Two insurers–Liberty Life Insurance Company and Atlantic Coast Life Insurance Company–are facing regulatory action for race-based pricing practices following an investigation by the South Carolina Insurance Department.
Liberty Life in Greenville, S.C., is facing an administrative hearing that could result in the suspension of its license to operate in South Carolina for a minimum of a year as well as $2 million in fines.
An order from the department dated Dec. 27, 2001, would require Liberty Life to enhance by 33% the benefits of its in-force premium paying, fully paid up, reduced paid up and extended term policies and on death, endowments and cash surrender values. Also under the order, Liberty Life would pay compound interest of 8.75% on those benefits from Jan. 1, 1986 to present. A $1 million fund would have to be set up for policyholders who could prove that they were charged different rates.
Robert Evans, Liberty Life president and CEO, says the company is appealing the decision. He says he is confident it will be able to continue to operate in South Carolina after the hearing.
Approximately 120,000 in-force policies are affected.
Evans says that although there is circumstantial evidence that the use of race-based premium pricing was a “common practice,” the company wants to do right by policyholders.
Following an investigation by Florida regulators, Evans says the company began the “arduous process” of looking through records that date back as far as the early 1900s. He adds that although there is “limited direct evidence” related to the specific charge, there is circumstantial evidence that the practice of race-based pricing was used.
According to Evans, there is “pretty strong evidence” the department was aware the practice was conducted since reserving requirements reflected differences in the pricing based on race. He says that “to some degree the industry endorsed the practice.”
Evans adds that Liberty Life does not have access to rate books and similar evidence dating back years, but the company has tried to put a program in place to do right by policyholders. However, different actions against the company from the department and the state court have prevented Liberty Life from moving forward with the program, he says.
During the late 1980s, the National Association of Insurance Commissioners sent out a set of questions, similar to ones sent out recently, asking companies about their pricing of policies.
According to Evans, Liberty Life responded to those questions, stating it was not able to uncover any such activities at that point, but that if such were uncovered, it would address them.
Evans says Liberty Life has been in contact with other state insurance departments but has not received any information on what they might do.
English McCutchen, a co-counsel with Pete Strom on a private class action suit against Liberty Life, says, “I think it is safe to say based on discovery done thus far that Liberty knew and has known for many years that it was charging [prices] using substandard rate tables.”
McCutchen contends that “Liberty, to this day, is collecting on thousands of policies that are discriminatory based on race. They knew and have known it. There is no way that they could not have known it.”
He says he totally embraces the action taken by the South Carolina department. If the department suspension holds, according to McCutchen, it would be the “death knell” for Liberty because agents that sell Liberty policies can’t afford to wait a year until the suspension could be lifted.
Atlantic Coast Life, based in Charleston, S.C., has reached a settlement with the department, according to CEO Bill Scarborough.
He says the settlement involves approximately 31,000 policies, including a block of 119 policies it assumed when it acquired American Home Life Insurance Company.
The total cost to Atlantic Coast, including legal fees and past and future benefits, will total $1.1 million, he says.
The Atlantic Coast policies are broken out into several categories. A total of 3,800 death claims will be retroactively enhanced and interest will be paid at the rate of 8.75%. An additional 2% will be added as a settlement, Scarborough adds.
The remaining policyholders who have in-force policies, will receive a 10% enhancement plus the 2% settlement, he adds.
The average time frame for the affected policies could run as far back as 1989 when the company last examined its race-based pricing practices, Scarborough says. That took place because of the NAIC interrrogatories, he says.
Scarborough says the company thought it had ended the practice of charging blacks higher premiums than whites but missed the block of policies because of administrative and computer oversight.
The company reexamined all its policies when it was hit with a class action lawsuit in South Carolina state court and found the practice was still being used for the 31,000 policies, he says. “We self-reported to the Commissioner [Ernst Csiszar],” he adds.
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 24, 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.