Unintentional Insurance Fraud
Updated: Jun 14, 2021
I am reading an interesting book regarding life insurance sales. Many chapters involve "problematic" sales methods from the 1950's through the 1990's. I am learning a lot about life insurance which was why I purchased the book. The unexpected benefit was learning so much about these questionable sales methods. "Egregious" sums up some of those practices.
I have worked in the P&C/Group Benefits sector my entire insurance career. I have not come across many seriously disrespectable sales methods (from a consumer's perspective versus dishonest applications provided carriers) excluding those agents that continue to advise homeowners they only need to insure their homes to 80% of the replacement cost. That is so completely wrong that agents selling that advice should lose their license. At least explain the options but do not just advise, "You only need to insure to 80% and you'll save money by not buying that unnecessary extra 20%."
Even in these situations, I have found many agents selling materially wrong coverages often do so out of their own ignorance. They actually think the wrong coverage is the right coverage because they are so poorly educated. Poor education and ignorantly bad advice originates with, among other factors:
Inadequate intelligence. There is a particular carrier that seems to have a reputation for hiring and developing people that are not quite the sharpest knife, among other qualities, because they have learned these people will just make sales. They will follow a script. They then hopefully have a system to clean up the mess. But these less bright people do not over complicate a sale either. They just make promises to get the sale done and if they were smarter, they would not do this. They would understand they could not actually fulfill the promise. A sort of naivety. If well-structured and then excellently managed, this is kind of an ingenuous structure but only if the "if's" work. Most organizations cannot manage or afford this system so maybe it just makes sense to hire for intelligence going forward. I hate even writing about this company's practice because some amoral reader might duplicate the process to their advantage, maybe some executives already are.
Laziness. To an extent, this is the result of our dismal continuing education system where people get credit for signing in when they arrive, sleeping through the program, and hopefully awakening in time to sign out. Insurance education was substantially better before CE arrived. CE plays to the lazy people in the industry. They get their credits and do not learn anything and they are too lazy to take substantive classes. They are often too lazy to read the policies they are selling too. I saw a question from an agent that had just incurred a potential E&O claim. His question was, "Obviously if I had read the policy, I would have realized the insured did not have the coverage I told him he had. Does this mean I need to read the policies I am selling?" Lazy.
Ego is another factor causing unsubstantiated belief a person knows things they do not know. This happens to everyone in sales from time to time. Honestly, it is to be expected along the margins and it is always unintentional in these situations. However, some people have such egos it happens with most every sale.
Just being new and not having the time to learn enough but having so much pressure to sell. That is one tough situation and only time fixes it. Either one does not sleep much learning and selling or something else has to give.
A new situation has arisen with Insurtech. Some of the Insurtech brokers and companies are so ignorant of insurance they truly have no idea, in my conversations with them, that the coverages they are selling are completely inadequate. I do not think it is possible to get them to understand this either because they really think the coverages are adequate.
Being ignorant and selling the wrong coverage does not cause sleepless nights. Conviction in the sales pitch is feasible. Sales may be easier too. It is so much easier to advise coverage exists, even if it does not, if one believes it does. If the consumer thinks coverage exists, but the price is lower because coverage does not exist, then the consumer thinks they are getting a deal when they are really getting screwed and the idiot agent makes another sale. Even when companies and brokers hire producers that fit this profile purposely, the end result is not purposeful fraud like some of the life insurance sales methods. It is more like caveat emptor and a pain for hardworking, knowledgeable agents to overcome.
I get the feeling that some Insurtech vendors may be purposely moving toward some of the egregious life insurance sales, rather than selling inadequate coverage through honest ignorance. The greed of opportunity is a risk when so many billions are being invested in Insurtech annually. The idea that someone can obtain millions of investment money from investors that do not complete due diligence on the actual coverage being sold and does not hire people to determine anything other than "will consumers buy the coverage?" is a real temptation. I have witnessed this exact situation where the investors are not completing any due diligence on the adequacy of the coverage. They do not even seem to understand that E&O is kind of like a gun with only two bullets and yet they are selling tens of thousands of inadequate policies. The investors do not understand the problem, the seller does not understand the problem, and the consumer certainly does not understand the coverage problem. The blind leading the blind leading the blind. Sometimes though, the middleman is not blind in this environment. They know what they are doing and they are making money off the other two sides. These are the situations veering toward the life sales described in the life insurance book.
Some providers would care if they knew but I have talked to others who really do not care. Their attitude is the consumer needs to be adequately knowledgeable and then take the time to read the policy for themselves before buying it. First, almost no one provides the policy upfront and second, no one but geeks, plaintiff attorneys, and retired bored people read insurance policies. Too many agents do not even read the policies they sell so to suggest consumers should read the policies first is a rich position.
In other cases, based on pricing, predictive analytics, and calculations, their goal is to sell insurance to people who absolutely will not read these policies.
Even more concerning is the pressure these practices puts on regulators to create a Sandbox regulatory environment allowing "technology" companies to avoid existing insurance regulations. So much of what I have analyzed, the conversations I have had, and the reading I have done suggest key reasons for the apparent benefit of any given Insurtech insurance company and some Insurtech brokers is really the result of cutting corners. Some new Insurtech entrants are clearly doing things right. Some are truly bring a genuine customer-centric model to the industry, a focus long needed.
Others though are awesome at marketing the customer-centric model, but the opposite it true. For example, I recently reviewed a policy from one prominent Insurtech insurance company that focuses on the consumer. It appeared to me, and not being an attorney or regulator I cannot conclude anything beyond appearances, that the form might not have been properly filed in the state, that the ISO form might not have been an ISO form, that the form might not actually have been a form as we know forms to be, and therefore, certain expected coverages might not actually exist.
My point with this article is that the P&C industry has, in my 30 years' experience, been generally safe from purposeful fraud relative to selling coverages that do not exists, unlike life insurance sales based on my reading. Consumers absolutely have been told that if they buy this policy or that policy, they would have coverages they did not actually have. This has usually been through stupidity, ignorance, wishful thinking, or people simply being new. I just have not seen purposeful coverage deceit often. But now I am beginning to see some of the new Insurtech players going that direction. Many times it is ignorance too, nothing different. But a few do seem purposeful. P&C has enough issues without damaging reputations. I hope carriers, agents, and their respective associations help regulators nip these practices in the bud rather than allowing special regulatory sandboxes.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand Insurance Education, Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.