State insurance regulators held the first of what they say will be a series of discussions to determine whether the treatment of retained asset accounts is a problem and if so, how they can resolve it.
The large ballroom here during the summer meeting of the National Association of Insurance Commissioners, Kansas City, Mo., was filled with attendees interested in hearing more on the issue. The topic has created concern in Congress and prompted New York Attorney General Andrew Cuomo to start an investigation into the matter. The debate started after Bloomberg Markets magazine ran an article detailing how a beneficiary of a U.S. service man was unable to use a check tied to the account and how the accounts earned insurers large interest spreads for their general account portfolios.
The new joint working group is headed by Connecticut Commissioner Tom Sullivan and New Hampshire Commissioner and former NAIC President Roger Sevigny.
The discussion started with insurers attempting to describe RAAs and what they say it does for the client. According to testimony from Todd Katz, executive vice president of U.S. business for MetLife and Bernard Winograd, executive vice president and chief operating officer of Prudential’s U.S. businesses, the product has been around for 25 years; is not a bank account; offers the option of withdrawing all death benefit proceeds at any time; and, is covered by state insurance guaranty funds.
Katz said that a third of those who have accounts with Met close them within two months and 60% withdraw all the funds and close them within a year. Interest starts accruing right away and ranges from 3% to 1.5% to 0.5% depending on how old the policy is, he continued. Nearly half of those who have these accounts with Met are earning 3% on their money and 80% are earning at least 1.5%, he continued. Katz also acknowledged that the accounts make money for Met.
He also said that the claim form has a list of options to receive the death benefit and that if none is chosen, there is a default to an RAA. He maintained that the claim form clearly lays out the options to consumers, but Maine Superintendent Mila Kofman countered that “What is clear to lawyers may not always be clear to consumers.”
Prudential’s Winograd said that 20% of Prudential’s RAA accounts take all the money out within 90 days after the account is opened and 60% close them within a year. A total of 99% of the accounts are at least used within the year, he said. The accounts, which were sold in a higher interest rate environment, offer a guaranteed minimum of 2.5%, Winograd added.
If the accounts are not utilized, according to Met’s Katz, a quarterly statement is sent to the beneficiary once a quarter and if the beneficiary cannot be found, a search is undertaken before the funds are sent to the state’s unclaimed property bureau.
New Jersey Insurance Commissioner Tom Considine noted that RAAs, which are supplemental accounts, are not filed with departments. He asked Katz and Winograd if they feel the accounts would be better regulated if they had to be filed with the department. Both Katz and Winograd said that it would be appropriate to have a dialogue on the point.
The point was then made that the Interstate Insurance Product Regulation Commission, Washington, might be able to work on standards for these accounts.
The discussion then turned to how group life contracts had different provisions depending on the employer. In some cases, according to the dialogue, individual beneficiaries were still allowed to make their own selection but in other cases, the employer could make the distribution selection for the employees’ beneficiaries.
Following the company presentation, Peter Gallanis, president of the National Organization of Life & Health Insurance Guaranty Associations, Herndon, Va., asserted that these accounts and interest accrued are covered by guaranty fund associations in the event of an insolvency.
Brendan Bridgland, director of the Center for Insurance Research, Cambridge, Mass., noted the potential for a conflict of interest if insurers were making profit from these accounts and cautioned that the argument that the interest was at least as good if not better than bank accounts assumed that the beneficiary would not put funds in a higher paying savings vehicle such as a long-term certificate of deposit.
State Rep. Brian Kennedy, D-Hopkinton, R.I., spoke on behalf of the National Conference of Insurance Legislators, Troy, N.Y. Kennedy said that in order to protect consumers and offer appropriate disclosures NCOIL was developing its own model law. The model, Kennedy said, was written by state Rep. Robert Damron, D-Nicholasville, Ky., and incorporates a statute from North Carolina, a North Dakota bulletin, and language from a Maryland law as well. The model was developed within the last week, Kennedy added.
Connecticut’s Sullivan responded by saying he wondered whether a model would offer an expedient solution since it would take time to develop and complete and put in place in states. He said that the same end could be reached by using a model bulletin that could be issued immediately by states.
Kennedy noted that Congress is looking to take action and a model law would signify similar concern at the state level.
Following the session, Illinois Director Michael McRaith said “based on what we know now, disclosure does appear to be the best solution. When asked about creating standards through the IIPRC (Compact Commission), McRaith said that it was one solution but that at this point there are still several large states that are not members. He said that a bulletin would be a more expedient solution.
A former regulator and attendee said that RAAs in general, do not benefit the consumer because the company is holding onto the beneficiaries money and delaying a payout. The former regulator said that it has nothing to do with helping the grieving beneficiary and everything to do with holding onto funds for as long as possible.