Mis-selling

  • Mis-selling and market conduct issues in the United States obviously have been important features of the U.S. markets in recent years, and again, some of that ties back to corporate governance.
    • SarbanesOxley obviously will have an impact.

--  Tom Dardis, Tillinghast's Dallas office who specializes in risk management

2004 - SOA - Integrated Risk Management, Society of Actuaries - 22p

  • As Steve discussed, you were illustrating 9% or in the heyday 11%.
    • Granted that was just an illustration, and you may or may not have had cautionary language alerting the policyholder that this isn't a guarantee. 
    • This is just where we are today.
    • Maybe the guarantee is something like 4%, but these people who perhaps were missold a policy by an aggressive agent thought that that 11% was going to be there forever.
    • It's now 7%.
    • ⇒  What is it that they lost?

--  Allan Horwich, partner in a law firm located in Chicago

1999 - SOA - The Role of the Actuary in Litigation Support, Society of Actuaries - 16p

  • 7.4 MISSELLING - Misselling of insurance and investment products has not been confined to unit-linked products.
    • Misselling in general falls under three categories:
      1. The sale of an inappropriate product
      2. The use of unrealistic assumptions to illustrate the benefits under the product
      3. Failure to explain the way the product works, including an explanation of policy factors that are and are not guaranteed or subject to review.

2000 - Report - Munich Re Group - Unit-linked insurance: A general report, Münchener Rück - 51p

  • 9.2.6 Operational risk
    9.2.6.1 Background and proposed approach
  • 342. This covers risks associated with the operations of the IAIG.
    • Examples of operational risk include losses due to fraud, failures in computer systems and administrative processes, legal risk (excluding strategic risk and reputation risk), mis-selling of products and external events causing damage to the IAIG’s premises,  equipment or people.  (Page 96 of 159)

2014/2015 - Report - IAIS - Risk-based Global Insurance Capital Standard - Public Consultation - 17 December 2014 – 16 February 2015 - 159p

  • 2016 - Max Planck Society - Financial Fraud: A Literature Review - 101p
  • (p63-64) - 4.3 The mis-selling of life insurance and pension schemes
    • One segment of the financial services industry that over the last few decades has been repeatedly plagued by episodes of large-scale mis-selling is the life-insurance and private pensions industry.
      • Widespread mis-selling of life insurance and pension plans resulted in major scandals and regulatory actions...
        • ...in the United States in the 1980s (Fischel/Stillman 1997; Egler/Malak 1999),
        • ...in the United Kingdom in the 1990s67 (Black/Nobles 1998; Ryley/Virgo 1999; Schulz 2000; Ward 2000),
        • ...and in the Netherlands68 and India in the 2000s (Anagol/Cole/Sarkar 2013; Halan/Sane/Thomas 2014).
    • Although academic literature on mis-selling practices in the life insurance industry is scarce, the literature that does exist shows that the abovementioned mis-selling scandals all occurred against the backdrop of a gradual withdrawal of government support for state pension provision and a secular move away from traditional, collective “defined benefit” pensions toward personal “defined contribution” accounts, which essentially are investment products based on the investment performance of an underlying portfolio (Black/Nobles 1998; Ryley/Virgo 1999: 20; Ericson/Doyle 2006: 998; Mitchell/ Smetters 2013: 1).
    • Governments in those countries allowed, through legislation, and encouraged, through tax incentives and advertising, individuals to substitute personal pension plans provided by life insurance companies for collective occupational pension schemes (Black/Nobles 1998: 796–797).
    • The political rhetoric behind these reforms was one of bigger pension benefits, increased efficiency and flexibility of pension systems, enhanced individual control over life savings, higher returns, and decreased government pension costs (Schulz 2000: 104).
      • In reality, however, the reforms turned out to create the perfect conditions for widespread mis-selling of life insurances and pensions in all of the abovementioned countries.
  • Lincoln UK Maintains reserves established in 1997 and 1999 for mis-selling activities.  (p82)

Lincoln National Corporation - 2006 Annual Report to Shareholders - 228p

  • 2. Heard a Presentation from the Operational Risk Consortium John Simone (Operational Risk Consortium—ORIC)
    • The definition of operation risk management would include any issues regarding people or governance as it pertains to oversight, technology, infrastructure, business continuity management, outsourcing, mis-selling, data protection, or transaction processing and products.
      • He explained that this is a broad definition, which makes it difficult to quantify because of the vast amount of variables involved, and is people-driven with a large amount of technology included, which makes it difficult to measure.
    • Operational risk also includes legal risks.  (10-596)

2012-3, NAIC Proceedings 

  • 7.4 MISSELLING - Misselling of insurance and investment products has not been confined to unit-linked products.
    • Misselling in general falls under three categories:
      1. The sale of an inappropriate product
      2. The use of unrealistic assumptions to illustrate the benefits under the product
      3. Failure to explain the way the product works, including an explanation of policy factors that are and are not guaranteed or subject to review.
    • In relation to unit-linked products, the potential client should be fully aware that its contract does not guarantee returns (unless otherwise stated) and that point-of-sale illustrations are used only to demonstrate how benefits would be affected under hypothetical investment scenarios.
    • However, intermediaries may be tempted to use unrealistic return assumptions for these illustrations in order to facilitate the sale, especially in a competitive environment.
  • In unregulated markets with no illustration guidelines, some purchasers may be misled into believing that the rates were guaranteed or that there were some minimum guarantees.
    • Widespread misselling of investment products can result in the local regulator imposing remedial action on the insurers (for example the pensions review in the UK) or in class action lawsuits against them (for example the “vanishing premium” class action in the USA).
    • The UK pensions review arose from sales of inappropriate products.
    • The “vanishing premium” class action arose from sales of universal-life policies where the high interest rates of the early 1980s were assumed to continue far into the future.
      • As interest rates actually fell, clients were notified that they would have to pay premiums for a longer period of time than illustrated in order to maintain their benefits or achieve their cash-surrender value objectives.
      • In the end, the insurance companies paid heavy fines and illustration guidelines were created.

2000 - Report - Munich Re Group - Unit-Linked Insurance: A General Report, Münchener Rück - 51p

  • The life insurance disclosure movement has focused almost entirely on point-of-sale disclosure, to the virtual exclusion of post-sale disclosure.
    • Life insurance companies are therefore under pressure to provide attractive point-of-sale information.
  • Some of the methods used to achieve this objective adversely affect long-time policyholders.
  • Emphasis should be placed on the need for post-sale disclosure. and policyholders should be educated on how to perform their own evaluations.
  • Publicity should be given to companies whose actions improve the position of long-time  policyholders and to companies whose actions adversely affect long-time policyholders.

1981 - AP - 140 Million Forgotten Consumers—The Life Insurance Policyholders of America, by Joseph M. Belth, The Journal of Consumer Affairs, Vol. 15, No. 1 (Summer 1981), pp. 1-12 - 12p - JSTOR