The Value of Living and Death Benefits

The cover of the May 14-18 issue of InvestmentNews has an article by Darla Mercado titled: VA Surrenders jumped after Hartford bowed out. She states: “The unusual increase in surrenders, which has happened at other carriers that have left the business, shows that some brokers use the exits as a rationale to encourage legacy VA holders either to cash out their contracts or exchange them for new annuities.” She goes on to point out that “At the same time, [such actions] benefit brokers selling new contracts, which carry commissions of as high as 7%, depending on the carrier and share class.”

The article leads to a very interesting discussion of the value of living and death benefits in existing contracts and how much individual owners can lose when they exchange for a new contract. Of course, there are many individual variables, and insurers should expect these replacements to be scrutinized by regulators. However, I am skeptical about the ability of current replacement disclosure forms to adequately set out the trade-offs at play in these cases. I think particularly of the forms under New York’s Reg 60. It is clear that they were developed long before the most valuable benefits in today’s annuity contracts, and with each passing year and each new benefit, it gets more and more difficult to clearly convey the trade-offs to a consumer on those forms, now so dated. Those forms illustrate the downside to forms that require a lot of specific information rather than a more free-form disclosure. If the specific information that is required is not the most important information, the consumer gets the mandated disclosure, but not always effective disclosure. Of course there are risks to leaving more discretion in what is disclosed, but if accompanied by active regulatory oversight, it can lead to better actual disclosure.

There are some market players who have an interest in seeing that the contracts stay in force and Ms. Mercado reports that some broker/dealers are “considering a program in which clients with certain rich contracts receive regular reminders of their VA’s attributes and benefits.” In the past, thinking about replacements has assumed that the carrier with the contract in-force would have an interest in retaining the business, but that is not always the case. This article concludes with a quote from Tom Hamlin, founder of Somerset Wealth Strategies and branch manager with Raymond James Financial Services Inc.: “The insurance companies aren’t protecting their existing clients, because they want to get out from underneath the exposure to living and death benefits. There is no legitimate excuse to exchange or liquidate these annuities; nobody who is informed would do it.”

Spring Conference Season

It has been a week since the IAdCA annual conference in Seattle ended. As always, it was a great event and the board, with Murray Vassar as President, did a great job making it an educational and fun time for everyone. I enjoyed the two sessions that I presented—Market Conduct Issues & Developments and Producer-Generated Advertising. I am looking forward to seeing the participant feedback, hoping attendees found the sessions useful and informative.

In the Producer-Generated Advertising session, one of the main topics of discussion was Kansas Bulletin 2012-1. I had picked the topic several months earlier and it was a welcome addition to have a Bulletin—so directly on point—be issued so close to my presentation on the topic. The bulletin leads with:

Due to a growing problem with advertising practices by third-party marketing entities, the Department issued in January 1991 Bulletin 1991-4 in order to remind insurers authorized to transact life and/or accident and health insurance in Kansas of the applicability of K.A.R. 40-9-100 and K.A.R. 40-9-118 to the marketing activities conducted by third-party entities. Over the last couple of years the Department has experienced a similar increasing trend in the number of complaints regarding life and health insurance advertisements produced and distributed by third-party marketing firms.

Some session attendees were very much aware of the bulletin, while others were not. But there was a lot of interest from both groups. Since I am leading a similar session at the New England Chapter of the AICP Education Day in Springfield MA on May 11, I realized that it would greatly enhance the value to have the Kansas regulators co-present/discuss the issues related to advertising produced and distributed by third-party marketing firms. I am pleased to announce that Ms. Jennifer Sourk, an attorney with the Kansas Insurance Department and Mr. Jason Lapham of the Life Division will both be attending E-day and will be sharing the panel with me. I am quite sure our discussion will be a lively one.

In between IAdCA and E-day is IRES. LHCA, the Life and Health Compliance Association, wrapped up yesterday on an altered schedule because of the religious holidays. E-Reg is coming, too. In the spring and fall, there are so many conferences; it sometimes feels that they are right on top of each other. I always look forward to the opportunity to share information and rekindle connections in person when so much of our interactions are by e-mail and telephone. At the end of each conference season I feel a sense of relief but also a bit of sadness as my work world again pulls inward. To those of you I will see soon, I am looking forward to it! To those of you who will not be at this round, perhaps I will see you during the fall conference season?

From A Woman and a Leader

I have to admit that I am a sucker for a blog post titled, “Are Women Better Leaders than Men?” There is no way I am not going to read that post. So, moments ago, I read Jack Zenger and Joseph Folkman’s post on the Harvard Business Review blog from last week, March 15, 2012. It was conveniently tweeted to me from Nicholas Kristof. I love social media!

And even more than that, I love their 2011 study’s conclusions: “at every level, more women were rated by their peers, their bosses, their direct reports, and their other associates as better overall leaders than their male counterparts- and the higher the level, the wider that gap grows…at all levels, women are rated higher in fully 12 of the 16 competencies that go into outstanding leadership. And two of the traits where women outscored men to the highest degree- taking initiative and driving for results – have long been thought of as particularly male strength.” Zenger and Folkman found the only management competence where men scored higher than women was “Develops Strategic Perspective.”

I do not believe that I have been the recipient of significant overt discrimination in my legal and consulting career. But I also decided to take the risk and start my own business because in both government and private industry, I felt there were significant obstacles to the career path that I wanted. Neither were directly related to gender, but in both cases I felt the sentiment expressed by some of the survey participants: “We feel the constant pressure to never make a mistake, and to continually prove our value to the organization.” On my own, that is not an issue and I try to make my employees feel that it is not an issue either. It is my goal to have everyone who works here know that they are valued and an important part of the team. Not because of any gender-based focus on nurturing but because that is how I think we do our best job for our clients. And doing the best job we can for our clients is how we grow and thrive.

When I look at the people who work here I see people who excel at all of the 16 top competencies of leadership that Zenger and Folkman used in their study. Many, though not all, of us are women. To greater and lesser degrees, depending on the particular competency, my employees all: take initiative, practice self-development, display high integrity and honesty, drive for results, develop others, inspire and motivate others, build relationships, collaborate and work as a team, establish stretch goals, champion change, solve problems and analyze issues, communicate powerfully and prolifically, connect the group to the outside world, innovate, have technical and professional expertise and, yes, even develop strategic perspectives. Oh, and they laugh a lot.

Starting a business felt like a big risk at the time and I guess it was. But it was good for me professionally and I think it allows me to create a work environment that lets others thrive as well. And, this blog post helped me to feel pretty good about that today.

Do you know the content of your documents?

Insurance compliance has seen a steady increase in the demands for information, whether approval information, licensing and appointments, complaint handling, payment of proceeds, etc.— the list is just about endless. Records management has become essential for the compliance office.

A recent posting on the Society of Corporate Compliance and Ethics website was interesting because it highlights the importance of document management as distinct from records management. That distinction is key for compliance. It is not only tracking the record itself, but also tracking the content of the document and any responsibilities flowing from the content that will be the difference between compliance and noncompliance in today’s world. The discussion at SCCE was not specific to insurance compliance, but it was certainly relevant.

The posting on March 5, by Eric Newman, Esq., Social Media Manager for SCCE stated: “documents provide the evidence of business transactions and decisions, but it’s the data contained in the documents that drives the decisions and regulatory filings and reports…even with the best document management program, compliance officers can only retrieve a document and must then manually mine the document for data.”

That is a challenge many of our clients have faced with recent regulatory inquiries and we expect the future will bring more such demands for information – not the document itself, but the consistency of the company’s conduct with the content of the document. The recent inquiries by the Minnesota Insurance Department and Attorney General, on the issue of unclaimed property, was an example of a regulator’s general request wanting an analysis of policies and procedures that were in place and the actual business practices that flowed from them. It was not enough to pull out the document that laid out the policy; they wanted to know how it was implemented on an ongoing basis. They wanted a discussion of the substance of the documents, not just a reference to the documents themselves. That makes sense from a regulators perspective, but from compliance perspective, it poses tremendous challenges.

Managing the content of documents and ensuring that across the enterprise is no easy task. Each document, contract, or agreement has to be reviewed for content that may need to be tracked. Only automation can feasibly make that content retrievable. Who is responsible for that review and tracking? Historically that is something that has rarely been done in any comprehensive or centralized way, but more and more it is becoming essential. When the law department reviews a new policy, procedure, or agreement, do they then hand off the document to an internal or external resource to review for deadlines, renewal dates, reporting markers, and other obligations and then enter those into a system that can track them? Or is each business unit on their own to keep track of those obligations as well as their other day-to-day work? If the later, we have found that makes responding to regulator inquiries much more difficult and time consuming.

We all know that things often don’t get done when we wait for the time to do them when little else is going on. We are all pulled in too many directions for that approach to work for critical compliance issues. The regulatory and business climate changes daily, but often the systems used for compliance have been in place for many years and have been updated only on an ad hoc basis. This is an area that will be increasingly more important for compliance and we urge you to look at the degree to which your company has control over the content of your documents.

Cailie A. Currin, JD
Jonathan Young, of Counsel

Producer-Generated Advertising Material

At the end of this month, I am presenting on the topic of producer-generated advertising compliance at the Insurance Advertising Compliance Association (IAdCA) conference in Seattle, Washington. I am finishing up my presentation and I’m excited about the discussion I hope we will have in that session.

Life Insurers put tremendous resources into their product advertisements and all the materials that are produced in the home office. But those materials come late in the sales process. Often consumers are not presented with those home office materials until right before the close.

There is so much that happens before that time. For example, a postcard for a seminar, the seminar itself, handouts for participants, one-on-one meetings, additional handouts, and much more can all come before the actual product is recommended and the application completed. Those materials do not refer to any particular product or insurance company.

Who is looking at those materials? What is the regulatory exposure with respect to what happens at a seminar? For an insurance company, does it come down to the “luck of the draw?” What if a producer who is appointed by, say, seven companies does a seminar that raises a number of compliance issues and ultimately sells an insurance policy/contract to an attendee of that seminar, and it turns out that the owner doesn’t really understand what they bought or makes a “bad” replacement? Is it only the insurer, whose product was actually bought, who is exposed? From a regulatory perspective, does that make sense? From a company perspective, is that fair? How many companies are looking at this risk? These are among the issues we’ll be talking about in a couple of weeks.

I’d love to hear from readers with your thoughts and I hope to see you in Seattle! Stop by our booth and say hi.

Changes to New York’s Market Conduct Profile for 2011 Reporting

On March 2, 2012, the New York Department of Financial Services posted changes for the Market Conduct Profile due later this year, to be completed with data from 2011 on its website. There were only two changes indicated from last year:

1. Question 7 in the Compliance Section is added. These questions relate to the Company’s AML Program and the specific products that are covered under the AML Program.
2. In question 12 of the Compliance Section (formerly question 11), the question concerning membership in IMSA has been replaced with question concerning the membership with The Compliance & Ethics Forum for Life Insurers (CEFLI) or other similar organizations.

It is the second one that I found particularly interesting. As we have discussed here previously, the change from IMSA to CEFLI was a very big change and one that eliminated the compliance assessment and certification requirement for membership. I was a qualified independent assessor under IMSA, so I have a bias, but I do not think that membership in an organization that hosts webinars and conferences on general compliance topics is the same as one that mandates an exhaustive in-house assessment process and then has an outside assessor review that work.

Membership in CEFLI is not the same as membership was in IMSA. That is not to say that CEFLI doesn’t provide important information or the opportunity for significant discussions on insurance compliance topics. However it does not reflect the significant commitment to a process of assessment and evaluation of a large number of company policies and procedures the way IMSA membership used to. I am sure that the New York Department of Financial Services knows that and they do indicate that other similar organizations can be included in the response. I am, therefore, hopeful that membership in all the other organizations that support life insurance companies in their compliance efforts (e.g., the Association of Insurance Compliance Professionals, the Insurance Advertising Compliance Association, and the Life and Health Compliance Association) are given similar weight to CEFLI membership.

What made IMSA different was the rigorous assessment process. Without that in CEFLI, there are a number of equivalent organizations to which companies may turn to obtain information and compliance support. In my opinion, all should “count” in their favor on the market conduct profile.

Can We Just Focus on the Circular Letter?

When the New York Department of Financial Services Circular Letter 4 (2012) was posted on their website in late February, I had a strong reaction, as did many others. But when I took a step back, I realized that it wasn’t so much the Circular Letter itself, it was the accompanying press release. That release was surprising in both its tone and conclusions. I was not surprised that New York would issue a Circular Letter requiring disclosure around retained asset accounts and rules for their election. Many other states have.

What was surprising to me was the use of emotionally charged statements in the press release such as: “For years, the life insurance industry has been earning hundreds of millions of dollars by holding life insurance payouts of America’s soldiers, veterans and others in so-called ‘retained asset accounts.’” Is this ranked in order of the amount of proceeds held or in the order of emotional appeal? The press release further states: “Even though the money is owed to surviving family members, the insurance companies continue to earn interest on and invest these funds until they are withdrawn by survivors.” That is a true statement, but it seems to suggest that other financial institutions would not benefit if those funds were on deposit there.

All financial institutions make a profit of the funds they hold, don’t they? If a beneficiary of a life insurance policy is issued a lump sum and they deposit those proceeds in a bank account, the suggestion seems to be that the bank doesn’t then make a profit on those funds.

The suggestion by the Department of Financial Services, that now regulates both banks and insurance companies, appears to be that banks are altruistic and insurers opportunistic. Unlike the insurers, banks won’t profit off of life insurance proceeds left on deposit with them. Really? My savings accounts are earning less than 1% interest right now. Am I supposed to believe that the banks are not investing and earning anything above that? They are passing everything through to me? If not, would that be somehow different if the funds sitting in my savings accounts were proceeds from a life insurance policy instead of saved income? If my accounts had been funded with life insurance proceeds, the bank would not “continue to earn interest on and invest these funds” until I withdrew them? The only alternative to a financial institution making a profit on life insurance proceeds seems to be to require that the proceeds be held by the beneficiary in cash – perhaps stuffed in a mattress. If a financial institution is going to profit does it really matter to the individual whether it is a bank or an insurance company?

Now there is the question of FDIC coverage. FDIC does not cover proceeds left on deposit with insurers. I am fine with that being disclosed. But what about state Guaranty Fund coverage? Why is it not equally important, in the name of full disclosure, that insurers be able to compare and contrast what Guaranty Funds cover with what the FDIC provides? Notices are required in some states on policy delivery, but discussion at any other time is generally prohibited unless initiated by the consumer. Full and complete disclosure would seem to argue in favor of changing that position and allowing a discussion of Guaranty Funds whenever FDIC is mentioned.

What seems unfortunate to me is that there would have been little insurer outrage at the content of the Circular Letter itself. It focuses on disclosure and procedures for electing settlement options in lieu of a lump sum and while the requirements are somewhat more onerous than other states, in my opinion, they are not surprisingly so and they require only incremental modifications to what most companies have implemented in other states. Not what companies wanted, particularly so late in the retained asset account game when changes have been made to process and procedure based on what other states already require: but not an insurmountable burden either, I don’t think.

When coupled with such an inflammatory press release, it is hard to avoid a strong emotional response. And emotional responses often lead to resistance and opposition, which I don’t think was necessary to achieve compliance. And that suggests that perhaps the goal of the press release was other than industry compliance.

How Many State PPACA Exchanges Will There Be on January 1, 2013?

The New York Times ran an interesting article this morning by Robert Pear, titled: “Many States Take a Wait-and-See Approach on New Insurance Exchanges.” The article makes clear that states are all over the board in how they are approaching the coming deadline, on which the decision will be made whether the state or federal government will run the exchange. It is impossible to understate the role of politics in anything having to do with health care, health care reform, or health insurance regulation these days.

In that light, it is fascinating to me that the states with leaders most opposed to the Affordable Care Act, those who object the most loudly to the federal mandates, are often the states purposely not working on exchanges. That seems to be putting all of their eggs in the Supreme Court basket. If the law is upheld and they have nothing to offer, the federal government will be running the exchanges in their states. No doubt there will be much finger pointing at that time. But it seems quite unlikely that those state legislatures will simply accept the loss, take responsibility for not working toward the deadline and quietly accept a federal exchange in their state.

Mr. Pear’s article refers to research by the nonpartisan Urban Institute, which found that 14 states had made significant progress, while 16 had made little or no progress and the remaining 20 were “somewhere in between.”

The article also points to what Mr. Pear describes as a “curious twist” saying that “insurance companies, which battled Mr. Obama over health care in 2009 and 2010 are now urging state officials to set up exchanges.” The article says that insurers tend to prefer state regulation to federal and they have a financial interest because payments will come directly from the US Treasury for insurance covering low- and moderate-income plan participants.

I think there is another reason, too. Health insurers did not uniformly jump behind PPACA in 2009 or 2010. They also cannot function efficiently in an environment of regulatory uncertainty.

In my view, certainty is one of the keys to effective regulation of any industry because it allows regulated entities to develop policies and procedures that are built around compliance. Uncertainty, especially for long periods of time and with deadlines looming, is often worse for business and more expensive than what might otherwise be considered burdensome regulations.

Insurers have to plan and develop procedures for compliance with PPACA. While some state legislatures and politicians may feel comfortable waiting and pushing the deadlines set under the law, insurance companies are used to being regulated. When there are upsides for them, as there are with PPACA, it is generally better for business to get on with it.

Mr. Pear included some very interesting examples of specific states and the political issues that have arisen over implementing the exchanges. None of them are rooted in what is good for consumers in those states or for the insurance companies trying to do business in those states. Rather the exchanges are mired in a party-line battle that is so familiar and so tiresome these days.

If the Supreme Court holds the law unconstitutional, so be it. But in the meantime, it is the law. And, in my opinion, it doesn’t do any interested party any good for states to refuse to implement it; it only prolongs the period when there will be confusion. For insurance companies, there are few things that make success more difficult than regulatory uncertainty.