1978 - GOV (House) - Life Insurance Marketing and Cost Disclosure - John Moss (D-CA)

  • 1978 0807, 0814 and 0815 - GOV (House) - Life Insurance Marketing and Cost Disclosure, John Moss (D-CA)  ---  [BonkNote]
    • [PDF-1049p-GooglePlay]  -  [PDF-826p-govinfo.gov] 
    • 1978 12 - GOV (House-Report) - Life Insurance Marketing and Cost Disclosure Report Together with Dissenting Views, John Moss (D-CA)  ---  [BonkNote]
    • Lee Richardson, Acting Director, U.S. Office of Consumer Affairs, Department of Health, Education, and Welfare
    • Jay Shaffer, Subcommittee Counsel
    • Herbert W. Anderson, NAIC, Commissioner of Insurance, Iowa
    • Joel Shapiro, NALU, chairman, Committee on Federal Law and Legislation.
    • House - Committee on Interstate and Foreign Commerce - Subcommittee on Oversight and Investigations 
  • (327-328) - Jay Shaffer, Subcommittee Counsel - My next question has to do with short-term lapse rates.
    • The 1977 ACLI fact book shows the rate as 19.10 percent. In 1951 it was 9.4 percent. The Hart subcommittee found that for the biggest selling policy of the 138 companies submitting data, 55 had 13-month lapse rates of 25 percent or more and 11 companies had 13-month lapse rates in excess of 40 percent for their top selling policy. I am sure you are familiar with those data.
    • The insurance commissioner for West Virginia told a NAIC convention that the enormous waste represented by lapse should be reduced and that the problem is "worthy of the best thought of those responsible for conditions in the field of life insurance. There is no more important question before them today." That was at a NAIC convention held in 1915.
    • The Massachusetts insurance commissioner told his fellow insurance commissioners at a national insurance convention in New York that lapse was a serious problem and that “the time has come when some measures should be adopted to prevent this wholesale slaughter of policies of life insurance.' 
    • Mr. Anderson, that convention was held in 1872. Could you explain how the NAIC has acted to protect consumers from this loss that the FTC says runs to $200 million a year?
  • NAIC, Herbert W. Anderson, commissioner of insurance, State of Iowa - I am not aware of any specific model law or model regulation adopted by the NAIC which is designed to remedy the problem, the acknowledged problem, of early lapse of whole life insurance policies. We continue to recognize that it is a problem. I can only say that my expectation is that in 2078 you or your successor won't be quoting similar kinds of statements from the present. I believe that we recognize that it is a problem and is one that we have to get a handle on, and that now with this project which had priority behind us, that that is one of the most important priorities of the NAIC Life Insurance Subcommittee.
  • Jay Shaffer, Subcommittee Counsel - So you are willing to believe that there is, or could be, a regulatory solution to the problem of high short run lapse rates? 
  • NAIC, Herbert W. Anderson, commissioner of insurance, State of Iowa - Well, I am prepared to believe that there is a sufficient expectation that that could result, that we should work on the problem and find out how it can be done.
  • Jay Shaffer, Subcommittee Counsel - Well, the model cost solicitation rule may have been a first priority item, but you have been working on that since the early seventies, whereas lapse has been a recognized problem since 1872. Now what should we conclude about the efficacy of State regulation on lapse rates?
  • NAIC, Herbert W. Anderson, commissioner of insurance, State of Iowa - The lapse rate may well be affected by the effective use of the NAIC cost disclosure regulation. If in fact it makes the buyer better able to purchase coverage suitable to the buyer's needs, then it follows that the likelihood of lapse is reduced.
  • (p464) - Jay Shaffer, Subcommittee Counsel - Well, the FTC's problem is that, once the person signs the application and pays his premium deposit, if he does not get any of the cost disclosure material until after that, he is probably not going to look at it or act on it in any way, because he has already made a psychological commitment to a particular product. Human nature being what it is, he is just not going to do anything about it.
    • Mr. Minck said yesterday that he thought that the percentage of sales that were reversed by the customer under the 10-day free look was 1 or 2 or 3 percent perhaps.
    • It is not very much. I just wonder what your reaction is to the FTC's claim that the 10-day free look really is not very effective.
  • Joel Shapiro, NALU, chairman, Committee on Federal Law and Legislation. National Association of Life Underwriters - I can understand their reaction. I do not subscribe to it. I think it would inhibit the sales process and not be in the interest of the public.
  • (p465) - Lee Richardson, Acting Director, U.S. Office of Consumer Affairs, Department of Health, Education, and Welfare
    • Some of the views I will express perhaps have been voiced by others at the hearing. While I will not dwell on those points, I do believe some of them merit further mention. I will address my remarks primarily to the requested information.
    • In my judgment, real price competition does not exist in the life insurance marketplace for a number of reasons, most of which relate to the disparity in bargaining positions between the buyers and the sellers of life insurance.

    • [NALU] - I believe that this problem is illustrated by a quote from the president of the National Association of Life Underwriters of last November. He said:

      ... the further away from the marketplace you get, the more sense regulations for solicitation and disclosure make. In the interest of presenting a solid industry front, NALU endorsed and does support the NAIC model regulation on solicitation and disclosure as it was finally developed.

      However, as a practical matter, it's a little hard for the agent to understand how you explain interest-adjusted or any other comparison method to a public that spends its money on pet rocks and green slime.

    • In short, if, as some companies and agents have asserted, the consumer is uneducable and must be sold, then I think that proves the market is not operating smoothly. Buyer and seller are not equals negotiating with each other as true equals. One strong indication that something is wrong in the life insurance marketplace is the high rate of voluntary terminations of ordinary life policies in force for less than 2 years. The 1976 rate was 19.7 percent; 25 years before that the rate was 9.4 percent.
    • Something has gone awry in the marketplace with this kind of experience. Because of the front-end load in these policies, such terminations are extremely costly to consumers.
    • The Federal Trade Commission has estimated that first-year terminations of ordinary life policies cost consumers about $200 million annually. As the voluntary termination rate has doubled, this $200 million loss may also be twice what it would have been under the marketing practices prevalent in 1951,