Problems

There are problems waiting to emerge that will be uncovered by lawsuits, not the regulators, or by the media.

  • Consider life insurance market conduct abuses of a decade ago.
  • The largest life insurers told people their premiums would disappear, and confused them into believing their life insurance was an investment.
  •  It took lawsuits to uncover these problems.  (p10-11)

-- Statement of J. Robert Hunter, Director of Insurance, Consumer Federation of America

2007 1030 - GOV (House) - Additional Perspectives on the Need for Insurance Regulatory Reform - [PDF-180p,

The number one perceived problem is that buyers simply do not understand the nonguaranteed nature of life insurance illustrations.

  • Also, it is impossible for the average buyer to judge the reasonableness of the assumptions underlying the numbers in the illustration. 

--  John W. Keller - (Northwestern Mutual)

1991 - SOA - Illustrations, Society of Actuaries - 20p

  • The main concern was that an unsophisticated buyer purchased a policy and did not know what the coverages, benefits and limitations were.
  • It was suggested that Sections 8 and 9(f) of the Universal Life Insurance Model Regulation needed considerable expansion. It was suggested that disclosure requirements be placed in the illustrations section of the models as well as in the contract itself.
  • Some of the items identified which should be disclosed:
    • (1) what is guaranteed versus what is not;
    • (2) adequate disclosure of the fact that a premium quoted will not support the contract for the whole life if the policy is a universal life policy;
    • (3) disclosure of the guaranteed surrender values on a flexible premium policy.  (p566)

1988-2, NAIC Proc.

2018 0319  - (LIBGWG) Life Insurance Buyer's Guide Working Group - Conference Call NAIC Proceedings

  • The Working Group discussed some language that was hard to understand referring to premiums and benefits. 
  • The Working Group agreed to include "premiums or values vary from year."
  • The Working Group agreed that language comparing different types of policies should be included in the next draft.

I. Objectives of the New (A) Committee

  • a. Simple disclosure form for universal type life products, as well as other simplified cost disclosure methods."

1982-2, NAIC Proceedings

Vaughan (NAIC-CEO)

I will tell you, the insurance regulators have had failures also.

  • We have been the recipient of several GAO studies, thank you very much, that pointed to problems in our system, and that we then went and fixed.  (p28)

2009 0305 - GOV (House) -  Perspectives on Systemic Risk - (Part 1 of 2) - PDF-254p

Terri Vaughan  - (NAIC-CEO): 

  • I have a hard time imagining that there would be issues that are needed in order to understand the risk posed by the insurance industry that the insurance regulators wouldn’t already be asking and gathering information about. - (p70)

2009 1006 - GOV (House) - Capital Markets Regulatory Reform: Strengthening Investor Protection, Enhancing Oversight of Private Pools of Capital, and Creating a National Insurance Office - [PDF-325p,

  • Agent - Recruiting, Training, Retention, Commissions
  • Complaints
  • Coverage Period - Benefits
  • Culture - Companies, Regulators
  • Expectations
  • Failure to Disclosure
  • Illustrations
    • Overly Aggressive Assumptions
    • Unsupportable Illustrations
    • Look - Goes to Zero (Blumenthal), Teresa Winer, Graphs
    • Lack of Understanding, Work
  • Interest Rates
  • Lack of Transparency
    • Regulators
      • 2011 0914 - GOV (Senate) - Emerging Issues in Insurance Regulation - Congressman Reed (RI) - PDF-51p, (p23)
    • Marketplace
      • 2011 0914 - GOV (Senate) - Emerging Issues in Insurance Regulation - Congressman Reed (RI) - PDF-51p, (p23)
  • Language
  • Lapse / Policyholder Retention / Disintermediation / Surrenders
  • Lawsuits
  • Leverage
    • 2011 0914 - GOV (Senate) - Emerging Issues in Insurance Regulation - Congressman Reed (RI) - PDF-51p
  • Misleading Statements
  • Mis-selling
  • Regulatory
    • Regulatory Capture
    • Revolving Door
      • Bill Nelson - (D-FL, Former Insurance Commissioner). 200x - GOV
  • Search for Yield / Low Interest Rate Environment

Tools

  • Illustrations
  • Annual Reports
  • Ratebook
  • Graphs
  • 1939 0412 - SEC to President (Franklin D. Roosevelt) - Re: Insurance Investigation -  3p

.... I agree that failure to disclose not only misrepresents but also sows the seeds of destruction. 

--  Allen D. Booth, FSA, is a consultant in the Milwaukee office of Towers, Perrin, Forster and Crosby. 

1982 - SOA - Universal Life Update , Society of Actuaries (rsa82v8n34) - 26p

Agent - Recruiting, Training, Turnover Rate

N. T. FUHLRODT, speaking on section A, said that recruiting and development of a field force is one of the big problems of all companies, the cost of which is  meaured not only by the level of commissions paid, but by the morale and turnover rate of agents.

  • A successful company must maintain a proper balance between the agent's compensation, policyholder's cost, and the company's profit.
  • Overstressing term insurance, he said, results in inadequate income to the agent in spite of high volume of sales, poor persistency, and, if such insurance is not properly sold and understood, loss of future business to the agent.

1953 - SOA - Agency Problems--Resulting From Special Policies, Society of Actuaries - 3p

One question you might have is why is there so much discussion of UL and the non-forfeiture rules now?

  • The product has been around for 10 years; what is the problem?
  • As I see it, companies, state regulators, agents, and the buying public are all concerned with the credibility of the process.
    • What is a company selling?
    • How should the states regulate what is going on?

-- Bruce E. Booker

1988 - SOA - Update on Universal Life Reserves and Non-Forfeiture Values, Society of Actuaries - 36p

* Universal Life Insurance *

The complications begin with a very simple question:

  • What's the premium for Universal Life?
    • It could be almost anything.
  • Then what's the cash value?
    • That depends on the premium.
  • It is the relationship between the premium and cash value that determines the product characteristics of Universal Life.

--  Ben H. Hitchell

1981 - SOA - Universal Life (RSA81V7N412), Society of Actuaries - 16p

<Bonk: "Product Characteristics" - "Coverage Period"

  • Language
    • The "unbundling' of services and other product differences between Universal Life and Ordinary Life cause current literature to be inapplicable, as well as insufficient, for Universal Life.
      • 1984 American Academy of Actuaries - Journal 
  • Misleading Statements
    • Larry Gorski of the Illinois department mentioned that in states that do not regulate advertising or promotional materials, misleading statements can be rampant in those materials even if the illustrations are made pure. --  Benjamin J. Bock (Transamerica Occidental)
      • 1992 - SOA - Life Insurance Sales Illustrations, Society of Actuaries - 16p
  • Interest Rates 
    • Bruce Booker - ACLI
      • 1995 - SOA - Practical Illustrations and Nonforfeiture Values, Society of Actuaries - 14p
  •  Overly Aggressive Assumptions, Unsupportable Illustrations
    • Robert Wilcox - Chairman of the Life Disclosure Working Group (NAIC)
      • 1996 - SOA - Current Developments Surrounding Regulations and Standards of Life and Annuity Products, Society of Actuaries - 18p
  • Sales Illustrations
    • Robert Nelson, chairperson of the National Association of Life Underwriters (NALU) Task Force on Illustrations - <Currently NAIFA>
      • 1993 - SOA - Sales Illustrations - We Can't Life With Them, But We Can't Live Without Them!, Society of Actuaries - 28p
  • Policyholder Retention
    • Mark J. Greene
      • 1995 - SOA - Practical Illustrations and Nonforfeiture Values, Society of Actuaries - 14p
  • He <Ario - Pennsylvania> said the consumer complaint analysts in a state are a “focus group” that each state should rely on.

2009-3, NAIC Proceedings

  • Lack of Transparency, Consumer Protection Regulation
    • Daniel Schwarcz - Law Professor
      • 2011 0914 - GOV (Senate) - Emerging Issues in Insurance Regulation - Senator Reed (D-RI) - [PDF-51p.
  • Policy Illustration Changes - <Consumers Reaction to...>
    • John Bruise - ACLI
    • 2016-4, LATF NAIC
  • Ed Coover (National Travelers Life) said the problem was explaining to consumers that the illustration was only a snapshot.

1994-3, NAIC Proceedings

  • If your training process for your agents is to sell at target premium, for example, and target premium carries the policy to maturity at a 7 percent rate, if you’re only crediting 6, it’s not making it there.
  • So keep an eye on how you’re training your agents to sell your products and try to avoid problems up front in the product performance before they become a premium risk problem.

--  Joseph E. Paul

2001 - SOA - Investment Strategies to Maximize Investment Yield, Society of Actuaries - 25p

HON. WILLIAM L. HUNGATE OF MISSOURI
IN THE HOUSE OF REPRESENTATIVES|

Mr. HUNGATE. Mr. Speaker, the State of Pennsylvania is taking what may be a leader's role in analyzing State insurance problems.

The following article should be of interest to all who purchase life insurance:

  • A national shopper's guide for life insurance shows that some major companies charge more than twice as much as others for similar policies, and that some of the best known firms charge the most for coverage.

1972 0724 - Federal Register - (p25109) - [link]

Commissioner Hager of the Universal & Other Plans (A) Task Force stated that there appeared to be disclosure problems with universal life plans and that the identification of these items should be placed on the Actuarial Task Force agenda.

The members present agreed that the disclosure issues extended to variable life as well as universal life.

  • The main concern was that an unsophisticated buyer purchased a policy and did not know what the coverages, benefits and limitations were.
  • It was suggested that Sections 8 and 9(f) of the Universal Life Insurance Model Regulation needed considerable expansion. It was suggested that disclosure requirements be placed in the illustrations section of the models as well as in the contract itself.
  • Some of the items identified which should be disclosed:
    • (1) what is guaranteed versus what is not;
    • (2) adequate disclosure of the fact that a premium quoted will not support the contract for the whole life if the policy is a universal life policy;
    • (3) disclosure of the guaranteed surrender values on a flexible premium policy.

1988-2, NAIC Proc.

  • The inability to evaluate policy performance in the normal course of owning the policy seems to be fundamental to any theory of informational market failure in this market.
  • The survey evidence cited above suggests that policyholders do not understand how to evaluate the dual savings/protection pay in advance life insurance contract.
  • They neither know nor realize the economic importance of cash values, dividends and the policy loan interest rate. 
  • None of the usual market institutions that help buyers cope with complexity, expert "agency" 'or firm reputation, will work unless buyers can and, with some frequency do, evaluate the product and the services supplied by sales agents. (p293)

1985 11 - FTC - Life Insurance Products And Consumer Information - Michael P. Lynch and Robert J. Mackay - Staff Report Bureau of Economics - Federal Trade Commission [PDF-317p]

But there has not been that level of focus on the types of issues that I am talking about, on simple issues.

If you buy insurance, you should have some ability to know what that policy provides.

  • You should have some ability to say, hey, can I see the policy beforehand?
  • Can you tell me how it is different than other carriers?

The lack of transparency is distressing and it really is a theme, I have tried to emphasize, and I think it comes from the fact that there has been such an emphasis on solvency—and rightly so. I am not saying that solvency is not important, but we have not seen action—— (p13)


  • In sum, State insurance regulation has generally failed at a core task of consumer protection regulation—making complex markets comprehensible to consumers and broadly transparent to those who may act on their behalf. (p10)
    • Why can’t I compare cash value products and have some sense of what is going on in the marketplace?
    • Because the notion—I mean, it really is a problem, and it is a problem that is under addressed because everyone is so focused on solvency that they forget all these other important regulatory issues. (p26)

-- Daniel Schwarcz - Law Professor

2011 0914 - GOV (Senate) - Emerging Issues in Insurance Regulation - Senator Reed (D-RI) - PDF-51p

Robert E. Wilcox (Chairman of the NAIC Life Disclosure Working Group / Utah Insurance Commissioner / Actuary):     I think you're right, Walter, in a significant respect.

  • The fact is that a minority would be inclined to make those overly aggressive assumptions and produce unsupportable illustrations,...
  • ...but every time one company would take that stand and use assumptions for the illustration that don't make sense, there's another company that competes with them and feels compelled to play in the same ball park and then another company that competes with them.
  • In the absence of regulation on those who would be most aggressive, the problem grows, but your point is well taken.

1996 - SOA - Current Developments Surrounding Regulations and Standards of Life and Annuity Products, Society of Actuaries - 18p

  • If you tell someone that a universal life (UL) policy's like a bank account where there's interest that accrues and charges taken off for insurance costs, people can grasp that, but in practice it's more difficult to pull that off.

-- Vincent Granieri

2003 - SOA - Do You Know How Much You're Spending? The Hidden Costs of Product Complexity,  Society of Actuaries  - 19p

  • Sen. Hackett stated:
    • ....that one of the problems that the life insurance industry has been experiencing for several years is that when universal life was sold years ago interest rates were so much higher and these policies are really going to blow up much earlier.  (p165)

2020 12 - NCOIL - 30 DAY MATERIALS AND TENTATIVE GENERAL SCHEDULE NCOIL ANNUAL MEETING - 200p

  • An agents’ association representative <Robert M. Nelson (NALU, NAIFA)> reported that his group was concerned about problems because agents are generally the first to hear the disappointments, confusion and bitterness created by the unrealized expectations of policyholders.
  • Of paramount concern to agents is the fact that illustrations may not be supportable under current actuarial standards of practice.
  • He asked the group to concentrate on the serious problems caused when illustrations of non-guaranteed elements and dividends are not supportable for even a few years into the future and tend to overstate the amount of non-guaranteed elements and dividends likely to be paid.
  • The association recommended more precise definitions and stricter rules on supportability and current experience.
  • The association also asked the NAIC to take action to sensitize policyholders to the effect of a change in interest rates, and to mandate a signed disclosure statement where the consumer acknowledges he has read the illustration and understands it.

1993-1,  NAIC Proceedings

I told the NAIC that I am alarmed by the paucity of meaningful information available to consumers and urged the commissioners to protect policy buyers.

  • In short, I told the NAIC that consumers need clear, honest information, so they have the ability to make informed decisions.
  • The NAIC says it is working on the problem. (p4)

--  Senator Howard Metzenbaum - (D-OH)

1993 0525 -  GOV (Senate) - When Will Policyholders Be Given The Truth About Life Insurance? - [PDF-354p-GooglePlay

One regulator <W. Harold Phillips, Senior Life Actuary - CA> summarized the problem in his department <Attachment Two-A):

  • Misleading illustrations are structured as inducements to buy rather than helpful tools to understand the workings of the product or as a comparison between products of competing companies. 
  • In addition, many purchasers as well as agents do not understand what an illustration is and what it is not.
  • Most agents, companies and actuaries agree that there is a problem and that something needs to be done.
  • The industry appears to be in gridlock on the matter.
  • Current regulation of illustrations is very weak.
  • Companies and agents can do pretty much as they please.

1993 Proc. IB 789. - LIFE INSURANCE ILLUSTRATIONS MODEL REGULATION - Proceeding Citations

  • The inability to evaluate policy performance in the normal course of owning the policy seems to be fundamental to any theory of informational market failure in this market.
  • The survey evidence cited above suggests that policyholders do not understand how to evaluate the dual savings/protection pay in advance life insurance contract.
  • They neither know nor realize the economic importance of cash values, dividends and the policy loan interest rate. 
  • None of the usual market institutions that help buyers cope with complexity, expert "agency" 'or firm reputation, will work unless buyers can and, with some frequency do, evaluate the product and the services supplied by sales agents. (p293)

1985 11 - FTC - Life Insurance Products And Consumer Information,  Michael P. Lynch and Robert J. Mackay - Staff Report -  Bureau of Economics - Federal Trade Commission - 317p

A regulator had told them that in that case they should not treat their universal life as though it was a whole life policy matured by paying the GMP <Guaranteed Maturity Premium>.

  • Rather, you should assume that people will pay the guideline level premium, and that will give you a policy that provides guaranteed coverage for something less than the whole of life.

--  Daniel J. McCarthy

1999 - SOA - Valuation Actuary Symposium, Society of Actuaries - 28p

Linda S. Streck : I think the response from the NAIC to the illustration issue is somewhat of a hard hammer for all of us.

  • In a session at this meeting, Dick Weber, who is now with Merrill Lynch, made the comment that, when we made illustrations available to the agents, that was when we, as actuaries, lost control of the product development function.

1994 - SOA - The Driving Forces Behind Participating - Universal Life (UL) - Nonguaranteed Element Product Development, Society of Actuaries - 12p