Webster defines compliance as “the act or conforming, acquiescing or yielding”. It is a department within a company that interprets the laws of the industry, dictates policy to employees, and investigates violations. This department is made up of lawyers and examiners who work together to ensure that the company does not get into trouble with the federal and state governments. The compliance department will scrutinize any agent that receives a complaint from a client. The agent is presumed guilty until proven innocent once he or she has been identified.
After a flurry of fraudulent life insurance sales in the United States, the 1980s and 1990s, compliance departments grew rapidly. Many insurance companies were vulnerable to the manipulation of old life insurance policies’ money for the sole purpose selling new policies. These were not a rash idea by naive clients or desperate agents. Sales campaigns were meticulously planned and executed by the top executives of the company. Agents were instructed by the top management to visit all clients who had enough monetary value from their previous policies and offer them additional life insurance “free.”
It was simple, but it worked. The sales concept was simple. A cooperating agent needed to review the life insurance records of all his clients and find those who had money in the policies. He then met with the client to “review”, point out any unproductive value that was still inside the policy, and suggest using the proceeds to purchase more “tax-free” death benefits for the client’s loved ones. The key to closing the deal was when the agent appealed directly to the client’s greed and said that they wouldn’t have to pay anything for it. Clients were assured that the money in the old policies would cover them for the rest their lives.
Many agents were so successful in selling insurance that they quickly rose up the corporate ladder to become upper management. This allowed them to spread their ideas across the company. Agents were able to receive special sales incentives and bonuses, which allowed them to travel to luxurious resorts to learn new sales techniques that would enhance their careers. All involved were “in the money” and there seemed to be no end in sight to the profits. Easy sales would continue as long as there was plenty of cash stored in old insurance policies. The insurance companies didn’t care that clients were being encouraged by the agents to withdraw money from one account and transfer it to another in order to generate sales and commissions. The management looked good as new policies were selling well, agents were making money and clients were convinced they were getting nothing for their hard earned cash. Nearly everyone was happy.
When interest rates and dividends dropped below the 1980s inflationary levels, reality arose. The old, dusty life insurance policies couldn’t support the new “free”. All the dreams of a bright, secure future and a bubbling stream of cash went out the window. Both the old and the new policies failed, leaving clients without a legacy for their loved ones. The state and federal regulators received numerous complaints and filed lawsuits against insurance companies and agents. When the government is caught sleeping, it can become a mighty, vengeful, and tense, writhing giant when it has to deal with bailouts and legal turmoil.
Insurance companies were investigated and found guilty of misleading their clients. The existence of programs to sell “free” life insurance policies was revealed. These programs were created solely for the purpose of generating commissions, and offered no benefit to clients. It was impossible to pay full compensation for losses due to the scale of corruption. Many of the biggest companies were victims of corruption that amounted to billions of dollars. Settlements were offered to those clients who were still alive and they were eventually accepted.
Insurance companies were required by law to establish compliance departments in order to supervise, investigate, and regulate their sales practices. They also had to promise clients that they would not be exploited again. The government authorities believed that by forcing companies to become self-policing they could better manage the risk of corruption and mismanagement.
A company that only deals with large amounts of money is not allowed to self-police. This is like a shepherd trusting his sheep to wolves because he has threatened them with their death if they don’t stop doing what he wants. There are too many sheep to care for and plenty of hungry wolves searching for loopholes in this extinction clause. However, most insurance companies’ compliance departments adhere to the law and the spirit that governs them. This allows for at least an appearance of ethical behavior.
Sometimes, the shepherd will return to count the sheep. He is not completely naive and expects to find violations of the rules. The wolves ensure that there are enough sacrifices to please him. Compliance understands that perfect compliance to regulations can make the government nervous. The last thing a company wants to do is be audited. Compliance departments have serious moral and ethical problems because they are trying to please government regulators. Compliance departments discourage honest agents who attempt to assist clients who have been victims of corruption or misrepresentation by other companies from doing so in order to avoid governmental scrutiny. The spirit and regulations of anti-corruption are not respected. Client trust in the agent is also violated.
A good agent will quickly spot instances of misrepresentation and cases where clients were victims of fraud. Many people don’t take the time to learn about their insurance products and don’t realize they have been scammed. Agents who are honest and generous will spend their time helping clients understand the details of the fraud. It may be a genuine effort to help a client. However, it could also be a professional gesture and a pride in their work. There are both good and bad people in every profession. Even though clients are fortunate to have an advocate for their needs, many people don’t appreciate or understand the value of agents’ services.
Unfortunately, fewer agents are willing or able to help with fraud complaints and risk being reprimanded by their state and federal regulators. An IRS audit can be easily compared to a visit by insurance regulators and company compliance investigators. An agent who tries to assist a client in filing a complaint against an insurance company or agent may have his motives questioned immediately and his actions investigated. All records of the agent who assisted the client in filing a complaint against another insurance company or agent are reviewed. His entire clientele may also need to be examined. Simple human error, such as a misfiled form or brochure, could lead to sanctions and fines. A costly punishment can result from the agent’s acts of charity and professionalism.
If an experienced and honest agent is able to identify a case of insurance fraud, it raises difficult moral and ethical issues. Is it possible to appreciate the effort and the trouble that the agent might cause by notifying the client and helping them solve the problem? Is it better to ignore the crime and say nothing, or do you choose self-preservation? This is a problem that only the agent can solve. Insurance fraud is almost impossible to manage because of greed that has been created by an industry that is driven by money. It affects everyone.
What can you do to guard yourself from fraudulent insurance practices? Learn about money management. Make sure you read all terms and conditions of any insurance policy. Ask questions until your fully understand the product. To ensure your investments and insurance meet your needs, you should review them at least once per year. You should be able to recognize when you are being taken advantage of, and ensure that your financial future is not ruined. You should also appreciate the value of a well-educated agent.