An avid reader called us here in the Hoboken, N.J., office of National Underwriter and said, “I live in Florida. Why is it that every questionable life insurance and annuity sales practice seems to start or take off here?”
Our Hoboken office happens to be a block from the Hudson River, where mobsters made many a soul sleep with the fishes. The city’s youngest mayor ever was sworn into office July 1, 2009. He ran the city for 22 days before being arrested by the FBI in a corruption probe. He is now serving a 24-month sentence in a minimum security federal prison.
I went to journalism school near Chicago, where FBI stings are about as common as rummage sales, and I grew up in Kansas City, Mo., where the citizens take great pride in describing how Kansas City mobsters put the slots in Las Vegas.
It doesn’t seem as if Florida could run away with a race to see which jurisdiction had the most interesting financial services regulatory climate.
But also I spent three years in Vero Beach, Fla., at a time many residents were suing over real estate limited partnerships that had gone bad, living in shoddy new condos that were nothing like what the developers had promised, and discovering that their life insurance premiums were not going to vanish. The old National Association of Securities Dealers, Washington, often seemed to list at least one broker from the area in its monthly disciplinary action report.
So, is Florida really different, or is there a scent of something fishy wherever we care to try to smell it?
Sheryl Waters, a certified public accountant and a certified fraud examiner at Waters CPA Group P.A., Tampa, Fla., a firm that helps some clients set up life insurance and annuity arrangements and helps others untangle what she believes to be unsuitable arrangements, says she thinks Florida really is different.
“Everything weird starts in Florida,” Waters said.
She thinks most of the weirdness has to do with consumers and product sellers who have moved to Florida, not with anything all that unusual about the culture of Florida itself. And she doubts that many of the people who sell bad arrangements start out consciously trying to do anything wrong. Instead, she said, she thinks poorly educated, poorly trained people who have spent too little time in church are making promises that the products they sell are unlikely to keep. They do this partly to meet unrealistic sales quotas, and partly because they believe what they are saying.
“It would be funny if it wasn’t so overwhelming,” Waters said.
Mason Dinehart III, president of Financial Education Network Development, Los Angeles, a firm that provides expert witness services during securities arbitration proceedings, said he believes any geographic variations in the financial services regulatory climate have to do mainly with demographics.
“You look for any concentration of retirees,” Dinehart said.
Frank Darras, an Ontario, Calif., lawyer, represents consumers in cases involving disability insurance and long term care insurance. His disability insurance clients come from all over the country. “I see more claims coming out of places that are warm,” he says of the long term insurance market.
Florida Insurance Commissioner Kevin McCarty, who was appointed to the commissioner’s post by Gov. Jeb Bush (R) in 2003, said Florida has a high concentration of older residents and a history of being a place where some have gone to try to take advantage of others.
But Florida also has some of the most stringent insurance laws in the country, McCarty says, and Florida regulators have helped develop models used throughout the country to handle issues such as travel underwriting.
Advisors who represent consumers in conflicts with insurers and insurance marketers said they believe the overall quality of U.S. insurance regulation is uneven. But they all agreed that the Florida Office of Insurance Regulation has made serious efforts to help consumers. For instance, Florida regulators have “clamped down on the annuity business,” Waters said.
Eli Lehrer, director of the Center on Finance, Insurance and Real Estate at the Heartland Institute, Chicago, said he disagrees with Commissioner McCarty on a number of important issues. “But I think he’s smart, competent and ethical,” Lehrer said.
Outside Florida, most state insurance commissioners seem to be good at what they do, despite rare reports of outright bribe-taking and somewhat more frequent reports of enthusiastic enjoyment of corporate hospitality, Lehrer noted. “In general,” he said, “the problems are not with corruption, but with poor regulation and poor business practices.”
Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, said he believes commissioners and other regulators in Florida, Wisconsin and some other states have taken their responsibility to protect consumers seriously.
But, too often, “they come from the industry and they go back to the industry,” said Birnbaum, who once worked for the Texas Department of Insurance and has represented consumers in proceedings at the National Association of Insurance Commissioners (NAIC), Kansas City, Mo. As a result, regulators who want to get out of the public sector may feel as if they have no good alternative to working in the industry.
One sticking point with insurance regulation is that many major problems have surfaced through trial lawyers, media reports or investigations by state attorneys general rather than as a result of insurance department exams and investigations, Birnbaum said.
Connecticut Insurance Commissioner Thomas Sullivan, chair of the Life Insurance and Annuities Committee at the NAIC, said he believes life and annuity policies have mostly converged. Any lingering differences in the nature of regulation tend to be due more to agency’s resources and its level of aggressiveness than to policy differences, he said.
The challenges for anyone trying to address concerns about life and annuity sales practices include philosophical conflicts. For instance, there is the eternal difference of opinion about where regulators should draw the line between when an agent is engaging in misleading hype and when he or she is merely being too optimistic. And there is also the deep divide between the planner suspicious of any life insurance arrangement other than term life combined with low-cost index funds and the life agent who has concluded that it was nice to have had customers in products with principal guarantees over the past five years.
Another challenge is the difficulty of finding apples-to-apples enforcement data. Florida, for example, reported starting many more actions over concerns about producers than other states did in 2009. But states use a variety of approaches to handling and reporting producer action data.
The Financial Industry Regulatory Authority (FINRA), Washington, works with producers licensed as life insurance agents when it is regulating members’ sales of variable annuity and variable life products. But FINRA declined to make a representative available to discuss regional variations in the variable product market.
Although Birnbaum respects some appointed insurance commissioners, he believes that elected commissioners are less likely to move into a commissioner post straight from the insurance industry.
Darras thinks one sign that an insurance department has the resources to do a good job is a dedicated fraud unit. Insurers say the units reduce the incidence of fraud against them, and the units also seem to help consumers.
Jack Waymire of Paladin Registries & Directories Inc., Sacramento, Calif., said he would like to see insurance regulators provide detailed, standardized producer data that would be similar to FINRA broker-dealer data.
Today, “there’s a lot of variation from state to state, which is unfortunate,” said Waymire, whose firm runs an advisor directory.
As for Birnbaum, he would like to see states release the kind of detailed, ZIP-code level transaction data released by the mortgage lending industry. “Insurance regulators are essentially in the stone age in terms of data collection and data analysis,” he said.
To address long-standing criticism of the state-based insurance regulatory regime, especially given its inability to prevent the failure of AIG, the Obama administration and Democrats in Congress included provisions creating a Federal Insurance Office (FIO) and an Office of Financial Research (OFR) at the U.S. Treasury Department in the new Dodd-Frank Wall Street Reform and Consumer Protection Act.
AIG’s problems did not stem from their insurance operations, but critics contend that the 50 different insurance regimes could not accurately compare data with each other, should any one regulator have chosen to look more deeply into AIG’s books prior to its dramatic collapse. A single federal system, ideally, would address that problem, but from the beginning, state regulators opposed it.
As the Dodd-Frank Act went through Congress, state regulators successfully fought off lawmakers’ efforts to give the FIO the authority to handle core regulatory functions such as producer oversight. But the FIO still is supposed to gather comprehensive information about the insurance market, and the OFR is supposed to use FIO research to produce portions of a financial company reference database and a financial instrument reference database.
The FIO will not have the power to issue subpoenas, but the OFR will.
Sullivan said he believes the FIO will focus on collecting insurance industry data relating to insurer solvency and will not be collecting market conduct or enforcement data.
Another new agency created by the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB), will have no ability to exercise any power over a person regulated by a state insurance regulator. In theory, it seems possible that the CFPB and a CFPB arm, the Office of Financial Protection for Older Americans, could use data from outside sources, such as voluntary surveys, the FIO or commercial databases, to prepare reports that might refer to insurance products. But Sullivan said he believes Congress clearly prevented the CFPB from having anything to do with insurance and that even preparing reports about insurance would exceed the scope of its authority.
So what does this mean for states like Florida, where conventional wisdom contends that, despite regulatory efforts, the state is a breeding ground for contentious sales practices? For those hoping for a federal fix, there is plenty more waiting to be done. Meanwhile, the state-based system seems to have dodged a bullet, but it might only be a matter of time before federal regulators increasingly decide to take trouble spots like Florida and other states out of the locals’ hands.