A police investigation into allegations of fraud by Shanghai's largest insurance dealer has stirred the insurance market and created jitters over the possible loss of customers' insurance contracts.

The Shanghai branch of the China Insurance Regulatory Commission said on August 15 that insurance sales agent Shanghai Fanxin Insurance Agency Co. was found selling unauthorized fixed-income financial agreements. Shanghai police have launched a formal investigation into the company's alleged misconduct, said the regulator.

Rumors have circulated in the market since August 14 that Chen Yi, general manager of Fanxin has fled to Canada with 500 million yuan. Caixin learned from a source close to the company that Chen is no longer the legal representative of the company and has left the country as the company is facing financial turmoil.

Established in 2007, Fanxin began to focus on life insurance products in 2010 after Chen joined the company. The company has experience aggressive expansion and became Shanghai's largest insurance dealer with clients including Sunshine Insurance Group, Happy Life Insurance Co., Kunlun Health Insurance Co., Taikang Life Insurance Co, AEGON-CNOOC Life Insurance Co. and Sun Life Everbright Life Insurance Co.

In 2011, Fanxin clinched new insurance contracts with premiums totaling 150 million yuan, and in 2012, premiums revenue reached 480 million yuan.

However, Fanxin's business model has raised fears on the scale of fraudulent activity within the industry. A source close to the company said Fanxin has asked for high commission fees from insurance companies for new contracts signed. A report by Beijing Business Today said commission fees are usually about 100 percent to 150 percent of the first premium payment.

After receiving the high commission fees, Fanxin is alleged to have used the funds for other investments, or offer extra returns to attract new customers. The company is also said to have used the funds to forge new insurance contracts in order to get more money from insurers, according to the source.

"However, the commission fee for follow-up premium payments are much lower than that for the first payment, thus, when there is a decline in clients, Fanxin is unable to pay the premiums (for the forged contracts), and suffers a shortage of capital," the source said.

Beijing Business Today also cited an unnamed source as saying Fanxin sold insurance contracts with premiums paid by installments to customers but asked for one-time payments, and used the funds for investment.

On March 1, the CIRC fined Fanxin 50,000 yuan when its sales representatives were found to have misled customers.

A manager at an insurance company told Caixin that the company has stopped working with Fanxin about two years ago due to concerns of high commission fee payment.

The investigation into Fanxin has triggered concerns over similar practices adopted by insurance dealers and the potential risks for insurance buyers.