Study 5: Managing Fraud Risk at the Point of Sale - Summary

Question 1

Role of intermediaries in controlling policy fraud

Answer 1

• Intermediaries must explain the consequences of misstatements and risk concealment (i.e. voided coverage)
• Explain need to operate ethically and in good faith during the application process

Question 2

New customers may bring an element of fraud risk. Intermediaries should use the following strategies to deal with this potential issue

Answer 2

• Adopt business practices to develop effective work processes and to create and maintain technical competencies
• Develop and maintain professional standards of conduct to serve the public
• Understand and use a checklist of red flags

Question 3

When completing applications, the intermediary must do the following

Answer 3

• Discuss the applicant’s requirements in detail
• Gain knowledge of the applicant’s background to understand any moral hazards
• Explain why certain questions are asked, what information is needed, and how the information is used
• Explain what happens when misinformation is provided (possible voided policy or no claim payout)
• Evaluate the hazards and perils the risk is exposed to
• Offer risk management advice to mitigate risk and losses

Question 4

Common sections on applications for insurance

Answer 4

• Named insured
• Policy term
• Subject of insurance
• Loss payees
• Loss history
• Prior insurance
• Agent’s and broker’s report
• Signatures

Question 5

Named Insured

(Application)

Answer 5

• Details who the applicant is (individual, group, incorporated business, or an individual with an operating name)
• Person must have an insurable interest in the property

Question 6

Policy term

(Application)

Answer 6

• Effective date and expiry date of a policy define the term
• Typically 12 months after the effective date - coverage ends at 12:01am on the expiry date
• Requests to back-date coverage should be treated with caution (ex. client could be trying to obtain coverage for a loss that has already occurred)

Question 7

Subject of insurance

(Application)

Answer 7

The thing to be insured.

• Property: what is it, where is it, what is it used for, what is the value
• Liability: intangible, coverage for actions or activities
• Automobile: description of vehicle, what it is used for, where it is used, who uses it, who has an interest in it (i.e. lienholder or lessor)

Question 8

Loss payees

(Application)

Answer 8

• Generic term for someone other than the named insured to whom the proceeds of insurance is paid (have insurable interest)
• Mortgagee: special type of loss payee. Have interest in real property as security for the money loaned to the owner. Protected by mortgage clause - protects their interest even if the owner’s actions cause a claim to be denied (as long as mortgagee was not aware)

Question 9

Underwriting concerns related to moral hazards when there are many loss payees on a risk

Answer 9

• The presence of multiple loss payees could indicate that the insured is suffering financial hardship.
• When cash flow is poor, the result could be substandard or delayed maintenance and a property that is not well cared for.
• Too much debt might tempt an unscrupulous insured to alleviate the problems by staging a loss.

Question 10

Loss history

(Application)

Answer 10

• Relevant to underwriters because it shows frequency and type of loss
• Best predictor of future losses is past claims history
• Different periods for different types of coverage (i.e. 3 years for home insurance, 6 years for auto coverage, etc.)

Question 11

Prior insurance

(Application)

Answer 11

Prior insurer’s names, policy numbers, and expiry dates are requested. The following may indicate a concern:

• an unexplained gap in coverage
• previous insurers declining, denying, or refusing to renew insurance

Question 12

Agent’s and broker’s report

(Application)

Answer 12

• Opportunity to present additional information about clients based on personal knowledge of them
• Can advocate for clients by emphasizing virtues of risk, or to alert insurers to parts of risks that may require restricted coverage

Question 13

Signatures

(Application)

Answer 13

• Practice of signing application varies by coverage line
• Electronic signatures are sometimes used

Question 14

Intermediaries are required to do the following in order to maintain their license

Answer 14

• Comply with the provisions of the various insurance acts
• Act in a competent, trustworthy fashion, avoiding fraud, deceit, and misrepresentation
• Pay insurers the premiums collected as stipulated in the broker agreement
• Comply with the legislation relating to unlicensed insurers, if placing insurance with them

Question 15

Intermediaries have a duty to clients to…

Answer 15

• provide the coverage best suited to the clients’ needs;
• not be swayed by remunerative gain;
• not take advantage of clients’ lack of knowledge or inexperience;
• not speak ill or put in a negative light any industry partner, associate, or competition;
• hold information in strict confidence; and
• competently perform services undertaken, which requires them to be well educated and indicates the need for continuing education.

Question 16

Intermediaries have a duty to insurers to…

Answer 16

• be honest and trustworthy;
• stay within the terms of the broker agreement; and
• disclose all relevant material facts to the insurer, even if it will make placing the risk difficult.

Question 17

Red flags during the application process

Answer 17

Difficult to identify which clients or policies will be fraudulent. Insurers try to look for red flags or indicators that can be used, not to prove fraud, but to encourage further questioning and analysis of the risk.

Question 18

Information about an applicant that may require further investigation during the application process

Answer 18

• Does not live or work nearby
• Lives in an area not consistent with income or occupation
• Has lived at his or her home for less than six months
• Requires high limits of coverage that are not consistent with income or lifestyle
• Works in an automobile-related business
• Has a record of claims and/or convictions
• Has had payment issues with a previous insurer
• Is evasive about details pertaining to employment or the subject of insurance

Question 19

Finance-related matters an intermediary will look for during the application process

Answer 19

• Is in debt
• Has a prior bankruptcy
• Is self-employed or unemployed
• Is unable to verify his or her business or location
• His or her business shows decreasing sales
• His or her business shows a trend of decreasing profits

Question 20

Detecting fraud during the application for property insurance

Answer 20

• Inspect the property risk, document condition, and recommend ways to improve it
• Property inspections are necessary to prove the property exists and confirm value
• Can also inspect for security and safety measures (ex. fire alarms, burglar alarms, etc.)

Question 21

Property inspection red flags and physical hazards (image)

Answer 21

Question 22

Red flags to be aware of include if a business…

Answer 22

• is less than fully active;
• has seasonal operations;
• has a high rate of staff turnover;
• is involved in employee disputes;
• is not concerned with improving risk management;
• is not concerned with cyber information or security;
• is not educated on how to avoid cyber threats, such as malware and phishing; and
• has old equipment or computer systems with no desire to update them.

Question 23

For automobile losses, false and inflated insurance claims could relate to the following

Answer 23

• Phantom vehicles
• Non-existent equipment and accessories
• Pre-existing damage and salvage schemes
• Import–export frauds

Question 24

Detecting fraud during applications for automobile insurance

Answer 24

• Insurers tend not to know automobile insurance clients well - anonymity can lead to greater fraud claims
• Detailed descriptions of vehicles are helpful when insuring them. Can include unrepaired damage, VIN number, equipment, and photographs
• Verify claims through independent sources, as people often cannot remember the exact dates or details of a claim

Question 25

Common red flags pertaining to automobile insurance applications

Answer 25

• Vehicle does not match the applicant’s income and lifestyle
• Applicant has had the vehicle with the insurer for less than one year
• Applicant has no previous insurance
• Applicant is newly licensed
• Applicant is requesting full coverage for an older vehicle
• Vehicle has existing damage or mechanical issues
• There is no lien on an expensive vehicle
• Driver is young and the vehicle is expensive
• Vehicle is an unpopular model that may also be expensive to operate, with a scarcity of parts or poor safety reports
• An endorsement limiting depreciation on a newer vehicle is about to expire
• Vehicle has a private lienholder
• Details of vehicle purchase are unclear, or the vehicle was bought for cash
• VIN search shows previous claim for theft
• VIN search does not match insured’s description of the vehicle
• Vehicle is lowly valued but its equipment is highly valued
• Car payments are in arrears