This publish is a part of a sequence sponsored by AgentSync.
As soon as upon a time, in Michigan…
A licensed life insurance coverage agent went door-to-door, posing as a Division of Insurance coverage and Monetary Companies (DIFS) worker. In accordance with client complaints that the precise DIFS acquired, this agent instructed the unsuspecting residence house owners that their present life insurance coverage service was being investigated for fraud and that she wanted them to cancel their insurance policies so she may problem new ones with a distinct service.
In actuality, there was nothing incorrect with these life insurance coverage insurance policies, and the agent was merely conducting a scheme to promote new insurance policies, which she stood to make giant commissions on. All of that is in keeping with a Sept. 2023 Order for Summary Suspension of Insurance Producer License and Notice for Opportunity of Hearing issued by the Michigan DIFS.
This story could also be one of the vital egregious examples of an insurance coverage agent partaking in fraudulent practices, however many varieties of insurance coverage fraud aren’t practically as apparent. As a result of we care a lot about compliance, and do every part we are able to to maintain licensed producers and dually licensed broker-dealers in good standing with their state departments of insurance coverage, we thought it’d be useful to interrupt down among the most typical varieties of insurance coverage fraud so that you just (customers, producers, carriers, and compliance workers, alike) can acknowledge and keep away from them.
It ought to go with out saying, however please observe: AgentSync isn’t your lawyer and this text doesn’t represent authorized recommendation. In the event you assume you or somebody you recognize could also be heading down the trail in the direction of insurance coverage fraud, please search skilled assist and steering from the suitable sources.
12 varieties of insurance coverage fraud to look out for
In accordance with statistics from the FBI, insurance fraud costs more than $40 billion each year. And that’s not even counting fraud associated to medical health insurance! This quantity of fraudulent exercise completely prices the typical American cash, but it surely isn’t at all times as simple to identify as the instance above. How insurance coverage fraud exhibits up can vary from small, seemingly innocent acts all the way in which to extremely coordinated efforts involving a number of individuals. The next are seven particular varieties of insurance coverage fraud that everybody working within the business ought to pay attention to and looking out for.
1. Premium diversion or stolen premiums
Insurance coverage customers perceive the fundamental idea of insurance coverage: In the event you pay a premium, you’ll have protection whenever you want it. That’s true, except the insurance coverage agent, dealer, or producer has dedicated the commonest sort of insurance coverage fraud.
Premium diversion refers to when the individual promoting insurance coverage collects premiums however by no means passes them alongside to the insurance coverage firm. The producer on this scenario pockets the cash or spends it on different issues. Regardless, the cash by no means makes it to the insurance coverage service and the coverage isn’t in impact.
2. Price Churning
In contrast to premium diversion, which one unhealthy apple can pull off alone, price churning is a scheme that depends on a number of individuals and firms. Price churning is when most or the entire premiums {that a} client pays are misplaced to commissions taken by completely different intermediaries alongside the way in which. The result’s that there’s no cash left to pay claims by the point any of the unique premium trickles its method by the scheme.
On the backside of the fee-churning pyramid, there could also be an organization that the unhealthy actors set as much as appear to be it was professional, however was solely ever meant to turn into bancrupt as soon as the majority of the cash made its method into everybody else’s pockets. The sort of insurance coverage fraud’s elaborate nature makes it simple to overlook since every transaction taken by itself appears professional. It’s solely when somebody connects the dots {that a} fraudulent scheme emerges.
3. Asset diversion
Asset diversion is one other advanced and complex type of insurance coverage fraud. It depends on intricate coordination between a number of individuals in positions of energy. In an asset diversion scheme, one insurance coverage firm makes use of borrowed cash to amass, or to merge with one other insurance coverage firm. As soon as the merger or acquisition is full, the primary firm pillages belongings from its new underling to repay the mortgage it bought to make the acquisition within the first place. With the mortgage paid off, firm administration can divert much more belongings from the acquired firm into their very own pockets, finally draining the corporate dry completely – or typically retaining it open and gathering new premiums to proceed fueling the fraud.
4. Staff’ compensation fraud
Staff’ compensation insurance coverage is a requirement in practically each state for any enterprise with not less than one worker. Given how prevalent this protection is, it’s no marvel there are a number of several types of fraud that insurance coverage carriers, brokers, employers, and workers can perpetrate.
- Stolen staff’ compensation premiums: In accordance with the FBI’s insurance coverage fraud web page, some unscrupulous insurance coverage carriers could attempt to promote low-cost staff’ comp insurance policies to an organization after which stroll away with the premiums whereas by no means really offering a coverage.
- Employer staff’ compensation fraud: Since staff’ compensation premiums are primarily based on an organization’s worker payroll, some employers could attempt to misclassify workers as impartial contractors to scale back the price of their coverage. Employers may also commit insurance coverage fraud by offering inaccurate payroll data to their service or lie about having sure security packages in place, which frequently result in reductions.
- Worker staff’ compensation fraud: It’s not unprecedented for an worker responsible a completely unrelated damage on one thing that occurred at work. Whereas it’s not fraudulent to report a staff’ comp declare if one thing job-related exacerbates a pre-existing damage or sickness, it’s undoubtedly towards the legislation to assert an damage occurred whereas on the job when it didn’t.
5. Faux accidents or claims
In relation to fabricating an insurance coverage declare, the one restrict is your creativeness. Individuals have executed some loopy and weird issues to attempt to get insurance coverage payouts. From faking their own death to actually chopping off a friend’s hand, individuals will go to nice lengths for cash. Policyholders themselves are sometimes the perpetrators of this kind of insurance coverage fraud. However insurance coverage brokers shouldn’t flip a blind eye if one thing appears suspicious. Even being concerned within the submission of a faux or exaggerated declare can put an agent’s insurance coverage license in danger, if not get them into extra critical authorized hassle.
6. Settlement or profit theft
If an insurance coverage producer helps a shopper submit a declare and is aware of a big settlement examine is on the way in which, there are a number of fraudulent and unlawful issues they’ll do to steal the cash away from the policyholder. The sort of fraud often occurs when an agent modifications the handle on file to their very own, and even to a fictitious enterprise handle. The examine results in the agent’s palms, and pocket, as a substitute of with the shopper who’s entitled to it. An agent must have lots of chutzpah to commit this kind of fraud, but it surely’s not unprecedented.
7. Misrepresentation
Whether or not on the a part of the policyholder or the agent, offering false data in the course of the insurance coverage coverage utility course of is insurance coverage fraud. This could occur, for instance, when a life insurance coverage agent desires to have the ability to promote a big coverage (therefore, incomes a big fee) that the client wouldn’t qualify for primarily based on medical questions. It may appear innocent to fudge the reality so the shopper seems to be in higher well being than they are surely, however getting a coverage written primarily based on incorrect particulars is a critical offense.
8. Ghost brokers or phony insurance policies
Who you gonna name? NOT ghost brokers, in case you’re good. A “ghost dealer” is an agent who sells a nonexistent insurance coverage coverage. They typically go so far as to create faux coverage paperwork to present to their shoppers, making it appear to be there’s a professional insurance coverage coverage in place when there’s not.
Ghost brokers are likely to prey on individuals who want insurance policies badly and might’t get them simply, or those that can’t afford a coverage from a extra professional supply. They aim their victims by promising low-cost insurance coverage and/or unfastened underwriting necessities, each of that are simple to supply whenever you’re not really promoting an actual insurance coverage coverage!
9. Backdating insurance coverage insurance policies
Nobody likes the concept of going with out insurance coverage protection for one thing as vital as a house, automobile, or their well being. However, in case you’re an agent and a shopper asks you to make their coverage begin earlier than the day they bought it, run – don’t stroll – away from that deal. What could really feel like a small favor is definitely a critical act of insurance coverage fraud.
Different motivations for backdating could come from an unscrupulous producer trying to get a big fee on a coverage they know wouldn’t get accepted below present situations. For instance, if an applicant for a big life insurance coverage coverage bought recognized with a terminal sickness and the agent thought they might get a coverage in place efficient earlier than the date of prognosis. Actually, the producer and the shopper stand to achieve lots from that situation, but it surely comes at a excessive value, together with hefty fines and even jail time, if convicted.
10. Twisting and churning
Twisting and churning in insurance coverage are two varieties of probably fraudulent exercise that we’ve lined in depth earlier than, each here and here. These phrases seek advice from the apply of changing one insurance coverage coverage with one other, often referring to life insurance coverage and annuity merchandise since their fee buildings supply essentially the most incentive for producers to jot down new enterprise.
- Twisting refers back to the act of canceling a present insurance coverage coverage and changing it with one which’s comparable, or not pretty much as good, from a distinct insurance coverage service.
- Churning refers back to the similar factor besides changing the present coverage with one which’s comparable, or not pretty much as good, from the identical insurance coverage service.
Certain, policyholders have the appropriate to cancel their present coverage and transfer to a distinct one at any time, for no matter cause. There are some instances when transferring to a much less helpful coverage is smart: Perhaps a married couple has lastly paid off their residence and not helps their (now grownup) kids. Transferring to a extra modest, and cheaper, life insurance coverage coverage is affordable. Twisting and churning, alternatively, are unethical (and infrequently unlawful) practices initiated by an insurance coverage agent and not using a professional profit to the patron.
11. Sliding
Twisting, churning, and now sliding? These insurance coverage fraud phrases can sound like enjoyable dance strikes, however they’re removed from it. Sliding refers to when an agent slides some further protection right into a coverage with out the insured agreeing to it. This in all probability isn’t a problem if the producer sees the prospect so as to add a rider to supply further safety at no further value. But it surely turns into a serious act of fraud when the agent beefs up a coverage past what the shopper wants, merely to lift the value and increase commissions.
12. Binding with out consent
In contrast to sliding, the place an agent slides some further protection in below the radar, binding with out consent refers to issuing a complete coverage that the insured by no means agreed to. That is an objectively clear-cut case of fraud and never one thing an agent may simply unintentionally do.
Much more methods to commit insurance coverage fraud
These 12 varieties of insurance coverage fraud are among the many most well-known, however hardly the one methods an insurance coverage agent, service, or client can get into sizzling water. This article from Independent Insurance Agents of Texas (IIAT) supplies an in-depth take a look at an agent’s skilled duties to each their shoppers and their insurance coverage service companions.
Is insurance coverage compliance the identical as insurance coverage fraud?
Nobody (we hope!) desires to fall out of compliance with state or federal insurance coverage rules. Doing so can deliver fines, administrative, and authorized penalties onto everyone involved. Thankfully, falling out of compliance is not the identical factor as committing insurance coverage fraud, generally (although they’ll overlap).
In contrast to insurance coverage fraud, which we’re fairly certain virtually nobody can commit with out making an attempt, compliance mishaps can occur to the perfect of us. The handbook nature of insurance coverage compliance makes it time-consuming, expensive, and simply plain exhausting to maintain up with whenever you’ve bought producers promoting completely different traces of enterprise throughout completely different states.
Regardless of its challenges, regulators don’t simply flip a blind eye to producer compliance violations. They count on insurance coverage carriers, MGAs, MGUs, businesses, brokerages, and particular person brokers and producers to remain on prime of managing state licenses and service appointments.
In the event you’re beginning to assume your present compliance administration system (or lack thereof) isn’t pulling its weight, see how AgentSync can take the pain out of producer compliance and make it easy and risk-free to maintain your producers promoting whereas adhering to all relevant legal guidelines.
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