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If a person were asked to provide the definition of an orange, he’d respond immediately with something like this: “It’s a round, orange fruit that grows on trees in warm climates.” If a person were asked to provide the definition of rain, he’d reply in somewhat the following manner: “It’s water that falls from the sky.” Very few insurance producers, however, would be able to respond so promptly or succinctly when asked to define ethics.

Not because insurance producers don’t understand what ethics is, but because the principle of ethics is not tangible—like oranges and rain are. The vast majority of insurance producers automatically know what the ethical thing to do is when presented with an insurance scenario and an ethical dilemma. They could respond to the request for a definition with one or more examples that clearly depict ethical, or unethical, behavior.

For example, if you lived in the Old West and someone stole your horse, it was accepted practice by settlers, ranchers, and law enforcement to hang the horse thief. In fact, the punishment for horse theft was more severe than the punishment for murder. Why? Because stealing someone’s horse was not only a deliberate insult, in most cases it also severely handicapped the individual to the point that he’d be unable to survive. Automobiles had not yet been invented and horses were the principal mode of transportation; they were also instrumental in the running of virtually all of the business ventures taking place at that time. The culture and citizenry of the Old West sympathized with the victims and abhorred horse thieves.

Definition Of Ethics

In the United States today, even in the west, society responds differently to horse theft. While the victim of a horse theft might want to hang the thief, actually doing so would result in far more serious consequences to the person hanging the perpetrator of the crime than to the criminal himself. As our society has evolved, the technology resulting from the industrial revolution gave birth to a new values system; what had previously been considered conventional ethical behavior is now considered not only unethical, but also criminal.

Ethics is a philosophy that studies behaviors, along with the attitudes and beliefs motivating those behaviors. Depending upon the branch of ethics and a number of other factors, judgment about behaviors varies.

Depending upon the source, ethics can be defined in varying ways; all, however, contain a similar theme.

· Webster’s Dictionary: “1: The discipline dealing with what is good and bad and with moral duty and obligation; 2a: A set of moral principles: a theory or system of moral values <the present-day materialistic ethic> <an old‑fashioned work ethic>; b: The principles of conduct governing an individual or a group <professional ethics>; c: A guiding philosophy; d: A consciousness of moral importance <forge a conservation ethic>; 3: Plural: a set of moral issues or aspects (as rightness) <debated the ethics of human cloning>”

· Encyclopedia Britannica: “A branch of philosophy concerned with the nature of ultimate value and the standards by which human actions can be judged right or wrong. The term is also applied to any system or theory of moral values or principles. Ethics is traditionally subdivided into normative ethics, meta‑ethics, and applied ethics.”

· Wikipedia: “(From the Ancient Greek word ‘ethikos’, meaning "arising from habit") is one of the major branches of philosophy, one that covers the analysis and employment of concepts such as right, wrong, good, evil, and responsibility. It is divided into three primary areas: Meta‑ethics (the study of what ethicality is), normative ethics (the study of what ethical truths there are and how they are known), and applied ethics (the study of the use of ethical knowledge).”

The preceding definitions illustrate that ethical behavior conforms to accepted standards of behavior and encourages moral sanction; unethical behavior does not conform to accepted standards of behavior and invites moral condemnation. Essentially, ethical decisions require the process of differentiating between good and bad, right and wrong and, after due deliberation, opting to do what is good or right. It should be noted that while ethical acts and decisions are almost always considered “bad” or “wrong,” they are not always illegal.

When a society creates and enacts laws, the process is the result of a collective decision concerning acceptable standards of activities and behavior: What is considered acceptable by one group of people may be considered just the opposite by another group of people. Culture, religion, the place in time and a number of other factors all affect how different societies make judgments—as seen in the previous example about horse thievery in the Old West versus horse thievery in our current society. Illegal activities and behaviors are characterized and assessed based on law. The law establishes the boundaries of what is considered acceptable, along with defining the penalties for breaking the law.

Ethical behavior, however, is characterized by values—those of goodness, badness, morals, scruples and guiding philosophies. These fundamentals are not as transparent or easily understood as law, which appears in black and white and is more easily assessed.

Unique Ethical And Compliance Issues

Legal obligations are defined and judged by law. Whether or not an individual is aware of a particular law, it exists—in black and white. Law books document a law’s existence, online versions of legal code are easily available to anyone with access to a computer, and entities such as law enforcement and the judicial system are exceedingly familiar with legal code. The consequences of violating a legal obligation (breaking a law) also appear in black and white. Sometimes they vary—depending upon the decisions made by judges, juries, and others with the power to mete out justice—but a generalized view of consequences is readily apparent to most people in our society.

For example, a sign on a highway states: 55mph. Drivers should know the sign is posted to display the legal speed limit. In other words, the jurisdiction has a law stating it is unlawful to drive in excess of 55 miles per hour on that highway. If a law enforcement officer witnesses an individual driving in excess of 55 miles per hour, the officer is entitled to issue the driver a moving violation for speeding. The recipient of the moving violation must pay a fine—unless he takes issue with the citation and appeals its issuance.

Sounds cut and dried, doesn’t it? Since drivers know it’s illegal to drive faster than 55 miles per hour on that highway, no one does. Right? Wrong. The majority of people driving that highway travel at speeds in excess of the posted speed limit. One person puts the car on cruise control at 59 miles per hour because he believes law enforcement doesn’t stop drivers until they’re driving at least five miles an hour over the speed limit. Another person drives at speeds up to 65 miles per hour because he believes that even if he does get a citation for speeding, tickets for traveling between one and ten miles per hour over the speed limit are held locally and not reported to the government for purposes of appearing on his driving record. Each of these individuals feels justified in breaking the law because each has made a personal determination that the speed limit is too low. Neither person feels he is breaking the law although technically each is and, when pressed, will admit it.

Unlike legal obligations, ethical obligations aren’t always defined and seldom appear in black and white. They are a consensus by society of what is acceptable conduct. One person’s set of moral values is considered puritan to another person. One group’s assessment of what constitutes acceptable principles of conduct sets another group gasping in disgust.

For example, Jane is walking on a busy city sidewalk. The fellow in front of her pulls something from his pocket and a wad of cash falls onto the sidewalk and bills scatter at her feet. The teenager walking beside Jane snatches handfuls of bills off the ground and stuffs them into her purse. Jane gathers the remaining bills and races after the man who dropped the money, calling after him.

Not so cut and dried now, is it? Maybe the teenager didn’t see the money fall from the man’s pocket. Maybe she did. Either way, she obviously felt entitled to the money. Jane, on the other hand, did not. This illustration paints a vivid picture of different ethical values.

Why do the teenager and Jane have different ethical values? Because of a number of factors, including differing perceptions of good versus bad and right versus wrong. They also experience dissimilar levels of self-interest, awareness of consequences and results, and concepts of what is moral. Perhaps Jane was raised in a loving family by parents who regularly attended religious services; perhaps the teenager was raised with seven other siblings by a mother on public assistance. Or, maybe the teenager’s house was recently burglarized and she’s still upset when she thinks about the $500 cash that was stolen.

Regardless of our speculation about the reasons for Jane and the teenager behaving differently, neither the teenager nor Jane seemed to experience an ethical dilemma when faced with all that cash at their feet. Each plunged into action without dithering. A third person might have had a terrible time deciding what to do.

Maybe he would have wanted to keep the cash because he’s behind on his rent but would have felt guilty because he saw it fall out of the other fellow’s pocket. He could justify keeping the cash if he simply found it on the sidewalk, but keeping it when he knew the person to whom it belonged just isn’t something he could live with. This third person’s dilemma is a direct result of his personal opinion of what is right, his level of social responsibility and his degree of self-interest.

Apply this understanding to the world of insurance and the insurance industry accepts the following phrases as being right—or ethical.

· Do what’s right for the client.

· Look out for the client’s best interests.

· Putt the client’s best interests first.

· Do no harm.

· Always leave the client in a better position than he was in before you conducted business with him.

Some insurance professionals, however, choose to believe that the following phrases are right—or ethical.

· If no one knows, it’s okay.

· If I don’t get caught, it’s okay.

· Who will it hurt?

· Everyone does it.

Two sincere, informed professional insurance producers could legitimately have different views about whether a particular transaction is right or wrong. While these same two individuals might agree that they should do “right” by the client, they may vigorously disagree about what exactly is “right.”

Many ethical considerations surround the sales of insurance contracts. Ethics is hard to define in practice and equally hard to enforce because it requires an agreement about what is right and fair and in the client’s best interests. While the facts of some situations may be viewed and considered by most to be unethical, the real test of defining or enforcing ethics comes in the more gray areas. Ethics also requires a commitment to a set of values and principles that, by nature, are vague. Ethics requires each producer to read or hear these principles, interpret them and incorporate what he thinks they mean into his daily business practices.

The easiest way to determine if something is in the client’s best interest is to ask him. Yes, come right out and ask, “Does that work for you? Does it make good sense? Will it help you or will it make things worse for you?” Another way to determine if something is in the client’s best interest is to encourage him to talk with his accountant, attorney or a trusted family member. If these individuals bring up issues, they need to be addressed—what better way to address them than with the client’s full cooperation and with the assistance of another trusted advisor or family member?

History Of Ethics

As with the horse thievery illustration discussed earlier, a society changes its values as it evolves. If ethics is defined as accepted standards of behavior, and those accepted standards are not documented in the same fashion that laws are documented, how are the standards created? Who creates them? Who enforces them? Who is responsible for seeing that they change—or don’t change?

Philosophers have expounded upon their opinions about ethics and the science of conduct for thousands of years. The science of conduct is the framework inside which a society lives its lives: It contains the fundamental and basic rules that govern the society. Moral and legal values have often formed the center of the philosophers’ opinions. These opinions have changed with time and they also differ among societies and cultures.

Ethics is divided into three major branches: (1) Meta-ethics, (2) ethical theory, and (3) applied ethics. Meta‑ethics is involved with the knowledge of ethical properties, statements, attitudes and judgments. Ethical theory and applied ethics are considered normative ethics. Normative ethics answer questions that involve the choice a person makes, such as: “How should I act in this situation?” Meta‑ethics answers questions that seek the knowledge of values and principles, such as: “What makes something bad?” or “How do I recognize when something is bad?” Other branches of ethics include Moral Psychology (the study of the nature of moral capacity and how it develops) and Descriptive Ethics (the actual moral values people adopt in their lifestyles).

Meta-Ethics

Meta-ethics focuses on the intrinsic makeup of good and bad and how to define what is morally right and morally wrong. Scholars of meta-ethics do not always share opinions about moral facts. “Moral realists” believe moral facts have a life separate from people and their opinions and that moral facts simply exist and people are either aware or unaware of them. “Moral antirealists” believe moral facts are created by people and their behaviors, conduct and beliefs.

Normative Ethics

The Greek philosophers Socrates, Plato, and Aristotle (500 – 300 BC) were the first to address ethics as a principle. Socrates believed knowledge was the source of good behavior and happiness; evil deeds and bad behavior, he contended, were caused by ignorance. He linked knowledge with virtue, and successively lined virtue with happiness. His guiding philosophy centered on the belief that a wise man knows what is right and good; as a result, a wise man will only do what is good and right. Therefore, a wise man will be happy.

A student of both Socrates and Plato, Aristotle formulated an ethical belief system dubbed “self-realization.” According to the theory of self-realization, if a person acts upon the impulses of his innate character and realizes his full potential, he will ultimately achieve happiness. Aristotle postulated that happiness was the ultimate goal of all people and that everything a person did or achieved, such as living within the framework of society and accumulating material possessions, was a method of reaching that goal.

A number of other philosophies thrived during the period from 300 BC to 30 BC, most notably hedonism. Hedonists theorized that the primary ethical objective was maximizing pleasure and minimizing pain. Different schools of thought branched out from this guiding philosophy, including the belief that the pursuit of self-gratification did not require consideration of its effect on others to the pursuit of spiritual bliss. Epicurus rejected the pursuit of self-gratification to the exclusion of all other efforts because, he felt, it frequently caused pain. Instead, Epicurus adopted the practices of prudence and moderation, preferring to avoid pain and fear at all costs.

Stoic philosophy was the next major ethical tenet of major note. Epictetus (55AD ‑ 135AD) asserted that happiness and peacefulness constituted the greatest good. According to his beliefs, self-control over wants and emotions was the method of achieving peace of mind and spiritual serenity. The fundamentals of Stoic philosophy involved acceptance of things that will not change, including death. The “unconquerable will” was Epictetus’ primary focus, which advanced the notion that people live independent and pure lifestyles.

Consequences and acts are separate concerns of the two schools of thought that divide Modern Ethics. Consequentialist’s believe that the consequences of an act should define the ultimate moral or ethical judgment. For example, if an act or behavior is responsible for a “good” or “right” result, then it is morally and ethically right. The end justifies the means is a clearer way to define this principle. Deontologist’s believe that the innate “goodness” or “rightness” of an act or behavior defines the ultimate moral or ethical judgment. For example, if the act or behavior is, in itself, “good” or “right,” then it is morally or ethically right. Its result, or consequences, need not be considered. The Golden Rule is a clearer way to define this principle, focusing more on the intent of the act or behavior than the outcome.

Substantial development on critical thinking took place during the 1900’s, as did a further amplification of what ethics is.

· The Marxist Theory focuses on the struggle between social classes, capitalism, and collective ownership.

· Modernism focuses on self‑consciousness and the appraisal of the past when compared with the Modern Age.

· Postmodernism focuses on the reaction to modernist principles by drastically reappraising art, architecture, literature, and/or business and either reintroducing traditional elements into these mediums or exhibiting extremes in their presentation.

Applied Ethics

The philosophy of applied ethics takes ethical judgments and employs them based on bona fide situations. Essentially, applied ethics searches out public policy within the framework of which it is utilized rather than as a big-picture judgment that doesn’t consider particular situations or conditions. For example, attempting to determine whether euthanasia is moral is a function of applied ethics in our society.

Military Ethics — The values and principles established by the military are determined solely by the standards of behavior and conduct within the military. Military ethics is evolutionary in nature and certain elements pertain specifically only within its framework, such as the justification for using force, gender equality, and political influence.

Bioethics — The debates arising from advances in medicine and biology are the subject of the studies of bioethics. Topics addressed by bioethics include abortion, animal rights, assisted suicide, cloning, confidentiality of medical records, contraception, disability, euthanasia, gene therapy, infertility treatments, life support, lobotomy, medical malpractice, organ donation, pain management, sperm and egg donation, recreational drug use, stem cell research, suicide, surrogacy, and transexuality.

Corporate/Business Ethics — The examination of ethical and moral principles that are cultivated within a business environment are the focus of corporate, or business, ethics. Sometimes corporate/business ethics apply only to a particular business industry or company. Corporate/business ethics often overlap with corporate and business philosophies that are used to define the basic purpose of an industry or company. The study of corporate/business ethics include:

· Corporate social responsibility;

· Corporate governance and leadership;

· Political contributions;

· Accounting practices;

· Insider trading;

· Executive compensation;

· Kickbacks;

· Human resource management:

o Discrimination,

o Harassment,

o Disabilities,

o Representation of employees by unions,

o Workplace surveillance and drug-testing,

o Occupational safety and health;

· Price fixing and discrimination;

· Anti-trust laws;

· Marketing strategies:

o Bait and switch,

o Pyramid schemes,

o Planned obsolescence;

· Advertising content;

· Black and grey markets;

· Patent and copyright infringement;

· Intellectual property rights; and

· Industrial espionage.

Moral Psychology

Moral psychology is based on an individual’s personal philosophy and is studied in the fields of philosophy and psychology. The reason for the concern in both fields is its relation to morality, or moral development, which have their foundation in a person’s religion (or lack of religious beliefs), conscience, and what a person believes is good or bad behavior. Moral psychology entails seven levels of functioning.

1. Moral intuitions

2. Moral emotions

3. Moral virtues/vices

4. Moral identity

5. Moral values

6. Moral reasoning

7. Moral willpower

Basically, moral psychology studies what factors persuade a person to make a moral or ethical decision.

Descriptive Ethics

Instead of focusing on what people do and how they behave, descriptive ethics is a process whereby the attitudes of a group of people are observed and researched. Descriptive ethics focuses on what people think is right or wrong. It seeks beliefs and attitudes about values, what actions are right or wrong, and what characteristics are judged as being virtuous.

Ethical Factors

When presented with a situation, two individuals will respond differently based on a number of factors. Each may deem their own behavior to be ethical and that of the other individual to be unethical. Why is that?

Based on their particular upbringings, lifestyles, and past experiences, each individual has a different perspective about life, people, and relationships. Their personal philosophy guides their decision-making.

In the study of any field of ethics, the following factors come into play.

· Morals

· Values

· Religious beliefs

· Good versus Bad

· Right versus Wrong

· Sociological Factors

· Degree of self-interest

· Pleasure and happiness

· Consequences and results

· Prima facie (all things being equal)

· Virtue

· Liberal rights

· Justice versus communal values

The following scenario is offered to illustrate how different people respond differently given the same set of circumstances. This is a true recounting of an event that occurred at an insurance agency.

The agency owner (Doris) arrived at the office on a Monday morning to find an envelope wedged into the mail slot. The envelope had been folded in half and actually held the mail slot open—the client (Warren) who’d placed the envelope in the mail slot did not push it all the way through so that it dropped to the floor. Doris removed the envelope from the mail slot and extracted its contents: Two $100 bills and a payment stub. The payment stub was the bottom half of an auto insurance invoice that had been issued by an insurance company. The preprinted information indicated that the policy’s outstanding balance was $400 and that the policy would be cancelled for nonpayment of premium if the $400 weren’t paid by 12:01 a.m. on the following day. In the space provided, Warren had handwritten in blue ink that the payment made was $400.

Before Doris reached her desk, the phone rang. The caller was Warren. He asked Doris if she’d received his $400 payment. She replied that she’d just found an envelope in the mail slot and that it contained a paystub and two $100 bills. Warren became agitated and emphasized that he’d left a $400 payment; he further stated that he couldn’t believe someone actually came along and stole $200 of his $400. Doris stated that she found it odd someone would steal only half the money in the envelope instead of the entire thing. Warren agreed it was an odd occurrence but that you never could figure people out. He asked if anyone else had dropped off a payment, implying that, perhaps, one of Doris’ other clients had stolen the $200. Doris indicated that Warren’s was the only payment she’d found that morning. Warren then went on to ask Doris what she was going to do.

She said she’d record Warren’s $200 payment and issue a receipt for that amount. She further explained that unless Warren paid an additional $200 before her office closed that day, the policy would be cancelled. Warren thought that was unfair, since he’d actually made a $400 payment. Doris said that she thought it unfair of him to expect her to replace the $200 that was “stolen.” She suggested that if he believed $200 had been stolen, Warren should visit the office and they should call the police to investigate the matter. Warren vehemently objected to Doris’ suggestion. She then asked him if he thought she’d stolen the money. Warren said that such a thing had never crossed his mind and they should just forget about the missing $200. He wasn’t happy that she’d only be crediting him with a $200 payment, but said he didn’t see any other alternative given the circumstances.

This seems like a very straightforward, although touchy, situation. The vast majority of insurance producers would have behaved exactly as Doris did, right? But what if more background information were revealed? Would it impact a producer’s decisions about how to act? Would it create a different perception about what is right and wrong?

What if Warren were the type of client who always paid his bills late? What if, in fact, he paid his bills so late that the insurance company often issued notices of cancellation for nonpayment of the policy premium? What if his policy had actually been cancelled and reinstated several times? Might these actions have created a lot of extra work for Doris—or any other producer?

What if Warren had experienced a number of previous losses? What if, during the process of investigating and settling the losses, the producer became aware that Warren had lied to the insurance adjuster? What if the producer decided that the next time Warren’s policy cancelled, s/he wasn’t going to reinstate his policy?

If all the previous what-ifs were true (which they were), might Doris—or another producer—have acted differently upon finding the $200? Recalling the factors listed earlier in this section, other producers might very well have experienced a different thought process than Doris did.

Here is an alternative scenario involving Irene, Doris’ fictitious producer. Knowing that all the previously cited what-ifs are true, and that Irene knew about them, Irene is the first to arrive at the agency that Monday morning. She rolls her eyes when she realizes someone was actually foolish enough to leave cash stuck in the mail slot. Then, when she sees that it’s Warren who did so, she becomes angry. She just knows he’s being manipulative and trying to get his policy reinstated without paying the entire required premium. Warren’s a liar and everyone at the agency knows he’s an E&O claim waiting to happen. Irene then wonders what would happen if Warren’s payment weren’t received at all. He’s surely going to claim that someone at the agency stole $200 of the $400 he paid. But what will he do when he learns that his payment was never received—as in: Someone came along and stole the whole darn envelope before the office opened? Warren can’t prove that he left $400 cash in the mail slot and, even if he could, he can’t disprove that someone stole it. Neither will he be able to prove that one of the agency employees stole the envelope. No one will suspect Irene of stealing the $200; after all, she’s got an excellent reputation. Her mind spins. She can donate the $200 anonymously to a local animal shelter so something good can come of the situation. And maybe Warren will learn his lesson. He’s a liar and a cheat and he deserves to see what it feels like to be the victim of a liar and a cheat.

Does this sound like something that might happen? People tend to justify their actions and Irene has her rationalizations tied up in a nicely wrapped package.

· Warren’s a liar and a cheat, so he doesn’t deserve to be treated honestly.

· No one will know what she’s doing, so it’s okay to do.

· Someone will benefit from what she’s doing, so there’s no real harm in it.

· Warren will learn a lesson, be reformed, and the story ends happily‑ever‑after.

Irene has convinced herself that she’s doing good; therefore, her theft isn’t bad. Unfortunately, in our society and within the insurance industry very few people are going to share Irene’s perspective. Irene behaved not only unethically but illegally.

Ethical dilemmas crop up because individuals perceive events and circumstances through the eyes of their own personal philosophies, as shown in the previous scenario. People behave differently because they do not share the same morals, degrees of self-interest, level of social responsibility, perception of right and wrong, etc. Although it never even crossed Doris’ mind to steal Warren’s $200, Irene not only considered it, she rationalized why stealing it would actually be the right thing to do.

Good people do bad things. While we might understand the rationale behind the bad decision, “bad” and “wrong” acts don’t magically transform into “good” and “right” because we sympathize with the intent. Our ethical values help us determine how to behave in appropriate fashion.

History Of Insurance Ethics

Gambling was rampant in England during the 1600’s and 1700’s, and citizens in the middle class would bet on anything. One type of popular betting situation involved the illnesses of prominent persons in society. People would place wagers on the anticipated date the sick person would die. The wagers often took the form of the purchase of a life insurance policy that would pay out only if the individual died before a certain date. (At that time, the concept of insurable interest had not yet been incorporated into the underwriting process of life insurance policies—which was why life insurance was outlawed in most of Europe.) During the same time period, merchants, ship owners, and underwriters met to conduct business, including the sales of life insurance and insurance on shipments of goods.

Meeting places, such as Lloyd’s Coffee House in London, accommodated both gamblers and businessmen. Because they didn’t want to be associated with individuals involved in what they perceived to be unethical practices (i.e., gambling in the form of purchasing a life insurance policy on a sick person), a number of influential merchants, ship owners, and underwriters stopped meeting at Lloyd’s Coffee House in 1769. They began meeting at a new location, and named it the “New Lloyd’s Coffee House.” That new meeting place is the precursor of the underwriting syndicate, Lloyd’s of London. In 1774, England outlawed the practice of wagering on people’s deaths, which demonstrates another situation where a group of people collectively decided a practice was so unacceptable and unethical that it should be considered illegal.

In the United States, extensive media coverage revealed the routine habits of extravagant spending and political payoffs practiced by three major insurance companies in the beginning of 1905 in the State of New York. The insurance companies were the Equitable Life Assurance Society, New York Life Insurance Company, and Mutual Life Insurance Company. Several journalists, including Joseph Pulitzer, targeted these insurance companies because the expenses, they claimed, were exploiting the insurance companies’ policyholders.

Because of the negative media attention, Equitable’s board of directors appointed a special committee to examine the company’s business affairs. After its examination, the committee reported to the board of directors the following.

· Corporate officers and special employees were receiving excessive salaries.

· Commissions were being paid to some agents at higher levels than were being paid to others.

· Accounting procedures did not adequately document expense reimbursements.

· Company funds were being used to support prices of Wall Street securities in which Equitable officers were involved.

When the committee recommended reorganization of the company and removal of two particular members of the board, the board of directors refused to comply with the committee’s recommendations. The committee chair and his supporters resigned from their positions with Equitable and leaked details of their report, and the board’s response, to the media.

Because of mounting pressure from the media, the New York governor asked the state legislature to investigate the business practices of all life insurance companies in the state. It was hoped that the evaluation of insurance company practices would result in the suggestion of legislation for the protection of policyholders in the State of New York. Although many of the business practices of life insurance companies were no different from those of other business industries, the public was outraged with the nepotism, favoritism, lavish spending and the excessive compensation of insurance company corporate officers and agents.

As the findings of the Armstrong Committee were published, other states launched their own state investigations. In 1907, in response to the Armstrong Committee’s findings, the New York legislature issued a series of strict insurance regulations. Other states soon followed their example.

The previous two illustrations cite insurance practices that were not originally considered unethical. The societies of their times evolved and called for laws to prohibit the practices and declare them illegal.

As stated previously, ethical dilemmas exist because people have differing morals, degrees of self-interest, levels of social responsibility, perceptions of right and wrong (or good and bad), etc. In the insurance workplace, ethical dilemmas can be many‑sided and generate much controversy. It is often difficult to solve quandaries that involve contradictory interests concerning an issue of significant value.

If a business, or a business industry, adopts a code of ethics, many benefits result.

· A moral compass is provided to those who grew up without one.

· Uniform moral guidelines are established.

· Teamwork and productivity are endorsed.

· Individual growth and development are promoted.

· Compliance with laws and regulations, and avoiding criminal acts, are ensured.

· A strong and affirmative reputation and public image is encouraged.

An ethical individual, organization, or business industry possesses:

· A feeling of comfort when relating to diverse groups of people;

· Concern with fairness;

· Complying with rules and standards of conduct;

· A sense of responsibility for its actions;

· A purpose, or goal, tied to a values system based on integrity; and

· The clear understanding that every action, and every decision, generates results and consequences.

Ethical people and businesses have the best interests of their business partners and clients in mind at all times. In any given situation, an ethical insurance producer will follow procedure, guidelines, rules, regulations, accepted standards of conduct, and the law. The ethical insurance producer will place his own interests behind those of the insurance company, the consumer, and his employer.

Ethical insurance producers sell products based on the consumer’s needs and financial ability while upholding the insurance company’s rules, regulations, underwriting guidelines, and business practices. Ethical insurance producers will not recommend an insurance product based primarily on the amount of commission he’ll receive after the sale is made.

Unfair Trade Practices

In an effort to promote fair competition among insurers and for the protection of consumers, legislation has been enacted that establishes certain insurance business practices as illegal.

These unfair trade practices have been deemed illegal because they were once regularly practiced by insurance agents but are considered harmful to consumers. Although some differences do exist between the laws of each state, a number of practices are universally considered illegal—and unethical.

Filing a False Application, Claim or Proof of Loss

In addition to conforming with all legal requirements concerning contracts, insurance companies issue policies after reviewing and approving statements made in applications for insurance. Insurance companies also issue claim settlements after reviewing insurance applications, loss notices, proofs of loss, and after conducting investigations. Because an insurance policy is a contract, it is incumbent upon all parties to the contract to be honest and truthful when making statements that will form the basis of an insurance company’s underwriting or claims decision.

The statements contained in insurance applications are called representations. A representation is an incidental statement of fact on the faith of which a contract is entered into. The individual making the representation does so to his best knowledge and belief. Representations are not promises or guarantees but they should be accurate and, more importantly, truthful.

A representation contained in an insurance application, claim document, or proof of loss is made for the sole objective of acquiring an insurance policy or claim settlement. If an individual knowingly makes a false representation in an insurance application, claim document, or proof of loss, for the purpose of deceiving or misleading, then he is making a misrepresentation.

An insurance policy may be voided if the insurance company discovers that a material misrepresentation was contained in an application, claim document, or proof of loss. A material misrepresentation is one upon which the insurance company based the issuance of a policy or settlement of a claim. If the insurance company had known the truth instead of the information contained in the material misrepresentation, they would NOT have issued the policy or paid the claim. Misrepresentations are often considered fraud.

Fraud is, according to Webster, “the intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right.” It is also defined as an act of deception or misrepresentation.

If an individual knowingly lies to an insurance company for the purpose of securing an insurance policy or claim settlement, he/she is inducing them to part with something of value (for example, money) or to surrender a legal right (for example, NOT making the claim payment because coverage should never have been in effect).

Scenario #1: A business applies for a fleet auto insurance policy on a number of pickup trucks. The vehicles are not available for the producer’s inspection because they are all at job sites. When the producer asks the applicant if any of the trucks have prior damage, the applicant claims they are all in good shape and have not sustained any type of body or glass damage. Unknown to the producer, on the preceding day, one of the trucks sustained damage when its driver collided with a deer. Within a matter of days, the applicant reports that one of employees was involved in a deer collision. This applicant is guilty of misrepresentation and, perhaps, fraud.

Now, if the applicant had revealed the prior damage to the producer and the producer had withheld the information from the insurance company, in addition to breaching his agent/company contract, the producer would also be guilty of misrepresentation and, perhaps, fraud.

Scenario #2: An individual is applying for a personal life insurance policy. During the process of completing the application, the insurance producer asks the applicant this question, which is one of many he reads right off the application: “Has any family member, parent, or sibling, before the age of 60, been diagnosed with or died as a result of any type of cancer, diabetes, heart disease, or stroke?” The applicant wants to know why the insurance company asks that question and the producer responds that the information is taken into consideration as part of the underwriting process. The applicant then responds, “So, if my father had a heart attack when he was 55, I’ll have to pay more money for my life insurance?” If the applicant answers the question truthfully, no problem exists. But if he lies, he makes a misrepresentation and might be considered to have acted fraudulently. If the producer knows the applicant lied and submits the application without informing the insurance company, he is guilty of breach of contract, misrepresentation, concealment and, quite possibly, fraud.

Although the individuals making the above misrepresentations benefit from their actions—which is why they would make them—the payment of undeserving claims has an adverse effect on premium rates. Other policyholders, not to mention insurance companies, suffer financially from such adverse effects. Premium rates are calculated based on a number of legitimate and statistical data, including anticipated losses. When fraudulent claims upset the rate calculations, every policyholder assumes the unnecessary burden of increased premiums. The misrepresentations and concealments noted above are unethical—in addition to being illegal—because they harm other people.

Twisting

When a producer misrepresents policy terms, conditions, or benefits, or when he makes incomplete policy comparisons, he has committed twisting if he does so to induce a consumer to:

· Lapse or cancel a policy;

· Surrender, convert, or exchange a policy; or

· Retain or keep a policy.

Insurance producers may sometimes possess incomplete or inadequate knowledge of the policies they sell or review. Although producers are required to be skilled and efficient, they sometimes make honest mistakes. Making an honest mistake is not the same thing as deliberately misstating the definitions, terms, conditions, benefits, or features of a policy for the benefit of the producer instead of for the benefit of the consumer.

For example, a producer and a potential client are discussing the potential replacement of the consumer’s business policy that was issued by another producer. The consumer asks for an “apples-to-apples” comparison of a particular “value added” endorsement on his policy. Because the producer knows the pricing of a comparable policy with his company will cost more money than the consumer is paying for his current policy, the producer deliberately avoids discussing some of the provisions in the value added endorsement of his competitor. He also exaggerates the benefits of the policy he proposes to sell the consumer.

This producer is twisting because he both misrepresents and makes incomplete comparisons of the policies to convince the consumer to cancel the current policy and buy a new policy so he can earn commission dollars on its sale. Not only will this consumer wind up paying more premium dollars than he currently pays if he follows the producer’s recommendations, he has been deprived of the benefits of the more comprehensive policy. The producer’s actions are both illegal and unethical.

Unfair Discrimination with Respect to Rebates and Premiums

Insurance rates must be approved by the insurance commissioner in each state. Some states actually require the insurance commissioner to establish rates for certain types of insurance, such as auto and workers’ compensation insurance. Unlike other business industries, the insurance industry does not allow insurance companies or agents to discount insurance rates.

For example, if a person were to walk into a paint store and inquire about the price of a gallon of paint, he might not like the $35 price tag. He might even ask the customer service representative to discount the price, especially since he’ll be painting his entire house—inside and out—and will be buying a lot of paint from the store. In some stores, the customer service representative may have the authority to discount the price; in other stores, he may have to consult with a manager before doing so. In still other stores, the price will not be discounted.

When a consumer decides he doesn’t like the $3,000 proposed premium for his business life insurance policy and asks the producer to discount the price, it is not legal for the producer to do so. Offering a client an incentive to buy a policy can be considered discrimination or rebating. Giving, paying, allowing, offering—directly or indirectly—any of the following, is illegal:

· A rebate, discount, abatement, credit, or premium reduction;

· Special favor of advantage in policy dividends or other benefits; and

· Valuable consideration not stated in the policy.

An example of giving an illegal rebate or discount would be for a producer to pay the first quarterly premium on a life insurance policy for the consumer as a way of “thanking” him for buying the $2,000,000 policy with a $3,000 premium. Most states consider the producer and the policyholder equally guilty in the preceding instance. In all cases, offering consumers “discounts” of any type is discriminatory and disrupts the rate structure; it is both illegal and unethical.

Sharing Commissions with an Unlicensed Individual

Insurance companies are not permitted, by law, to pay commissions to an individual or business entity unless the recipient of the commission payment is duly licensed. Individuals are not permitted to receive commission in exchange for the sale or servicing of an insurance policy, unless they are duly licensed.

An individual is also required by law to hold an insurance license in the line of insurance that was sold in order to receive commissions. For example, if Steve wishes to receive commission for the sale of an auto insurance policy, he must hold a property & casualty insurance license issued by the state in which the auto insurance policy was sold and issued. Steve’s life insurance producer’s license does not entitle him to receive commissions paid on a property and casualty insurance policy, even if the license is issued in the same state.

Some consumers and non-insurance professionals mistakenly believe that it is customary for an insurance agent to share commissions with an unlicensed individual in the form of a finder’s fee or referral fee. For example, a realtor might refer a home buyer to an insurance producer when they are in the process of buying a new home. The realtor may request a $10 referral fee for each consumer she refers to the producer. The realtor and producer may believe that because the agent isn’t sharing a percentage of his commissions, the transaction is not illegal. They are both mistaken and they are both guilty of violating the law if a referral fee is paid and received.

The payment of the finder’s fee or referral fee is a form of commission sharing. Another form of commission sharing is the offering of gifts to consumers in exchange for the purchase of policies or for referrals that may result in sales. For example, the finance manager at a car dealership regularly refers clients to an insurance producer. Whenever the producer sells an auto policy, he gives the finance manager a $10 gift card to a local coffee shop.

The practice of sharing commissions with an unlicensed individual, in any form, is both illegal and unethical. It should be noted that some insurance codes stipulate a dollar threshold when defining a rebate, discount, abatement, credit, special favor, advantage, gift, or valuable consideration—such as $25 or $100.

Commingling of Funds

Insurance producers must always keep funds belonging to the consumer and/or the insurance company separate from those of the insurance producer and the insurance agency. Monies collected from clients on behalf of insurance companies are required to be held in a fiduciary capacity. No justification exists, legally or ethically, for an insurance producer to use client or company funds for any purpose.

As recently as the 1980’s, some agent/company contracts permitted agents use of the premium dollars collected on agency billed policies before it was due at the insurance company on the agent’s Account Current. The Account Current is the billing statement issued by insurance companies to its agents that lists the policies for which the agent is entirely responsible for collecting client policy premiums.

The insurance companies that allowed agents use of the money for a specified period, spelled out the privilege in the agent/company contract. Some of the provisions may have included the following, or similar, verbiage.

· The agent was permitted to determine which new business policies would be billed directly by the insurance company and which would be billed by the agent; the agent marked his option on the insurance application.

· If the agent opted to bill a policy and include it on his Account Current, he was contractually permitted to use the premiums collected on agency billed policies for a set period of time.

· A typical arrangement would require payment of the net policy premiums (the policy term premium less the agent’s commissions) appearing on the Account Current by the first of the month that occurred two calendar months after the policies’ effective dates.

o Example: The February Account Current would list policies with effective dates falling in the month of February, due and payable at the insurance company on May 1st.

As recently as twenty years ago, insurance company/agent contracts permitted agents use of the premium dollars collected by the agents for agency billed policies before it was due at the insurance company on the Account Current.

Following is an example of how it worked with some insurance companies.

· The agent decided if a new business auto insurance policy would be billed directly by the insurance company or if he, the agent, would bill the client.

· If the agent decided to put the policy on agency bill, his contract with the insurance company allowed him the use of the premiums collected on agency billed contracts for a certain period of time. A typical arrangement would be that the net premiums (premiums paid by the client less the agent’s commissions) would be due at the insurance company on the Account Current statement for all policies by the first of the month that occurred two calendar months after the policies’ effective dates.

o Example: The policy effective dates falling in the month of February would be listed on the Account Current statement that would be due for payment on May 1st.

What an ethical insurance agent did when he agency billed policies—even before law required him to do so—was to deposit the policyholder’s premiums into a separate bank account for holding until they were due at the insurance company (called an escrow account). Subtracting his commissions would have been done once the entire premium was paid.

For example, if the agent collected the entire policy premium of $100, he would deposit $80 into the escrow account and deposit his $20 commission into his operating (or personal) account. On the other hand, if the policyholder made two payments of $50 each, the first $50 payment would be deposited into the escrow account and the commission of $20 would be subtracted from the second payment of $50, after the $30 due the insurance company was deposited into the escrow account.

Unfortunately, some agents did not have the business sense to realize that if they deposited all premiums collected from agency billed policies into their general account, and didn’t keep a separate accounting of the monies due the insurance companies on their Accounts Current, they might find themselves short of money once the Account Current became due. Many agents found that once they paid their operating expenses, which included payroll, insurance, rent, taxes and utilities, they often didn’t have enough money to pay their Accounts Current.

A few other agents simply took advantage of “the float” (as the monies collected and not yet due) were called. Most regulatory authorities have established laws requiring the establishment of a separate bank account—a client trust account—for the express purpose of keeping the agent’s money separate from that of the client and the insurance company. In fact, many regulatory authorities actually audit insurance agents and agencies to confirm the existence of client trust accounts and to verify that they are being properly utilized.

Another item of note is that when an insurance company issues a return premium on an insurance policy that is included on an Account Current (i.e., agency billed), the return premium must also be deposited into the trust account. This refund does not belong to the agent—it belongs to the policyholder—as does the return commission.

If an agent does not utilize a trust account, and instead deposits his clients’ premium dollars into the same bank account as his agency’s operating account or his personal bank account, he is considered guilty of commingling funds—and breaching the fiduciary duty owed to both the client and insurance company. If he uses any client’s premium dollars—earned, unearned, or refunds—to pay any of his own expenses (business or personal), he is also often considered guilty of theft. Failing to utilize a trust account, or to utilize one properly, is both illegal and unethical.

Unfair Claims Settlement Practices

The National Association of Insurance Commissioners (NAIC) developed the Unfair Claims Settlement Practices Model Act, which has been adopted by most states. Using the NAIC model, each state has its own Act and particulars of state legislation address unfair claim settlement practices in that state. For example, in Massachusetts, the courts award double or triple damages if an insurance company is judged to have violated state unfair claims settlement practices with respect to insurance claims as outlined in two separate sections of Massachusetts General Law. In California, legislation protects seniors and requires severe penalties for anyone committing senior abuse—especially with respect to insurance practices and insurance claims practices. A recent case in that state awarded the client triple damages for the unethical acts of two insurance securities brokers.

In most states, a practice is considered to be an unfair claims settlement practice if it occurs with such frequency it can be considered a regular business practice. Some states, however, consider even a single instance of a violation to be illegal. The following are typical offenses considered to be unfair claims settlement practices in most states:

· Misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue;

· Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies;

· Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies;

· Refusing to pay claims without conducting a reasonable investigation based upon all available information;

· Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed;

· Neglecting to attempt in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear;

· Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds;

· Attempting to settle a claim for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material accompanying or made part of an application;

· Attempting to settle claims on the basis of an application which was altered without notice to or knowledge or consent of the insured;

· Making claims payments to insureds or beneficiaries not accompanied by statements setting forth the coverage under which the payments are being made;

· Making known to insureds or claimants a policy of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration;

· Delaying the investigation or payment of claims by requiring an insured, claimant, or physician of either to submit a preliminary claim report and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information;

· Failing to promptly settle claims, if liability has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance; or

· Failing to provide promptly a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement.

Insurance policies are contracts. The terms of the policy contract specify when coverage is provided and when it is not provided. Laws specify the boundaries insurance companies, producers, and adjusters must respect when settling claims. Of course, the actions of insurance companies, producers, and adjusters may be interpreted differently by different people. Item #2 above will be used in an example to demonstrate the point.

In a particular state, insurance code cites it is considered an unfair claims settlement practice for a person (aka anyone) to “fail to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies with such frequency as to indicate a general business practice.” So, if Sharon were driving a vehicle and Rachel rear-ended her, Sharon might want to submit her claim to Rachel’s insurance company because Rachel would be considered legally responsible for the collision. Sharon faxes a loss notice to ABC Insurance Company, the insurer providing coverage on Rachel’s vehicle. ABC never responds to Sharon. Is this an unfair claims settlement practice? Is ABC’s lack of response illegal? Is its lack of response unethical?

A few things need to be researched before being able to answer these questions accurately.

· Did Sharon actually fax her loss notice to ABC Insurance Company?

Did she have the right fax number?

· Was the fax received by ABC?

· If the fax was received by ABC, it needs to be determined if ABC ignored Sharon’s fax or if it was misplaced.

· How long has it been since ABC received the fax?

· Did Sharon give ABC a reasonable amount of time to respond?

· Did Sharon give ABC her contact information?

· What if ABC did respond but Sharon didn’t receive its response?

· What if Sharon’s contact information wasn’t legible and ABC’s response was directed to a wrong address or phone number?

· What if ABC did receive Sharon’s fax and it’s sitting on a claim representative’s desk because she’s on vacation?

· What if the fax is buried beneath a pile of work and the assigned claim representative hasn’t gotten to it yet?

· What if the assigned claim representative simply doesn’t want to handle the claim and shreds the fax?

Are any of the preceding situations going to be described as practices that are committed with “such frequency as to indicate a general business practice?” If so, then ABC may be violating the law. If the situation is an isolated incident, it is unlikely to be considered illegal—unless it occurs in one of those territories that consider a single act to qualify as a violation.

Using the previous scenario, except: Instead of faxing her loss notice to the insurance company, Sharon calls her own insurance agent to report the claim and never receives a response from her insurance company. All the same questions listed above must be asked of both the agent and company before we can decide if the agent, or the insurance company, is acting in bad faith and committing any unfair claims settlement practice.

Did the agent forget to notify the insurance company—i.e., she forgot to document the telephone conversation or she printed a loss notice and forgot to fax it, etc.? Did the agent submit the loss notice—either by fax, email, or other electronic means—and simply overlook following up? Did the insurance company receive the information from the agent and do any of the things cited in the previous example? Or did the agent deliberately not report the loss to the insurance company because she didn’t want it to affect her loss ratio?

Again, it must be determined if the actions of the agent or insurance company are being committed with “such frequency as to indicate a general business practice” to be considered illegal. What if this is the first time the agent decided not to submit a loss? What if it’s December and she’s hoping to postpone submission of the claim until January, when it won’t apply to her current year’s loss ratio? Are the agent’s actions illegal according to law? Probably not. Are they unethical? You bet they are—in addition to being a breach of the contract between the insurance agency and the insurance company.

One thing to keep in mind with respect to unfair claims settlement practices and bad faith claims is that there exists a tremendous body of legal precedent in this area. Governing laws and previous court cases have a lot to do with the final determination of an agent’s (or adjuster’s or insurance company’s) culpability when accused of an unfair trade practice or acting in bad faith—of any kind.

Practices Involving the Auto Business

Most states have enacted legislation regulating the business transactions occurring between insurance companies and automobile body repair shops, glass vendors, and rental car agencies. Before such legislation was enacted, insurance companies had a tendency to include specific businesses on their lists of referral vendors. Policyholders and third-party claimants were directed to obtain services from only those vendors appearing on the pertinent lists. Financial gain was the motive for this practice, on the parts of insurance companies and vendors. Vendors were able to secure a steady stream of referral business and insurance companies were able to limit their claims expenses.

These practices, however, were considered to be both unfair and unethical by consumers and by those vendors who were not on the preferred lists. Legislation has been enacted by many that states that insurance companies must, by law, inform their policyholders and third-party claimants that they may obtain motor vehicle repairs, glass repairs, and/or covered rental car services from the vendors of their choice. Laws may specify rates the insurance companies must pay the vendors—regardless of whether or not they appear on the insurance company’s preferred vendor lists. Laws also may specify the procedure insurance companies must follow when a vendor asks to be added to the insurance companies’ vendor lists. The decision to add, or not add, a vendor to its preferred list can no longer be made solely based upon the insurance companies’ discretion.

A typical example involves rental car services. Beth is driving her car and is rear‑ended by Brendon. She submits her claim for damages to Brendon’s insurance company and obtains authorization from them to rent a car for three days and bill the charges to them. The insurance company tells her that she must rent the car from 123 Rental Company, because it’s their only approved vendor in the town in which she lives. In states where legislation has been enacted, this practice is considered illegal. The insurance company must tell Beth that she may rent a car from whatever rental car agency she prefers. The insurance company may tell Beth that 123 Rental Company is its preferred rental car company and they can process her claim more quickly if she utilizes them because they’ll pay 123 directly rather than requiring Beth to pay the vendor of her choice and then submitting a bill for reimbursement.

Military Sales Practices

The U.S. government offers service members life insurance as part of their benefits package. Each member is eligible for low cost Servicemembers’ Group Life Insurance (SGLI), which can provide up to $400,000 of term life insurance coverage. It should be noted that SGLI does not contain an exclusion for death resulting from an act of war, which some policies offered by life insurance companies do contain.

According to a 2009 Report to Congressional Requesters by the U.S. Government Accountability Office (GAO), the following is a summary of the predatory and dishonest practices that were taking place nationwide in 2005: “In the 2006 Military Personnel Financial Services Protection Act (the Act), Congress found that certain life insurance products were improperly marketed as investment products and provided minimal death benefits in exchange for excessive premiums that were front‑loaded in the first few years, making the products inappropriate for most service members.” The Act provided for state insurance regulators, the National Association of Insurance Commissioners (NAIC), and the Department of Defense (DOD) to address concerns over unsuitable insurance products and inappropriate sales practices directed at service members.

The report went on to say that sales of life insurance coupling life insurance with side savings account were “problematic,” especially for junior service members. The sales of these products contained unfavorable features that “included a high-cost life insurance product that provided nominal supplemental coverage and aside fund that had an unfavorable interest-crediting method and high withdrawal penalties for the policyholder.” According to information Congress received from state regulatory authorities, these policies had an unusually high lapse ratio for nonpayment of the policy premium. In addition to the previously cited issues, the Department of Defense identified that many of the sales of these policies involved agents who used prohibited means of gaining access to the military installations for the solicitation of insurance and other types of products and services.

In 2007, the NAIC adopted model regulation governing military sales practices in conjunction with the Department of Defense that comply with the federal Military Personnel Financial Services Protection Act, P.L. No. 109-290 (2006). The purpose of the Act and Model Regulation is to provide uniform standards among the states to protect active duty service members of all branches of the U.S. Armed Forces from the dishonest and predatory practices of insurance producers.

Model Regulation applies to the sale and solicitation of life and annuity products but does not apply, typically, to property and casualty insurance products. The NAIC also established the Military Sales Online Reporting System (MCORS) to carry out the Act’s stipulation that a national system be created to collect data about anyone against whom disciplinary action has been taken with respect to the sale or solicitation of any life insurance product on a U.S. military installation.

The Model Regulation states that particular acts and practices are false, misleading, deceptive, or unfair. According to Model Regulation, the following acts or practices committed by an insurance company or producer are considered false, misleading, deceptive, or unfair when committed on a military installation or in military controlled housing:

· Soliciting the purchase of any life insurance product “door-to-door” or without first establishing a specific appointment for each meeting with the prospective purchaser;

· Soliciting service members in a group or “mass” audience or in a “captive” audience where attendance is not voluntary;

· Making appointments with or soliciting service members during their normally scheduled duty hours;

· Making appointments with or soliciting service members in barracks, day rooms, unit areas, or transient personnel housing or other areas where the installation commander has prohibited solicitation;

· Soliciting the sale of insurance without first obtaining permission from an office designated by the installation commander;

· Posting unauthorized bulletins, notices or advertisements; and

· Failing to present DD Form 2885, Personal Commercial Solicitation Evaluation, to persons solicited or encouraging persons solicited not to complete or submit a DD Form 2885.

Several state regulators and the Department of Defense have taken regulatory action against insurance companies and agents for conducting prohibited sales practices on military installations. The DOD, NAIC, and state regulators continue to work to increase the effectiveness of the programs in place and to implement new programs for the protection of service members of the U.S. Armed Forces.

Pretext Interviews (aka Bait and Switch)

Bait and switch tactics are a form of false or misleading advertising. Bait advertising involves the offer to sell a product, or one of its features, that the advertiser does not truly want to sell. When the consumer is distracted by the “bait,” the advertiser attempts to sell something else, to obtain leads to other people, or to obtain information not pertinent to the “bait.” In the insurance industry, unethical producers often use bait and switch tactics in the form of a pretext interview to obtain information under false pretenses.

The growing popularity of estate planning and living trusts has generated scams called Living Trust Mills. These scams often target seniors who are attracted to free seminars about estate planning, living trusts and other similar topics. Some producers provide themselves with official sounding titles, such as Trust Expert, Trust Advisor, Senior Estate Planner, or Paralegal and present free seminars under the pretext of helping establish or update living estates. The true purpose of these producers is to acquire the financial information of seniors they might otherwise not be able to obtain—in the form of a pretext interview.

Illegal Practice of Law

Oftentimes, a consumer will ask a producer for advice that borders outside the producer’s area of expertise, such as with accounting and legal matters. It is illegal in most areas for a producer to offer any type of legal advice without being licensed to practice law. If the producer is questioned about any topic related to insurance that deals specifically with estate planning, elder care planning, and/or tax planning he should be referred to the appropriate professional for consultation and advice.

Unfair Trade Practices Summary

Most legislation related to unfair trade practices reflect actual practices that were originally accepted within the insurance industry. The practices evolved into acts that became deceitful, fraudulent, or harmful to consumers and the citizenry. Regulatory authorities decided they were unacceptable.

The previously cited unfair trade practices are used as representative of the major illegal practices recognized by most and are in no way to be considered the only unfair trade practices. They may, however, be utilized when evaluating situations involving consumers where the producer is not sure how to behave. Sometimes, it appears that a single act or behavior is acceptable because it benefits the client and it “doesn’t hurt anyone else.” In order to confirm the legality of an act or practice, a producer should always refer to the rules and regulations of the insurance company, his agent/company contract, and the laws of the state(s) in which he is doing business.

Trade Practices And Seniors

Because of a number of factors, the senior segment of the population is at more risk, in a variety of ways, than any other segment. Seniors are more susceptible to high‑pressure sales tactics and scams, especially those that prey on a senior’s fears associated with longevity and the condition of their health. Because medical science is advancing at such a rapid rate, people are living longer, which presents the very real possibility that many seniors will outlive the retirement income they’ve set aside.

Everyone assumes some risk when purchasing an annuity; seniors assume a much higher risk. Ethical producers take pains to explain all available options, and elicit as much information as possible, when dealing with senior clients in order to appropriately gauge the level of risk they can safely assume.

Choosing and executing a successful retirement plan doesn’t happen overnight. An individual’s retirement goals should begin to take shape at around age forty—and sometimes at a younger age. Considerations when setting retirement goals in the earliest phase of retirement planning include answering the following questions.

· What is the desired retirement age?

· Will a spouse or other individual be a party to the retirement plan?

· What is the desired retirement lifestyle?

· Where will the funding for retirement come from?

· What retirement funding options are available?

· How will assets be allocated both before and after retirement?

· What are the tax advantages available throughout the process AND in retirement?

· What financial, legal, and insurance professionals will assist with the process?

As the individual approaches retirement, he should not only continue to focus on his goals but also to revise them. A job change, children moving out of the home, acquisition of property, divorce, and other life-altering events often dramatically affect a person’s retirement goals and the ability to carry them out. Existing investments, pension and profit sharing plans, inheritances, and taxes all manage to influence the process as well.

Once a consumer has officially retired, he should carry on with his plans and revisions, with an eye to his very special needs now that he is no longer earning income and must support himself with the retirement funds he has established. Did he accurately predict his retirement expenses and cost of living? Is he living the lifestyle he intended five (or twenty) years ago? Does his spouse and/or other family members depend upon the retirement income he’s provided for himself? Will required minimum distributions come into play at age 70½ and, if so, how will they affect the plan?

An insurance producer must be familiar with all phases of retirement planning, and all the concerns a client might have, in order to properly advise and recommend products, features, benefits, and available options—especially when dealing with seniors, who have much less time to act than other consumers do.

Financial Concerns

Once a person reaches the age of 60 or 65, he has far more concerns than younger people realize. Perhaps he doesn’t have to get up and head to the office each morning, but the worry about bringing home the bacon doesn’t disappear just because he no longer sits behind a desk from 9 to 5. Sure, he can hop in the RV and tour the Midwest in the summer, or spend every morning at the fishing hole, but these pursuits cost money—and he’s no longer earning any.

Social Security

The majority of people depend upon their Social Security benefits in retirement; however, most don’t understand when benefits start or the most beneficial way to take advantage of them. For example, every consumer knows he can opt to begin receiving Social Security retirement benefits at age 62, but few realize they’ll receive a permanent reduction in their monthly benefit in an amount between 25‑30 percent! Poor planning may result in taking a huge bite out of someone’s retirement income.

If an individual begins working after receiving Social Security benefits, his benefit amount may change and he may actually have some of his benefits withheld if he has excess earnings. Once the individual reaches full retirement age (FRA), the Social Security Administration will recalculate the benefit amount to give the individual credit for any months in which he didn’t receive benefits because of earnings.

The illustration below demonstrates age 62 reduction amounts and includes examples based on an estimated monthly benefit of $1,000 at full retirement age. You can see how much a benefit will be reduced for retiring between age 62 and full retirement age.

Benefit Reductions Before & After FRA by Month

Year of Birth

Full Retirement Age

Months between age 62 and FRA

At Age 62

A $1,000 retirement benefit would be reduced to:

The retirement benefit is reduced by:

1937 or earlier

$ 800

20.00%

1938

65 and 2 months

$ 791

20.83%

1939

65 and 4 months

$ 783

21.67%

1940

65 and 6 months

$ 775

22.50%

1941

65 and 8 months

$ 766

23.33%

1942

65 and 10 months

$ 758

24.17%

1943-1954

$ 750

25.00%

1955

66 and 2 months

$ 741

25.83%

1956

66 and 4 months

$ 733

26.67%

1957

66 and 6 months

$ 725

27.50%

1958

66 and 8 months

$ 716

28.33%

1959

66 and 10 months

$ 708

29.17%

1960 and later

$ 700

30.00 percent

Illustration 1.1 – Percentages are approximate due to rounding

Note: If a person delays retirement, he should still sign up for Medicare at age 65. Delaying this process may generate higher costs or affect eligibility.

Having benefits reduced by receiving them a few years early doesn’t seem like a significant thing to some people; neither does forfeiting an increase in benefits by not working a year longer than planned. However, most people reconsider their position after looking at actual figures. What could an extra $250+ a month do?

If a person delays receiving Social Security benefits past his full retirement age, his benefits will be increased by a certain percentage, depending upon his date of birth. The benefit increase no longer applies when a person reaches age 70, even if he continues to delay taking benefits.

Following is a chart that shows the increased percentages for delayed retirement.

Year of Birth

Yearly Increase

Monthly Rate of Increase

1933-1934

5.5%

11/24 of 1%

1935-1936

6.0%

½ of 1%

1937-1938

6.5%

13/24 of 1%

1939-1940

7.0%

7/12 of 1%

1941-1942

7.5%

5/8 of 1%

1943 and later

8.0%

2/3 of 1%

Note: If you were born on January 1st, you should refer to the rate of increase for the previous year.

Illustration 1.2

Monthly benefits increase substantially once FRA is passed, increasing the retirement benefit at the rate of approximately eight percent per year of delay plus cost of living increases.

The following table demonstrates how delayed retirement affects a beneficiary’s benefit, assuming their full retirement age, from age 66 to 70. You can see that by age 70, the increase has grown by 132 percent. The increase is based on the beneficiary’s date of birth and the number of months they delay the start of retirement benefits. For instance, if the beneficiary begins receiving retirement benefits:

· At age 67, they will receive 108 percent of the monthly benefit because they delayed getting benefits for 12 months; or

· At age 70, they will receive 132 percent of the monthly benefit because they delayed getting benefits for 48 months.

Age

2016 Maximum Benefit

$ 2,639

$ 2,850

$ 3,061

$ 3,272

$ 3,483

Illustration 1.3

Retirement Plan Distributions

Many retirement plans, including qualified IRAs and 401(k)s require an individual to begin minimum distributions no later than April 1st of the year following the year in which they turn age 70½. The amount of the distribution is calculated based on life expectancy—the number of years over which it is expected withdrawals will be made. (The IRS provides three life expectancy tables: The Joint and Last Survivor Table, the Uniform Life Table, and the Single life Expectancy Table.) These distributions are subject to taxation as ordinary income for the qualified portion of the assets and the account’s earnings; the portion of distributions that are a return of pre-taxed principal are not subject to income tax. If an individual fails to withdraw the required minimum distributions in a tax year, a penalty will be assessed that equals 50 percent of the amount of the required withdrawals.

Investing Retirement Assets

Once a person has retired, his primary goal is keeping what he has. Yes, investing and growing assets is an attractive prospect, but most seniors don’t want to—and shouldn’t—risk their current assets and the safety of their principal for the possibility of accumulating more funds. Having said that, there are circumstances where seniors have enough liquidity to take some risk. It is up to the producer to help a senior determine precisely where he is with respect to liquidity and the potential for assuming risk and, then, to act accordingly.

Surrender Charges

In addition to any surrender charges contained in a particular annuity contract, it is very important for a producer to remind his client that premature surrender of, or withdrawal from, an annuity and other retirement plans—such as IRAs and 401(k)s—prior to age 59½ will generate a ten percent (10%) federal penalty.

Even more important, is the aspect of surrender charges when a senior is considering the replacement of an existing policy or annuity. While the replacement contract might be attractive, it will likely involve a surrender term and penalties. It is possible to add benefits to the contract, such as critical illness and other crisis waivers to eliminate some penalties, but these options cost money—which reduces the beneficial effect of the replacement. The producer needs to keep the substantial financial benefit doctrine in mind in all times when replacing an annuity contract.

Insurance Concerns

In the senior market, insurance concerns have a much more far-reaching effect than they did when the consumer was younger. Premiums are much higher for seniors if they’re purchasing brand new policies and, if they suffer from health issues, they may not be able to purchase new insurance coverage at all.

Many people are fortunate to have disability and life insurance included in their employee benefits. What happens when they retire? Do their benefits continue?

If the medical, disability, and life insurance benefits do not continue after the senior retires, the producer is often charged with the duty of helping the senior find alternative coverage. An individual is eligible for Medicare at age 65, but will that coverage be adequate for the senior’s needs? Can the senior afford a Medicare Supplement policy? The senior probably won’t need to continue his disability coverage, but what should he do if he decides to work part‑time after retiring? Will he still need the life insurance? And what if he decides to retire before turning age 65?

Planning for long-term care should begin well before a person becomes a senior but, unfortunately, many people don’t consider long-term care coverage until after they develop a medical issue. Typically, they will not be able to purchase coverage, for the most part, once they’ve developed a serious medical condition. They may have a tendency to believe, incorrectly, that Medicaid will protect them.

Estate Planning

Regardless of the size of a consumer’s estate, the importance of having an estate plan in place cannot be overstated. An estate plan is comprised of several essentials: A will, a power of attorney, and a living will (or health care proxy or medical power of attorney). Sometimes a trust forms part of an estate plan.

When beginning an estate plan, it is important to consider all assets and what role they will play in the plan. Who is listed as beneficiary on the life insurance policies, retirement and pension plans, IRAs, etc.? Who will inherit the assets when the owner dies, including homes, businesses, and real estate? Who will be authorized to make medical decisions if the estate owner is unable to do so?

Once a person (or couple) answers these questions, the easiest way to assure that his (or their) wishes are carried out is to state these wishes in a will. Dying without a will, and allowing the governing authorities to determine how to distribute assets, can be costly for a person’s heirs and may ultimately result in the implementation of an estate settlement that is contrary to what the individual actually desired.

For 2016, the estate and gift tax exemption is $5.45 million per individual, up from $5.43 million in 2015. That means an individual can leave $5.45 million to heirs and pay no federal estate or gift tax. A married couple will be able to shield $10.9 million. (The annual gift exclusion remained the same at $14,000.) A person may leave an unlimited amount of assets to a surviving spouse without the spouse incurring a taxable event but, when the spouse dies, his/her taxable estate will be significantly increased, thereby generating a huge tax bite for children (or the spouse’s heirs).

Life insurance and annuities may be effective tools in the estate planning process, especially when a client dies. Death benefits can cover costs that range from final expenses to the payment of taxes, thus allowing a surviving spouse or the client’s heirs from having to liquidate assets.

Sales Practices and the Senior Market

When today’s seniors bought their first insurance policies, Whole Life insurance was popular—Universal Life hadn’t even been invented! The idea of flexible premium payments, cash value accounts with varying rates of interest, and buying an insurance policy that could invest in the stock market were unheard of. Insurance products have grown more complicated over the years and annuities are exceedingly complicated.

Many seniors are not equipped to understand all the changes that have been implemented in the tax treatment of insurance products or with the new features and benefits available. For this reason, it is especially important for a producer to be explicit in his explanation of contract provisions. Illustrating to the senior consumer all the consequences of a purchase, both positive and negative, and then documenting them for the client’s review is the best way to help a senior make the best buying decision.

Buyer Competence

The issue of legal capacity often arises in cases involving senior consumers. Legal capacity is the term used to define a person who is able to understand and appreciate the consequences of his actions. It determines his “buyer competence.”

A person who lacks legal capacity cannot, for example, enter into a contract, give a power of attorney, make a will, consent to medical treatment, or transfer property. Minors typically lack legal capacity, as do individuals who are mentally impaired or under the influence of alcohol. The older we become, the more likely we are to develop a mental disease or disability such as Alzheimer’s disease or dementia, which diminishes both our legal and mental capacity.

If a producer sells an insurance policy to an individual who lacks legal or mental capacity, it could be argued that the sale is inappropriate—even if neither the producer nor the consumer were aware of the lack of capacity. Since basic contract law requires “competent parties” for a contract to be considered legal, it could further be argued that the contract is not valid and binding upon the incompetent individual.

Some seniors experience diminished capacity as they age; recognizing the signs of such a condition is often difficult, especially for a producer who doesn’t routinely have dealings with seniors. Producers who exert undue influence over seniors commit elder abuse. “Undue influence” is defined, in part, as: “…an individual who is stronger or more powerful making a weaker individual to do something that the weaker person would not have done otherwise. The stronger person uses various techniques or manipulations over time to gain power and compliance.” Such techniques are both illegal and unethical.

It is important that producers recognize the indicators a prospective insured may exhibit that illustrate the lack of short‑term memory, or judgment, that is required to knowingly purchase an annuity.

Diminished mental capacity does not mean an individual does not have legal capacity; it does indicate, however, that the individual does not function as well as s/he has functioned in the past. Since each person is unique and possesses varying degrees of decision-making capabilities at various stages in his life, it is a considerable challenge for a producer to recognize diminished mental capacity in a person he just met.

For a producer who is not formally trained in a mental health disciplines (and most are not), assessing diminished capacity is possible in some cases but, in general, beyond the expertise of a typical producer. A major issue involved in assessing diminished capacity pertains to short‑term memory. Many individuals have occasional memory problems due to the natural aging process and take longer to make decisions. Loss of memory and/or the onset of diminished mental capacity is usually a gradual process that accelerates over time. It is entirely possible for a senior consumer to make an insurance-related decision today, when appearing cognitively adept, and to be considered cognitively impaired two or three years in the future—after a complaint of elder abuse has been filed.

Below is a list of several indicators of diminished mental capacity of which producers should be aware. Not all of these indicators will be apparent in the context of a typical meeting with a senior. Additionally, some of these indicators require prior knowledge of the senior in order to determine if deterioration has taken place in a particular aspect of the senior’s behavior over time.

· Memory loss: The senior is repeating questions, forgetting details, forgetting appointments, misplacing items or losing track of time.

· Disorientation: The senior is confused about time, place, or simple concepts OR the senior appears to be disoriented with surroundings or social settings.

· Difficulty performing simple tasks: The senior lacks the ability to remember the order of performance of the steps necessary to complete a simple task such as tying one’s shoes.

· Difficulty speaking: The senior use words that do not fit the context of their use.

· Difficulty understanding consequences: The senior appears unable to appreciate the consequences of decisions.

· Difficulty with decision-making: The senior makes decisions that are inconsistent with his or her current long-term goals or commitments.

· Attitude: The senior seems overly optimistic.

· Difficulty following simple directions: The senior has difficulty with directions, particularly when they include multiple steps that must be performed in sequence.

· Deterioration of handwriting and signature: The senior appears unable to accurately write the letters of the alphabet or the letters are written backwards.

· Drastic mood swings: The senior may exhibit a swift change in mood within a short period of time with no obvious reason for the mood change.

· Difficulty with finances: The senior does not remember or understand recently completed financial transactions.

· Lack of attention to personal hygiene: The senior appears uncharacteristically unkempt.

· Confusion as to date and time: The senior may be confused as to the season, the current month, the day of the week, or the time of the day.

The Alzheimer’s Association publishes a list of explanations for some of the indications of Alzheimer’s disease. While the following information relates to the recognition of Alzheimer’s, it also provides a brief description of normal behaviors that can be of value to a producer when attempting to recognize signs of short‑term memory loss and/or lack of judgment in senior consumers.

· Memory loss that affects job skills. It is normal for a person to occasionally forget an item at the grocery store, a deadline, or a colleague's name; frequent forgetfulness or unexplained confusion may signal that something is wrong.

· Difficulty performing familiar tasks. Busy people get distracted from time to time. For example, a person might leave something on the stove too long or forget to serve the vegetables at dinner. People with Alzheimer's disease might prepare a meal and not only forget to serve it but also forget they made it.

· Problems with language. Everyone has trouble finding the right word on occasion; a person with Alzheimer's disease may forget simple words or substitute inappropriate words, making his or her sentences difficult to understand.

· Disorientation about time and place. It's normal to momentarily forget the day of the week or what you need from the store. People with Alzheimer's disease can become lost on their own street—not knowing where they are, how they got there, or how to get back home.

· Poor or decreased judgment. Choosing not to bring a sweater or coat along on a chilly night is a common occurrence. A person with Alzheimer's, however, may dress inappropriately in more noticeable ways, such as wearing a bathrobe to the store or wearing several blouses on a hot day.

· Problems with abstract thinking. Balancing a checkbook can be challenging for many people, but for someone with Alzheimer's disease, recognizing numbers or performing basic calculations may be impossible.

· Misplacing things. Everyone temporarily misplaces a wallet or keys. A person with Alzheimer's disease may put these and other items in inappropriate places, such as an iron in the freezer or a wristwatch in the sugar bowl, and then not recall how the item got there.

· Changes in mood or behavior. Everyone experiences a broad range of emotions, such behavior is part of being human. People with Alzheimer's disease tend to exhibit more rapid mood swings for no apparent reason.

· Changes in personality. People's personalities may change somewhat as they age. But the personality of a person with Alzheimer's can change dramatically, either suddenly or over a period of time. It is not uncommon for a person suffering from Alzheimer’s to have his normally easygoing temperament become angry, suspicious, or fearful.

· Loss of initiative. It's normal to tire of housework, business activities, or social obligations, but most people either retain or regain their interest. The person with Alzheimer's disease may remain uninterested and uninvolved in many or all of his usual pursuits.

One method of preventing the future claim of an ethics or suitability violation involving a senior is for a producer to invite a trusted family member or other individual to be present when meeting with a senior for the purpose of discussing insurance or annuities. Privacy issues may have an impact on this practice and producers should make certain compliance with all privacy laws and regulations are in place. Another concern for the producer is the possibility that the trusted family member is, himself, the perpetrator of elder abuse.

Examples of a family member exploiting a position of influence over a senior to gain access to the senior’s assets, funds, or property (the definition of elder abuse) include the following.

· Cashing a senior’s checks without authorization or permission

· Forging a senior’s signature

· Misusing or stealing a senior’s money or possessions

· Coercing or deceiving a senior into signing a document, such as a will or a contract

· Improper use of conservatorship, guardianship, or power of attorney

Possible signs of elder abuse being committed by a family member include the following.

· The senior’s sudden reluctance to discuss financial matters

· Sudden, unusual, or unexplained withdrawals from, or other changes in, a senior’s bank accounts, insurance policies, or other investments

· Abrupt changes in a senior’s will, trust, or power of attorney

· The senior’s increasing lack of contact with, and interest in, the outside world

· Admission or suggestion that a financial or material exploitation is taking place

· The senior’s concern or confusion about missing funds in his/her account

· Fear of placement in a nursing home if money is not given to a caretaker

· Appearance of insufficient care or neglect, despite having money and a means of support

The Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC), and the majority of the states are increasingly concerned about elder abuse and unethical sales practices targeting seniors. An ethical producer will report all instances of suspected senior abuse to the appropriate authorities and will also refrain from working with a senior if the producer even suspects the senior is a victim of diminished legal or mental capacity.

Numerous changes have taken place in the insurance industry over time. Perhaps the most overlooked and yet most significant change has come in the form of technology. What was once such a personal interaction between the agent and the consumer has now taken a backseat to such technological advancements. Such advancements can be a two-way sword, however, if the agent does not stay on top of it.

In the not-so-long-ago past, friends and relatives would most frequently ask other friends and relatives for a recommendation of an insurance agent or company when they were in the market for insurance products. Names and phone numbers would be exchanged and the agent or company would be contacted and a personal meeting would take place. Though this still does happen, it is no longer the case as a whole. In fact, recent studies have determined that insurance products are most frequently sold on line without any personal interaction between the consumer and an insurance advisor.

But developing a personal relationship between an agent and a client is more beneficial that a lot of consumers realize. We all lead very busy lives and it’s virtually impossible for us to stay on top of all of our changing needs—let alone the latest insurance industry developments. A product that may suit the consumer’s needs at one specific junction in their lives may not be as suitable in just a short time, and they may have no idea.

That’s where the agent/client relationship can be of utmost service. Insurance professionals are trained to be…well, professionals—professionals in their respective fields who are trained to assist their clients and to act on their behalf and in their best interests. New products are continually being developed and the average consumer just does not have the tools or the time to stay on top of them. And they’re not expected to. That’s the insurance professional’s job—that’s your job!

The Trust Relationship

The trust relationship between the consumer and the insurance professional is so vital to the sale of valuable, needed coverage. It can allow the attainment of specific goals for the client, which can cement the relationship into a long lasting and mutually satisfactory one.

However, that relationship can also be a door that can swing both ways. On those occasions when the client might encounter a serious disappointment with his or her purchase, or when the agent's motives had been called into question by a third party, the client’s perception of the situation often may not be that of a simple business disagreement or misunderstanding. Rather, it could take on elements of a betrayal—that the client looked to the agent to care for his or her interests by allowing the development of a delicate trust relationship, only to be let down in later years.

Life insurance, health insurance, homeowners’ insurance, and automobile insurance remain as the top policies sold in the insurance marketplace. Each contains their own policy components, which differ from the others. How can the layman be expected to understand each and know which product is best for them? That’s where you, the insurance professional, come in. The value of your relationship with your client cannot be understated…IF you keep your clients’ interests above your own.

Aside from the goal of acquiring additional credits toward your continuing education requirement as you complete this course, it is our hope that you will acquire a new level of competency and insight into the highly critical area of ethics.

As time goes by, the ethical landscape and individual interpretation and practical applications change respectively. Program changes, content updating, and course program availability are constantly being assessed, updated, and revised. Yet some things are fundamental and seldom, if ever, change. Ethics are ethics—and this basic fact has not changed over time. Our future, and the environment in which we will operate in that future, depends upon everyone adhering to higher levels of moral, ethical standards and practices.

Regulatory Authorities

Regulation has taken this concept to heart through the many changes in law over the years. We will take a close look at these regulatory changes and requirements as we proceed, but here is a brief introduction to the regulatory authorities we will be studying regarding the ethical relationship between the consumer and the insurance professional.

ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.

FINRA

The Financial Industry Regulatory Authority (FINRA) is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry.

DOL

The United States Department of Labor (DOL), headed by the U.S. Secretary of Labor, is responsible for occupational safety, wage and hour standards, unemployment insurance benefits, reemployment services, and some economic statistics. The DOL administers and enforces nearly 200 federal laws and thousands of federal regulations.

The term “fiduciary” is not a new one that was developed by modern society as some seem to think—it has been around since early English common law.

· Fiduciary — Of or relating to a duty of acting in good faith in regard to the interests of another; relating to or involving trust (such as the trust between a customer and a professional).

One would think that acting in such capacity would come naturally. After all, we’ve all been taught the Golden Rule from a young age, “Do unto others as you would have them do unto you.” So why must we create laws for such a simple way of living? Because, as human beings, we can justify anything. And some, unfortunately, take the completely opposite attitude, “if everyone else is doing it, I can too.”

The latter is the fundamental attitude legislation is aimed at eliminating. ERISA and the Internal Revenue Code (IRC) protect retirement plans, plan participants and IRA owners by imposing fundamental duties on fiduciaries, requiring them to act impartially and to provide advice that is in their clients’ best interests.

The key to determining whether an individual or an entity is a fiduciary is not found in their respective title, but whether they are exercising discretion or control over the plan. For instance, a plan’s fiduciaries will ordinarily include the trustee, investment advisors, those individuals exercising discretion in the administration of the plan, members of a plan’s administrative committee, and those who select committee officials.

The Employment Retirement Income Security Act (ERISA)

ERISA is a federal law that sets standards of protection for individuals in most voluntarily established private‑sector retirement plans. ERISA requires plans to:

· Provide participants with plan information, including important facts about plan features and funding;

· Set minimum standards for participation, vesting, benefit accrual, and funding;

· Provide fiduciary responsibilities for those who manage and control plan assets;

· Establish a claims and appeals process for participants to get benefits from their plans; and

· Give participants the right to sue for benefits and breaches of fiduciary duty.

In addition if a defined benefit plan is terminated, ERISA guarantees payment of certain benefits through the Pension Benefit Guaranty Corporation (PBGC).

Fiduciary responsibilities as defined by ERISA include:

· Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to those participants;

· Carrying out their duties prudently;

· Following the plan documents;

· Diversifying plan investments; and

· Paying only reasonable plan expenses.

ERISA was a very innovative law in 1974. However, a lot has changed in 40 years. For instance, 401(k) plans did not even make their appearance onto the investment landscape until four years after ERISA, in 1978. Since then, the 401(k) has become a regular subject in household conversations with over $1.8 trillion in assets.

The U.S. Department of Labor (DOL) has proposed new regulations broadening ERISA’s definition of fiduciary. The proposal (which will be discussed shortly) expands the scope of fiduciary to ERISA retirement plans and IRAs.

But before we get into this recently proposed legislation that aims at broadening the term fiduciary and fiduciary responsibilities, let’s take a look at FINRA Rule 2090 (Know Your Customer) and Rule 2111 (Suitability).

Financial Industry Regulatory Authority (FINRA)

FINRA provides the first line of oversight for broker‑dealers and, through its comprehensive regulatory programs, regulates both the firms and professionals that sell securities in the United States and in the U.S. securities markets. To protect investors and promote market integrity, FINRA enacts rules and publishes guidance in its role as regulator of securities firms and brokers.

FINRA Rule 2090 — Know Your Customer

FINRA Rule 2090, aka the “Know Your Customer” or “KYC” Rule, supersedes NYSE Rule 405, Diligence as to Accounts. The Rule requires member firms to “use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.”

“Know Your Customer” is, in its most basic form, the process of a business verifying the identity of its clients.

Essential Facts — Facts essential to knowing the customer are those required to:

· Effectively service the customer’s account;

· Act in accordance with any special handling instructions for the account;

· Understand the authority of each person acting on behalf of the customer; and

· Comply with applicable laws, regulations and rules.

FINRA Rule 2111 — Suitability

Prior to FINRA Rule 2111, suitability standards applied only to “transactions,” which was defined as the purchase, sale or exchange of securities. Rule 2111 expanded the scope of suitability determinations by including any “investment strategy involving a security or securities.”

The Rule requires, in part, that a broker‑dealer or associated person “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer’s investment profile.”

The suitability rule is fundamental to fair dealing and is intended to promote ethical sales practices and high standards of professional conduct. The rule identifies three main suitability obligations: (1) Reasonable‑basis, (2) customer‑specific, and (3) quantitative suitability.

· Reasonable‑basis — The reasonable‑basis obligation is comprised of two components:

1. A broker must perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards; and

2. A broker must determine whether the recommendation is suitable for at least some investors based on that understanding.

· Customer‑specific — Broker‑dealers must seek to obtain and analyze the customer‑specific factors listed in the rule when making a recommendation to a customer. The obligation requires a “reasonable basis” to believe that the recommendation is suitable for a particular customer based on that customer’s investment profile.

· Quantitative suitability — Quantitative suitability requires a broker who has actual or de facto control over a customer account to have a reasonable basis for believing that, in light of the customer’s investment profile, a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile. No single test defines excessive activity, however.

o Factors such as turnover rate, cost‑to‑equity ratio, and use of in‑and‑out trading in a customer’s account may provide a basis for finding that the activity at issue was excessive.

A broker’s recommendations must be consistent with the customer’s best interests. The suitability requirement that a broker make only those recommendations that are consistent with the customer’s best interest prohibits a broker from placing his or her interests ahead of the customer’s interest.

Investment Profile — In general, a customer’s investment profile would include the customer’s:

· Age;

· Other investments;

· Present financial situation and needs;

· Tax status;

· Investment objectives;

· Investment experience;

· Investment time horizon;

· Liquidity needs;

· Risk tolerance; and

· Any other information the customer may disclose in connection with a recommendation.

FINRA offers the following definitions regarding the customer’s investment profile.

· Liquidity Needs — The extent to which a customer desires the ability or has financial obligations that dictate the need to quickly and easily convert to cash all or a portion of an investment or investments without experiencing significant loss in value from, for example, the lack of a ready market, or incurring significant costs or penalties.

· Time Horizon — The expected number of months, years, or decades a customer plans to invest to achieve a particular financial goal.

· Risk Tolerance — A customer’s ability and willingness to lose some or all of the original investment in exchange for greater potential returns.

Department Of Labor — Proposed Fiduciary Rules

Now that you’ve refreshed your memory on the FINRA Rules, we will dive into the U.S. Department of Labor’s newly proposed regulations broadening ERISA’s definition of fiduciary. The proposal vastly expands the scope of who is considered a fiduciary to ERISA retirement plans and IRAs, which will include many insurance agents, insurance brokers and insurance companies.

February 23, 2015, President Barack Obama:

“Today, I’m calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interest. It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.”

Adhering to that directive, the Department of Labor (DOL) moved forward with proposed rulemaking, currently referred to as “the conflict of interest rule,” which requires retirement advisors to abide by a “fiduciary standard”—that of putting their clients’ best interests before their own interests and/or profits.

“This boils down to a very simple concept: If someone is paid to give you retirement advice, that person should be working in your best interest,” said Secretary of Labor Thomas E. Perez. “As commonsense as this may be, laws to protect consumers and ensure that financial advisors are giving the best advice in a complex market have not kept pace. Our proposed rule would change that. Under the proposed rule, retirement advisors can be paid in various ways, as long as they are willing to put their customers’ best interest first.”

The proposed rule revises a 40‑year‑old DOL rule to protect retirement savings and ensure that more retirement advisors in today’s marketplace are treated as fiduciaries. It applies to retirement accounts, protecting 401(k) and IRA investors by mitigating the effect of conflicts of interest in the retirement investment marketplace.

In 2010, DOL put forth a proposal with the same goal in mind—that of requiring investment advice to be in the client’s best interest. However, the proposal contained many loopholes and was, therefore, withdrawn in September 2011.

The new proposal addresses key concerns regarding the 2010 rule, improving the 2010 version both on process and substance.

Process improvements:

· Includes exemptions alongside the proposed rule;

· Based on consultations with the SEC and other federal stakeholders; and

· Includes a more rigorous analysis of the anticipated gains to investors and costs.

Substance improvements:

· Provides a new, flexible, principles‑based exemption that can accommodate and adapt to the broad range of evolving business practices;

· Includes other new, broad exemptions;

· Expressly treats rollover and distribution recommendations as fiduciary investment advice;

· Carves out investment education to IRA owners;

· Determines who is a fiduciary based not on title, but rather on the advice rendered;

· Limits the seller’s carve‑out to sales pitches to large plan sponsors with financial expertise;

· Excludes valuations or appraisals of the stock held by ESOPs from the definition of “fiduciary advice;” and

· Includes other new carve‑outs from fiduciary status.

Under the new proposal, as a fiduciary an advisor is legally bound to provide advice that is in the best interest of the client and cannot accept any payments, unless under specific exemption, which could create conflicts of interest.

Conflicts of Interest

A White House Council of Economic Advisers (CEA)* analysis found that conflicts of interest result in annual losses of about $17 billion.

*The Council of Economic Advisers (CEA) is an agency within the Executive Office of the President, established by Congress in the Employment Act of 1946. CEA is charged with offering the President objective economic advice on the formulation of both domestic and international economic policy.

DOL’s regulatory impact analysis conservatively estimates that the proposed regulatory package would save investors over $40 billion over a ten‑year time period.

A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation. More generally, conflicts of interest can be defined as any situation in which an individual (or corporation) is in a position to exploit a professional or official capacity in some way for their own personal benefit.

For instance, an advisor may have a conflict of interest if he or she gets paid for steering clients into one investment product instead of another. Inflated fees can give advisors an incentive to make recommendations that do not necessarily provide the best investment for their client.

Insurance advisors must act in all transactions to avoid any potential conflict of interest between himself, his client and the organization involved. The highest priority is the obligation to the client (or potential client)—acting at all times with the client’s best interest in mind is paramount.

Acting in a fiduciary capacity means that insurance professionals should never put themselves in a position in which they can benefit from both parties involved in a transaction.

For many professionals, it is virtually impossible to avoid having conflicts of interest from time to time. A conflict of interest can, however, become a legal matter; for instance, when an individual tries (and/or succeeds in) influencing the outcome of a decision for personal benefit. If any conflict of interest exists, it must be fully disclosed to the client or prospective client.

Fiduciaries are not permitted to receive payments creating conflicts of interest without a prohibited transaction exemption (PTE).

A prohibited transaction is a transaction between a plan and a disqualified person that is prohibited by law. Prohibited transactions generally include the following transactions:

· A transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person;

· Any act of a fiduciary by which plan income or assets are used for his or her own interest;

· The receipt of consideration by a fiduciary for his or her own account from any party dealing with the plan in a transaction that involves plan income or assets;

· The sale, exchange, or lease of property between a plan and a disqualified person;

· Lending money or extending credit between a plan and a disqualified person; and

· Furnishing goods, services, or facilities between a plan and a disqualified person.[1]

Certain transactions are exempt from being treated as prohibited transactions. For example, a prohibited transaction does not take place if a disqualified person receives a benefit to which he or she is entitled as a plan participant or beneficiary. However, the benefit must be figured and paid under the same terms as for all other participants and beneficiaries.

The DOL has granted class exemptions for certain types of investments under conditions that protect the safety and security of the plan assets. In addition, a plan sponsor may apply to the DOL to obtain an administrative exemption for a particular proposed transaction that would otherwise be a prohibited transaction.

According to U.S. Code…“A fiduciary with respect to a plan shall not:

· Deal with the assets of the plan in his own interest or for his own account;

· In his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries; or

· Receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.”[2]

The Secretary of the Treasury is granted exemption rights if the Secretary finds that the exemption is:

· Administratively feasible;

· In the interests of the plan and of its participants and beneficiaries; and

· Protective of the rights of participants and beneficiaries of such plan.[3]

Pros and Cons

Supporters of the proposal believe the rule would protect investors from high‑fee products that erode retirement savings. The Obama Administration says the rule is needed to help consumers understand that their financial advisors might have a conflict of interest with Wall Street institutions.

Opponents assert it will significantly increase liability risk and regulatory costs for brokers, making giving and receiving advice more expensive. They also argue that the proposal would discourage advisors from taking on lower‑income clients.

The latest news available is that the House passed legislation in October 2015 to prevent the DOL from finalizing the controversial regulation until the Securities and Exchange Commission (SEC) issues a final rule that would apply to all retail investment counsel.

Democratic Representative Maxine Waters, the top Democrat on the House Financial Services Committee, stated that forcing the SEC to act first is a stalling technique, stating, “While we should clearly encourage the [SEC] to also update its own rules on investment advice over securities, we should not make retirement savers wait any longer for protection by hinging the DOL’s rulemaking to the SEC’s.”[4]

At this juncture, the DOL is continuing to work closely with staff from the SEC, Treasury, and other regulators on the proposal and how to best align it with other regulatory regimes.

On July 21, 2015, the NAIC issued a comment letter regarding the DOL’s proposal. Following is an excerpt from that letter.

“We recognize that oversight of the retirement plans marketplace is a shared regulatory responsibility, and has been so for decades. State insurance regulators, the DOL, SEC and FINRA each have an important role in the administration and enforcement of standards for retirement plans and products within their jurisdiction. From a consumer protection standpoint, it is important that the approaches we as regulators take within the regulatory framework are consistent and compatible as much as possible.

“State insurance regulators share the DOL’s commitment to protect, educate and empower consumers as they make important decisions to provide for their retirement security. The states have not only acted to implement a robust set of consumer protection and education standards for annuity and insurance transactions, but have extensive enforcement authority to examine companies, revoke producer and company licenses to operate, as well as collect and analyze industry data. Such authority allows state regulators to identify market issues and take the appropriate regulatory action swiftly and effectively when warranted. So much of protecting consumers comes down to effective enforcement. Although there will always be instances of improper conduct, the states have a strong record of protecting consumers, especially seniors, from inappropriate sales practices or unsuitable products.”

The NAIC also states, “Until the rule is finalized and implemented, it will be difficult to know the extent of the impact on the insurance sector and it is therefore imperative that all insurance sector participants continue to monitor this significant development.”

With this elevated ethical expectancy, insurance professionals at all levels are better equipped to service their customers and the insurance industry as a whole.

The insurance industry has gone through a period of enormous shock and increasing change. A number of insurance companies have become insolvent and ceased operating, leading to fear and skepticism on the part of the buying public. Sales illustrations from many of the best companies have apparently failed to achieve what buyers felt they were promised in terms of financial performance. Some of the biggest companies have been sued for sales practices that may have seemed reasonable to agents at the onset.

The result is that insurance companies, agents and state insurance commissioners alike, have come to the conclusion that sweeping changes are necessary on the part of all concerned if the insurance sales industry is to continue growth. All parties agree that standards and procedures are required that:

· Safeguard the interests of the policyowner and serve to reassure the public;

· Protect the insurance company and the agent from unfounded or opportunistic litigation; and

· Enable the state insurance commissioners to assure that insurance is sold with appropriate sales materials, terminology, and disclosure of essential information.

Professionalism

The concept of professionalism, as defined in the fields of law and medicine, has always required that the client's interests come first. The best insurance agents have long believed the same thing—the question being which product will serve the client's interest best. Insurance buyers are more sophisticated than they once were. They are better educated and they have been trained to function in an increasingly complex business environment.

The Modern Insurance Buyer

Modern insurance buyers are increasingly exposed to volumes of investment information. They expect to be given a great deal of information and they expect to be spoken to in sophisticated terms. With the onset of the Internet, they have a deeper understanding of rates of return, loads, expense charges, income taxes, tax deferred qualified plans, limited partnerships and mutual funds. The modern agent has to be able to speak with understanding about such things and to present insurance products favorably in a highly competitive context. The modern insurance buyer can tell when the insurance agent is unsure, when he or she seems to exaggerate the benefits of a policy, or seems to obscure the difference between a policy's guarantees and its nonguaranteed overall potential performance. The modern insurance buyer has the same skepticism that buyers have always had and needs more information than ever to overcome that skepticism and enter into a professional relationship.

The Modern Insurance Agent

It is contingent upon the modern agent to do everything in his/her power to become the most well trained, well educated, and professional salesperson possible. The modern agent is in competition with stockbrokers, bankers, and insurance policies sold on the Internet—even TV. The agent who falls behind the industry in terms of education and training is truly risking his/her career. In today's environment, clients want to know that the agent is continuing to learn, just as their doctors and legal advisors are doing.

It is not only a matter of practicality in maintaining one's clientele; it is also a matter of professional ethics for agents to remain up to date in their field. This is the primary reason state insurance commissioners have instituted continuing education requirements in order for an agent to remain licensed. And these requirements just keep getting more stringent. To be able to keep up with the competition, one must be vigilant in fulfilling their continuing education requirements.

Continuing Education and Self-Improvement

Agents today have a wide variety of educational opportunities, including programs of study leading to professional designations including Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC), Certified Financial Planner (CFP), Certified Employee Benefit Specialist (CEBS), and Registered Health Underwriter (RHU). The attainment of one or more of these designations is often recognized by prospective buyers of an agent's willingness to honor his ethical responsibility to keep up to date in his/her profession.

In addition to these organized programs of study, there are a number of educational seminars presented at regular intervals in urban areas by the local chapter of the American Society of CLU & ChFC, and the local Association of Life Underwriters. There are also professional seminars, designed by continuing education experts in various areas of the insurance industry, and presented throughout the year all over the United States. These seminar courses, along with approved correspondence courses, provide a convenient and effective way for busy insurance professionals to keep up to date with important topics and changes in their fields of expertise.

It is also important today for agents to remain aware of the state of the financial world in general. For instance, life insurance once may have been perceived as a separate world of its own, functioning apart from the areas of securities, accounting, finance, and law. However, today changes in the law, securities, accounting, and securities regulation—to name a few—can resonate across financial boundaries and make unforeseen changes in matters of insurance that may be critical to the welfare of an agent's best clients.

The Broad Area Of Sales Ethics

“Buyer beware” may be a practice that is applicable to most transactions involving buying and selling. It is however unethical to generalize its application to policy sales as the consequences of incorrect policy purchases have far more serious outcomes than the gullible purchase of a fake designer hand bag. The magnitude of the negative consequences underscores the need for a sales conduct that is beyond reproach.

Sound sales conduct will remove the changes of legal reprisal that is hostile to the agent and company involved. It will lead to higher commissions stemming from lower operating costs and enhanced public trust. Underwriter involvement will also be limited when there have been no sales conduct violations.

There are a number of distinct responsibilities that are a part of appropriate sales conduct.

Ethical Sales of Policies

A code of moral conduct is not inherited. It develops over a lifetime of experiences. Although the comprehensive results of practicing ethical behavior may not be evident in immediate gains, it does have very concrete benefits. These include more policy sales and minimized risk of legal action. Application of ethical principles in the industry entails that policy sales should be governed by the needs of the client, not the size of the commission expected.

It has become popular in the media to highlight cases of malpractices in insurance policy sales. This offensive is counteracted by the work of various insurance associations and sales speakers. These associations include the Chartered Property and Casualty Underwriters, American Society of CLU and ChFC, the International Association of Financial Planning and the Million Dollar Round Table. A number of workshops, lectures and publications focus on distributing and implementing a Code of Ethics that cannot be overlooked in the business of insurance.

Some crucial elements of a Code of Ethics include:

· Recognizing that the client's interests supersede the agent's personal interests;

· Safeguarding the trust of the client by maintaining confidentiality;

· Maintaining a level of competence and expertise commensurate with advancements in the field so as to provide the best possible advice;

· Disclosing all the relevant facts so that clients can make the best possible decision;

· Providing information that is part of one's knowledge and does not violate licensing regulations; and

· Respecting competitors and providing an honest overview of policies compared to those of peer companies.

Defining and following a clear code of conduct aids both agent and client to sort through the complex plethora of available financial services. It is also an additional aid in handling the stress that stems from a conventional focus on cutthroat competitive practices. These ethical principles are important if we want to move away from a purely ability-based assessment of competence to a more character-based assessment of outcomes. Thus success can be measured with more than just monetary standards. This in turn will further boost the value of honest selling practices. Thus the prescription and adoption of a clearly defined set of ethical guidelines results in the outcome that is most desired by agents—meeting client's needs.

Companies are most interested in development of ethics that span the lifetime as this creates stronger agent-client relationships. Mutual feelings of loyalty can result in returning clients and increased sales.

A Moral Compass

Just as the ship's gyroscope helps maintain the balance of the entire vessel, leaders are responsible for creating a balanced corporate environment. Taking the nautical metaphor a little further, leaders with a very strong moral compass or GPS themselves are most likely to lead subordinates in the correct moral direction.

This inbuilt GPS does not just mean doing the bare minimum such that no negative outcomes result. It means actually going above and beyond the minimum requirements and letting a strong sense of right and wrong guide one's behavior. A strong, internalized ethical system means that the correct thing is done irrespective of personal interests. A strong sense of ethics does not preclude good business performance; research shows the very opposite in fact. Businesses that score higher on 'virtuousness' have better business outcomes as compared to those who score lower on the same scale.

Handling Moral Conflict

Moral conflict at work usually results from unrealistic goals or unhappiness with a current work situation. Frustrations that result from poor decision-making can be alleviated if one tries some specific strategies. First, take on only as much as can be realistically handled. When an agent takes on excessive responsibilities, he or she may be tempted to cut corners to meet them. When the resources to meet obligations fall far short of what is needed, it can lead to less than ethical shortcuts. Therefore it is best to give up short-term goals resulting from overloaded schedules. Keep in mind the long-term goals of stronger relationships based on ethical behavior, which result in positive practical and emotional outcomes. Secondly, everyone involved in the situation should be considered a stakeholder. A stakeholder is one who has an investment in the company. The investment need not be just monetary. Thus in addition to shareholders, stakeholders could include clients, insurers, and most importantly, the agent. Company well-being is linked with client well-being. An agent's well-being also hinges on how well the company is doing. Thus client well-being is very closely related to agent well-being. Bearing this in mind encourages long-term thinking and the creation of trustworthy relationships. Finally, developing a high threshold for handling ambiguous situations or challenges is a good strategy to handle moral conflict. Understanding that gray areas exist and there is an ethical way to resolve these issues helps to handle any unexpected situations that may seem overwhelming.

Controlling Liability

Ethical behavior does not preclude the idea of risk prevention. An agent needs to make sure that minor issues do not escalate to major liabilities by following the guidelines listed below.

· The first defense in cases of liability is your own errors and omission insurance. Make sure it is current and that you know when it is applicable and when it is not.

· Be aware of what is legally required and exceed it only if you possess the level of expertise that permits this extension.

· Do your duties bearing in mind a clear and strong ethical framework.

· Learn vicariously from the mistakes of other agents and avoid their repetition.

· Keep abreast of current sensitive areas in the field and steer the company away from those problem areas.

· Be informed about current trade practices and what constitutes unfair practices and ensure that you follow the rules scrupulously.

· Be uniform in the way you treat various client situations; i.e., maintain consistency in handling similar situations over time.

· Make sure you clearly explain all conditions involved to the client and get proof of this understanding by means of initialized documents.

Abuse of Authority

An agent is in the position to influence crucial and life-altering decisions that customers make. This can also increase the likelihood of such authority being abused, knowingly or unknowingly. Misrepresenting oneself as an expert without having the actual expertise to back this up can constitute ethical and sometimes, legal, violation.

Cases where such misrepresentation has led to client dissatisfaction and loss has resulted in legal reprisal against the agents and companies concerned. For example, in one situation, the agent failed to provide the client, who asked for the best possible auto insurance, with enough information and the client sustained consequent losses. This led to a lawsuit that was upheld by the court as it decided the agent had abused a position of power by claiming an expertise he did not possess, and had broken the client's trust. In another instance a long-standing client wished to obtain additional insurance for a sea wall, but was informed by the agents that such insurance was unavailable to them. After that same wall was damaged due to a storm, it emerged that such insurance was well within the client’s rights. The court found the agent guilty of neglecting his duty toward the client.

One way to guard against such misuse of one's position is the use of the preferred registered agent. As a preferred registered agent, duties include gaining comprehensive knowledge of products available and responsible handling of clients. In cases where requirements exceed knowledge, such an agent would promptly refer clients to the right source and be diligent in the pursuance of due care.

Law of Ethics

Although laws and ethics are not completely overlapping categories, they are by no means mutually exclusive. Though an idea of what is deemed right and wrong does guide the creation and maintenance of laws in society, it is very possible to stick to the letter of the law while performing an unethical action. Lies of omission on an application form for instance, although unethical, may not always be considered illegal.

As is the case with most disciplines, the legal field is also becoming increasingly complex, with no one lawyer being able to know every single law enacted over the past few years. This leads to increased specialization, and the need for teams of lawyers to cooperate on the same case.

Maintaining Privacy

Privacy concerns are always paramount in the field of insurance, which deals with very personal financial, health, and other information. A number of laws and other safeguards are in place so that this private information does not get into improper hands. These include the right of the client to decide what information they are comfortable sharing with others. In cases where it is imperative to divulge personal information, the client must be notified in advance. The idea of how privacy can become a source of contention is illustrated by the following case.

A large insurance firm employed Edward Bean as an exclusive career agent. As part of his employment, he used computer equipment and software leased from the company. The company clearly stated its continuing ownership of, and right to monitor the equipment and communications conducted using the same.

Various agents across the state met up and decided to form a chapter of independent contractors, of which Bean was elected as chapter member, with the additional responsibility of writing a newsletter. The company was unwilling to accept the validity of this chapter. Following this, Bean reported some allegedly unethical business practices the company was conducting. This resulted in the company having to pay a fine and an assurance that the said business practices would stop. All of this was reported in the chapter newsletter. The company retaliated by reminding all employees via a memo that although freedom of speech was paramount, reporting false information was not encouraged. The company would meet future violations of this nature with legal reprisal.

Simultaneously the company set in motion a plan to provide direct insurance coverage to clients without the help of an agent. The chapter of agents countered this by creating a draft, which they proposed to send to competitors. This letter included the idea of probable cessation of professional relationships between the agents and the company as well as the possible defection of a number of clients to rival companies. The letter, although not widely circulated, was emailed to one other company.

The company then sent out another memo delineating improper communications and carried out a search of agents’ emails that were stored on the company server to locate proof of the letter that was sent. After finding communication regarding the offending letter in agent Bean's account, his association with the company was terminated and the company retrieved all equipment. An internal review board upheld the company’s right to do both, as they found a breach of trust had occurred due to Bean's actions. In the ensuing legal battle focusing on interception and freedom of speech, the court once again upheld the company's right to obtain the information from the servers as it was not intercepted in real time, but merely taken from the servers post the communication. Also, the company being a private corporation was not bound by the parameters regarding freedom of speech.

The above case highlights various nuances in the maintenance of privacy, and the need to be aware of all the aspects of such issues, especially in ambiguous situations.

Sharing Personal Information

Various institutions such as credit card companies and collection agencies require sensitive personal information in the screening process. This type of information is also required by travel agents, contest companies, telephone companies and insurance companies. Various agencies such as credit bureaus often sell this information to marketing agencies. This dissemination of essentially private information makes it important for clients to be aware of their rights.

There are two options that a client needs to be aware of. The first one places the responsibility of protecting privacy on the customer, while the second one is more oriented toward the customer. The first one is legally adopted and is the opt-out option. This means that the client needs to clearly state they do not wish for their private information to be shared in order for this to happen. Until this occurs, the institution is free to do so with the information without intimating the customer. The more stringent opt-in option, although not adopted legally, was the one that consumer advocates were strongly promoting. According to this option, client information cannot be shared unless the customer clearly states that they are allowing it.

There are a few issues to bear in mind before jumping to conclusions about the ethical superiority of one or the other option.

· Opt-in can in some situations actually undermine privacy of customers by opening the way for fraud and identity theft. As the company will not have all the information regarding customer behavior trends, they cannot detect deviations from this pattern in time to stop unauthorized activity. Once the fraud occurs, the personal information is required anyway.

· Opt-in operating costs are higher and these are passed on to the customer thereby increasing the prices of available services. It also is wasteful in terms of diffused marketing strategies that are spread over a wider section of the population, as opposed to being tailored to a specific demographic. This increase in cost may be especially applicable to those who shop via catalogues. As many who use this technique also fall in a lower socio‑economic level than those who do not use it, it is likely they will be the most negatively impacted by this option.

· Online shopping may actually benefit from the opt-in option, as most people who avoid it are those who have deep concerns about identity theft and other such privacy issues. By assuring them that the company will not share private information unless directed otherwise it may boost sales, which will offset any increase in operational costs.

· As operating costs of companies increase due to the opt-in option, smaller businesses with narrower profit margins may be edged out. Also consumers may prefer to exercise the opt-in option with larger, more familiar companies and this will severely restrict the customer pool for smaller businesses. With the proliferation of e-commerce however, such operating costs may be significantly reduced and even out the playing field for businesses of all sizes.

Maintaining Client Confidentiality

It is crucial to maintain complete confidentiality of client information in order to create a sound fiduciary relationship. While privacy issues deal with obtaining information, confidentiality implies what is done with that information. Technical and legal finesse is required to make sure that confidential information is not inadvertently divulged. In a world of increasing Internet usage, the chances of divulging client information through inappropriate forwarding of messages or not using secure passwords can also cause breaches in confidentiality.

Making an Ethical Decision

To ensure that the decision made regarding your client's future is ethical can be made by following certain steps, including the following.

· Obtain all the pertinent facts before making the choice.

· Be clear about the problem that needs to be solved. Exploring all the alternative solutions to the problem and consequences of these alternatives can accomplish this.

· Use the power of conviction in convincing the conflicting parties about the ethical validity of a solution.

· Balance the long-term outcomes against the immediate gains and take risks if needed, but only where they are ethically justified.

· Exploring all the options and being clear about those options will create the best possible result without being unethical.

· Make sure the client is on-board with the alternative selected. Make sure the client has made an informed decision based on a complete understanding of facts.

· Revisit the decision and evaluate it in an objective manner.

Resolving Unethical Behavior

In a world where it is considered correct to 'live and let live,' it is crucial to understand how such indifference can be counter-productive to ethical practices. Active participation is needed to in resolve instances of less-than-honest behavior.

Some techniques used that can discourage such behavior include being very upfront about what you consider acceptable or unacceptable behavior. In case a superior asks you to subtly push a client toward one specific policy even though it may not be the best possible one in that situation, you can clearly ask if he/she wishes you to provide a less than optimal service to the client. Another way to resolve such a conflict could be by presenting or talking about other instances where such cases have led to legal reprisal from the client. Finally, one clear way to discourage such behavior is to make sure that at no point is such behavior endorsed or authorized in any form whatsoever by the superiors in the organization. In a hypothetical situation a company is under fire for allegedly ratifying an agent's unethical practice. It bodes well for the company if they have taken action for allegedly ratifying an agent’s unethical practice. It bodes well for the company if they have taken action as soon as the fraudulent practices have come to light, even before there is a chance of legal action from the client.

Ethics at a Macro-Level

Following certain moral principles is a very personal choice. However, the environment that the individual occupies can doubly encourage it. In the case of the agent, it is the company atmosphere that dictates how supported the individual feels in making moral decisions. A structure that positively reinforces honest practices makes it easier for members of the organization to stick to their principles without experiencing burnout.

The Concept of Integrity

Conventionally, integrity is understood to mean a consistency in exhibiting moral behavior across situations without consideration of personal outcomes. The law, however, contains additional measures, which further defines the concept. An agent needs to know these in order to ensure integrity is a part of their life—not just personally, but professionally as well.

Firstly having integrity implies that the agent has all the professional qualifications required in order to practice, including various licensing requirements. These licenses may not be granted to those agents whose integrity is compromised by past instances of incompetence or misconduct, even outside the field of insurance. Similarly current violations of trust can also lead to revocation of licenses. If an agent does not abide by the law, misleads clients, or fails to provide a service he/she is legally obliged to, all of these can be grounds for license invalidation by the courts. Other fraudulent practices such as misrepresentation of the scope of a policy can be considered out of step with integrity and valid reasons for license cancellation.

In one case, an agent tried to attract automobile owners who were considered high‑risk. He claimed to provide cheaper insurance due to the high number of the policies the company issued. The policies also appeared to have originated from the Department of Motor Vehicles, further misleading future clients. The extremely high rate of interest was another important violation, and all of this resulted in a rescission of the license of the fraudulent agent involved. Finally any actions that go against the public interest are also considered violations of integrity and, as such, punishable by the law.

Product Selection

When the agent is helping the client make the best possible selection from the variety of policies that are available, there are a few points to be kept in mind to avoid future trouble.

· Obtain detailed information about the client needs and assets and make sure all policies relevant to the client’s situation are explored and reviewed by you first.

· Clearly state all relevant information to the client, including the scope of coverage, the duties of all concerned, and specifically the responsibilities of the agent. The importance of disclosure is highlighted by a case where an agent did not mention 'employee dishonesty coverage.' The agent was considered responsible for a claim after a case of embezzlement led to a failed claim application. This was because he had failed to inform the client about this option.

· Go over some sample policies and changes to the same when creating contracts for the transaction.

· Continue to scrutinize the policy over time to ensure that client’s needs continue to be met.

Sales Methodology

Most life agents would agree that different prospects require different sales methods. One prospect might seem to have only a single need to be addressed while another might appear to have two or more needs. A third person's situation might demand a comprehensive analysis to discover exactly what his or her various needs were and how to most logically fill them. It is entirely possible that the prospect does not even know exactly what is needed because they have never thoroughly analyzed their own financial situation with that end in mind.

The insurance professional should make every effort to determine the need or combination of needs for every product sold and to apply to that need the appropriate product in the appropriate manner. The same product today may fill widely different types of needs tomorrow.

For instance, a client may desire a specific type of policy for just one reason only, such as the following:

· To pay off a mortgage or other large debt;

· To provide for the education of a child;

· To pay final expenses at death;

· To provide a fund to generate income to support the insured person's survivors; or

· To help pay estate and/or inheritance taxes.

Any of these needs, and others, may exist alone or they may exist in combination. The agent will not know, unless he/she asks, whether the right single need or the right combination of needs is being addressed. It has happened many times that an agent has sold a policy for the single need described by the client, only to find out years later that a number of needs existed that the client had not mentioned, but which could have been revealed in just a short exploratory conversation. Agents have been called lazy, incompetent and worse for not providing coverage a surviving spouse thought should have been there but wasn't. In today's environment it is justified in expecting a professional insurance advisor to inquire into all such varying needs, and to make sure the survivors will have the assets they need upon the insured's death.

Fact Finding & Needs Analysis

That is why a comprehensive analysis of the insured's financial responsibilities and insurance needs is the most important. Only when the agent, the client, and sometimes the client's spouse, have gone through a thorough fact‑finding process, can the agent say that all needs have been professionally explored and discussed.

Once a comprehensive fact‑finding interview has been conducted and all necessary notes made, the agent owes it to himself and his clients to do a thorough analysis of the information. Any such analysis needs to include certain assumptions for the future rate of inflation, and for the rate at which pledged assets grow.

Such a program will not only explore and quantify all of the various needs for insurance at the time it is done, but it will provide the basis in the future for regular updates of the information and adjustments to the client's insurance plan. In a great many instances, a surviving spouse has asked the agent to go over the plan with him/her after the insured's death, to review with them exactly what amount of insurance money was supposed to be applied to exactly which financial need. Many agents have described this as the most moving and satisfying service they have ever provided for their clients.

In addition to the practical benefits described above, a comprehensive analysis also safeguards the agent's interests. When kept in the agent's records, it provides evidence that the plan was done thoroughly and in good faith, with full understanding by the clients. Some agents, for all of the reasons above, refuse to work with a new client unless they will agree to go through such an analysis because it is concrete evidence of the agent's ethical conduct of his/her business.

Product Illustrations

Once the various needs have been explored, analyzed and quantified, it is time for the agent to make a product proposal. The product, or products, proposed should fill all of the financial needs to the extent possible and in a manner that is well understood by the client. The product should also be priced in accordance with what the clients have said they could afford to pay. Sometimes it is not possible to cover all needs with the premium dollars available. In such cases, the clients have the choice of either reducing some of their financial goals or deferring them to a later date when the plan may be revised as more funds becomes available.

Any insurance recommendations must be presented to clients in a manner they can easily understand. Clients must be able to understand how the policy works, what guarantees are available, and what features depend on the nonguaranteed financial performance of the recommendations.

Checking Questions

It is wise for the agent to occasionally ask him‑ or herself the following questions.

· What is the worst that can happen in this situation? Have I prepared my client for it?

· Am I prepared to defend my client's interests if things go wrong?

· Am I prepared to defend myself and my own interests if things go wrong?

· Are my client records and my training and licensing in order?

· Is my relationship and my reputation with my company and client as strong as possible?

Recordkeeping

The place where many agents get into trouble is in recordkeeping. On occasion a client will call complaining that something was not done correctly, or not done on time, or even that something was done contrary to his or her wishes. It is in the interests of the client, as well as in his/her own interests, that the agent keeps complete records in order to clarify a situation. Without such records the agent may be found liable for the amount of a claim.

Records to be kept include:

· Notes of all conversations;

· Copies of all correspondence;

· Copies of all promotional material;

· Copies of all case materials:

o fact finders,

o sales presentations,

o policy illustrations;

· Copies of applications, new account forms, monthly draft forms; and

· Copies of service forms, changes of beneficiaries.

While the primary purpose of such records is the service of the client, the associated reasons are (1) to assure the insurance company and other regulators (like the state insurance commissioner or the NASD) that the agent is performing his duties ethically and in compliance with company, industry and governmental guidelines, and (2) to assure that the agent is in a strong position in case of a complaint.

Record retention is essential for most individuals, but it is also mandated by law for insurance agents. Most states require that agents keep specific records for specially‑mandated time periods. Such records should include much, if not all, of the following information—and more, if necessary.

· Name of the insured and insurer

· Policy number

· Effective dates, termination dates, and cancellation dates of coverage

· Amount of gross premium, net premium and commission

· Names of persons who receive or are promised any commissions or other consideration related to the transaction

· Amount of premium initially received

· Date the premium was received by the agent

· Date the premium was deposited into a trust account

· The name, address, and account number of the bank in which the premium was deposited

· Date the premium was paid to the insurer along with the transferring transaction paperwork

Such information may be imaged or kept in digital format for ease and convenience, in lieu of maintaining hard copies of each.

Money Handling

The most frequent problems in the area of handling money do not involve actual theft, but rather the mistakes made in the way money is managed once it leaves the client's hands. It is important to follow agency and company procedures to the letter about:

· How and when money is to be collected from the client, as well as when it may not be collected;

· Within what timeframe the funds must be transferred to the agency or company; and

· What forms, properly filled out, must accompany the funds, such as monthly bank draft forms and, for variable products, new account forms.

Following are the most important rules about accepting money from clients.

· Discourage the client from giving you cash for a premium payment. Your agency or company may prohibit this entirely. If you must accept cash, be sure to provide a proper receipt.

· Never commingle a client's funds with your own money. If it can be construed in any way that the client's money has been used for the agent's own purposes, the agent may possibly be charged with theft, fined, and stripped of their license.

Utmost Good Faith

Probably no business in the world is more dependent on the concept of utmost good faith than is the insurance business. It is one of the basic concepts on which the insurance industry is based.

Most business arrangements involve the exchange of money by one party for tangible goods or valuable services in the present timeframe. There is an equality implied between the money paid and the value received. Such arrangements do not require a great deal of mutual good faith, at least not for very long.

The insurance industry is unique in that it only works if everyone involved generally tells the truth and does what they say they will do. The insurance company receives a relatively small amount of money in the form of a premium from the policyowner in the present timeframe, and promises to pay a much larger sum to a beneficiary at some unknown time in the future when and if the covered event occurs. This requires a great deal of faith on the part of the policyowner that the insurance company will remain sound, live up to its fiduciary responsibility, and pay the claim when it is due. Also below a certain level of coverage, the insurance company accepts the risk involved on the basis of information provided on the application, which is another example of utmost good faith.

It is the agent's ethical responsibility to fulfill their role in the relationship of utmost good faith that must exist between the policyowner and the insurance company.

Maintaining the Relationship

The relationship the agent seeks to build with the client is sometimes perceived as beginning and ending in the process of the first sale, and being of little importance beyond that except in order to obtain referrals. It may appear to have very little to do with ethics in that context. It does, however, have a great deal to do with ethics, and is perhaps the agent's best insurance against complaints and legal action throughout the agent's career.

It is commonly believed that the relationship with the prospect begins and is built in the fact‑finding process. When an agent indicates interest in the personal details of a prospect and his or her family, the agent is asking for a great deal of trust. And when the agent follows through by listening closely, asking about their hopes and dreams, and appearing to adopt their financial goals as his/her own, a significant bond of trust is built—at least for a while.

It is up to the agent to maintain that relationship and that quality of trust for the client's own benefit. If the agent provides continuing service, including reviews of the client's plan every year or two, then the client is well served and feels the agent is a valuable resource. Under these circumstances when a concern arises, the client will call the agent first for advice and the agent will have an excellent chance to provide immediate service to the client and, in most cases, ease the situation entirely before it becomes serious. In the absence of such a relationship, the client might delay taking action until the situation has deteriorated beyond hope. It is the agent's ethical responsibility to prevent this from happening primarily for the benefit of the client but, in fact, for the agent's own benefit as well.

The Agent’s Ethical Responsibility to the Insurance Company

In the process of providing reliable service to the client, the agent has very clear ethical responsibilities in his/her dealings with the insurance company. A paramount duty that all insurance agents have is to make sure they place clients with the best possible company given the requirements of the client.

Correct Selection Of A Company

Although this may seem like an obvious duty that does not have to be overtly stated, a survey of agent's knowledge about policies and methods of customer guidance emphasized the need to do so. Some areas where lack of preparation was glaringly evident included client guidance regarding the credit-worthiness of the insurer selected.

The importance of being well prepared with all the relevant information is important for the well-being of both the client and the agent. A client is best served when there is the best possible match between what they need and the company providing them the service. An agent who makes this match protects oneself against litigations that can arise due to poorly thought out matches that result in client dissatisfaction and loss.

An agent can make sure desired outcomes are attained as far as client-company goodness of fit, by trying a combination of various techniques including periodic monitoring, disclosure, knowledge of regulations, consideration of multiple carriers, product variability diversification, etc. All of these, and more techniques, lead to an outcome that is acceptable at both ethical and legal levels, by assuring that the needs of the client are met in any eventuality.

Solvency of Companies

An agent needs to accurately assess and continually monitor the ongoing solvency of any company that their clients are linked to. When providing the policy options, it is crucial to assess the current credit-worthiness of the policy provider. But agent responsibility is not over. An agent is responsible for continuing peace of mind of the client. Bearing that in mind, it is crucial to be informed about the company's continued solvency by making sure the company is aware of your desire to be kept in the loop before, during and after policy purchase. This allows an agent to perform their duties in the best possible manner. It is thus the agent's responsibility to make sure that, irrespective of inevitable fluctuations, a client is covered adequately for the duration that the policy is valid. As agents are considered the experts in this situation, they are holders of their clients’ trust, and as such must make sure this trust is maintained.

There are many ways in which the solvency of a company can be monitored. These due care procedures are well worth the time invested in them, as they translate into better agent-client relationships leading to ethical and monetary benefits.

Rating Agencies

With the proliferation of rating agencies, agents have a way of assessing the reliability of various insurance companies at a glance. These agencies (e.g., Moody's, Standard & Poor’s, A.M. Best) assign a rating to a company that reflects the company's ability to handle customer claims. In cases where the company's financial standard is rated poorly it can lead to client pullout and downward trend in business volumes. It is best to bear in mind that ratings (especially downgrades) are not always objective. There may be other factors, such as a desire to enhance credibility of the rating service responsible for severe or extreme ratings. These ratings may not accurately reflect reality. For a better idea, it is best to glance over multiple ratings for the same company and be sensitive to widely different ratings. This may be indicative of some underlying problems.

Promoting An Atmosphere Of Utmost Good Faith

The insurance company can only offer its services in an atmosphere of utmost good faith and it is the agent's duty to promote that atmosphere in several ways, among them the following.

Persistency

The agent has a responsibility to sell insurance products in such a manner that they remain in force until they have served their ultimate purpose. Doing so will benefit the company, the agent, and the client in the long run.

For the insurance company, there is the question of expenses and economy of operation. If an individual policy stays on the books for a long time, it means that the time and expense involved with issuing that policy has to be absorbed only once instead of many times. The financial benefits, which inure to the insurance company in the later years, are lost in the case of early lapses. There are definite savings and profits for the company involved with having a high "persistency ratio."

A policy that is issued but never pays benefits contributes little to the company's reputation in the community. Only when the policy has performed as expected, does the company benefit from a good reputation and follow‑on sales. Long‑term clients refer agents to other potential clients, which is highly desirable for everyone.

The agent's sales efficiency, in terms of low lapses, contributes to home office financial efficiency, a commonality of interests in serving and keeping the policies in force, and to the home office's desire to maintain a good relationship with the agent and his clientele.

Policy persistency is actually one way of measuring the strength of an agent's relationships with his clients. When the relationship is strong, the agent and client communicate regularly and there are few surprises. If a dividend scale or policy cash value interest rate is going down, it is communicated gradually and prevents a sudden shock later on. The agent remains the expert and counselor instead of fading into the role of messenger when there is bad news. In this way, the relationship fostered by excellent service not only keeps policies on the books but also tends to reduce the incidence of litigation by policyowners.

Minimize Litigation

The next ethical responsibility of the agent follows the previous one closely. The agent should sell and service his clients in such a way as to minimize the amount of litigation brought against the company.

Some agents might feel that they are safe no matter what they do because if something goes wrong, the big insurance company would have to pay to put things right—and not themselves as agents. This attitude displays a lack of concern both for the interests of the client and the insurance company, each of whom has accepted the agent in the spirit of utmost good faith.

This attitude not only sets the stage for a variety of questionable sales practices and a generally low level of client service, but for almost certain litigation at some point in the agent's career. The agent always suffers in the process of litigation, either in the loss of his agent's contract with the company, the loss of his license with the state, or in the inability to purchase errors and omissions (E&O) insurance, which is essential to continuing in his/her career.

The same sales and service practices that will keep the agent in good standing with the client will do much to keep the company in good standing as well. This includes the use of only company approved prospecting and sales materials to assure that inappropriate, inadvertently misleading language or terminology does not creep into the sales talk or in any visual materials.

Ethics involves proper administration of paperwork, assuring the handling of all application materials, forms of all types, and monies remanded to the agent in the manner required by company and industry guidelines. Ethical behavior also includes accepting responsibility for one's actions and avoiding the shifting of blame for misleads or errors.

The agent should also present the company's rules, regulations, and even their underwriting decisions to the client in a way that does not reflect badly on the company. When the agent criticizes the company, even mildly, he is also criticizing himself for representing that company.

It is also important for the agent to inform the company immediately and fully of any potential problem, complaint, or potential litigation by a policyowner. This allows the company to quickly research the problem and take appropriate measures to either placate the policyowner or to defend its own interests competently in case of actual litigation.

Promote Company Status

It is the agent's responsibility to promote his/her company's status within the community. A company's reputation for service as a responsible member of the community increases the strength of its relationship with every one of its policyowners in that community, increases policy persistency in general, and reduces the likelihood of litigation.

There are a variety of opportunities for service in one's community. Sometimes the opportunity is within the structure of the local life underwriter's association. Blood drives, blood pressure screenings, charity golf or tennis events are common, but most often supported by agencies or groups of agents, rather than individually. On an individual basis, an agent might increase their reputation and that of their company by participating in civic clubs, religious groups, literacy action programs, the American Red Cross, the United Way, etc.

The important thing to remember is that the agent cannot raise the reputation of their company without raising his/her own reputation at the same time. The sales professionalism displayed in the agent’s practice reflects well on the company and the speed with which the company responds to service requests reflects well on the agent. The agent and the insurance company are often inseparable in the minds of the public.

On those occasions when one's insurance company comes under public scrutiny or criticism, it is important for the agent to take the initiative in defending the company. Assuming he/she trusts the company and has a good relationship with them, the agent should generally restrict comment to the company's own approved news releases and publicity. If the agent feels the company is not being entirely candid, he/she has an ethical responsibility to all concerned to work out the details of any disagreement with the company behind closed doors before saying or doing things that would make clients and policyowners unnecessarily anxious.

Field Underwriting and the Home Office Underwriter

Underwriters are hired and trained to keep the company from assuming poor risks or acceptable risks at the wrong premium. It is their job to approve applications only when information on the application from the medical records and from other sources indicate that it is appropriate. The agent also has a responsibility to the company to perform his/her field underwriting duties thoroughly. The company relies strongly on the agent—depending on the agent’s reputation and relationship with the company to perform a certain amount of underwriting in the field before sending in an application.

For example, the underwriter needs to know how well the agent knows the prospective insured. Is the person a referral from a long‑time policyowner or is he someone who responded to a cold call? Is the person in the correct economic circumstances to buy from this company or to buy a particular product?

The agent is obligated to assist the underwriter by filling out the application fully and accurately, including the agent's certificate, with any and all information available about the prospect. The agent is also obligated to use paramedical or medical examiners who have a good reputation for speed and thoroughness and who can be depended upon to represent the insurance company well.

Occasionally an underwriter must request additional information about a client—perhaps blood pressure readings, laboratory tests, or X‑rays, etc. It is a temptation for the agent to blame the need on "those guys in the home office," implying that the underwriter, perhaps, should not have asked for the requirement. The agent has a duty to the underwriter and the company to communicate their request with dignity and to assure the prospect they wouldn't ask unless it was needed for the underwriting process. If the agent wants the underwriter to treat his cases and prospects with the respect they deserve, then the agent must reciprocate.

The agent should be honest with a prospect about the possibility of a rated premium or a declination. Assuring a prospect that he or she should get a policy with no problem sometimes sets them up for a great disappointment later on; and an instantaneous reduction of the agent's and company's reputation with that individual and, very likely, everyone they can tell about it.

An agent should deliver policies as soon as he/she receives them. Most states have a 10‑ or 20‑day free look period during which the policyowner can return the policy and get the premium back. It is essential for the policy to be delivered, and for these periods to begin as soon as possible. If the policy is not delivered for three months, the free look period will last for 10 or 20 days beyond the delivery date and the policyowner will still be able to get the premiums back. Most companies would consider this to be unethical behavior on the part of the agent with respect to the interests of the insurance company. Today, many companies have required delivery dates and delivery receipts that prevent this from happening.

Company Approved Materials

Although the subject of company approved sales materials has been mentioned previously, it deserves a more complete explanation since it is so critical—from both an ethical and a legal perspective.

Working as an agent in the insurance business is a demanding career with both positive and negative features. One of the most positive is the opportunity it gives agents to be creative in their work, and to tailor presentation materials to the specific needs and temperament of a particular prospect. Many agents find this process to be very rewarding and resent any attempt by the insurance company to suppress that creative effort. However, the local development of sales materials can get agents, managers and insurance companies into a certain amount of trouble.

For instance, use of the word “deposit” when the word “premium” would have been correct, or using the word "savings" instead of "insurance policy cash value." In such cases, policyowners may later claim they had been misled into thinking they had bought a special type of retirement plan, not knowing they had bought a life insurance policy with all of its associated loads, expenses and commissions. In one such case, policyowners were members of the same "target market" who banded together and filed suit against the agents, agency and the insurance company. The policyowners won!

The insurance industry has taken action to restrict the use of locally manufactured sales presentation materials unless they have been approved by compliance officials at the home office level. Insurance home offices all over the country began creating sales materials at the home office, designing them to be extremely clear in their language, eliminating ambiguities, and disclosing more complete information about policy guarantees than locally produced presentations had generally disclosed. Today, presentation materials are reviewed for appropriateness by the compliance officials who make sure they meet certain legal and ethical standards developed by the company. All of this is intended to protect the consumer from misleading sales presentations, and to safeguard the agent and the insurance company from unnecessary problems, complaints and litigation.

While they are sometimes regarded as a hindrance to the creative process, the marketing and compliance personnel at insurance home offices are among the agent's most valuable associates. Insurance products are, by nature, complex and difficult to explain. Insurance professionals are charged with the responsibility of helping the agent do his or her job in an effective, ethical and legally defensible manner.

Agent Training

Let's explore agent training in a little more depth. Many people would agree that the insurance selling environment today is much more complex than it used to be, and that agents should be grateful for every training opportunity that becomes available.

Each state insurance department requires certain types and amounts of training prior to the agent's taking the licensing exam, as well as continuing education requirements for license renewal. In some states these requirements are quite strenuous, requiring the agent to accrue, on average, between one and three hours of training per month, sometimes in specific subjects. Fortunately, there are a variety of sources for attaining these hours and credits, including seminars offered by local associations and CLU chapters, seminars and correspondence courses provided by professional insurance training companies, and professional classes leading to industry designations such as Certified Financial Planner (CFP), Chartered Life Underwriter (CLU), and Chartered Financial Consultant (ChFC).

The designations mentioned above are almost expected by prospects at certain levels of insurance sales as evidence that the agent takes his/her career and responsibilities seriously. One way agents can fulfill their responsibilities to their clients and to the insurance company, regarding ethical levels of knowledge and competency, is to pursue such professional designations and to promote the value of them within the community.

As an agent becomes well educated and familiar with various areas of law and taxation, it important to remember what the agent's area of expertise is and what it is not. Agents study law, accounting and taxation as they pertain to insurance, but generally not in the broader context of all business and family financial affairs. That is the appropriate professional territory of the attorney and accountant. Occasionally a prospect or client asks an agent about a point of law or accounting that borders on actually practicing that profession. The agent is ethically required to recommend that the individual contact their lawyer or accountant about that type of question. Most lawyers and accountants are very easy to get along with once they are reassured that the agent is a well trained insurance professional, and is not likely to meddle in areas where he/she is not trained or licensed.

Needs Based Selling

Needs based selling is a type of selling that involves spending significant time with a client asking questions about all relevant aspects of his/her family situation, income savings, and goals for the future. In the course of this fact‑finding interview, the agent and the client eventually develop the beginnings of a trust relationship, which is enhanced during future discussions and meetings.

In needs based selling, the agent takes the information learned about the prospect, his family or business, and his goals for the future and develops from that information a comprehensive plan describing how insurance can best be used to attain most, if not all, of the individual's financial goals. After the mathematical work is performed, the resulting presentation can be fairly complex.

Needs based selling takes a lot of time and effort but it generally leads to a more satisfactory conclusion for the client, the agent and the insurance company than the alternative methods of selling that tend to address only one, or perhaps two, needs at a time. Once the initial plan has been completed and the first insurance needs filled, it is relatively easy for the agent and client to meet again each year or two to review the plan and make required changes. It is also strong evidence to the client, to the insurance company, and to any regulatory office or court, of the desire of the agent to provide a thorough and accurate service in an entirely ethical manner.

Many insurance trainers would say that needs based selling is the only responsible method of selling life insurance. It surely appears to have many ethical advantages over "single need selling" for most persons who earn at or above the middle income level. It is presented here as the ideal method that covers the most needs and provides the greatest good for the majority of clients.

However, it is also important to acknowledge that there are many different types of insurance buyers, not all of whom will be best served by a needs based approach. Let’s take life insurance as an example. At some economic levels, the maximum role life insurance might reasonably be expected to play might be that of a burial policy, or to pay off a mortgage or other indebtedness. It is not always possible, for financial or even cultural reasons, for many people to use life insurance in larger amounts for more or varied purposes. Needs based selling is not the only approach to insurance sales. It was once said that, "If the only tool you have is a hammer, then all opportunities will appear as a nail."

Administration

The insurance industry is a paper-intensive industry. There are no tangible products, but there is a tremendous variety of paper items that must be handled effectively and efficiently. This is an easy place for agents to get in trouble. Many agents are by nature expressive, outgoing people; yet some are not detail oriented. They may well spend most of their time developing and enhancing relationships, only to suffer near disasters in the area of administration. Oversights, mistakes, or carelessness in certain areas can destroy a hard‑won reputation.

For example, we all know that applications for new insurance need to be handled in a timely and efficient manner. They need to be filled out completely and accurately and then be turned in immediately to the agency or to the insurance company. Medical exams, paramedical exams, and any other medical information must be ordered and obtained as quickly as possible.

Any money accepted with the application together with associated paperwork, such as monthly draft forms, must also be given to the agency or the company as quickly as possible. In extreme cases the timeliness with which applications, medical, other underwriting information, and money taken with the application reach the office may determine whether the insurance was in force at the death of the insured prior to the issuance of the policy.

It is equally important that requests for loans or surrenders, changes in ownership or beneficiaries, and other similar forms be handled with appropriate speed and accuracy. Delays or oversights in these areas can cause complaints (and possibly litigation) as quickly as mistakes in any other area.

Most serious problems and complaints having to do with administrative paperwork can be avoided if well designed procedures are installed and followed rigorously. Most insurance companies already have such administrative procedures that they prefer their agents to use.

The associated area of recordkeeping is another one that can make or break an agent's reputation with his/her clients. Good records of when and how all applications, medicals, other forms and money were handled will save the agent from accusations that they were not handled properly. Poor recordkeeping by the agent leaves the agent and the company open to such charges without an adequate defense.

The Insurance Company’s Ethical Responsibility to the Policyowner

One of the most important concepts in the business of insurance involves the insurance company's ethical responsibilities to the policyowner. These responsibilities cover the entire spectrum of company operations from the management of field agents, to providing day‑to‑day service to policyowners, to maintaining the financial strength of the insurance company.

· Business Ethics — The study of proper business policies and practices regarding potentially controversial issues, such as corporate governance, insider trading, bribery, discrimination, corporate social responsibility and fiduciary responsibilities. Business ethics are often guided by law, while other times provide a basic framework that businesses may choose to follow in order to gain public acceptance.[5]

Business ethics are implemented in order to ensure that a certain required level of trust exists between consumers and various forms of market participants with businesses. For example, a portfolio manager must give the same consideration to the portfolios of family members and small individual investors. Such practices ensure that the public is treated fairly.

Design Of Approved Sales Materials

As previously mentioned, the insurance company is responsible to the client for the accuracy and completeness of all field sales materials. By so doing, the company can assure the prospective policyowner that all sales materials are free of inadvertently misleading terminology and ambiguous statements. Such presentation materials benefit from a professional appearance and contain well‑written, clear, and useful information. These materials are reviewed by a number of proofreaders and editors before publication. One of these reviews is to ensure that the materials are legally and ethically appropriate for field use, and are in compliance with company and regulatory standards. Because of this, the client is assured that all information is in the words of the company, and not merely in the words of the agent.

Supervision Of Field Sales Practices

Insurance companies that sell variable‑type policies have long been in the practice of regularly exercising supervision over agents' sales, administrative, and recordkeeping practices. This is because of the nature of such policies' equity separate accounts, which fall under the jurisdiction of securities industry regulators. However, it is common practice for companies who primarily sell traditional policies and universal life to implement many of the same procedures.

Some of these procedures include annual meetings generally presented by home office personnel on the subjects of ethics and compliance.

These meetings are designed to educate agents on common types of mistakes made by agents and the resulting consequences, sometimes including fines, loss of licenses, and other types of disciplinary actions. Other procedures sometimes include the review of client files and of sales materials in use.

Agents licensed to sell variable‑type products are required to submit signed statements to the effect that they understand and agree to comply with their companies' detailed standards of ethical and procedural behavior.

It is also the company's responsibility to assure that agents receive adequate training in the areas of administrative procedure, recordkeeping, product knowledge and terminology, and company‑approved sales methods and materials. The company should also encourage its agents to participate in professional education opportunities within the industry.

Insurance Company Administration

At the insurance company level, there is a large volume of paper and electronic information to be handled on a fast and accurate basis. The policyowner deserves reassurance that this is being done effectively in his or her interests. The company has a responsibility to ensure that every application, beneficiary change, ownership change, etc., is handled correctly because of the damage that could be done to a family's or a business' finances if it is not handled correctly.

The maintenance of records is another major area of responsibility. Often a piece of correspondence, such as a split dollar agreement from thirty years before, may be essential to understanding how the death benefits of a policy are to be paid out. This is true of other documents also, including policy ownership changes, loan requests, optional premium payments, etc. As another example, when a policy cash value is used as a form of retirement supplement, accurate records are necessary to determine how much of each retirement income payment is reportable as taxable income to the recipient. If such records are not accurate and readily available, the policyowner or beneficiary could suffer significant financial loss.

Maintaining Financial Strength

Insurance companies exist to provide benefits to clients and their beneficiaries. They often must do this even though the premium dollars taken in are only the barest fraction of the substantial death benefit that must be paid out. Through the expertise of its actuaries, its investment specialists, and its other management decision makers, an insurance company has as one of its pre‑eminent ethical responsibilities—the maintenance of its strength as a financial institution. The insurance company must be able to pay the benefits guaranteed to its policyowners and their beneficiaries in spite of wars, epidemics, or large‑scale financial disasters.

The Insurance Company’s Ethical Responsibility to the Policyowner

Design Of Approved Sales Materials

Supervision Of Field Sales Practices

Some of these procedures include annual meetings generally presented by home office personnel on the subjects of ethics and compliance.

Insurance Company Administration

Maintaining Financial Strength

We have surveyed the subject of ethics and ethical behavior in the insurance business from three different perspectives: (1) The agent's responsibility to the client, (2) the agent's responsibility to the insurance company, and (3) the insurance company's responsibility to the client.

While each party—the agent, the client, and the company—has its own needs and responsibilities, the unifying theme of them all is that of utmost good faith. One party alone cannot create an insuring relationship—if any one party cannot be viewed by the other two as generally acting in good faith, the insurance contract cannot exist. Each party depends on the other two.

There is a striking difference among the interests of the various parties in the short term. The agent needs the commission from the sale, the client often needs a low price, and the company needs a healthy, financially stable, and reputable insured. In the long run, however, they all need the same thing: A well‑designed insurance program for the client sold at an appropriate price that lasts until the policyowner or the beneficiaries have received their needed benefits. In that context, it is possible to characterize ethical behavior in part as that behavior that assists all parties in achieving this mutually beneficial long‑term goal.

When all parties are oriented toward the same goal, and each is striving aggressively toward that goal, and all parties are mutually dependent on each other for the attainment of that goal, then there is generally a minimization of conflict and a maximization of cooperation among the parties involved. In such cases, a potential conflict of interest is replaced by a mutuality of interests.

This is a long‑term practical goal, which seems very idealistic when viewed from a short‑term perspective—which is why company and industry regulations are necessary to keep ethical considerations in the forefront of insurance selling.

National Association Of Insurance And Financial Advisors (NAIFA)

PREAMBLE: Helping my clients protect their assets and establish financial security, independence and economic freedom for themselves and those they care about is a noble endeavor and deserves my promise to support high standards of integrity, trust and professionalism throughout my career as an insurance and financial professional. With these principles as a foundation, I freely accept the following obligations:

· To help maintain my clients’ confidences and protect their right to privacy.

· To work diligently to satisfy the needs of my clients.

· To present, accurately and honestly, all facts essential to my clients’ financial decisions.

· To render timely and proper service to my clients and ultimately their beneficiaries.

· To continually enhance professionalism by developing my skills and increasing my knowledge through education.

· To obey the letter and spirit of all laws and regulations which govern my profession.

· To conduct all business dealings in a manner which would reflect favorably on NAIFA and my profession.

· To cooperation with others whose services best promote the interests of my clients.

· To protect the financial interests of my clients, their financial products and my profession, through political advocacy.

Million Dollar Round Table (MDRT)

MDRT is a strong advocate of ethical behavior on the part of financial professionals. All MDRT members must adhere to the code of ethics below.

Therefore, members shall:

1. Always place the best interests of their clients above their own direct or indirect interests.

2. Maintain the highest standards of professional competence and give the best possible advice to clients by seeking to maintain and improve professional knowledge, skill, and competence.

3. Hold in the strictest confidence, and consider as privileged, all business and personal information pertaining to their clients' affairs.

4. Make full and adequate disclosures of all facts necessary to enable their clients to make informed decisions.

5. Maintain personal conduct that will reflect favorably on the insurance and financial services profession and MDRT.

6. Determine that any replacement of an insurance or financial product must be beneficial for the client.

7. Abide by and conform to all provisions of the laws and regulations in the jurisdictions in which they do business.

CPCU Code Of Professional Ethics

The American Institute for Chartered Property Casualty Underwriters (CPCU) is a professional association of individuals who have earned or who are working toward the CPCU designation conferred by the American Institute.

The Code of Professional Ethics with its Canons and Rules of Professional Conduct codify the ethical standard that Property & Casualty agents are expected to maintain.[6]

An important function of this presentation is to serve as a reference for professional ethics. It has been designed to help the student obtain objectives that are formulated from the belief that moral effort in addition to intellectual effort is required in order to create and maintain a sense of ethical conduct.

The following Canons were developed to assist insurance professionals in making the right decision should they be placed in a position of conflict in their career.

· Canon 1 — CPCU’s should endeavor at all times to place the public interest above their own. A CPCU has a duty to understand and abide by all Rules of Conduct which are prescribed in the Code of Professional Ethics of the American Institute.

· Canon 2 — CPCU’s should seek continually to maintain and improve their professional knowledge, skills and competence.

· Canon 3 — CPCU’s should obey all laws and regulations and should avoid any conduct or activity which would cause unjust harm to others. In the conduct of business or professional activities, a CPCU shall not engage in any act or omission of a dishonest, deceitful, or fraudulent nature. A CPCU shall not allow the pursuit of financial gain or other personal benefit to interfere with the exercise of sound professional judgment and skills.

· Canon 4 — CPCU’s should be diligent in the performance of their occupational duties and should continually strive to improve the functioning of the insurance mechanism.

· Canon 5 — CPCU’s should assist in maintaining and raising professional standards in the insurance business. A CPCU shall support personnel policies and practices which will attract qualified individuals to the insurance business, provide them with ample and equal opportunities for advancement, and encourage them to aspire to the highest levels of professional competence and achievement. A CPCU shall encourage and assist qualified individuals who wish to pursue CPCU or other studies which will enhance their professional competence. A CPCU shall support the development, improvement, and enforcement of such laws, regulations and codes as will foster competence and ethical conduct on the part of all insurance practitioners and insure to the benefit of the public.

· Canon 6 — CPCU’s should strive to establish and maintain dignified and honorable relationships with those whom they serve, with fellow insurance practitioners. A CPCU shall keep informed on the legal limitations imposed upon the scope of his or her professional activities. A CPCU shall not disclose to another person any confidential information entrusted to, or obtained by, the CPCU in the course of the CPCU’s business or professional activities, unless a disclosure of such information is required by law or is made to a person who necessarily must have the information in order to discharge legitimate occupational or professional duties.

· Canon 7 — CPCU’s should assist in improving the public understanding of insurance and risk management. A CPCU shall support efforts to provide members of the public with objective information concerning their risk management and insurance needs, and the products, services, and techniques which are available to meet their needs.

· Canon 8 — CPCU’s should honor the integrity of the CPCU designation and respect the limitations placed on its use. A CPCU shall use the CPCU designation and the CPCU key only in accordance with the relevant Guidelines promulgated by the American Institute. A CPCU shall not attribute to the mere possession of the designation depth or scope of knowledge, skills, and professional capabilities greater than those demonstrated by successful completion of the CPCU program. A CPCU shall not make unfair comparisons between a person who holds the CPCU designation and one who does not.

· Canon 9 — CPCU’s should assist in maintaining the integrity of the Code of Professional Ethics. A CPCU shall not initiate or support the CPCU candidacy of any individual known by the CPCU to engage in business practices which violate the ethical standards prescribed by this Code. A CPCU possessing unprivileged information concerning an alleged violation of this Code shall, upon request, reveal such information to the tribunal or other authority empowered by the American Institute to investigate or act upon the alleged violation.

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