专业文章内容
Problems in shortening the long-term insurance

Author: Sam Zhao

Shanghai High People’s Court made a final judgment on the fund-raising fraud case involving the former actual controller Chen Yi and the former senior executive Jiang Jie of Shanghai Fanxin Insurance Agency (hereinafter referred to as “Fanxin”) on 8 December 2015. Chen Yi was condemned to life imprisonment and Jiang Jie was condemned to 15 years’ imprisonment on a charge of the crime of defrauding fundraising.

Relevant judgment states that: from February 2010 to July 2013, Chen Yi and others entered into insurance agency agreements with some insurance companies via Fanxin, and recruited over 400 insurance agents as its sales team in Shanghai and Zhejiang. Chen Yi and others exploited the agents or bank employees to promote unreal insurance financial products to over 4,400 people amounting to RMB 1.3 billion in Jiangsu, Zhejiang, Shanghai and other areas, and took over more than RMB 1 billion  through refunding the service charges of insurance companies.

On 28 July 2013, Chen Yi and Jiang Jie found that the capital chain was going to rupture, then they transferred nearly HKD 50 million to Hong Kong and carried over 830,000 Euro in cash as well as jewelry, luxury goods and other belongings abroad. Until 19 August, they were arrested in Fiji. The incident has resulted to RMB 800 million’s actual losses of over 3,000 investors totally.

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, it is prone to cause non-standard or even illegal behaviors. In this case, the illegal operations done by Chen Yi and others through Fanxin mainly involve the approach of “shortening the long-term insurance to short-term one”, which means to sell the long-term life insurance products as short-term financial products in essence, that’s to say, splitting and packaging the 20-year life insurance products of insurance companies into one to three years short-term, guaranteed financial products with high rates of return and selling to the public. After receiving the funds of investors, they falsely claimed to insurance companies that the funds of investors are the premiums of the 20-year life insurance products, and paid principals, interests and huge operating costs etc. to investors with the service charge refunded by insurance companies.

In the aforesaid illegal operations, in order to cope with the inspection of insurance companies, a large number of signatures written by policyholders under many insurance contracts are forged, and the information of work units and revenue is fictional. The contact numbers of policyholders recorded in the insurance contracts are actually the numbers bought by the sales person. Obviously, the approach of “shortening the long-term insurance to short-term one” does not have the actual profitability and long-term sustainability. It is essentially a Ponzi scheme that would  crash eventually one day. When it crashed, Chen Yi and others would obviously  become insolvent. From the view of principal, only insurance companies may 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 relationship, insurance companies have inescapable responsibility for managing and controlling the agencies and intermediaries.

Unfortunately, many insurance companies do not seriously take up 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 cooperate with any agencies who could bring premium to them regardless of whether the conduct of the agencies is in compliance with laws and regulations or not. The extensive business philosophy of “premium is the king” and the actual status of poor management, offer opportunities for illegal intermediaries. The case of Fanxin raises an alarm to insurance companies. In order to avoid the occurrence of such risks, it is recommended that insurance companies should strengthen risk control in the following four aspects when they consign insurance agencies to sell products:

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

Secondly, insurance companies should establish an alert system to monitor the repetitive client information at any time. In case of duplicated information, insurance companies should promptly ascertain the facts, and timely investigate and dissolve potential risks. Insurance companies need strictly monitor the renewal rate, and identify the reasons for the agencies which do not meet the standard renewal rate, and troubleshoot risk vulnerabilities, and timely adjust the subsequent proxy and cooperation programs based on the renewal situation of the agencies.

Thirdly, 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 visit, network information investigation, assistance of law firms etc., and point out the sale risks and responsibilities explicitly.

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