Fraud shows shortcomings in insurance monitoring

By Sam Zhao, Wintell & Co
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Shanghai High People’s Court made a final judgment on the fund-raising fraud case involving the former actual controller, Chen Yi, and former senior executive, Jiang Jie, of Shanghai Fanxin Insurance Agency on 8 December 2015. Chen was sentenced to life imprisonment and Jiang to 15 years in prison for the crime of defrauding fundraising.

SAM ZHAO, Senior Consultant, Wintell & Co
SAM ZHAO
Senior Consultant
Wintell & Co

The relevant judgment states that: from February 2010 to July 2013, Chen and others entered into insurance agency agreements with some insurance companies via Fanxin, and recruited more than 400 insurance agents to its sales team in Shanghai and Zhejiang. Chen and others exploited the agents, or bank employees, to promote fake insurance financial products to more than 4,400 people, amounting to RMB1.3 billion (US$195 million) in Jiangsu, Zhejiang, Shanghai and other areas, and took more than RMB1 billion through refunding the service charges of insurance companies.

On 28 July 2013, Chen and Jiang found that the capital chain was going to rupture, and transferred nearly HK$50 million (US$6.4 million) to Hong Kong, also carrying over €830,000 (US$930,000) in cash as well as jewellery, luxury goods and other belongings. They were arrested in Fiji on 19 August. Their actions resulted in more than 3,000 investors incurring actual losses of a total of RMB800 million.

RISK ANALYSIS

Many insurance intermediaries utilize the commissions and channel costs paid by insurance companies to rapidly expand their business scale. Since insurance companies are not in direct contact with customers, these actions can be non-standard or even illegal behaviour. In this case, the illegal operations of Chen and others through Fanxin mainly involved the approach of shortening the long-term insurance to a short-term one, which means to sell the long-term life insurance products as short-term financial products in essence, splitting and packaging the 20-year life insurance products of insurance companies into one-to-three year, short-term, guaranteed financial products with high rates of return, and then selling them to the public.

After receiving the funds from investors, they falsely claimed to insurance companies that the funds were the premiums of the 20-year life insurance products, and paid principals, interest and huge operating costs etc., to investors, with the service charge refunded by insurance companies.

In the above-mentioned illegal operations, in order to mislead the inspection of insurance companies, a large number of signatures written by policyholders under many insurance contracts were forged, and the information of work units and revenue was fictional. The contact numbers of policyholders recorded in the insurance contracts were actually the numbers bought by the sales person. Obviously, the approach of shortening long-term insurance to short-term does not have profitability and long-term sustainability. It was essentially a Ponzi scheme that would crash eventually. When it did, Chen and others would obviously become insolvent. From the view of principal, only the insurance companies would pay for it.

RISK CONTROL

In accordance with the rules of the industry, insurance companies pay service charges to insurance agencies, and insurance agencies serve as platforms to sell the products and provide the services of the insurance companies. In such a relationship, insurance companies have an inescapable responsibility for managing and controlling the agencies and intermediaries.

Unfortunately, many insurance companies do not take seriously the responsibilities of managing and controlling the intermediaries. They often “value underwriting, and discount the service”. In order to seek rapid growth of premium volume, they are willing to co-operate with any agencies that can bring premium to them, regardless of whether the conduct of the agencies is in compliance with laws and regulations. The business philosophy of “premium is king” and the status of poor management offers opportunities for illegal intermediaries. The case of Fanxin raised the alarm for insurance companies. In order to avoid the occurrence of such risks, it is recommended that insurance companies strengthen risk control in the following four areas when they consign insurance agencies to sell products.

First, insurance companies should strictly control each procedure of underwriting, make call-back records conscientiously, and periodically check and visit customers. In order to prevent phone fraud relating to the address of the insured or even the full information of clients, insurance companies can visit clients directly. During the visit, a comprehensive survey should be conducted the content of the questionnaire should include, but not be limited to, personal information, reasons for application, knowledge about the policy interests, process for execution of the policy, and evaluation of sales staff. Insurance companies should perform a certain percentage of return visits after the first visit, based on the customer information.

Second, insurance companies should establish an alert system to monitor repetitive client information at any time. In the case of duplicated information, insurance companies should promptly ascertain the facts and in a timely fashion investigate and dissolve potential risks. Insurance companies need to strictly monitor the renewal rate, identify the reasons for the agencies that do not meet the standard renewal rate, trouble-shoot risk vulnerabilities, and in a timely fashion adjust the subsequent proxy and co-operation programmes based on the renewal situation of the agencies.

Third, insurance companies should have a comprehensive understanding of the actual operations of insurance agencies, including, but not limited to, operation modes, distribution channels, major customers, estimated operating costs etc., and conduct research by means of unscheduled site visits, network information investigations, giving assistance to law firms etc., and pointing out the sale risks and responsibilities explicitly.

It might be better for insurance companies to promptly initiate an investigation once they find irregularities with insurance agencies in the sales process, and if necessary suspend their sales authorization for the insurance agency. If serious problems are found during an investigation, insurance companies should report and deal with problems in accordance with relevant provisions in a timely way. Losses, costs and other issues arising from an investigation must be undertaken by insurance agencies according to the prior written agreement.

Sam Zhao is a senior consultant at Wintell & Co

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