How it works

      A Pyramid or Ponzi Scam starts with a person or entity at the top so its kind of like a big pyramid. The higher up on the pyramid, the more money or benefit there is to be made. There are many of these types of schemes in place and the early ones started something like:

1. Person A - Has Person B and C give him $2
2. Person B and C each have 2 people give them $2, some of which gets kicked back up to Person A. So Person E and F would each pay Person B and Person G and H would pay Person C. Person B and C would each keep say.. $1 and kick $1 back to Person A.
3. Persons D, E, F, G would each go and talk to and recruit 2 people of their own who in turn would pay $2 and go on to recruit 2 of their own and so on.

     Under this simple yet crude plan (we'll explain why its crude in a minute), the people towards the top make the most money because of all the kickbacks that filter upwards. The type of scheme that is illustrated is highly illegal by the way. Work has been done over the years and people have learned to complicate the good ole fashioned Ponzi or Pyramid Scheme.

Borne: Multi-Level Marketing Scheme - The grey area

     The old saying goes, if it aint broke, dont try and fix it. Well Pyramid and Ponzi schemes became broken because they could easily land people in jail for starting or participating in them. So some smart people had to come along and fix it. Rebranded as a "Multi-Level Marketing Tactic" the old illegal schemes now float in a grey area that isn't illegal. Unethical, immoral, uncouth.. yes but illegal is all that the money makers are concerned about.

Life insurance - The perfect vehicle!

     A life insurance company came about a few years back and they started this thing where you start to work for them and sell life insurance. Due to the extreme profitability of life insurance for the company that writes them. It is a product that can basically be conjured from thin air and handed to people in exchange for real money. The main thing that made the old Pyramid/Ponzi shams illegal was that nobody was selling a product! There were of course certain other companies that created a door to door sales force to sell makeup or cleaning products. Those all worked fine and dandy but I'm starting with life insurance because its really balancing the line of being a true product because it doesnt cost the company anything to make it.

     Now you were brought on with the idea that you were going to sell this life insurance to people but you also had a seed planted in your head that you have people working under you doing the same thing that you referred to the company. Hmm this is looking familiar now. So now the real idea is to find other people, who find other people, who find other people, who also find other people to sell life insurance to people. All this money filters to the top of the pyramid again. Except.. Tada! Its legal now!

The Farmers Insurance Multi-Level Marketing Scheme

      How it works:

Farmers Insurance offers Auto, Home and Life Insurance policies. Similar to the life only company they have a product with a very very high profit margin and two other products being the Auto and Home product with not so high profit margins.

The pyramid tops out at the stock holders of the company, but before they get paid money filters from client -> agent -> District Manager -> District Marketing Manager -> Regional Manager. The company further enhances the pyramid and ponzi design to benefit those at the top by the following structure changes:

• Hire lots of agents - Farmers has by far the most agents per policy of any company in their market. In Arizona there are 1200 Farmers polices per agent average, Allstate has 2000 policies per agent, and State Farm has close to 4000 per agent.
• Sell more life - Farmers Agents are pushed until they cannot take it anymore to sell life insurance. Farmers Insurance Group wants all the life insurance it can get because of its profit margin.
• Agents are not employees - Make all the agents independent contractors so that Farmers Insurance Group does not have to provide benefits, be subject to wage laws and to protect themselves from certain lawsuits.

The key to the Scheme: The Farmers District Manager

The Farmers District Manager is the next step up from the agent. The district manager makes a percentage of income based on how much the agents in his district sell. They get bonuses based on how much production is made on certain sales such as (fill in the blank) insurance!

What kind of Quotas could a DM for Farmers have? Maybe hire x amount of agents a year, or have them increase growth by x amount etc.. but growth requirements are district wide. This means that the more agents a DM hires the better they can do! The DM doesnt care one bit if the piddly little agents underneath him are a success. The DM's goal is bottom line hard numbers and district wide increases in policy count. How can a DM make this work?

1. DM hires an agent off the street. Makes no difference if their smart, dumb, male, female, white, black, Chinese or whatever! As long as they know people they can sell insurance products to, especially life insurance.
2. DM tells agent lies about how they will make mass amounts of money and eventually sit around and do nothing while staff does all the work and renewals pay their salary.
3. Agent gets psyched about making a lot of money for very little work in the future and look at the road layed out ahead of them. Hmm the problem is, the agent must sell 20 life this year or DM wont like him.
4. Agent writes life insurance on himself and all his closest family members and yay! Gets a piddly blue vase award! Starts to feel good about himself
5. A little time goes by and Agent again needs to write 20 more life policies. Hmm, he asked all his clients every time he talks to them. He also pesters everyone that sits next to him at the car wash or standing in line at the grocery if they want to buy life but none do. Nobody wants any life insurance.
6. Agent gets desperate, he's falling short of life, starts to beg closest friends for life insurance policies. Starts to write a 2nd and third on himself, wife and all his kids. He squeaks by for 6 more months.
7. DM Demands more life from agent or else!
8. Agent quits
9. DM recycles all of agents hard work in the form of Auto and Home policies and gives them to his favorite agents in his district to make them do better.

Identified: A new step in the pyramid!

Take a look back at step 9. The DM will have some favorite pet agents in his district to pass these loser agent polices on to. The good news is its only really a half step. The recipient agent gets a crippled commission structure on these policy transfers! The pet agent can make this work though by constant cancel and rewrite of the incoming policies. Who cares if it pisses the client off. We gotta convert this crap from series 500 to 300!

Removal of commission paid for life insurance to agent!

Now heres the good part, pay close attention to this one.

First we have to start out with how life insurance commission is paid -

1. Originating Agent writes the policy
2. Underwriting approves
3. Client pays
4. Agent gets paid 40-55% of the 1st year premium paid
5. Agent gets paid a very small service commission after the first year that ranges from .05 to 1%.

If the originating agent of this policy quits what happens? The life policy goes to the new agent or pet agent as referred to above. Pet agent will only get the commission in step 5 and perhaps only 50% of that structure but since I dont recall exactly recall we'll just call it 1% of premium paid per year. The average life policy wrote in my agency while with Farmers had a premium yearly of about $300-400. Based on that, the transfer agent will make $3 - 4 a year on the life that I wrote! So its not a complete removal of commission but 3-4 bucks a year on something that you must service or have your contract canceled for sounds like a huge bargain for Farmers Insurance. They have people doing their work now and they will never get paid for it!

What happens to the rest of the money!

Life insurance has an extremely low rate of payout. Were looking at the rage of about 1% and say for example 100 people had the same exact rate of $400 a year, in 20 years Farmers would collect 400 x 100 x 20 = $800,000 in premium. I know what your thinking right about now, "how much insurance did these people buy and what about if someone dies and they have to pay?". The sweet part about this is something called re-insurance! Farmers doesnt have to pay so it doesnt make any difference what the limit was on the policy. The only thing that makes a difference is the cost of the reinsurance. So now we subtract out 1/2 of the first year premium for commission to agents which total : $20,000 and subtract out some underwriting costs and maybe paramed charges (well wipe out the other half of the fist year commission), and also toss out that 1% per year over 19 years for commission and we get:

$752,400 in profit or $7,524 per policy profit

This doesnt even mention the fact that they invest it and make many times this amount.

Here are 3 hard facts about being a Farmers Insurance Agent, Reserve Agent or Career Agent:

• Agent must write 4 policies every 3 months or get fired
• Reserve agent program is 3 months
• Career Agent Program 24 months

Heres an example of how this scheme could work in the Farmers District:

• Reserve agent rate of success is 40%
• Career Agent rate of success is 50%
• Non-Successful Career Agents stay average of 12 months
• Average of 3-5 agents a month enter the districts Reserve Agent Program. We'll call it an even 4 per month spread out over the year.

Reserve Agents:

40% pass = 4 life x 1.6 Agents = 6.4 Life Policies

60% fail = 2.4 Agents Fail but write 1.3 life each = 3.12 Life policies

Total Reserve Agent Life policies per year = 12 x 9.52 = 114.24

Career Agents:

50% pass = Each Agent -> 16 life a year (minimum) x 19.2 new agents a year = 307.2 Life policies a year

50% Fail = Each Agent -> 16 life a year (minimum) x 19.2 agents fail but stay 12 months average = 307.2 more life policies a year

I'm not adjusting per year, were just going to assume anything in the latter part of the year carries over to next and the prior year carried over to this one to balance the average out. The other thing that isnt accounted for is the sucsessful career agents that write another 12 months and pull in an additional 300 policies a year though some might wash out by then.

Net Figures in year one

114.24 + 307.2 + 307.2 = 728.64 New Life Policies in a year

With an average of $400 a year in premium that is:

728.64 x $291,456 per year in premium.

Average span 20 years *subtracting 1st year premium as expense = $5,537,764

Now look at the average tenure of a DM which we'll put at 7 years

7 x 5537764 = $38,763,648 PROFIT!

I will point out a couple flaws here so you dont have to. I know that many districts wont bring on that many agents a month and we can adjust that. But also account for this: I didnt add in the extra 307.2 policies the career agents will write in the 2nd 12 months of their program AND I didnt include life policies existing agents in the district are writing! I'm also not accounting for life policies that wont make it the full 20 years. It is quite possible that Farmers can make in excess of $100,000,000 in hard cash off of each District Manager. I say hard cash because you and I know that the money is invested and will yield many times this amount over 20 years.

I absolutely dare anyone to come up with and provide to me proof that this example is completely incorrect.

It is very possible that on our sample district that farmers can make close to 1 billion dollars from the clients that were brought in over their life time. That is one district, and the tenure of one single district manager in my EXAMPLE.

Of all this money coming in the door. Who gets it and where does it come from?

It comes from you and me and everyone else that has taken part of this. It all goes to Farmers Insurance. As an Agent we made a small fraction of what the policy is really worth over time yet we did all the real work.

I further contend that being a Farmers Insurance Agent sucks!