Those who track insurance criminals for a living say that as the economy has worsened, insurance fraud has been on the rise– and they are on the alert for any jump in fraud by property/casualty agents and brokers.
These days when preachers, judges, doctors, law enforcers, business owners and athletes are caught up in reported insurance scams, it’s not surprising that some unscrupulous agents and brokers exist, too.
In a severe economic downturn, they can be among those who succumb to pressure to keep their own businesses or lifestyles alive or to protect their accounts through fraudulent means.
(See slideshow on A Dozen Bad Apples: Recent P/C Agent-Broker Fraud cases.)
The Insurance Information Institute estimates that fraud accounts for 10 percent of the property/casualty insurance industry’s losses and loss expenses, or about $30 billion a year. Since these are costs that are passed along to buyers in higher premiums, officials are determined to keep that figure from rising.
“It has been the general experience of the bureau that as the economy goes, so goes instances of alleged or actual misrepresentations,” Michael T. Beavers, supervisor of the P/C agent investigation unit of the Virginia Insurance Bureau, told Insurance Journal.
“Right now, we want to be vigilant because everybody’s experiencing the effects of the economic downturn… and that’s when people get desperate,” said Sandy Praeger, Kansas insurance commissioner and head of the anti-fraud task force for the National Association of Insurance Commissioners (NAIC).
Today’s economic conditions can drive producers to cut corners, take risks, or, worse, commit fraud. They may be under personal financial stress or harbor unrealistic financial expectations. They may also be under increasing business pressure to earn commissions or meet quotas from carriers.
“[T]he current economic downturn is creating more problems because many agents are financially hard hit as small business people. Those agents who are living on the moral margins have much more motive to try to rescue their sagging finances by milking unsuspecting clients,” said Jim Quiggle, communications director for the Coalition Against Insurance Fraud.
With access to their clients’ confidential financial information, brokers are well-positioned to commit fraud if that’s what the route they choose.
“[T]hey have an awful lot of information. Those agents have everything they need to file false claims, through identity theft open accounts in somebody’s name. It really is important that we have people that are licensed and are above reproach, because there are a lot of opportunities for the unlawful person to take advantage,” said Praeger.
Sometimes it’s not the agent who is financially vulnerable, but the agency’s client.
“Virtually every small town in our state has insurance agents. So, they’re selling to their friends and neighbors. These are not just arm’s length business transactions. I’m sure there is some pressure brought on them to – ‘Hey, you know, I had a little damage and we just had a hailstorm so let’s see if I can’t get some home repairs done that weren’t exactly caused by the hail,'” said Praeger.
“Everyone is trying to shave costs at every end of the insurance transaction. It would be easy for clients to suddenly ask their agents how they can push the margins of legality to save money in premiums. And an agent whose book of business is struggling under the weight of the recession might be sorely tempted,” said Quiggle.
So false information on an application or claims files might be added or ignored, or payroll figures adjusted, or a fake certificate of insurance issued.
Howard Goldblatt, CAIF government affairs director, notes that a dishonest customer can place an agent in an unwelcome predicament. The agency might write several lines for an account— workers’ compensation, commercial auto, property, maybe also some personal insurance. The client then fudges the employee payroll for the workers compensation account. “Is the agent going to blow the whistle on the account and risk losing all this business?” asks Goldblatt.
The fraud cases that these investigators are watching out for are not like the multi-million dollar bid-rigging or internal frauds by some mega-brokers that made headlines starting in 2004. Rather they are looking for missteps by individual agents or smaller conspiracies where often insurers and sometimes insureds are being ripped-off.
However, noted Goldblatt, these smaller frauds where the dollar amount is “kept below the radar” can go on for quite awhile.
Virginia investigator Beavers categorizes agent-broker fraud into several categories: premium theft or diversion cases where an agent collects the premium but does not remit it to the insurance carrier, causing the policy to lapse for non-payment; cases where an agent never even places the policy being paid by the client; and cases of agent misrepresentation such as the filing of false certificates of insurance or creating bogus policies or surety bonds.
Beavers and other investigators are also on the lookout for a practice known as sliding, where an agent sells coverages or add-ons to clients without their knowledge.
Investigators say premium theft or diversion schemes are the most common fraud cases among producers.
“We know what they tend to do is take the premium checks that are intended to go to the insurance companies and abscond with them to embezzle them, to shift them for personal use while telling the insured they are covered,” says Goldblatt, who adds that these brokers typically get caught if and when the insured files a claim and discovers there is no coverage in place.
Policyholder premiums are not the only target; escrow accounts can also be tempting.
“[T]hey might ‘borrow’ from that escrow account that they’ve been building up. For example, if they sell surplus lines, they collect the premium tax, and then remit it to the state. Some of them put it in a separate account, they’re supposed to, and then remit it all at one time. And, sometimes, unfortunately, they see the dollars there and they’re a little desperate and they think, ‘Well, I’ll just borrow from that account and then I’ll pay it back.’ That’s when they get caught,” said Praeger.
Fraud is most likely to rise where premiums are going up, particularly in places and situations involving high risk businesses and coastal areas, according to officials.
“You might see agents selling bogus workers’ comp coverage, or liability, or malpractice coverage to high risk businesses, you know, in construction, or maybe beauty shops that use a lot of chemicals, or medical professionals,” said Quiggle. “But, in particular, wherever premiums might be rising, whether it be coastal properties, or some industries that are high risk, that’s where the risk goes. Fraud happening might be greater there.”
He said that smaller businesses may be more vulnerable than large businesses that have their own risk management departments.
Nobody’s saying that fraud by P/C agents has been or is rampant, even in this economy. Officials readily acknowledge that the vast majority of agents are honest.
Agents are also on the front lines in the fight against fraud and are often well-positioned and willing to blow the whistle on those who try to commit fraud.
“I think a vast majority of the agents and brokers that we have out there do a great job, and are pretty good about policing their own,” stressed Praeger.
“[M]ost agents are honest, and ethical, and treat their clients fairly. But the economy, especially, is driving too many agents who may be morally suspect off the cliff and into the financial abyss,” said Quiggle, who said a former fraud bureau director told him that if his staff worked nothing but agent fraud cases, they still wouldn’t have time to handle them all.
Hard numbers to quantify any rise in P/C agent fraud since the economy crashed are not easy to come by now. It’s too soon into the downturn, plus producer cases are not separately categorized by all states or watchdogs. But before the economy really slowed, the numbers indicate that, as Kansas’ Praeger termed it, the problem of agent-broker fraud is “manageable.”
The New York Insurance Fraud Bureau’s most recent report shows that out of 2,424 general insurance fraud investigations in 2008, only 119 involved agents and brokers. Out of 2,732 cases in 2007, some 131 involved agents and brokers.
In New Jersey, out of 171 property casualty fraud cases investigated in 2008, 20 involved agents.
Florida’s 2007-2008 report shows that out of a grand total of 1,742 cases opened (119 of them against licensees including carriers, adjusters and agents), some 63 involved an agency or an agent.
In Utah, 14 percent of all fraud cases involve agents.
In Texas in 2008, out of 195 referrals for prosecution (from 379 cases opened), 15 percent were categorized as agent fraud. That was way up from 8 percent in 2007 and up a bit from 13 percent in 2006.
Some of the agent-broker fraud that appears in state reports is committed by agents selling annuities, life or health products, not P/C products. Officials have been cracking down in particular on sales to seniors and military families by some life and health agents.
But officials maintain that remaining vigilant against any P/C agent-broker fraud, however minor, is important because the damage it causes affects more than just the people or firms involved in any single case.
“It’s serious if for no other reason than it really puts the spotlight on how trusting the system is,” said Golblattt. “If you can’t trust your agent, who can you trust?”
Economy Puts Ethical Pressures on Agents
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