Herb Denenberg Column For December 13, 1999


The life insurance industry has been hit with billion dollar verdicts and multi-million dollar fines for deceptive sales practices. The two largest companies, MetLife and Prudential, have each been hit with billion-dollar-plus verdict. Most major companies have also been sued for deceptive sales practices. The list goes on and on, as successful lawsuits finally caught up with an industry that has long bilked the public, misrepresented its product, and ignored the urgent need for basic reforms to stop abuses.


With billion dollar judgments (and that is "billion" with a "b"), you'd think the industry would learn its lesson. That's what you'd think but you'd be wrong.


The life insurance industry did establish the Insurance Marketplace Standards Association (IMSA). Of course, there are now ads announcing that the life insurance industry is committed to the fair treatment of policyholders. But early returns on the industry's efforts suggest it is just a sham and a shell game designed to prevent real reform by legislation and regulation.


Now a study by Professor Joseph Belth, publisher of the Insurance Reform, a respected newsletter on the life insurance industry, finds the reforms are a sham. I'd have to say as usual the life insurance industry wants to improve its public relations, not its policy relations.


The Insurance Forum study correctly notes that much of the life insurance deception comes about because the industry does not make full disclosure on rates of return and prices necessary to sound decision making by insurance buyers. By failing to disclose needed information, consumers are easily duped by deceptive methods.


The Insurance Forum put the industry to a test by asking the chief executive officers of 40 companies (31 of which are members of IMSA) for the kind of information that should be freely and automatically available to prospective policyholders.


Of the 41 companies surveyed, 27 did not participate. Only 13 companies (10 of which are members of IMSA) participated in the study.


And some of the 13 participants provided deceptive information. Some provided incomplete information. Some provided the kind of information that would not be helpful to the typical consumer.


The Insurance Forum study concludes that IMSA will not bring about the needed changes in the life insurance industry, but will simply delay their enactment. Most industries prefer "voluntary" action, so the foxes can continue to guard (and eat) the chickens, also known as policyholders. What's more, after the great life insurance scandals of the 1980s and 1990s, the industry is determined to perpetuate a system in which life insurance rip-offs by major and minor companies alike will continue to be standard operating procedures.


The bottom line is that the life insurance industry has practices that are precisely the opposite of its proclaimed ethical principles.


Here are some examples:


IMSA has an ethical principle that says its company members will "provide competent and customer-focused sales and services.\" The Insurance Forum survey suggests that most companies will engage in business as usual, giving the consumer no information, inadequate information or deceptive information.


IMSA has another ethical principle that says it will "engage in active and fair competition." But by not providing information or by providing deceptive information, it is clear that major segments of the industry will continue to engage in competition by confusion.


As Bob Hunter of the Consumer Federation put it, "The proof of the pudding is in the eating. It's hard to trust the life insurance industry, given its recent history. They're going to have to reprove themselves as trustworthy."


Unfortunately, the life insurance industry is proving itself untrustworthy. And as for the proof of its good intention being in the pudding, my advice is don't eat its pudding. It's the same old stuff plus a phony sermon on ethical principles.


(Herb Denenberg is a former Pennsylvania Insurance Commissioner and consumer advocate.)

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