Regulators Probe Insurers' Death Claims

By Jeff Jeffrey
A.M. Best Co.
May 2, 2011

U.S. insurance regulators are homing in on how life insurers make decisions about how to pay benefits under life insurance policies. Practices that some companies have used for decades are being called into question by regulators in 35 states, many of which have coordinated their efforts over the past several years.

At issue is whether roughly two dozen of the largest life insurers are failing to confirm policyholders deaths, aren't paying beneficiaries in a timely manner and aren't turning unclaimed funds over to states as required by unclaimed property laws. Some, such as MetLife and John Hancock , are alleged to have known about a number of policyholder deaths but continued to draw-down premium costs from their account until the cash reserves were used up.

State regulators said that given the number of ongoing investigations in almost three dozen states that focus on industrywide practices, more regulatory actions are likely to follow.

Two states, California and Florida, have begun slapping major life insurers with subpoenas, ordering the companies to appear before regulators to explain their payment practices. Florida issued a subpoena to Nationwide Life Insurance Co., requiring a company representative to attend a May 19 hearing. MetLife was hit with subpoenas from both the California State Controller's Office and the Florida Office of Insurance Regulation (BestWire, April 26, 2011). Tom Leonardi , Connecticut's commissioner, announced that his state is launching an investigation into death benefits as well.

California said last week it was one of 23 states to reach a settlement agreement with John Hancock Life Insurance Co. that required the company to make a number of concessions. As part of the settlement, John Hancock agreed to restore the full value of more than 6,400 impacted accounts dating back to 1992 and to help reunite more than $20 million of death benefits and matured annuities with their owners or the owners' heirs (BestWire, April, 25, 2011).

To date, California has audited 21 insurance companies over the past three years. Florida has six active investigations going.

Florida Insurance Commissioner Kevin McCarty said the National Association of Insurance Commissioners is making this an "industrywide examination. If a company has knowledge of a death, they have an obligation to investigate what its impact will be on benefits." The NAIC tapped McCarty to lead a task force focused on life and annuities claim settlement practices. The individual investigations being conducted in the states are being coordinated by the NAIC.

The May 19 hearing in Tallahassee, Fla., is designed to serve as the initial front of the national examination of life and annuity settlement practices, McCarty said. In addition to regulators from the Florida OIR, the State Department of Financial Services and the State Office of the Attorney General, insurance regulators from across the country have been invited to attend.

McCarty stressed that the hearing his office ordered MetLife and Nationwide to attend was "not intended to suggest that their conduct was improper or different from any other company. They were just first in line."

Insurers argue beneficiaries bear the burden of notifying the companies of a policyholder's death. They also contend they have taken a proactive approach to matching names found on the Social Security Administration's Death Master File with their lists of policyholders.

"MetLife has a strong history of taking proactive measures beyond those required by law to improve its ability to make prompt payment of life insurance benefits to the correct beneficiary upon notice of death," said John Calagna , a MetLife spokesman, in a statement.

Andrew Edelsberg , vice president of the life/health division at A.M. Best Co., said in general, litigation "is always part of the equation. Insurance is a contract. When you're dealing with contracts, you're going to see parties disagree over the complexities and details in the contract."

As far as ratings, such investigations usually "don't have a significant impact. When the issues are substantial enough, it could have an impact on sales and distribution. But in most cases, we haven't seen any impact on ratings or the financial performance of companies."

The coordination among the states includes the decision by most of them to hire the same auditing firm, Verus Financial, to investigate life and annuity settlement practices in their individual jurisdictions.

Caroline Marshall , Verus Financial's general counsel, said states usually hire the firm on a contingent basis, offering to pay the company a percentage of any unclaimed funds turned over to the state as a result of discoveries made during Verus' audits.

Jacob Rosen , a spokesman for California Controller John Chiang , said California agreed to pay Verus 10.5% of all funds turned over to the state. Florida, however, opted for an hourly rate of $125, according to the state's April 7, 2009 contract with Verus.

For life insurers, the investigations into their life and annuity settlement practices mark the latest black eye for an industry already buffeted by recent controversies.

Last year, then-New York Attorney General Andrew Cuomo issued subpoenas to some of the nation's largest life insurers, asking them to explain their use of retained-asset accounts for policies purchased by federal employees, including the death benefits of members of the military (BestWire, July 29, 2010).

Also last year, state regulators began investigating unscrupulous investors who allegedly used a form of annuities fraud to target seniors and terminally ill patients in a deal similar to stranger-originated life insurance transactions (BestWire, May 20, 2011).

Regarding the most recent investigations, Whit Cornman , a spokesman for the American Council of Life Insurers, said, "We think an examination of this issue will reconfirm the industry's commitment to fulfilling its promises to policyholders -- a commitment evidenced by the $1.6 billion life insurers paid to policyholders and beneficiaries on average every day in 2009."

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