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Ethics For Insurance Professionals - California Before
beginning, please read the following instructions:
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Table of Contents | Introduction
Introduction The
study of ethics has a long and colorful history; and, is currently a
highly debated topic among ethicists, politicians and the business
environment. Ethicists, historically known as philosophers, have been
around for centuries and have addressed all sorts of social dilemmas with
differing points of view. We’ll begin this study with a couple of views
as to what ethics is and is not. Merriam-Webster defines an “ethic” as:
Wikipedia,
the free online encyclopedia, says that the word ‘ethics’ is derived
from the Ancient Greek “ethikos,” meaning “arising from
habit.” Ethics is also a major branch of philosophy and is the study of
value or quality. It covers the analysis and employment of concepts such
as right, wrong, good, evil, and responsibility. Well,
from this we can see that ethics is pretty comprehensive. Too bad - you
thought that this was going to be a simple exercise. It seems as though
ethics involves morality, duties, obligations, theories, conduct,
philosophy, habits, values, right, wrong, good, evil and responsibility.
Some even perceive ethics as a list of do’s and don’ts in answering
the question, “What should I do in this instance?” Instead, from what
we can gather in this discussion is that the more appropriate question
should be, “What kind of person should I strive to be?” So, from the
agent’s perspective, maybe he should be asking, “How can I best serve
this customer’s need?” instead of, “What product best suits this
customer’s need?” Ethics
is not something that you are ignorant about. Since as far back as you can
remember, you have experienced ethical situations although you may not
have recognized them as such. Parents, teachers, mentors, friends, and
even business associates have all contributed to your present ethical
state of being even though the outcome and consequences of decisions has
fallen squarely on your shoulders. Simply put, ethics is not about
feelings, or what the law or our religion says. Since it applies to all
peoples, it is so much more. In
a nutshell, and quite obvious from the above, it is not always easy to
make the “most” ethical decision. However, we’ll attempt to provide
you with some fundamentals to help you approach and resolve ethical
dilemmas. The purpose of this course is to better enlighten you as to how
ethics is a cornerstone of your success – to help you make ethical
decisions, to secure a more rewarding career, and to ensure a growing and
dedicated clientele. In
this course, the term agent will be used generically to mean agent
and/or broker, unless the text indicates otherwise. TEST |
Table of Contents | Introduction ------------------------------------------------------------------------------------------------ Chapter
1 - Ethical Theories
The
theory of ethics can be traced back to some of our earliest Greek
philosophers such as Socrates, Plato and Aristotle. Even though history
finds no written legacy of Socrates, his purported student, Plato, uses
him as the central figure in his Socratic Dialogue, which mostly consists
of Socrates discussing ethical issues with others. Aristotle was an
intense learner, studying multiple topics and becoming one of the most
influential thinkers of his time. His greatest writing on ethics was the Nicomachean
Ethics, which centered on virtues. Per this writing, in order for one
to become virtuous, or more virtuous, he should perform virtuous acts as
opposed to just studying about virtue. A virtuous person is also one that
is ethical. As
discussed above, if virtues can be claimed to be synonymous with ethics,
then what are virtues? They are characteristics or traits, such as
honesty, integrity, generosity, etc., that lead to some high standard of
right and morality that propels one to fully develop his human potential.
Virtuous people are seen as having a persona of excellence. One of the
most significant signs of having virtues is that they are habitual. For
example, if one is considered to be an honest person, she will typically
be honest in all of her dealings. Generous people always seem to be
generous. If one has integrity today, he will more than likely have
integrity tomorrow. So, we can conclude that virtues are habitual
characteristics; therefore, one will naturally be predisposed to act out
those virtues. Let’s
take our lead from acting virtuous, as state above, to move along this
train of thought. Does practice make perfect, or more appropriately
stated, does acting out (practicing) virtuous or ethical behavior make one
more ethical? Most people would probably say yes. Of course, what does
that mean, to “practice” ethics, that is, how do I go about practicing
ethics or practice being ethical? Well, we first have to start with
getting a good grasp as to what ethics or ethical behavior may be.
Following are a list of approaches to ethical behavior.
Even
though we have previously defined ethics, the man or woman on the street
would probably say that ethics is “doing the right thing.” In a
simplified way, that would probably be correct except for the fact that
most people have differences of opinion as to what ‘doing the right
thing’ may be. Everyone has a different upbringing, different
influences, different education, different experiences, different beliefs,
etc. All of these events over one’s lifetime have a tendency to mold
one’s thinking. As a result, what you think is the right thing to do is
probably different from that of your neighbor. For
some, doing the right thing is conditional (relativism). For others,
it’s a concrete decision (absolutism) and damn the consequences. For
example, your colleague, Jill, has just informed you about a
million-dollar whole life sale she just made with someone you are well
acquainted with, Jack. During the conversation, you find out that,
according to Jill, Jack is clean as a whistle and she stands to make a
huge commission. Of course, you personally know that Jack is a hang glider
and parachutes on occasion. What do you do? Each action that you do
presents a different ethical dilemma for you and/or Jill. Let’s
assume you tell Jill about Jack’s extra-curricular activities? She is
now in an ethical dilemma. Let’s assume she does the right thing and
tells her insurer to put a hold on the case until she can go back and
complete a hazardous activities questionnaire. Jack may either comply,
which could cost him a lot more money, or he could tell her to get lost
and go to someone else. From his perspective, his activities are not
disclosed on his medical records (Medical Information Bureau) and are no
one’s business. Either way, she risks a lot by going back to Jack.
Depending upon the outcome, your relationship with Jill could head south
as well. Let’s
assume Jill does not do the right thing per your standards of right and
wrong as well as your understanding of your agency contract. What ethical
position does that leave you in by not disclosing information to your
insurer that could lead them to act in a way contrary to knowing all the
facts? Jill could lose her job if you disclosed this information; or, you
both could lose your jobs if you didn’t disclose this information. Let’s
assume you don’t tell Jill and just kept your mouth shut. Is it possible
that your knowledge of Jack’s activities and refusal to disclose that
information could jeopardize your job? Well, unlikely, but your agency
contract would determine that. However, that is a legal issue, which
we’ll discuss later, and this is about an ethical issue based on your
perception of doing the right thing. Non-disclosure is probably not
illegal from your position but it is probably unethical, depending upon
whom you ask. For sure, one thing is certainly clear; the answer is not so
black and white, is it? Let’s
take a look at two guiding principles of scripture. The first, the Golden
Rule found at Matthew 7:12, says (paraphrased), “Do unto others as you
would have others do unto you.” This standard is certainly not the only
one of its kind. Most religions of the world and earlier works of
philosophers state a similar standard. Why is this concept so well known
throughout history and adhered to as a tenet of ethical conduct? It’s
probably because one’s primary motives in life are for self-preservation
- everything you do is for yourself and your loved ones. The
Golden Rule states that you should place everyone else on the same plane
as you. For example, when you sell as insurance product to someone, you
should do so as if you were selling to yourself. If that were the case,
what would you want to know about the agent, the product or the company?
Does the product and the premium you pay give you the most bang for the
buck? Does it meet your needs better than any other alternative? Is the
agent knowledgeable and experienced? Does the company have strong
financials? Make a list and see what you come up with. Now, compare that
to your own typical sales presentation. Do they look similar or are there
vast differences? The
second guiding principle complements the first and says, “Do not merely
look out for your own personal interests, but also for the interests of
others,” Philippians 2:4. This is a pretty tall order. Every action you
take affects others. It’s a given that you will act in your best
interests. But what about others? Whose interests are affected by your
actions and will those interests be for the better or worse? Let’s
first take a look at whose interests may be affected by your actions –
the customer, the insurance company, the industry, the general public, and
the law. Even though we’ll touch on these in more detail later, let’s
briefly discuss the ethical dilemmas that arise with this principle. Obviously,
if you sell an insurance product that pays the highest commission, it is
unlikely that the client’s best interests will be served. If you
withhold information on the application and cause the insurance company to
act in a way that’s contrary to having all vital information, their best
interests will not be served. Any action of an insurance agent that puts
his interests above his customer or company never serves the best
interests of the industry or public. New insurance industry regulatory
laws and ethical legislation are usually the result of unethical acts,
perceived or otherwise, of insurance agents and companies. For
lack of having a scientific or sophisticated model to adhere to, one can
see that this standard of regarding others may serve most pretty well.
However, since many people are not religious or hold to a different
religious calling, this standard would seem to only apply to certain
religious agents. So, as we can see, a religious based, or perceived as
religious based, standard may prove to be inadequate in providing an
ethics standard even though the underlying principles are sound. Absolutism
may be likened to absolute truth whereby all things are either absolutely
true or absolutely false. This is an extremist’s domain of thought,
whether the subject matter is politics, religion, morality, business, etc.
The theory of absolutism has its initial roots in religion and politics,
later used as a byword for the way in which monarchs and despots ruled. Unlike
and opposite to ethical relativism, absolutism adheres to an objective
analysis of ethics - actions are either right or wrong, good or bad. There
is no uncertainty, no in between or, “Well, it depends.” An ethical
absolutist believes in one moral standard that should apply to all
societies. “It
depends!” Where do you live and what are the norms for that society? In
America, we have a pretty enlightened way of looking at things compared to
the rest of the world. But, that is what ethical relativism is all about
– the beliefs and moral standards of a society as compared to another.
For example, is it appropriate for Americans to impose their moral
standards and culture on another people group, say, Egyptians or
Taiwanese? An ethical relativist would certainly say no. Most Americans
would probably agree since their culture and mainstream religion is so
different from ours. Well, let’s take a look at a group that is a little
closer to home, the people of Mexico. Would it be appropriate to impose
our morality, culture and beliefs on them? “Ethical
relativism is the theory that holds that morality is relative to the norms
of one’s culture. That is, whether an action is right or wrong depends
on the moral norms of the society in which it is practiced. The same
action may be morally right in one society but be morally wrong in
another. For the ethical relativist, there are no universal moral
standards – standards that can be universally applied to all peoples at
all times. The only moral standards against which a society’s practices
can be judged are its own. If ethical relativism is correct, there can be
no common framework for resolving moral disputes or for reaching agreement
on ethical matters among members of different societies.” (Source: Issues
in Ethics V5 N2 (Summer 1992)) Anthropologists
highlight the fact that some societal practices are considered morally
acceptable while other societies may condemn them. In Ruth Benedict’s Patterns
of Culture, she expresses her belief in cultural relativism, which is
the principle that one’s beliefs and activities should be interpreted
relative to his own culture. She indicated that each culture has its own
morality that can only be understood if one studies that culture as a
whole. It was wrong, she felt, to disparage the customs or values of a
culture different from one's own. Those customs had a meaning to the
persons who lived them which should not be summed up or superficialized.
We should not try to evaluate people by our standards alone. Morality, she
felt, was relative. (Source: Wikipedia) History
shows that most societies, and most ethicists, disagree on ethical and
moral relativism. Consider the world’s reaction to Nazi Germany’s
cultural view and destruction of the Jewish people or the world’s
denunciation of South Africa’s now defunct apartheid movement or Racial
Cleansing. From
an individual’s perspective, ethical relativism rubs against the very
grain of individuality. If one’s own beliefs are to be guided by the
standards of the society in which he lives, then he must act in accordance
with those standards to be morally compliant regardless of its rightness
or wrongness. One incentive that we can conclude from ethical relativism
is to closely examine why we hold to certain beliefs and why others
don’t. For example, many religious groups in the United States feel that
it is unethical to not support government actions, except in those cases
where those actions are in conflict with their beliefs. However, if the
rest of society - the majority - agrees and is complicit (in the eyes of
the religious), then who is being unethical? Utilitarianism
is a moral theory that deems an action to be right if and only if it
conforms to the principle of utility, that is, the well being of the
person(s) affected, either directly or indirectly. More specifically,
which action will produce the greatest benefit and least harm for the
greatest number of people? The answer to that question is the most ethical
decision. This
theory may be likened to what takes place in the law-making arena where
lawmakers are theoretically supposed to be guided by a similar standard.
For example, from a lawmaker’s perspective, does this law produce the
greatest benefit for all Americans? Or, from the opposite perspective,
does this law produce the least harm? To
examine this approach to ethics, we must first determine what a right is
or is not. Fundamental rights preexist laws even though some are
enumerated in the law. Most laws; however, grant privileges that are
conditional. A right is a justifiable and unalterable claim by a person
that cannot be abridged. In some societies, rights can be restricted or
taken away if the laws of that society are violated. Immanuel
Kant, a German philosopher, developed the rights approach to ethics, aka
the theory of deontology. He theorized that people are free and
rational beings to be respected; and, any action that violates those
rights is immoral. Conversely, acts that respect one’s fundamental
rights are moral. One’s ultimate duty is to promote and protect human
freedoms. We
may be able to infer, if it is permissible to do so, from Kant’s theory
that our rights, which are integrated into the Constitution, have such
theoretical underpinnings. The Declaration of Independence asserts, “all
men are created equal, that they are endowed by their Creator with certain
unalienable rights, that among these are life, liberty, and the pursuit of
happiness.” The Universal Declaration of Human Rights, adopted by the
General Assembly of the United Nations, declares, “Everyone has the
right to life, liberty and security of person…the right to freedom of
movement…the right to own property…the right to freedom of thought,
conscience and religion…the right to work.” One
of our greatest rights is that of being able to make choices for ourselves
without any interference from others as long as our actions do not
infringe upon the rights of others. Over the years, the theory of rights
and who’s protected has become a major issue and point of contention for
many. This
approach assumes that a society’s motivation is guided by the premise
that all actions, goals and values should be for the good of all members.
The challenge would be for one to view himself as an individual whose
rights are subordinate to the common good of society. In light of this,
the common good does not just happen – it can only take place through
the members of society being proactive in addressing broader issues such
as, “What kind of society do I want and how do I achieve it?” For
the common good to work, all members of society must have equal access to
its benefits. For example, a national health care system has been
considered to meet the common good medical needs of all Americans. For
lack of a good model from other countries, none has been implemented yet.
Many perceive that the Social Security system was intended to fulfill a
common good need. One can argue that research into a cure for cancer is a
common good need. Most
of the problems that we have today are the result of fundamental
differences between the rights of the individual versus the needs for the
common good. The task for this approach is to find the balance between
individual sacrifices for the advancement of the common good and the
common good. Since
we have an abundance of ethical history and theories, let’s revisit the
premise stated at the beginning, “What kind of person should I strive to
be?” Can one make this determination and be taught to be that person,
that is, can ethics be learned? Most past and modern philosophers and
psychologists would agree that since ethics is derived from knowing what
to do, such knowledge can be taught. TEST |
Table of Contents | Introduction ------------------------------------------------------------------------------------------------ Chapter
2 - Ethics and the Law
Being
ethical is usually not the same thing as being lawful. Even though many
ethical standards have been codified into the law, just like feelings,
laws can deviate from being ethical. Laws are designed to direct the
behavior of the public as society mandates. Many laws come about as a
result of unethical actions of persons and entities. As societies change,
so do their views on ethics as well as laws controlling ethical behavior.
For example, throughout history slavery has been lawful in many societies,
but none would agree today that slavery was ever ethical. Many business
practices today may be lawful, but not ethical. Even
from the perspective of societal acceptance, not all actions carry an
equal amount of ethical weight. Today, most societies accept many
practices that would have never been accepted just a few decades ago, such
as premarital sex, the gay agenda, unmarried couples and abortion.
Conversely, most societies reject many practices that were accepted just a
few decades ago, such as slavery, child labor and apartheid. As a result,
laws are enacted to direct the behavior of the members of society to
comply with the social agenda of the day. However, ethics still seems to
be out of the reach of the law, but remains under the scrutiny of the will
of the people. From
a regulatory perspective, there are many entities that influence insurance
ethics by regulating the role of the insurance agent, the company and the
marketing practices of both. National
Association of Insurance Commissioners (NAIC)
The
NAIC was created in 1871 to create a forum for all state insurance
regulators, including the District of Columbia and the five U.S.
territories, for the development of uniform policy in regards to insurance
regulation. Much of this uniformity has been developed in what is termed
as ‘model legislation,’ which can either be adopted in whole or part
by individual state legislators. The
mission of the NAIC is to assist state insurance regulators in serving the
public interest and achieving the following fundamental insurance
regulatory goals in a responsive, efficient and cost effective manner,
consistent with the wishes of its members:
(Source:
NAIC) Through
the NAIC, the majority of states have enacted, or used as a benchmark for
their own legislation, many model insurance regulations as well as various
model illustrations. Some of the more generally applicable regulations, in
regards to this course, have been the –
These
were designed to define and prohibit unfair trade practices, such as
discrimination, defamation and claims; control the use of deceptive policy
illustrations and false advertising; and, regulate marketing practices and
disclosure standards. Depending
upon a state’s laws, a state insurance department may perform any of
several functions. For example, the California Department of Insurance has
a very broad spectrum of responsibility:
(Source:
California Department of Insurance) Without
a doubt, an insurance department’s strongest weapon in controlling the
ethical conduct and education of an agent is through its licensing
mandates. For example, to obtain an Agent & Brokers: Life Agent (LX)
license from the California Department of Insurance, one is required to
have 40 hours of approved prelicensing classroom study and 12 hours of
approved prelicensing classroom study on ethics and the California
Insurance Code. To keep that license, the licensee must then complete 25
hours of approved continuing education during each of the following four
years, then 30 hours for each two-year cycle thereafter. Insurance
agents can also be licensed to sell variable products, which put them
under the scrutiny and regulation of their state securities division. Laws
governing securities are similar to laws governing insurance in that they
are fairly uniform. Here is a sampling of how ethical conduct has been
codified as either forbidden or prohibited actions. One who is licensed to
sell any security, which includes variable products, may not:
Many
of the statutes that regulate insurance mirror securities legislation.
Following is a summary of some of the statutes from Colorado that
determine how ethical conduct in the business of insurance is regulated.
One may not:
(Source:
Colorado Revised Statutes, Title 10, Article 3, Part 11) The
above is only a summary sampling of some of the statutes that address
ethical issues. However, actual state statutes that addresses topics such
as unfair competition, deceptive practices, misrepresentations, false
advertising, defamation, unfair discrimination and rebating are quite
extensive and look like a hodgepodge of legalese. Let’s
discuss some of the most frequent occurring ethical issues. Churning/Twisting An
agent participates in churning by engaging in superfluous transactions,
such as persuading the insured to cash in one policy for another with no
demonstrable increase in benefits, for the sole purpose of generating
commissions. Twisting
became a popular buzzword when the “term and invest the difference”
advocates became a force to deal with back in the 80s. Back then, it was
probably meant more as a derogatory response to their unpopular practices.
Today, however, the term has grown to represent unethical practices used
by some insurance professionals. Twisting is seen as an act of intent,
that is, the agent is seeking to make a sale and not seeking to improve
the customer’s situation. Sometimes
churning is called twisting and usually takes place after a policy has
been inforce for a while and has substantial cash values. This increase in
cash values makes the policy more valuable and is a favorite target for
unscrupulous churners. The deposit of cash values enables a customer to
purchase larger policies, which in turn make bigger commissions. On the
downside, other than being illegal and unethical, the customer’s new
plan is subject to new charges; it starts over in terms of cash value
buildup; depending upon the type of policy, it is subject to risks not
exposed to before; and, if there is any fallout, it’s not readily
noticeable, sometimes many years later. How
does one discern whether twisting has taken place or whether a legitimate
replacement has taken place? Some in the industry would suggest that any
type of replacement is twisting. That may be true if one is to assume that
all insurance products and pricing were created equal; a customer’s
needs remained constant; and, the tooth fairy really does have wings. A
good rule to use is whether the replacement or transaction is in the
customer’s best interest. One way to validate this is to provide a set
of pros and cons, illustrations, product brochures, fair and factual
comparisons of the status quo versus the recommendation, to the customer
and discuss each in detail. Most
states require agents to identify current policies of the customer and to
declare whether or not those existing policies will be replaced if the new
coverage is taken. This is mandated to enlighten the customer as to his
rights, to keep the agent honest in protecting the rights of the customer
and not to frighten the agent into thinking that his replacement
activities will always be viewed under the twisting microscope. Some
actually do fear this and circumvent replacement laws by using a
lapse-replacement approach – don’t replace the old coverage, just
allow it to lapse after the new policy is inforce. This is an obvious
attempt to circumvent regulations; it is unethical and will probably
backfire. Defamation This
is any type of written (libel) or oral (slander) communication, which is
false, malicious, and intentionally made, that publicly injures the good
name and reputation of another person or entity. Many times, an agent may
practice defamation by verbally spreading rumors, innuendos, inferences,
falsehoods, etc. about a competing company or agent. He may also do so via
a drawing or any writing such as a letter or email. Misrepresentation This
is any representation, product comparison or material omission, either in
writing or made orally, about a policy, person or company that is
inaccurate for the purpose of inducing someone to change, lapse, cancel or
surrender a current plan of insurance for another. Misrepresenting
a policy includes making any inaccurate statement or omission concerning
the policy’s benefits, terms and conditions, advantages or
disadvantages. Prior to the
sale, it also includes any form of misleading sales materials, false or
misleading information, misstatement, or omission of facts on the
application. Rebating Although
not illegal in all states, rebating is any type of “incentivising,”
which is not specified in the insurance contract that persuades a
prospective insured to purchase an insurance policy. Rebating may take on
several forms such as: an informal agreement to refund or pay part of the
customer’s premium, an agreement to share commissions with the customer,
any form of kickback, inducement, favor or promise that is not
specifically spelled out in the insurance policy. Rebating
is a worldwide problem for insurers with no easy solution in sight.
Besides being penalized for their error, some agents may even be stripped
of being paid on advanced commissions and finding themselves on an “as
earned” paying status. However, this is also a disincentive for those
who put a lot of hard work and effort into getting their prospects to sign
on the dotted line. From
an agent’s perspective (and law), rebating is seen as unfair
competition. Competition for a customer’s business is stiff enough as it
is without an unscrupulous agent throwing a wrench in the works by
offering incentives that cut the competitive feet out from underneath
everyone else. An equal playing field is not only the ethical thing to do,
it is in the customer’s best interest. Replacement This
takes place when a policy owner exchanges, lapses or terminates an
existing policy for another. The majority opinion in the insurance
business says that replacement is not in the owner’s best interests.
State laws; however, do not make replacement an unlawful act, but in some
cases do require certain disclosures for the agent and policy owner to
acknowledge. Although
the majority opinion disagrees with replacement, there are obvious
situations that warrant such a move. For example, there still exists many
old life insurance policies whose rates were based on an older version of
mortality table, such as the 1940 Commissioner’s Standard Ordinary
mortality table. Since most new policies are issued based on a company’s
current mortality experience, this may prove to be a more cost effective
alternative. Others may have had ‘child’ policies purchased on them
after birth. Now, the insured has a family and his needs are totally
different. Despite the circumstances, replacement laws are on the books
for the vast majority of states. There
are basically two camps under the life insurance and annuity replacement
banner: Yeas and Nays. For the Yeas, following is a non-inclusive list for
reasons why replacement is good:
For
the Nays, following is a non-inclusive list for reasons why replacement is
bad:
Vanishing
Premium The
concept of vanishing premiums arose from the high interest rate years of
the 80s. It was during this time that policy illustrations projected these
high interest rates for the long-term and magically showed that policies
would accumulate such substantial cash values that interest earnings would
eventually pay the premiums. At that time, the premiums were termed to
“vanish.” Of course, those elevated rates didn’t last long and the
premiums did not vanish. Many still possessed paperwork that showed
premiums vanishing and began asking why they were still getting premium
notices. Of course, such projections are never meant to be factual, which
is the stance that many insurers took. Many customers were able to
convince a jury of their peers otherwise. Using
any terminology, inference, projection, proposal, etc. suggesting or
implying that premiums may one day be unnecessary to maintain benefits
must be avoided. Of course, the exception to this rule would be that the
representation be accompanied by a complete explanation as to (1) what
benefits or features would be discontinued or provided after such time and
(2) the conditions under which such situation would be sustained. Unfair
Competition Most
actions that put the competition in an inferior position based on less
than accurate information or omissions could be construed as being unfair.
Saying something that is not totally true or even inferences that are not
correct, etc., could be considered as unfair competition. As stated above,
misrepresentations, false advertising, the use of false or misleading
information, defamation, unfair discrimination, and even rebating are
incidents of unfair competition. Commingling Commingling
happens when a customer’s money loses its identity, typically because
the money was mixed with the insurance professional’s money. For
example, Mr. Bob takes out a life insurance policy and pays cash for the
first month’s premium. He sets up a monthly bank draft on his savings
account because he doesn’t have a checking account. Agent Bigbucks
pockets the cash and goes to his bank to deposit the cash along with some
commission checks into his business checking account. A few days later, he
mails all his applications for the week but stops by the bank first to get
a money order for Mr. Bob’s application. He fills out a withdrawal form
to take money out of his business account to pay for the money order. Any
monies, securities or financial instrument of a customer should never,
even temporarily, be commingled with an agent’s assets and should always
be kept separate and immediately sent to the insurance company. The agent
is considered a trustee acting on behalf of the company and commingling to
any extent is taboo. This not only applies to the agent, but the agency as
well. Even
though insurance is mostly regulated by state law, the feds have enacted
various pieces of legislation to influence ethics in the workplace, most
of which are not earmarked specifically for the insurance industry. Ethics
in the workplace, and federal legislation addressing such issues, has
become a recent hot topic especially with the blunders by some very well
known companies. Here’s a short list and their purported ethical
fallout. Adelphia
Communications. The founding family collected $3.1 billion in off-balance
sheet loans backed by the company. The company overstated results by
inflating capital expenses and hiding debt. AOL
Time Warner. As the ad market faltered and AOL's purchase of Time Warner
loomed, AOL inflated sales by booking barter deals and ads it sold on
behalf of others as revenue to keep its growth rate up and seal the deal.
AOL also boosted sales via "round-trip" deals with advertisers
and suppliers. Arthur
Andersen. Shredding documents related to audit client Enron after the SEC
launched an inquiry into Enron. Bristol-Myers
Squibb. Inflated its 2001 revenue by $1.5 billion by "channel
stuffing," or forcing wholesalers to accept more inventory than they
can sell to get it off the manufacturer's books. Enron.
Boosted profits and hid debts totaling over $1 billion by improperly using
off-the-books partnerships; manipulated the Texas power market; bribed
foreign governments to win contracts abroad; manipulated California energy
market. Halliburton.
Improperly booked $100 million in annual construction cost overruns before
customers agreed to pay for them. Qwest
Communications International. The company inflated revenue using network
capacity "swaps" and improper accounting for long-term deals. WorldCom.
Overstated cash flow by booking $3.8 billion in operating expenses as
capital expenses; gave founder Bernard Ebbers $400 million in
off-the-books loans. Zerox.
Falsifying financial results for five years, boosting income by $1.5
billion. (Source:
Forbes: The Corporate Scandal Sheet) As
ethics becomes more of a concern to the populace, we will see more ethical
issues being codified into federal and state law. Following are some
federal laws and a Supreme Court case that affect the insurance industry,
directly and indirectly. Our
modern insurance regulatory environment was set on its current path via
the Supreme Court case of The United States v. South-Eastern
Underwriters Association (SEUA), 323 U.S. 811 (October 9, 1944). For
75 years prior to this ruling, the courts have relied upon Paul v.
Virginia, 8 Wall. 168 to establish that insurance regulation was under
state jurisdiction. However, the SEUA court indicated that all of their
prior rulings did not seek to establish whether the business of insurance
was subject to the Commerce Clause of the U.S. Constitution or the Sherman
Ant-Trust Act. Their conclusion was that in conducting business, an
insurance company set forth a chain of events such as transfer of funds,
information, and communication over state lines that brought such activity
under the Commerce Clause and Sherman Anti-Trust Act. As
a result of the SEUA ruling, Congress responded by passing the
McCarran-Ferguson Act (59 Stat. 33, March 3, 1945; 15 U.S.C. 1011 et seq.)
Here are some of the interesting sections of that law that set the
statutory foundation for state versus federal jurisdiction over the
business of insurance.
As
you can see, even though the business of insurance is considered
interstate commerce, the federal government wanted the several States to
be on the front lines of regulatory responsibility. However, the feds did
expand authority from prior federal acts, beginning in June 30, 1948, to
include the business of insurance, such as the Sherman Act, the Clayton
Act, the FTC Act, and the Robinson-Patman
Anti-Discrimination Act (15 U.S.C. 1013(a)), but only to the extent that
State legislation was absent. Take notice that there is an escape clause that gave the States authority to enact their own legislation to mirror the prior federal acts so that the States could maintain regulatory control. The escape clause (15 U.S.C. 1012(b)) dictates that prior federal acts “… shall be applicable to the business of insurance to the extent that such business is NOT [emphasis added] regulated by State Law.” Also take notice of the time gap between the date of this act (March 3, 1945) and the time that prior federal acts were to expand to include the business of insurance (June 30, 1948), which is a little over three years. Summarily, the escape clause and time gap gave the States three years to enact legislation to keep the business of insurance under their control.
In
a nutshell, 18 USC 1033 prohibits anyone who has been convicted of a
felony involving dishonesty or a breach of trust from conducting the
business of insurance unless he or she has obtained the written consent of
the Insurance Commissioner, which specifically refers to this federal
statute. If you have been convicted of a felony described above, then you
must obtain such written consent from the insurance commissioner of each
state in which you plan to be licensed and do business. One
of the most recent pieces of ethics legislation is the Sarbanes-Oxley Act
of 2002 (Pub. Law 107-204, July 30, 2002; 116 Stat. 745), which is also
known as the Public Company Accounting Reform and Investor Protection Act
of 2002, “An act to protect investors by improving the accuracy and
reliability of corporate disclosure made pursuant to the securities laws,
and for other purposes.” It came about in response to a number of major
corporate and accounting scandals, some of which are mentioned above. Even
though the act centered on ethics in accounting and reporting practices,
it has far reaching implications. It mandates that the Securities and
Exchange Commission (SEC) shall issue rules to require issuers [public
companies meeting certain SEC requirements] to disclose whether or not,
and if not, the reason why, such issuer has adopted a code of ethics for
senior financial officers. The act defines a code of ethics as standards
that are reasonably necessary to promote –
We
can easily see that these rules could just as well be read from an
insurance company’s compliance manual. Since many insurance companies
are public companies, they are subject to the act just like other
corporations. You
can be rest assured that as time goes by, there will be more ethical
guides, laws and regulations written for the workplace, all of which can
be applicable to the insurance industry in some form or fashion. More than
ever, the NAIC and legislators will step in and attempt to regulate and
mold the insurance professional. So, if you are one of the majority who
already adhere to a set of personal, business and professional ethics, you
are way ahead of the ballgame. TEST |
Table of Contents | Introduction ------------------------------------------------------------------------------------------------ Chapter
3 - Ethical Responsibilities
When
it comes to acting or being ethical, who are you, the insurance
professional, accountable to? Well, there are lots of folks at the gate
who enter your realm when you engage in the business of insurance. You may
not realize this, but your actions affect many people, groups and
entities, either directly or indirectly; maybe not today or tomorrow, but
eventually. Let’s take a look at some of these and how your ethical or
unethical actions affect them. Of
course, you are the real reason you decided on a career in the insurance
business. And, why not? It’s practically one of the best careers on the
planet. You are at the top of the triangle when it comes to ethical
accountability. By acting ethically, you enhance your career, reputation
and paycheck. You have a vested interest in what you do and how you do it.
As an insurance professional, ethics should be a way of life, a way of
doing business. It
should be as natural to act ethically in business dealings as pulling out
of the driveway and going to the office. Unfortunately, things are not
always as they should be. One way we can help keep ourselves on the
correct path is to do a periodic ethics balance sheet. We already use
balance sheets to take a snap shot of one’s financial strength. Why not
do the same in regards of our ethical strengths and weaknesses? After all,
the first balance sheet will be affected by the second – wouldn’t you
agree? Of course, the hardest part will be for you to be candid about your
strengths and weaknesses. That can be easily resolved by asking others to
do the assessment, assuming you can be humble enough to accept their
conclusions without becoming defensive. Once
you know what your strengths are, you can continue those actions that
enhance and reinforce them. For weaknesses, you’ll need to acknowledge
those actions that are contributory and avoid them. At the same time,
you’ll need to find alternative actions that will enable you to turn
those weaknesses into strengths. Without getting too far out on the limb
here and sounding ridiculous, you’ll want to pump ethical iron. This is
the only way to keep you ethically fit. Insurance
Professional as Fiduciary As
an insurance professional, you play several roles. Some of these you
assume and acknowledge; others may not be so clear. However, you must
consider the fact that other people may see you as filling certain roles
whether you agree or not. For example, you are considered a fiduciary and
will be held to that standard. A fiduciary is one who is in a position of
trust and confidence, and must act loyally and honesty with respect to the
interests of another. Some examples of fiduciaries are attorney, trustee
and guardian. As a fiduciary, you will be held to a higher degree of
accountability than others. Through
your agency contracts, you are empowered to perform certain acts. Even
though these acts are enumerated, your ethical obligations are in no way
limited to those actions, but rather broadened to encompass that of a
fiduciary. Consider the fact that the acts you are allowed to perform
involve a great deal of trust and confidence, as well as the devastating
consequences and liability for any failure to act ethically, whether by
design or ignorantly. A fiduciary does not have the option of deciding
whether or not he wants to act ethically; it is mandatory. Insurance
Professional as Financial Planner Many
insurance professionals, in order to be perceived as something that they
are not or to be held in a higher professional light, call themselves
financial planners. The term financial planner became a popular
title back in the 80s and it seems that everyone is now calling
himself/herself a financial planner, whether an insurance agent, stock
broker, trust officer, accountant and even viatical settlement
salesperson. For
those who have crossed that line, they have unwittingly broadened their
ethical responsibilities and accountabilities as well as drawn the
attention of state and federal authorities. The public views a financial
planner as one who has specialized training, expertise and knowledge in
various areas such as tax planning and strategies, insurance and
investment products, and retirement and estate planning. One who sells and
services insurance products is not a financial planner and must not
represent himself as such unless he has the training, education and
experience to ethically make that claim. The
main organizations that promote, educate and have taken strides to enhance
the financial planning field are the College for Financial Planning and
Financial Planning Association. Both of these have set the standards for
educating financial planners as well as educating the public on the
integrity and professionalism of the financial planning profession. While
it is possible for one to become qualified as a financial planner on his
own initiative, it is imperative that one should, instead, associate
himself with one of these recognized organizations for his training and
education. Insurance
Professional and Conflicts of Interests As
an insurance professional, there’s a long list of potential conflicts of
interests. To act ethically would be to proactively resolve these in a
timely fashion. The best course of action would be to avoid them in the
first place. The first conflict of interest may be dependent upon how the
agent represents himself to the client and public. For example, if he is
not qualified to be financial planner but refers to himself as such, then
that would be a professional conflict as well as unethical. This may cause
other conflicts as well. For example, financial planners are sought for
their professional expertise and are paid for their advice. If an
insurance professional receives a fee, then he may be subject to other
applicable laws without his knowledge. Agency
contracts can sometimes be “intrusive” into your other activities,
have non-compete clauses, or restrictions on client activity if you leave
the agency. These all affect one’s livelihood but at the same time are
conflicts of interest that must be resolved. If
certain conflicts arise, and dependent upon the agent’s status, he may
also be subject to disclosure requirements mandating the submission of a
Form ADV to the client as required by the Investment Advisors Act of 1940.
He may also have disclosure requirements as required by his professional
organization’s code of ethics. For example, the CFP Board requires
disclosures via Form FPE or Form OPS if certificants are engaged in
certain activities. Insurance
Professional and Professionalism In
order to maintain your professionalism, you are ethically obligated to
stay abreast of current products, laws, knowledge and training. The
insurance industry is no different than any other industry – they’re
always looking for new products, new bells and whistles or to be the first
at having something that no one else has. Product changes and enhancements
are sometimes motivated by legislation and sometimes by creativity. As an
insurance professional trying to serve the best interests of his
clientele, you need to stay abreast of these. Legislation
is always changing, some of which affects policy design, policy benefits,
tax consequences, sales strategies, etc. It is not only required but also
assumed that you will take the initiative to keep up with current laws.
The authority granted in your agency contract, either implied or express,
allows you to give advice applicable to the products that you sell. Your
clients expect the same. However, along with this comes the expectation
that the advice will be correct and currently applicable to recent
legislation. As a fiduciary, you are ethically obligated to do so. Knowledge
and training may or may not come together. One must always seek training
to enhance his career, which will also enhance his knowledge, but
knowledge is more extent and may be acquired extracurricular. For example,
a life insurance agent is required to have continuing education and
training that is directly related to his license and sales responsibility.
However, he may also want to become a financial planner or sell other
products and obtain additional areas of expertise. This will require
knowledge that may be outside his normal realm of training. The end result
of all this, of course, will enhance the agent’s professionalism. One
of the first obligations that you have to your customer is to know your
trade. This means that your training and knowledge must be current,
correct and extensive. In the eyes of the customer, you are the expert and
he is depending upon your knowledge and skills. This does not mean that
you must be an expert but rather you must exercise a “standard of
care” in your practice, which is the standard by which negligence is
determined. Standard of care - the degree of care the law requires is
always the care that a reasonable person would exercise in similar
circumstances. As an insurance professional, you have a professional
liability to maintain a reasonable degree of knowledge and expertise and
to exercise such in a manner that is prudent and absent any negligence or
fraud. Malpractice suits against agents have been and will continue to be
on the rise because agents have failed to meet this expectation. Educate
the Customer An
educated and knowledgeable customer is a more satisfied customer. Some
insurance professionals do not take the time to “educate” their
customer or involve them in the decision-making process. In any type of
planning, whether it is a complex estate planning case or a simple
annuity, an agent would better serve his and the customer’s interests by
involving the customer in as much of the process as possible. This builds
trust, which is nurtured and continually reinforced. To this end, one must
keep in mind that simple issues and solutions lead to simple decisions.
Complexities will only confuse and prolong decisions. Will all this
prevent problems? Probably not, but it will, however, lessen any
misunderstandings. It is always recommended that the agent have a
commitment to communication. Questionnaire One
of the most underutilized tools of the insurance professional is the
questionnaire. A properly designed questionnaire can be a validation tool
for ethical behavior. It can also be the best ethical tool to properly and
adequately define a customer’s needs. When
one’s actions and recommendations come into question, what better tool
is there to justify oneself than by providing a paper trail of information
provided by the customer – a questionnaire showing the customer’s
assets and financial condition, financial goals and problems – and
signed by the customer? From this, the insurance professional can
determine the proper solution and make recommendations. Assuming one’s
recommendations and advice are not outside accepted parameters, any
accusations of unethical conduct cannot be sustained. The
questionnaire is also the tool by which the insurance professional can
assess whether or not he is qualified and licensed to provide the tools
necessary to meet his customer’s needs. This is where many get into
trouble by not candidly assessing their own qualifications and unethically
proceeding when they should not. In essence, the ethical solution would
have been to get assistance from a qualified colleague or other
professional. For the long term, one could also take this as a clue that
more education, training, and licensing would be appropriate. The
questionnaire is also one of the most generally accepted beginning points
for determining product suitability and needs based selling. Determining
Needs Needs
based selling leads to success plus satisfied and long-term customers;
selling the biggest commissioned product or more than is needed is
unethical and leads to malpractice suits. There are many ways to determine
a customer’s insurance needs – some are very short and simple; others
are extensive and complicated. You, the insurance professional, will have
to determine which methodology is best. Just remember that at any time you
may be called upon to validate and/or justify your recommendation and how
you arrived at it. Ultimately,
the insured (customer) is responsible for determining the proper type and
amount of insurance. Of course, we don’t live in a perfect world so
don’t depend on this as your argument in defense of your ethics. Let’s
elaborate on the possibilities and see which may be the best course of
action. First, agent’s and brokers perform similar and different roles.
An agent is typically one whose primary responsibility is to represent the
interests of his company and sells products on their behalf. These agents
are usually not permitted to have contracts with other companies; they
have an office with the company’s name and logo on it; and, to the
public, they are the “XYZ Agent.” The agent can also represent the
customer and his interests. A broker, on the other hand, is contracted
with multiple companies and represents the interests of the customer. It
would behoove the insurance professional to make responsibilities clear,
preferably by written agreement, as to which party(ies) bear the burden of
determining the proper type and amount of insurance. Next,
the insurance professional should choose the proper methodology to
ascertain the customer’s needs. For example, let’s assume the customer
only needs some life insurance. Would the best methodology be to use the
customer’s annual salary times eight, as some do, or do a more complete
life insurance needs analysis? There is nothing ethically wrong either
way, however, the “standard of care” rule may dictate otherwise. At a
minimum, one knows that there must always be some form of analysis and
evaluation that leads to an appropriate plan of action. Lastly,
the decision as to the best type of insurance would probably rest with the
professional. However, taking into consideration that the customer should
be educated, included in the decision-making process and that full
disclosure is warranted, this is probably a decision that should not be
made alone.
Full
Disclosure In
order for an agent to provide full disclosure to the customer, he must be
fully informed as well. Full disclosure in this context means everything
that is material, that is, things that are important, relevant, and
relates to the merits of what is being proposed. Well, this can encompass
lots of things. Most
customers will not read their insurance policy, an A.M. Best Report about
the company, company product brochures, your complete analysis, etc. They
will, however, make decisions basely mostly on what you say. At a minimum,
one should always give a simple disclosure of everything that is
“material” and follow-up by providing all the written material that
supports what you say. Agent/Broker
and Company. The insurance
professional is obligated to disclose to the customer her qualifications,
which may include education, experience, credentials, etc. Of course, why
wouldn’t one do this – it only establishes credibility and creates
trust. The customer wants to ensure that the agent is a qualified
professional and will be able to meet his needs. Next, the agent will want
to shed light on the company she is representing. After all, the
customer’s financial future may rest on the stability and strength of
the company. One of the best pieces of disclosure on an insurance company
is the A.M. Best Rating. A.M. Best
Company was founded in 1899 with the purpose of performing a constructive and objective role in the insurance industry toward the
prevention and detection of insurer insolvency. A Best's
Rating is an independent evaluation that subjects all insurers to the same
rigorous criteria, providing a valuable benchmark for comparing insurers. Insurance
professionals depend on Best's Ratings to determine the financial strength
and operation of specific insurers. Ratings also have become an
increasingly important factor in consumers' decisions to purchase
insurance. (Source: A.M. Best Company) The last
item that an agent must always do is to provide full disclosure on the
application. When an insurer assumes a risk and then writes an insurance
policy, they depend upon the information that the customer provides to
assess the risk. In this regard, the agent represents the interests of the
insurer and is ethically, legally and contractually bound to ensure the
application is complete, factual and honest. To do otherwise is to cause
the insurer to act in a way that is contrary to what they would have done
if properly informed. Policy
Benefits. Current product
knowledge is imperative to prevent making unethical presentations due to
inaccurate information and ignorance. Insurance companies are continually
changing policies, adding new features, redesigning old products, and
reducing/increasing benefits. There are
many documents and publications that describe a policy’s benefits other
than the policy itself. One that usually comes with the policy is a policy
summary, which gives data in the form of cost indexes to help one evaluate
the underlying costs to compare death benefits, for example. Insurance
companies publish ‘customer-friendly’ sales pieces that describe
benefits/costs in a simple and easy to understand manner. The National
Association of Insurance Commissioner’s (NAIC) also publish Buyer’s
Guides to aid customers in the purchase of multiple insurance products.
These are excellent documents and can be purchased in hard copy or
downloaded off the Internet. Many states require that the agent provide a
buyer’s guide to prospective insurance customers. The NAIC
provides Buyer’s Guides for the following types of insurance products:
auto, home, life, cancer, fixed deferred annuities, medigap and long-term
care. (Source: NAIC) When used
together, the Buyer’s Guide, policy summary, and company sales piece can
assist the agent to fully explain the policy’s features and benefits
while avoiding the complexity of reading the policy. They are also useful
tools for making comparisons of two or more policies. Underwriting
Process. Most customers have
experienced the underwriting process and understand that they have to
qualify for the insurance applied for. However, every new generation has
to go through the process and it is up to the agent to prepare them for
it. The underwriting process is an insurance company’s procedure to
determine whether a prospective insured will be offered the insurance as
applied for or make an offer other than as applied for. The insurance
company will assess the risk, dependent upon the type of coverage applied
for, by evaluating one or more of the following, which is not a complete
list: the prospect’s medical history, financial condition, credit
worthiness, occupation and other activities, driving record, etc. They may
even want the prospect to provide a blood and urine sample or even have a
medical examination. Many
people consider the underwriting process intrusive but necessary. To
‘smooth over’ the extent of what the insurance company will demand is
unethical and should not be avoided. One way to turn this potential lemon
into lemonade is to remind the prospect that many people pay dearly to
have such things performed by medical personnel. It also has the side
benefit of informing the prospect of existing medical conditions that they
may have never known about. Considering the fact that needed coverage may
cost more because of one’s current lifestyle, this may also motivate an
insured to make lifestyle changes in order to qualify for a better rate at
a later date. For example, a smoker who has wanted to quit smoking but
lacked the motivation may now have an extra “out-of-pocket” expense,
via a costlier life insurance policy, to motivate him to quit. Policy
Delivery |