Disclosure Focus of NAIC, NCOIL RAA Solutions

Orlando
State insurance regulators and legislators say they are going to focus on disclosure as a way to avoid possible misconceptions over retained asset accounts, according to discussions during the fall meeting of the National Association of Insurance Commissioners here.

Toward that end, state insurance commissioners will work on a bulletin that they say can be adopted uniformly by states. State insurance legislators are developing a model law titled ‘A Beneficiary’s Bill of Rights’ which they plan to adopt next month during the National Conference of Insurance Legislators, Troy, N.Y.

RAAs, which are accounts that offer one option to distribute death benefit proceeds to beneficiaries that are similar to checking accounts, have come under intense scrutiny in recent months over whether they are protected like bank accounts, whether they pay interest and whether consumers have ready access to the funds deposited in accounts.

A working group under the direction of Connecticut Insurance Commissioner Tom Sullivan, charged with looking at the issue, sent out a survey to insurers to learn more about how RAAs are handled. As of Oct. 15, 2010, 30 companies had responded to the call. Thirteen do not offer RAAs. Those which do provided information that was incorporated into the following preliminary findings:

--companies generally portray RAAs as checkbooks against which the death benefit proceeds can be drawn down rather than draft accounts which add another step to the equation because the institution listed on the draft withdraws funds provided by the insurer. The difference in the type of account can lead to confusion, according to the RAA working group findings.
--companies do not always tell the beneficiary where the funds are kept—either with the insurer or with the bank listed on the draft statement.
--while companies indicate interest will be earned, they do not generally provide the interest rate to be earned in the initial disclosure form.
--companies do not always clarify whether funds are insured by the Federal Deposit Insurance Corp. (FDIC).
--companies do not reference the fact that contracts are protected by guaranty fund coverage.

Other findings indicate that most companies use RAAs as a default option if the beneficiary does not say how they want to be paid. Some say that they only use RAAs if the death benefit exceeds $5,000. And, most companies accrue interest daily but only post monthly, thereby reducing the amounts payable to consumers on full liquidation.

New Jersey Insurance Commissioner Tom Considine introduced a motion to develop a bulletin on RAAs, a form of disclosure which Connecticut’s Sullivan has argued is a quicker, more effective way to put guidance in place quickly. The bulletin will require that information be provided about guaranty funds and FDIC coverage. It will address areas that the survey found could be improved. It will also require a filing of disclosure documents with the company’s insurance department.

During the discussion, legislators testified that a provision that was in the original NCOIL model was removed. The deleted provision would have required beneficiaries to opt in to an RAA and would have prevented an insurer to put a beneficiary’s money in an RAA by default if the beneficiary to not select an option.

Indeed, during a consumer liaison meeting which followed the RAA session, NAIC funded consumer Daniel Schwarcz said that he was disturbed by NCOIL’s decision to drop the provision. He expressed concern that both the NAIC and NCOIL were relying solely on disclosure. Empirical evidence shows that default options that are made available to consumers do make a difference. And, he added, personally, he would recommend that any beneficiary take the lump sum death benefit and put it into a bank account.

Insurers have argued throughout the debate that they pay competitive and sometimes more than competitive interest rates on monies in RAAs.

After the RAA session, state Rep. Brian Kennedy, D-R.I., said that the default provisions were removed from the model after receiving input from a wide range of stakeholders who had indicated that a focus on disclosure was preferable.