Two recent stories in Insurance Journal caught my eye and gave me this topic.
These are two stories about two very different issues. An agent arrested for falsifying a roof certification and a workers’ compensation carrier placed in receivership by the state. There doesn’t seem to be common ground here, or does there?
In one story, you have an agent who was arrested because he submitted false documentation so that a carrier would write the risk that he submitted. I agree with one commenter who questioned the Florida Department of Financial Services (DFS) decision to make this particular arrest. It makes me wonder what else they knew about this particular agent.
In the other story, you have a workers’ compensation carrier that simply didn’t have enough money to continue operating. It happened as it happens so many times. By the time the Office of Insurance Regulation (OIR) caught this carrier’s problems, it was already in a tough spot. According to the story, the OIR put them under supervision in August after noting that the carrier’s chief actuary revised their estimated reserving requirements, which made them out of money. It’s November and the company is in receivership. Policyholders will be contacted. They will need to find other workers’ compensation coverage and probably ought to do it as soon as possible.
You might be asking yourself what these two stories have to do with each other (other than they’re both Florida stories). Both stories show indications of fraudulent activity. The agent’s fraud is pretty clear. If you read the other story, you can see where the OIR believes that inappropriate financial activity happened.
Insurance fraud is often spoken of in terms of insureds padding claims or filling false claims, but there is much more to it than that. In the case of the agent, what he did is seen by some as “doing what you have to do to get the business,” or “taking care of his clients.” In the end, it’s still insurance fraud Why?
The agent submitted falsified documents. Insurance companies have submission requirements. Those requirements are designed to give the underwriter a full picture of the risk that she is analyzing. Since insurance requires trust, the underwriter and the company try to trust that what the agent submits is accurate. If it isn’t accurate, the company may take on a risk that doesn’t fit what it wants to write.
The problem is that this appears to be an accepted practice with some agents. Please read my words correctly. I am not saying (nor would I say) that all agents do this. I’m not even saying that it’s a majority of agents. I am saying that there are agents who make it a practice to “do whatever it takes” to write the business, including falsifying documentation to make a risk appear better than it actually is.
What’s wrong with that?
When the agent doesn’t tell the insured that their roof is too old for most insurance companies, the agent fails to serve his customer properly. An old roof in itself is not an issue. We could replace the old roof with existing damage to the structure, old claims history, trampolines, etc. What we really have here is an agent who is willing to make false statements in order to write a risk with an insurance company.
Depending on what falsifications the agent made, the insurance company may well end up paying claims that they shouldn’t. The items that someone would falsify on an insurance submission often end up becoming the items that cause the losses later. The old roof fails. The neighbor’s son is hurt on the trampoline. The history of nuisance claims becomes the major claim.
So, under the pretext of doing what was necessary to write the business, the agent creates more losses and more expensive losses. As much as I think that the insurance industry does good in the world (and as much as some startup companies like to make us think that they’re not trying to turn a profit) I also know that insurance is a business and companies want to make a profit. Increased claims costs are not just absorbed by the companies. Increased claims costs means increased premiums for everyone.
It also means that we lose something in the industry. We lose trust every time this happens. Every time we lose trust, relationships don’t work the way that they should. We no longer look at the submission from agents the way we used to. Underwriters think that agents are trying to game the systems. Agents think that underwriters are being too strict. We look closer and suspect more. That’s not the way this is supposed to work. It’s really supposed to be an industry based on mutual trust.