1979 0710 and 1017 - GOV (Senate) - FTC Study of Life Insurance Cost Disclosure

  • 1979 0710 and 1017 - GOV (Senate) - FTC Study of Life Insurance Cost Disclosure, Howard Cannon (D-NV)   ---  [BonkNote]  ---   [PDF-592p]
    • ACLI - John H. Filer, Chairman of the Board, AETNA Life & Casualty
    • ACLI
      • (p130-) - 1980 0130 - Letter - ACLI to GOV (Senator Howard Cannon (D-NV) - American Council of Life Insurance
    • Bureau of Consumer Protection - Albert H. Kramer, Director
    • Bureau of Economics - Michael Lynch
    • FTC - Michael Pertschuk, Chairman, Federal Trade Commission - 11p 
      • FTC rate of return index
    • "Removal of the FTC's Fact-Finding and Reporting Powers by the McCarran Ferguson Act,'' memorandum  .............. 80
    • (p26) - NALU [Currently NAIFA] - Letter - James H. Douds, vice president and general counsel 
    • (p130) - Letter - President Jimmy Carter to State Governors
  • <WishList> - (p188) - 1977 08 - Best's Review - Moorhead, "Doomsday Just· Ahead for Life Insurance? Not Necessarily!" 10, 12 (August, 1977).
    • 1979 0710 and 1017 - GOV (Senate) - FTC Study of Life Insurance Cost Disclosure, Howard Cannon (D-NV) - [PDF-592p]
  • (p9) - Statement of Hon. Michael Pertschuk, Chairman, (FTC) Federal Trade Commission; Accompanied By Albert H. Kramer, Director, Bureau of Consumer Protection; And Michael Lynch, Bureau Of Economics 
    • C. Timing of disclosure
    • Finally, the Commission was concerned about the timing of the disclosure.
    • The Commission believes that this information is important and useful to the consumer.
    • Because the information is more detailed it may not be readily available to the agent during the sales presentation, but it can easily be provided with the policy, as is currently the practice of companies which comply with the NAIC model.
      • Our experience indicates that if cost disclosure is to be effective, it must take place before the purchase decision. Consumers are very unlikely to read and use a disclosure package provided after the transaction has been completed.
      • For this reason, we recommend that a buyer's guide be given at the beginning of the sales presentation and that a preliminary policy summary be given prior to the time prospective purchasers are provided an application for a policy.
      • The preliminary policy summary would contain the basic information concerning the policy, such as the policy type, premium, surrender index and the rate of return.
      • The proposed preliminary policy summary contains only those limited items of information essential to an informed purchase decision.Under the NAIC model regulation, consumers generally received the buyer's guide and policy summary only when the policy is actually delivered, often a week to 10 days after purchase.
      • It would not be impractical for agents to have all of the information needed to fill out the preliminary policy summary with them during the sales presentation.
      • However, we concur in the NAIC's recommendation that a full policy summary be delivered with the policy.
      • That summary contains more detailed information concerning the cash flow elements of the policy.
  • (p130-) - 1980 0130 - Letter - ACLI to GOV (Senator Howard Cannon (D-NV) - American Council of Life Insurance, ACLI)
    • DEAR SENATOR CANNON: Enclosed is a copy of the response of the American Council of Life Insurance to the comments by the Federal Trade Commission on the Council's testimony on the Commission's life insurance cost disclosure report which was issued on July 10, 1979. Sincerely, Robert Bland Smith, Jr.
      • The staff of the Federal Trade Commission has chosen to respond to eight of the criticisms of the staff report made by representatives of the life insurance business at the October 17, 1979 hearing of the Senate Committee on Commerce, Science and Transportation.
        • These responses merely repeat the erroneous ideas and conclusions that were set out at length in the FTC staff report.
      • We should like to offer a few comments pointing out what we see as flaws in the responses of the FTC staff in order to clarify some of the matters under dispute.
        • Our comments will follow the same sequence used by the FTC staff.
    • 8. The Federal Trade Commission should not be involved in the life insurance area because it has not received a sufficient number of consumer complaints.
      • Predictably, the FTC staff responds that "consumer complaints do not always provide an accurate gauge of consumer problems."
  • (p13) -Senator Howard W. Cannon (D-NV), Chairman of the Committee -  Isn't it more realistic to assume a customer wants to know what the cost will be if he carries that policy out to maturity? 
  • ......
  • (p13) - Michael Pertschuk, Chairman, FTC, Federal Trade Commission. Actually, the vast majority of policyholders do surrender those policies. I think the staff report does expose the
    figures. But I think that at one point, after 15 years, as I recall, 32 times as many policyholders will have surrendered as terminated
    through death. So it is a fair measure.
  • Howard Cannon (D-NV), Chairman - Is there a median point that the staff has found? Let's say an average point at which the policies are surrendered?
  • Michael Pertschuk, Chairman, FTC, Federal Trade Commission. Twenty years-Mike, why don't you answer.
  • Michael Lynch, Bureau of Economics -  It's return rates that stabilize after about 20 years. As for lapse rates, they peak in the very first year. The very highest lapse rate is in the first 13 months. The next year typically has a higher lapse rate as well. Thereafter, they continually decline.
  • Howard Cannon (D-NV), Chairman - So that the first 13 months is the highest?
  • Michael Lynch, Bureau of Economics - The 13-months-lapse rate is typically the highest, and it's about 20 percent or so.
  • (p50)  --  Jim Martin, ACLI - chairman of the Massachusetts Mutual Life Insurance Co. My professional background is in marketing and I, too, represent the American Council of Life Insurance here today.
    • The NAIC committee on cost comparison considered and rejected Linton Yield-the method now proposed by the FTC-primarily because the committee believed that any system that attempted to separate the insurance and savings elements of a life insurance contract would create more misunderstanding than enlightenment for consumers.  
  • (p34) - John H. Filer, Chairman of the Board, AETNA Life & Casualty:
    • Whole life insurance is not partially insurance and partially savings.
      • It is wholly insurance.
    • It is not designed to provide for the possibility of economic gain in return for a risked sum of money.
      • That's an investment.
    • Nor is it designed to accumulate deposits of money building toward an individual or family goal as the depositor remains alive to make the deposits.
      • That's a savings account.
    • It is designed to provide a guaranteed benefit at death, whenever death ocours, in return for a price which is expressed as a fixed periodic premium.
      • That is what it is, that is what it does.
  • (p111) - The FTC commissioned three studies, two by Professor Jacoby of Purdue University and one by Professor Formisano of the University of Wisconsin.
    • The results of these studies helped improve the FTC's recommended disclosure system.
    • They were by no means suppressed, but rather were publicly released at the earliest possible date and have been disseminated widely.
    • All the studies are, in fact, summarized in the cost-disclosure report
      • the Formisano study on pages 150-163 of the text
      • and the much more technical Jacoby studies in a 27 page appendix.
  • (p130) - Letter - President Jimmy Carter to State Governors 

    • To Governor  ____________ -

      • Americans spend over $30 billion a year on life insurance premium payments. Yet too often, consumers lack the basic cost information they need to find the best policy at the lowest price.

        • The Federal Trade Commission has recently recommended a model state regulation on life insurance cost disclosure to help achieve this purpose.

      • On the basis of economic study and consumer research the Commission concluded that whole life value insurance policies not held to maturity pay a relatively low rate of return on their cash values, and that consumers are not getting the information they need to understand the true costs of their policies.

        • The result is billions of dollars a year in unnecessary costs to consumers.

      • I am enclosing a copy of the model state regulation and other material which summarizes the key findings and recommendations.

        • The model regulation is designed to provide meaningful disclosure of life insurance costs.

        • Under the law, only the states can act to require this kind of disclosure.

        • This is an important initiative the States can take to promote rice competition and to ensure that the life insurance market is responsive to the needs of consumers.

        • I hope that the resources invested in this study by the Federal government will yield a dividend of increased Federal-State cooperation.

        • I urge you and your insurance officials to give the model regulation the most careful consideration.

      • Sincerely, Jimmy Carter

  • (p130-136) - 1980 0130 - Letter - ACLI to GOV (Senator Howard Cannon (D-NV), Chairman, - American Council of Life Insurance, on The FTC Staff's Responses to Criticisms of the Report on Life Insurance Cost Disclosure 
    • (p130) - DEAR SENATOR CANNON: Enclosed is a copy of the response of the American Council of Life Insurance to the comments by the Federal Trade Commission on the Council's testimony on the Commission's life insurance cost disclosure report which was issued on July 10, 1979. Sincerely, Robert Bland Smith, Jr.
      • The staff of the Federal Trade Commission has chosen to respond to eight of the criticisms of the staff report made by representatives of the life insurance business at the October 17, 1979 hearing of the Senate Committee on Commerce, Science and Transportation.
        • These responses merely repeat the erroneous ideas and conclusions that were set out at length in the FTC staff report.
      • We should like to offer a few comments pointing out what we see as flaws in the responses of the FTC staff in order to clarify some of the matters under dispute.
        • Our comments will follow the same sequence used by the FTC staff.
        • 8. The Federal Trade Commission should not be involved in the life insurance area because it has not received a sufficient number of consumer complaints.
      • Predictably, the FTC staff responds that "consumer complaints do not always provide an accurate gauge of consumer problems."
    • (p131) - For cost comparison purposes, the natural unit price for insurance is dollars of Premium per thousand dollars of death benefit per year—adjusted as appropriate and cash surrender values.
  • (p167) - 125 Reprinted in Moss Subcommittee Hearings, supra n. 4, at 409.
    • In testimony before the Moss Subcommittee, Mr. Julius Vogel, Vice President and Chief Actuary of Prudential Insurance Company, testifying on behalf of the ACLI, readily admitted that the industry has taken inconsistent positions on the timing of disclosure in initial sales and replacements.
      • Mr. SHAFFER (Subcommittee counsel): My obvious question is, isn't this inconsistent with your position on timing for the model solicitation rule?
      • Julius VOGEL (ACLI / Prudential): Yes, it is.