FRAUDUENT SALES IN INSURANCE COMPANIES

Fraudulent sales in insurance companies

Fraudulent sales in insurance companies

Fraud is both perpetrated on insurance companies and unfortunately fraud, in the sense of poor sales practice, is sometimes perpetrated by rogue personal at an insurance company. In areas of insurance where customer claims are frequent such as Property and Casualty, Health and long term disability customer fraud exists. It is estimated that 10% of all property and casualty claims submitted are fraudulent. Medical claims fraud discovery and prevention is similar to problems faced by Credit Card and Telcos. An individual, health practitioner or claims adjuster is involved in a series of transactions. Individually each transaction makes sense but collectively the set of transactions is suspicious. Unlike credit card fraud real-time analysis is not required. Association rules, sequential analysis visualization tools similar to those used to detect money laundering are helpful in detecting these problems. In some insurance areas, particularly Personal Insurance, poor sales practice have to be detected. Similar problems also occur in the brokerage industry. Some sales people are motivated by greed and their own self interest at the expense of thetr clients and the firm. Recently Prudential Insurance has agreed to resolve complaints of allegedly deceptive sales practice for over 400 Million dollars(Bolton Hand 2002). Sales practice violations can take several forms: Misrepresentation of product information including false Illustrations or claiming features that a product does not have. An Illustration is a particular class of insurance product/client literature that shows how the coverage, dividends, cash value and premium change over time for a particular product and client. Selling an unsuitable product to a client. Unsuitable products do not have the benefits required by the client or have a cost structure not commensurate with the benefits. In the brokerage industry a similar problems arises when the product being sold does not have an appropriate risk/reward profile. Sometimes the situation ts complex i.e., life insurance to 70 year widower with no dependents (what about if he was contemplating getting married?) Churning is the practice of converting an existing policy into a new policy, generating additional commission for the agent without commensurate benefits to the customer. Licensing violations are sales by representative not approved to sell certain products i.e. mutual funds Insurance companies, as do brokerage companies, have a compliance department responsible for the detection of poor sales practices. (Feldman 2001)

Although the overwhelming majority of insurance agents and companies are honest and reputable, there are a few unscrupulous operators. Protect yourself by verifying whether or not an agent or company currently is licensed in Mississippi. Be sure to watch out for these agent fraud schemes: 

Pocketing - Instead of turning an insurance policyholder's premium payment in to the company, an agent simply “pockets” it and leaves the consumer without coverage. 

Twisting - An agent persuades the life insurance policyholder to change policies after the first year that it is in effect, in order that he or she can continue to receive the highest commission rates that typically are paid during that first year. 

Churning - An agent tries to sell an additional policy to a person who already has a life insurance policy with cash value. However, the cash value of the old policy is depleted to pay the premium of the new policy, requiring the policyholder to come up with money to pay for both policies, or allowing the coverage to lapse. 

Sliding - An agent “slides” extra, more expensive coverage into a ...