Cash Flow

  • The cash flows of a policy are defined by the Society for this purpose as “the actual transfer of funds between the policyholder and the insurance company in either direction, and includes premiums, dividends, cash values and death benefits.”  Actuaries Report, supra n. 33, at 6.
  • So what I am saying is that the Belth calculations cannot get out of a policy anything that isn’t there already.
  • The premiums and the dividends and the amounts of insurance and the cash value8 are all there is to a policy.
  • You can fool around with them any way you like but mostly you can get at all the facts just by looking at basic things.

—  Julius Vogel, Prudential, on behalf of the American Council of Life Insurance, ACLI

1978 0807, 0814 and 0815 – GOV (House) – Life Insurance Marketing and Cost Disclosure, John Moss (D-CA)  —  [BonkNote]

Surplus Relief

  • We have developed model regulations dealing with surplus relief, and we tried to close those loopholes so that the balance sheets are in fact truly stated, perhaps not misleading, but truly stated.

—  John F. Gies (Chief Life/Health Actuary of the Connecticut Insurance Department)

1999 – SOA – Insurance Company Failures of the Early 1990s – Have We Learned Anything?, Society of Actuaries – 25p

Consumer Understanding

  • James Hunt (National Insurance Consumer Organization) stated that in his experience most people are very confused about the coverage they have.
  • Mr. Morgan (Ohio)
    • stated that his experience was that consumers did not understand what they had purchased.
    • He said there should be an understandable way of saying that the company is guessing because there is no way to know what will happen in the future.

1993-1, NAIC Proceedings

  • Judy FAUCETT: In line with John’s comments, we were told by one group that actually runs focus groups that if you got a group of recent purchasers of insurance in a room, you might get responses of what they think they did or what they think they should have done, as opposed to what they actually did.

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

  • We have to get out of our mode of talking about these policies in language that can only be understood by the person who wrote the language.
    • I find, after 30 years plus of experience in the life insurance business, that there is jargon used in illustrations that I don’t understand.
    • I can have difficulty in taking an illustration and figuring out what in the world the authors are trying to illustrate and how they are doing it.

—  Robert E. Wilcox – Chairman of the Life Disclosure Working Group (NAIC)

1994 – SOA – Problems and Solutions for Product Illustrations, Society of Actuaries – 28p

  • If we are going to have a group of consumers of our products who are satisfied with what they get, we have to meet their expectations.
  • Obviously, there are two adjustment points whereby that can be accomplished.
    • One is that you can change the outcome to match the expectations.
    • The other is to change the expectation to match the outcome.

— Robert E. Wilcox – Chairman of the Life Disclosure Working Group (NAIC)

1994 – SOA – Problems and Solutions for Product Illustrations, Society of Actuaries – 28p

Guessing

  • The actuary cannot and should not attempt to estimate or predict the future.
    • This would reduce actuarial work to guessing.
  • ⇒  What then are actuarial assumptions?

1998 01 – SOA – Actuarial Futures – Actuarial Assumptions and the Future, by W. Harold Phillips [Hal], Senior Life Actuary at the California Department of Insurance, Society of Actuaries – 4p

  • 2013 0412 – Letter – AAA to WSJ, Wall Street Journal, Cecil Bykerk, President of the American Academy of Actuaries [re: Pensions, Guessing] – 1p
    • Cecil Bykerk: Those in the pension arena must come to recognize that appropriate pension funding is much more than an “actuarial problem,” and that it includes a commitment toward responsible governance of those plans.
      • It is time to challenge all stakeholders in retirement plans to engage in a thoughtful public discussion of the issues if we are to assure financially secure and sustainable systems.
  • (p3) – Companies say: After 5 years, there will be enough in your cash value for you to stop paying premiums forever, or your money will earn at 10 percent, or your premium will never be more than $7.00 per thousand dollars of insurance.
    • And very quietly, maybe hidden in a footnote or in a gobbledygook phrase, they say: Well, we are really only guessing.  (p3)
  • They never say: We do not have any idea how much you will eventually have to pay for policyholder.
    • They do not say: We are not telling you how much of your premium will go into your cash value, but probably none for 4 or 5 years.
    • They do not say: All of your first-year premium will go to expenses, mostly agents’ commissions.
    • And they do not ever say: The interest or dividend we are promising you will probably drop by next year.
  • But these are the very things that unwary policyholders must confront.
  • When the policyholder has to pay more premiums than he expected or notices that his cash value is not accumulating, his company will tell him: Values were not guaranteed.
    • Translation: We were only guessing.
  • Some witnesses today will testify what happened when their insurance companies guessed wrong. Companies have been guessing wrong for a while now.
    • One of our witnesses today told an industry group not long ago that less than 10 percent of life insurance in the market will perform as illustrated, and it is getting worse, not better.
    • The Wall Street Journal reported May 12 that life insurers would almost certainly be cutting dividends and interest rates paid to policyholders again this year.
      • The story said: “They have fallen sharply this year, but are expected to fall even further. Every rate that is not guaranteed has to come down.”
  • Why is this flimflammery allowed to continue?
    • Where are the laws to prevent companies from misleading people?
    • What is wrong with the State regulators?
    • Why is the Congress of the United States not doing something about it?

—  Senator Howard Metzenbaum (D-OH) 

1993 0525 – GOV (Senate) – When Will Policyholders Be Given The Truth About Life Insurance?, Howard Metzenbaum (D-OH)  —  [BonkNote]

Culture

  • Chairman Paul KANJORSKI. (D-PA) – Do you think it is not working smoothly because of avarice, or a thoughtful intent to deny paying customers, or attempting to target and only make special monies in special areas?
  • Mr. HUNTER. I think it is-
  • Chairman KANJORSKI. From the areas that Mr. Eiland is talking about?
  • Mr. HUNTER. I think it is a fundamental change in corporate culture over decades, to the point now where, for example, McKinsey could come in to Allstate and say, we want to turn your claims operation into a profit center, and here is how you can basically cheat your customers.
    • And Allstate didn’t kick them out.
    • When I was a young man in the insurance industry, I think we would have called the cops if somebody came in and made such a proposal, and now probably 17 of the top 20 insurers are using that methodology.
  • Chairman KANJORSKI. Mr. Gilliam, do you agree with Mr. Hunter that the standards for the insurance industry have materially changed as a result of culture?
    • Or do you think it is getting better?
  • Mr. GILLIAM. I am not quite sure how to answer that because Mr. Hunter and I don’t agree on very many things.
  • Mr. HUNTER. I didn’t think you would.

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

  • Hunter, J. Robert, Director of Insurance, Consumer Federation of America
  • Gilliam, Scott, Assistant Vice President and Government Relations Officer, The Cincinnati Insurance Companies

Price Fixing

  • One of the specific examples, Lou, was a survey done about term insurance in conjunction with a workshop.

—  Stephen H. Frankel, Northwestern Mutual the incoming Chairman for the Society’s Program Committee

1982 – SOA – Is There a Future for Traditional Society of Actuaries Meetings?, rsa82v8n410 – Society of Actuaries- 18p

  • Kevin A. Marti, vice president of administration and chief actuary for Westfield Life Insurance Company
    • However, the regulation, as written, states that if the industry cannot agree on a generally recognized expense table, we’ll just fall back to use of fully allocated expenses, which would be a wonderful proposition!
      • Small companies would basically be out of business at that point, because if you can’t illustrate it, I don’t believe you can sell it.
    • While I appreciate Tom’s comments about pricing and illustrating, from my perspective, it’s hard to separate the two.
    • I think a great number of actuaries have embraced macro pricing.
    • It has even been described as a generally accepted actuarial practice methodology by some prominent actuaries.
    • In my opinion, to not allow illustration of products developed on this premise looks and smells very similar to “price fixing.”
    • We could ask any number of reinsurers in this room how often they have had the luxury of using full expense allocations in their pricing.
      • I think you’d find out that they can’t do so very often.
    • Furthermore, the required disclosure of the expense allocation method chosen on the illustration can be utilized by agents in competitive situations to an even greater extent than some of the size and financial ratings comparisons that have been used against smaller companies in the past.
  • I’m disappointed that the NAIC and the ASB have reached this point.
  • When I read the program information, I was struck by the antitrust disclaimer that we have at the front of the program. I want to read that disclaimer to you.
    • It says, “Under no circumstances shall meetings or programs be used as a forum for representatives of competing companies and/or firms to reach any understanding whatsoever either about the pricing of specific products, whether particular products should be marketed to the public, or terms on which products are marketed.”
    • That sounds to me like some of the things that are built into and implicit in the illustration model regulation.

1995 – SOA – Sales Illustrations, Society of Actuaries – 14p

  • 1986 0121 0122 – GOV (House) – The Liability Insurance Crisis – [PDF-553p-GoogIePIay

    • CFA – J. Robert Hunter, Consumer Federation of America – p279-299

      • What Should Congress Do?
      • First, it should subject the insurance industry to the anti-trust laws, thus preventing insurers from acting in concert to raise prices.
      • Since 1944, the McCarran-Ferguson Act has allowed insurance companies to fix prices, while price-fixing in other industries is punishable by three years in jail.
      • We specifically propose a two-year sunset provision during which time the insurers, the states and the federal government can prepare for the change.

Reliance

  • 1999 – LC – Zarrella v. Minnesota Mutual Life Ins., 96-2782 – Opinion – 26p
    • (p10) – More importantly, however, plaintiff could not have prevailed on the misrepresentation claims because the statement did not induce plaintiff to act on them in the manner that Minnesota Mutual intended.
      • The statements were part of an attempt designed to retain plaintiff as an insured.
      • The plaintiff, however, did exactly the opposite and switched insurance companies.
      • There simply is no juxtaposition between plaintiff’s act of switching insurance companies with defendant’s issuance of the conservation statement, which was an attempt to persuade plaintiff to stay with Minnesota Mutual.9
        • See St. Paul Fire and Marine Insurance Co. v. Ellis & Ellis, 262 F.3d 53, 62 (1st Cir. 2001) (holding that to succeed on the issue of reliance, the plaintiff must determine that its reliance was substantially influenced by the defendant’s misrepresentation and that such reliance was of the type that the defendant intended);
        • see also Restatement (Second) Torts, § 552 cmt a at 128 (1977) (“one who relies upon information in connection with a commercial transaction may reasonably expect to hold the maker to a duty of care only in circumstances in which the maker was manifestly aware of the use to which the information was to be put and intended to supply it for that purpose”).

Misleading

  • Why is this flimflammery allowed to continue?
  • Where are the laws to prevent companies from misleading people?  

—  Senator Howard Metzenbaum (D-OH)

1993 0525 – GOV (Senate) – When Will Policyholders Be Given The Truth About Life Insurance?, Senator Howard Metzenbaum (D-OH)  —  [BonkNote] 

  • 1957 – Book – Northwestern Mutual Life: A Century of Trusteeship by Harold F. Williamson and Orange A. Smalley
  • It goes on: “Even the more modest claims for this type of policy proved to be misleading because of two trends…
    • one was the increasing life expectancy in the United States,
    • the other the continued fall in the rate of interest ….
  • [O]ver longer intervals survivors ultimately collected much smaller dividends than they had been led to expect.” (op. cit.)
  • This sounds eerily like the situation today.

—  William C. Koenig

1991 – SOA – Disclosure Systems: Can an Ideal Method be Found?, Society of Actuaries – 22p

  • While it is possible to make some sort of cost comparison in these cases on the basis of cost in a given year per $1,000 of net protection, such comparisons apparently can be misleading in some cases when the original policy is an endowment or retirement income policy or a limited payment policy.

—  Walter Young

1969 – SOA – Life Net Cost Comparisons, Society of Actuaries – 34p

  • Mr. DeAngelo responded that the New Jersey Unfair Trade Practices Act on false advertising is only one paragraph long and the department has been criticized for not telling the industry in its regulations what is false and misleading, for example.
    • No other regulators spoke in support of the ACLI suggestion, so it will not be included in the next draft.
  • Mr. DeAngelo said there had been a suggestion that Section 2A(1)(c) be revised.
    • He said if materials for agents are misleading or incomplete, then agents may in turn mislead the public.
    • He asked if regulators were interested in deleting the language that says “which is designed to be used or is used to induce the public… .”
  • Mr. Hanson said he would like to see all training materials included and Mr. Burch said he was also in favor of deleting the language.
  • Mr. DeAngelo said he did not recall seeing incorrect or misleading training materials, so this is somewhat a theoretical question.
  • Mr. Hanson responded that he had seen misleading materials in market conduct examinations.
  • Diana Marchesi (Transamerica) said this language would then be broad enough to include material designed to inspire agents to sell more for the company.
    • All of the information in the regulation would then need to be included in that inspirational brochure.
  • Mr. DeAngelo asked if there is a middle ground, such as requiring the regulation to apply to material that describes to the producer the features, advantages or disadvantages of an insurance product.
    • The regulators agreed that was an appropriate compromise.
  • What the regulators really want to say is that the agent training materials should not be misleading or incomplete.
  • Mr. Burch said that he has been convinced that the requirement for agent training materials should be deleted and the rest of the regulators agreed.

1999-4, NAIC Proc. – Unfair Trade Practices 

  • 359 – The statements made in the 2007 Form 10-K press release of February 28 2008 and conference call of February 29 2008 were materially false and misleading in at least the following respects.
  • As described above Defendants knew that AIG faced significant risk of being subject to tens of billions of dollars of additional collateral calls arising from it CDS portfolio Defendants also knew that the overwhelming portion of the cash collateral received from borrowers under AIGs securities lending program was invested in RMBS and other asset backed securities that such securities were becoming increasing illiquid and that demands by borrowers for the return of their cash collateral would severely strain AIGs liquidity
  • As result the following statements among others touting AIGs financial strength and capital position were materially false and misleading:
    1. with diverse portfolio of global businesses strong capital base and outstanding talent AIG has the ability to absorb the current volatility Sullivan February 28 press release
    2. AIG has the financial strength to meet our performance goals and build long-term shareholder value Sullivan February 28 press release
    3. AIG is well positioned to grow shareholder value despite the current turbulent environment Sullivan February 29 investor call and
    4. AIG has strong capital base and we are not raising additional capital Sullivan February 29 investor call Indeed less than three months later AIG would announce equity offerings of $12.5 billion which would have severe impact on its earnings per share among other metrics.  (p156-157)

2012 – LC – Pacific Life Funds and Pacific Select Fund vs AIG – 12-CV-6071 – Complaint for Violations of The Federal Securities Laws – 241p

Internet

  • Commissioner Linda Ruthardt (Mass.) said that at some point people will be able to buy life insurance over the Internet and will create their own illustrations.

1995-1, NAIC Proceedings 

  • From the Floor: Do you think that the Internet really deals with more commodity like products, that insurance products on the Internet will become simpler, like a trend away from universal life and towards term or more vanilla types of whole life?
  • Mr. Levison: That’s a good question. I certainly think most of the sales activity on the Internet will be with simpler products, and then some products will be more simply designed than perhaps they are right now.

1996 – SOA – The Impact of Technology on the Distribution of Insurance and Financial Services, rsa96v22n136pd – Society of Actuaries – 11p 

  • 2. Consider changes that may be needed to NAIC models impacting sales of life insurance to address sales on the Internet.

1996-4V2, NAIC Proceedings