Fbi Investigation

[Dilbert]

I have read elsewhere the the FBI denies that a probe into the the insurance industry has been initiated. I think this is a good thing, as in working for several insurance companies, I have found there to be quite a few loopholes that are used. From my experience, to some extent the executives can pick a loss ratio number and twist the reserves to meet that number. They can make a good year look worse to cover future lean years by overstating reserves, and make bad years look better by under-reserving or removing redundant reserves. Depending how this information is used in influencing the stock price, this could be illegal. Add into this the finite reinsurance issue and contingent commision scandal, and the industry is ripe for someone (in addition to Spitzer) to come in and tear things apart.

[crossins]

You have to be kidding. Losses are losses. The IBNR losses have put many insurers out of business. Reserving is reserving, and it is a science. It becomes more difficult when the premium charged (sometimes 20-30 years ago) did not contemplate the effect of legislation and personal injury attorneys.

With regard to contingent comissions, this activity is not scandalous. Say for example I owned a store and sold 5 million packs of cigarettes a day. Should I be charged the same wholesale cost for product as the competitor that sells a thousand packs a day?

Contingent comission rewards me for what I do best-sell the product.

[Dilbert]

IBNR is just another factor that can be adjusted to pick the right loss ratio number. If a company wants to lessen a bad year, they can reduce redundant reserves and under report IBNR. Then the next time they have a good year, they can reverse the procedure to recover from their previous hedging, and lessen the size of the growth to acceptable levels all at the same time. One of the factors that caused the recent hard market is that too many companies had been playing this game without a good year popping up to rectify their problems. To hide the fact that they were not charging enough premium to cover their losses they changed their reserving practices to keep the loss ratios relatively level. Once they got to the point they still couldn't make things look good on paper they had no choice but to start raising premiums and increasing reserves. Look at any industry study. The P&C industry is still billions of dollars underreserved. Why? Because if the reserves were adequate, the ratios would be higher and investors would run away.

As far as contingent commissions are concerned. You have to admit there is a gray area as far as ethics are concerned. Assume you have product A that is a superior to product B. However product B has a better contingent commission structure. So you push product B to your insureds, even though product A is a better solution, and may even cost them less. In addition, if the contingent commission is solely production based, you may be more inclined to misrepresent the true risk/history of a client in order to get more business with the company and meet your contingent commission requirements.

I have no problem with contingent commission structures that are tied to company results. In addition to encouraging production, these also provide disincentive to pushing inferior risks to the company in the name of premium growth.

[Dixie]

I disagree about your "hard Market" theory. Loss reserves just don't carry that large of a swing. The hard market was a result of the drop in the stock market (if insurers aren't making enough funds there, they must increase their premiums to cover losses) and the large loss from the Terrorist attacks (which covered almost all lines of insurance), the industry was taking the largest hit it had ever seen, in the midst of a declining stock market. I am actually surprised that with the 4 hurricanes this past season that the hard market didn't hold on longer.

As for contingent commissions, there is a gray area; however this is where integrity has to step in. It's a fine line, yes; but I do feel that agents who do their job well and provide for and educate the CUSTOMER as to why a certain product could be bought, should be eligible for contigent income. They may have taken extra steps to be sure their client was getting that product that best fit their needs. Granted as an agent, if you know another product will fit better that does not have contingent incomes, you know what is right to do. That's your job and you will still get paid.

Just my opinion, but what do I know????

[BillyB]

The commission issues and the ethics that come into play in almost every sale have long been at the forefront in the life insurance industry. The P&C side is now seeing some of the same attention that hurt the life companies beginning in the late 90s. In the previous example on selling product A vs. product B because of a different commission structure, the writer identifies a problem that will continue to be an issue. As long as agents are incented (through increased comssions) to sell an inferior product they are going to do it. Follow the money! To totally remove the problem a carrier would have to have a flat commission structure and that will not happen any time soon. Expect the same outcome that the life side has had.

[robalfan]

I do not agree with Billy B's statements. In all the more than 40 years I was a broker/agent in California, I do not recall hearing about any of my colleagues thinking about their own pocket books first. Assuming that the policies are equal in all respects, it is not dishonest to offer the one having the best financial result for the agency. However, there are not many instances of all policies being equal. I have never seen an inferior contract being offered, with the only reason being a higher commission. I have seen many inferior contracts offered, where they were the only solution that the agency could offer, due to lack of markets. It is not unethical to sell what you have, and not tell the prospect/insured that another company has a better product. We never had a Chubb contract, and, therefore, could not offer their superior policies. However, our companies were first rate, Safeco, St Paul, Zurich, Travelers among others. We did not offer policies issued by companies with a less than A- rating. Commissions percentages never entered into the equation. I do not believe that we were exceptional in doing this. I think it is the norm!

[Roger Poe]

6-2-2005

BUSINESS/FINANCIAL DESK | May 5, 2005, Thursday

Nation's Insurers Face New Inquiry, by F.B.I.
By ERIC LICHTBLAU (NYT) 764 words
Late Edition - Final , Section C , Page 19 , Column 4

DISPLAYING FIRST 50 OF 764 WORDS - The Federal Bureau of Investigation has begun a nationwide review of insurance practices to determine whether the accounting irregularities uncovered at American International Group represent a pervasive problem in the industry, agency officials said on ... The F.B.I. has instructed agents at its 56 field offices to talk to government...

<a href='http://query.nytimes.com/gst/abstract.h ... 94DD404482' target='_blank'>http://query.nytimes.com/gst/abstract.h ... D404482</a>

Earlier...(10-15-2004)
-Spitzer makes clear he is taking aim at widespread industry practice, saying he has come across wrongdoing in sale of virtually every type of personal insurance;

<a href='http://query.nytimes.com/gst/abstract.h ... 94DC404482' target='_blank'>http://query.nytimes.com/gst/abstract.h ... C404482</a>

[etimer]

I agree that there is not one darn thing wrong with making money. If company "A" and company "B" offer the same benefits but "B" pays a higher commission you are a silly business person to not take the higher commission. I'm not sure what Billy B is talking about in the life industry? I sell a heck of a lot of life insurance and have for over 23 years. There is one company that even if they are
a few dollars less I WILL NOT show their illustration. Why you may ask? Their underwriting stinks, they are very slow, they are not efficient, etc, etc, etc! They pay a better commission but they have created too many bad feeling between me and a client. An example: Last fall ( Nov 2004) I had a case declined. Just last week (July 2005) I receive a cc's letter that the company sent to the applicant explaining to the applicant that they can't offer insurance. Seven months have passed!!!!

Most all companies can try to sell on a 25% profit margin (or higher). Sometimes due to competition that margin can be lowered. The insurance business is not all that different. We have business expenses, kids to feed, college to pay for and yep...someday you'll retire and you need money for that, so if you do no harm to a client and a company pays you more, what harms is in it? Unless you are Elliott Spitzer who is already a wealthy man off of the taxpayer's dollar and can view the insurance industry with an altruistic purist mind. But then….he already has his, doesn't he?

I do not agree with Billy B's statements. In all the more than 40 years I was a broker/agent in California, I do not recall hearing about any of my colleagues thinking about their own pocket books first. Assuming that the policies are equal in all respects, it is not dishonest to offer the one having the best financial result for the agency. However, there are not many instances of all policies being equal. I have never seen an inferior contract being offered, with the only reason being a higher commission. I have seen many inferior contracts offered, where they were the only solution that the agency could offer, due to lack of markets. It is not unethical to sell what you have, and not tell the prospect/insured that another company has a better product. We never had a Chubb contract, and, therefore, could not offer their superior policies. However, our companies were first rate, Safeco, St Paul, Zurich, Travelers among others. We did not offer policies issued by companies with a less than A- rating. Commissions percentages never entered into the equation. I do not believe that we were exceptional in doing this. I think it is the norm!

[ISOWriter]

-Deleted Post-

[smbumgr]

In response to the Contingent Commission debate. I work on the company side and I will say that I do not think the contingency plays into most of our agent's decisions to place business with us. I would say that it mostly due our servicing, marketing, and claims handling for the agency's client. As someone mentioned, the company with the best contingent agreement could be the worst one to deal with and agent's will lose the business to a competitor, if the company does not help to retain the client.

[CATHIEA]

Ok now think about what the issue was with contingent commission. It was not a small agency but a brokerage house that got into trouble. It is not you and me placing a few accounts with a higher priced carrier because it pays us a couple of percent higher commission or may pay us contingency at the end of the year. (that would be called salesmanship - and quite a feat in any area) It was about a brokerage house that was providing quotes to you and me - cherry picking their carriers for those quotes - blocking the market to place business with just the carriers that paid them the big override for the agreed upon production. These people have the ability to make or break a carrier.

Dilbert, you must have worked for a carrier in the past... untrusting soul that you are... But right in many respects. Carriers have used IBNR for years to manipulate the reserves for year end. However, you're a bit jaded. Many other factors go into factoring of loss ratios besides IBNR.