The Coalition Against Insurance Fraud’s recently released interim survey of state insurance fraud bureaus includes some predictable stuff, and a couple of surprises. For instance, it’s no surprise that the bureaus reported that all types of insurance fraud were up, and that their operating budgets were down.

What did surprise me, though, was that agent fraud is the third most prevalent form of fraud being reported by the bureaus, right behind bogus health insurance and drug diversion:

Suspect cases involving insurance agents increased substantially year-to-date in 2009. A total of 69% of respondents said agent cases were up slightly higher or much higher so far in 2009, while a quarter reported no change. Only one bureau said the number of cases involving agents had fallen in 2009.

We contacted CAIF’s Dennis Jay, who minced no words:

Let me be clear upfront: The vast majority of agents are honest and committed to their clients’ best interests. But a small and disturbingly growing minority are painting the entire profession as a bunch of crooks. .

Survey results and CAIF’s own database of agent fraud cases culled from news stories and other sources shows a steady increase in agent cases since 2007 through 2009. “This suggests agent fraud cases may be rising, but also may reflect increased crackdowns by insurers, fraud bureaus, state AGs and other fraud fighters to better detect agent scams,” Jay said. “Or it may reflect both trends. At bottom, agent scams are a significant consumer problem, and constant headache for insurers and state regulators alike.”

Stealing premiums without buying the promised coverage is one of the most common forms of agent fraud. “It’s easy to commit, and can leave clients dangerously uncovered when they have a claim,” Jay said. “Some agents are selling bogus health coverage, which is spreading rapidly around the U.S. We’re also seeing producers selling overpriced life products clients may not need, want or understand. Seniors especially are frequent victims of annuities scams. ”

Crooked agents also are selling “shady investments in non-insurance areas far out of their insurance expertise, and often without a license,” Jay said. “Smaller businesses in high-risk operations also have been sold fake liability coverage or had premiums stolen. They’re vulnerable because liability premiums tend to be high and coverage isn’t always easy to find.”

Agent fraud is the Mr. Hyde opposite of the Dr. Jekyll of agent-as-expert-consultant, with wise guys using their industry knowledge to exploit the average Joe, Jay said. “Dishonest producers coldly exploit their position of trust. They’re authorities in a highly complex, technical arena that most people don’t easily understand. So average, trusting consumers tend to believe whatever agents tell them. This is especially true of seniors, who’ve built up larger portfolios that crooked agents try to drain. The profession’s leadership and carriers also keep urging the public that agents are professionals that people can trust. So when people believe the marketing messages, trust their agent and then get swindled, that leaves a bad taste in the public’s mouth.”

To avoid public backlash, Jay recommended that the industry get behind some serious housecleaning.

The agency community’s associations across all lines should be challenged to aggressively help weed out the bad actors before state legislators take punitive actions and the agency profession’s public image among customers plummets lower. If people think they can’t trust producers, their first temptation might be to try direct writers. There’s so much at stake competitively that the entire agency community, especially the leadership, should aggressively clean out its closet.

Maybe I just have fraud on the brain since attending last week’s annual PLUS International Conference in Chicago (see our Web exclusive article on data breach), where the subject came up a lot, but there does seem to be a lot of synchronicity about fraud issues in the zeitgeist lately. 

Just today, National Underwriter posted the findings of a new PricewaterhouseCoopers global economic crime survey showing that insurance was the second most fraud-prone industry, right after communications. It’s not surprising that insurance is a target, given the amount of data used in processing products and services. Typical crimes include asset misappropriation (such as inventory theft), accounting fraud, and bribery — all crimes that are easier to commit because of reduced resources deployed for internal controls, according to PwC.

The threat is just as real for the average joe, especially in a world fueled by virtual transactions. Electronic data files are dismayingly easy to hack for expert criminals who know what they’re doing, according to Lori Nugent, partner at law firm Wilson Elser Moskowicz Edelman & Dicker. Lori, a specialist in the security breach area, scared the bejezuz out of me by describing how easy it is for sophisticated hackers, many of whom are part of huge international fraud rings, to grab data like credit card and Social Security numbers and ruin your life.

For agents, the burden is on you to protect your customers’ confidential information — hence the FTC “red flags” ruling. But you shouldn’t need a federal mandate to establish internal safeguards for your firm. In a conversation about data security breaches on the LinkedIn ACT group, several readers offered recommendations on how to start, including:

• Creating a data security plan and establishing proper controls
• Limiting data access with proper security rights assignment
• Establishing a system to eliminate paper in an encrypted repository
• Limiting access to confidential life/health data to restricted employees
• Limiting the ability to access personal information between commercial and personal files
• Establishing security settings so only producers have access to their clients’ data 

Tech guy Steve Anderson has written a book on client data security that’s worth a read — check it out at www.clientdatasecurity.com.

Meantime, with the red flags law looming, what are you doing to secure your clients’ data?