling insurance without a license, collecting premiums and then not paying claims.

Example #1

In an example from Idaho, the agent admitted to writing scheduled personal property (SPP) items onto homeowner and renters’ policies without the customer’s knowledge or consent, resulting in the insureds paying premiums for items they did not own. By adding SPP to policies directly affected the agency’s overall item count, which increased the agency compensation. Some items were legitimately added to policies, yet the agent failed to include accurate descriptions and valuations for the items, causing the consumers to be underinsured. This lack of detail and proper valuation could have caused harm to the insureds if they had suffered an actual loss and made a claim.

“This dishonest practice caused financial harm to insureds by having them pay for insurance on items they did not own and had no insurable interest,” said Idaho Department of Insurance Director Dean Cameron. “We encourage all consumers to carefully review their applications and policies. Contact your agent or the Department of Insurance Consumer Affairs if you have questions or concerns.”

Example #2

  In an example from California, an agent charged with 12 counts of grand theft, 34 felony counts of forgery, 34 counts of insurance fraud, and one count of money laundering, after allegedly collecting premium payments from customers and forging bogus insurance documents they then provided to their victims as proof of insurance.

   “Fraud ultimately hurts consumers and our recovering economy. These charges serve as a warning to all that insurance fraud is a crime and punishable in a court of law,” said Insurance Commissioner Ricardo Lara. “My department is dedicated to investigating and stopping unlicensed unscrupulous agents to protect California’s consumers and businesses.”

   The agent allegedly embezzled more than $27,000 from customers and diverted the funds to a personal investment account where they withdrew the funds as cash. By failing to place coverage for commercial general liability insurance policies, the agent left his victims exposed to significant financial losses and liability.

Example #3

  In another example from California, an agent was arraigned on 14 felony counts of insurance fraud after allegedly stealing consumers’ identities to file 14 fraudulent insurance claims with six different insurance companies using a “paper collision” scheme, meaning most of the accidents never occurred and only existed on paper.

   The Department of Insurance launched an investigation after multiple insurance companies flagged claims that they had received. An investigation found that the agent stole their victim’s insurance information and posed as that person to report accidents where the agent was the other party involved. While posing as the victims, the agent would admit fault to the accident and request their contact information be updated to their own phone number so the insurance company would contact the agent regarding the claims instead of the real policyholder in order to get away with the scheme.

   Detectives discovered the agent obtained the victims’ insurance information while their vehicles were being worked on at a stereo and tint shop where the agent was previously employed for a short time as a “sales-helper” and is suspected of obtaining victims’ information while brokering vehicle purchases for them. The agent’s alleged actions resulted in a total loss of $17,293 to six different insurance companies.

Fee Churning

• In fee churning, a series of intermediaries take commissions through reinsurance agreements.
• The initial premium is reduced by repeated commissions until there is no longer money to pay claims.
• The company left to pay the claims is often a business the conspirators have set up to fail.
• When viewed alone, each transaction appears to be legitimate—only after the cumulative effect is considered does fraud emerge.

Asset Diversion

• Asset diversion is the theft of insurance company assets.
• It occurs almost exclusively in the context of an acquisition or merger of an existing insurance company.
• Asset diversion often involves acquiring control of an insurance company with borrowed funds. After making the purchase, the subject uses the assets of the acquired company to pay off the debt. The remaining assets can then be diverted to the subject.

  In December of 2022, the National Association of Insurance Commissioners (NAIC) published the following:

Types of Fraud

Two categories of fraud exist:

1. Hard fraud and

2. Soft fraud.

  Hard fraud occurs when a policyholder deliberately destroys property with the intent of collecting on the insurance policy.  Soft fraud, which is more common, occurs when a policyholder exaggerates on an otherwise legitimate claim, or intentionally omits or lies about information on an application to obtain a lower premium. Soft fraud is often considered a crime of opportunity.

  The most common type of fraud scheme among insurance producers is premium diversion.

Insurance Company Fraud

  Illegitimate insurance companies and dishonest insurance agents can defraud consumers by collecting premiums for bogus policies with no intention or ability to pay claims. These “companies” may offer policies at costs that are significantly lower than the traditional market price to attract consumers who are trying to save money. In many cases, a fake insurance company will provide consumers with documents that look real. In other instances, these policies may even be represented by legitimate insurance agents who themselves have been misled by fraudulent companies.

  Legitimate companies that are not licensed by the state to sell insurance might lead consumers to think they are selling “insurance” while evading state insurance regulations. For example, a company selling a health sharing plan might call the plan insurance when it is actually an unregulated, non-insurance product.

  Employees of legitimate insurance companies can also deceive consumers for personal gain. For instance, an unscrupulous agent could collect premiums from a customer without delivering the insurance policy to the company. The insurance company could cancel or refuse to renew the policy. Signs of fraud with reputable companies include the failure to receive an insurance identification card or a copy of the written policy in a timely manner.

Consumers should be aware of the following warning signs, as they may indicate that an insurance company is illegitimate:

• An agent or broker using intense sales pressure tactics, such as urging a consumer to buy a policy immediately, otherwise the price may change. 
• The premiums from one company are more than 15-20% lower than other companies’ comparable coverage.
• A company’s contact information is not readily available or is difficult to track down.

  To educate and combat this growing trend, California made a one-hour requirement on the subject of insurance fraud training. Different states are adopting their own specific requirements on flood, discrimination, homeowner’s and state specific law requirements. This trend will probably not change.

This completes your course.

United Insurance Educators, Inc.

(800) 735-1155

mail@uiece.com

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[1] Professional Liability Pitfalls for Financial Planners by Cheryl Toman-Cubbage, page 17

[2] https://www.fbi.gov/stats-services/publications/insurance-fraud