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Consumer Advocates Slam Small Policy Proposal

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A National Association of Insurance Commissioners working group is proposing that states protect purchasers of small life insurance policies by beefing up disclosure requirements.

Members of the NAICs small face amount policy working group presented the proposal here at the Kansas City, Mo.-based associations summer meeting.

If the NAIC approves the proposal as is, life insurers would have to give purchasers of small policies a one-page document stating, in simple language, that the total premiums paid over the lifetime of the policy might be greater than the initial amount of coverage purchased.

An insurer would have to give the disclosure to the purchaser by the time it delivered the policy, according to Leslie Jones, a life actuary with the South Carolina Insurance Department.

The proposal also calls for the use of a standard disclosure letter that state insurance departments could send in response to consumer inquiries.

The working group hopes to develop a model act for implementing the disclosure requirement in time for the group to adopt the model at the NAICs fall meeting, regulators said.

Illinois Insurance Director Nat Shapo said a working group subcommittee is also developing an actuarial study to collect more data about small life policies.

Consumer advocates slammed the proposal.

Simply requiring “a disclosure document is a side-stepping of the issue,” said Bonnie Burns, a representative of California Health Advocates, Scotts Valley, Calif.

The small policy proposal is so weak, it might turn some members of Congress away from the idea of state regulation of insurance, according to Kevin Hennosy, executive director of, Kansas City, Mo.

But industry representatives and some regulators questioned whether the small life policies are really causing a disproportionate number of problems.

In Arkansas, insurers sell many small life policies, but regulators there have heard “very minimal complaints,” said John Hartnedy, deputy commissioner with the Arkansas Department of Insurance. “We do not have major problems.”

Complaints about small policies have also been rare in South Carolina, according to South Carolina Insurance Director Ernst Csiszar.

Csiszar said the NAIC has heard only anecdotal reports of problems with small policies and needs a study to determine just how common serious problems really are.

If the study results indicate widespread problems, the working groups emphasis on disclosure might change, Csiszar said.

Regulators have been discussing life policies with small death benefits for years.

Opponents say the total premiums purchasers pay often exceed the policies face values or death benefits.

Insurers market the small policies aggressively to poor consumers and rarely try to sell them to “someone who lives in a wealthy white neighborhood,” said Sonia Alleyne, director of community investment with the Massachusetts Affordable Housing Alliance, Dorchester, Mass.

Selling the small policies “is another form of redlining, and redlining is a discriminatory practice,” Alleyne said.

But defenders say purchasing small policies gives consumers a convenient method for obtaining small amounts of coverage without having to scrape up large amounts of cash for premium payments.

Besides, one regulator at the NAIC meeting noted, consumer advocates never raise complaints when a policyholder pays $1 to buy a policy with a $3,000 face amount, dies a few days after buying the policy, then leaves beneficiaries with $3,000 in death benefits.

The latest NAIC effort to tackle the issue is the third NAIC initiative in that area since 1989, Burns noted.

The NAIC began the current small policy initiative as a result of a broad investigation of race-based life insurance sales practices.

Scott Cipinko, executive director of the National Alliance of Life Companies, Rosemont, Ill., said “everyone will have a crack at the microphone” when the small policy working group exposes the disclosure model for public comment.

The industry has tried to give as much data as it could, Cipinko added.

“It is not fair to prejudge the issue,” Cipinko said.

But the consumer advocates at the meeting attacked what they described as a lack of action on the part of regulators.

“I think [the disclosure proposal] shows who they feel they work for,” Hennosy said. The small policy meeting “was the least public-interest-oriented meeting that I have attended in five years.”

Mona Carter, a Kentucky regulator, said she has seen many studies on the small policy issue over the past six years.

“For whatever reason, we have tended to drag our feet,” Carter said. “We need to move and be proactive and help the poor people of America.”

Small policies “are sold to the old and/or poor, those that can least afford to pay more than they get,” Burns said. She added that many purchasers pay the premiums without the knowledge of their adult children.

If the children knew their parents held such policies, the children would take steps to cancel the policies, Burns said.

Elsie Crowell, an insurance advocate with the Florida insurance department, said she believes creating a new disclosure requirement is an inadequate response to what she believes to be serious problems with small policy sales practices.

“Just because a consumer doesnt complain, doesnt mean that there is not a problem,” Crowell said. “If an individual starts paying premiums in their 30s and 40s, you cannot convince me that in their 80s they havent paid enough for a product and a benefit.”

Crowell warned that the disclosure letter the small policy working group developed to answer consumer inquiries could be considered insulting.

The draft letter implies that the working group has assumed that all members of an entire class of people are “unhealthy and uneducated,” Crowell said.

Reproduced from National Underwriter Edition, June 22, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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