Pyramid
sales of insurance policies condemned
Paris, 9
July 1997 - The International
Chamber of Commerce has pressed governments in eastern and central Europe and
the ex-Soviet republics to clamp down on pyramid sales of life and accident
insurance policies, describing such practices as legally dubious or even criminal.
The ICC, the world's leading
business organization, said a small number of sales agencies, usually based
in western Europe, were using pyramid sales on an unlicenced basis in the new
market economies to distribute policies issued by west European insurers.
Expressing alarm at the
damaging consequences of such practices to the orderly development of life insurance
markets, the ICC noted that the offending agencies were exploiting inconsistent
legislative and enforcement measures in eastern and central Europe and the newly
independent states.
It urged insurance regulators
and associations of insurers and brokers throughout Europe to secure from their
governments the legislation and enforcement powers necessary to suppress unauthorized
pyramid sales in their countries.
"Sales by ill-trained
personnel motivated by factors entirely unconnected with the well-being of the
client jeopardize the confidence necessary to secure the stable development
of a long term life insurance market, and therefore the future capital markets
and domestic investment potential of the countries of the region," the
ICC said.
Describing the practice,
it said that typically, a network of sub-agents, agents, general agents, sales
managers and general managers conducts operations across national borders. The
pyramid sales system functions according to a scale of points that are accumulated
for selling policies or recruiting new agents. As agents climb the pyramid,
commission escalates.
Citing the example of Hungary,
the ICC said the country was penetrated by the pyramid sales organizations very
rapidly due to its relatively liberal economic climate and the absence of any
cle
ar provision in insurance legislation dealing with insurance intermediaries.
The Hungarian insurance supervisor calculated in late 1994 that the total value
of illegally sold insurance was around US$ 40 million per year, with 50,000
policy holders.
The ICC's representations
were drafted by its Insurance Commission,
headed by Filomeno Mira, Vice-Chairman of Corporacion MAPFRE, Madrid.
The ICC insurance experts
said: "The most effective single measure which could be taken to restrain
the activities of the pyramid sales agencies would probably be for insurers
to cancel contracts with them in their home territory if they engage in non-admitted
sales abroad."
Nature
and consequences of pyramid activities in life and accident insurance