Insurance Execs Weigh Ethical Challenges Facing Industry

All of the panelists said the hypothetical client described in one of three case studies, a 70-year-old man facing financial difficulties who desires to cash out his life policy, should consider alternatives to a life settlements. Solutions offered, short of a policy surrender, included borrowing against the policy’s cash value; transacting a 1035 exchange; selling the policy to children, who could then place the policy in trust for the benefit of their children; and securing a bank loan, pledging the policy’s death benefit or a percentage thereof as collateral.

While espousing full disclosure by agents about alternatives to life settlements, panelists qualified their support of compensation disclosure. Echoing the comments of the panelists, Edward Zore, CEO of Northwestern Mutual, Milwaukee, said agents should tell clients how they’re compensated generally, but should not have to convey a dollar amount. He added that such detailed disclosure, and the idea that clients would be well served if agents received levelized (rather than front-loaded or “heaped” commissions) would be counterproductive.

“Disclosing exactly how much one gets paid would [be detrimental] to the sale process,” said Zore. “Also, levelized commissions are nice in theory, but they’ll only result in fewer agents selling fewer policies.”

Panelists rejected a suggestion of the moderator, Jim Mitchell, a former CEO of IDS Life, Minneapolis, Minn., that agents disclose premium costs in greater detail. Zore said that making apples-to-apples comparisons of commissions and products from one company to the next is problematic, in part because of variations in underwriting classifications and product features. Johns agreed, adding that differences in insurers’ distribution channels can also skew client perceptions of policy costs.

“It may appear to the client that our commissions are higher than Northwestern Mutual’s, even though the total cost of our respective field forces are probably comparable,” said Johns. “So there’s an issue as to whether disclosure of commissions would be fair, meaningful and representative of our true costs.”

He added that when dealing with clients angered by front-loaded commissions they view as unreasonably high, agents should point out that they’re entitled to a free-look period during which they can request a refund of the premium paid; review with clients why they purchased the policy; and, as necessary, disclose market data indicating whether clients received a fair price for the purchase.

As with compensation disclosure, panelists said product complexity and differences have to be weighed when deciding whether an agent inappropriately recommended replacing an existing annuity with a new one. O’Byrne said that if the agent’s compliance record indicated the recommendation was a one-time event, then additional education or supervision of the agent may be necessary. But if determined to be a “serial churner,” then suspension or termination of the agent’s contract, among other penalties, should be considered, he said.