We have, in recent weeks, seen a new political firestorm that has already put life insurers in the crosshairs of state regulators, what amounts to a private-sector life insurance bounty hunter, and state treasurers desperate to raise revenue any way they can.
I am talking, of course, about a multi-state (and by multi-state, I mean some 35 states and counting) probe into the payment histories of life insurance companies on dormant policies going as far back as the 1940s. Every life insurer has these kinds of policies in their books somewhere; an insured who bought a policy kept it in force and then just disappeared without filing a claim, or even having trackable whereabouts. Technically, the life insurance company is supposed to track down disappeared plicyholders and if not, to forward the money in the policy into a state-run unclaimed monies fund. But as California, Florida ans a number of other states are suspecting, numerous insurers, including MetLife, may not have been as good about this as they were supposed to have been.
This story has already made the front page of the Wall Street Journal, and if you Google “dormant life insurance,” the first page will yield little more than links to news stories by state insurance departments detailing their own investigations. To say this has become another political grease fire for the industry (a term I last used when Prudential got blindsided by that bogus retained assets account fiasco last year) is an understatement. This has all the fixings for a major problem for the entire life industry, for a number of reasons.
First, it’s no surprise that the most vociferous investigations are coming from California and Florida (both of which have public hearings on this later this month, which should be interesting to say the least), as both states have budgetary problems that make a gambling addict look solvent. For them, looking into dormant policies is basically like digging for gold at the expense of an industry that has political pull but very little public sympathy. For regulators who don’t want to rotate back out to the industry, as so many of them do, this is a no-brainer of a crusade, for any money turned over wins them hero points at the state capitol, and if nothing comes up, the only people who are put out are the insurers, whose friendship with politicians is fair-weather at best.
Secondly, this all got started mainly out of the involvement of a company called Verus Financial LLC, which helps the states dig up info on dormant policies. Why? Because it gets a portion of whatever is recovered. Verus is not acting in the public interest or out of an effort to keep anybody honest. This is a compny that is essentially a band of professional treasure hunters. And the backyard it’s digging up with all the discretion of a bundle of dynamite is the history of the life insurance industry itself. What Verus is doing is legal. And it’s really not morally repungnant. But it plays into a public myth that the life insurance industry is always up to no good, and that is where I get a bad taste in my mouth. The public did not bother to fact-check the nonsense Bloomberg published about Prudential last year. Nor will it fact-check what Verus and its many partners in the statehouses are doing now, which is shaking down life insurers for loose change. This is not a good guys and bad guys thing, but I fear it will be seen as one.
Thirdly, and most importantly, it looks like there might actually be something to find, and that is the worst part about it all. Don’t get me wrong: if life insurers acted inappropriately, then they’re going to have to be called out for it and made to pay. That’s just the law. But at this moment, I am not entirely sure if the problem is as big as so many states seem to think it is. That so many states have followed California and Florida suggests that there’s enough possibility here to make it worth their while. It may only be a few companies. Or it may be a standard degree of sloppy detail management across the board. Whatever is yielded in the long run, though, comes out of the collective coffers of the industry’s public reputation. And that’s bad, bad, bad.
Why? As I have said before, the industry’s political weakness makes it very difficult for it to get anything from its political will. It lobbies hard in issues that matter to it, but at the end of the day, the industry still has not been able to turn aside the most hurtful elements of healthcare reform or financial services reform. To have burned so much political capital and to find themselves under the gun again, and like this, makes every life insurer vulnerable. Not just to companies like Verus, and not to opportunistic state regulators. But to everybody who has a villain story to tell at insurers’ expense. Trial lawyers. Dodgy journalists. industry analysts. Everyone.
Hopefully it won’t come to that, but we won’t know just yet. Keep your eyes peeled on National Underwriter for ongoing coverage, especially on the California and Florida hearings scheduled for later this month. In the meantime, the NAIC has announced its own taskforce to look into this, but don’t expect too much to come out of it. Whenever the NAIC announced these things after the fact, it’s usually for show.
Until then, I am left thinking of two things colleagues of mine have told me about this on the condition that they not be named. The first waved this entire thing off as laughable monkey water, a classic shakedown that would end once the states got what it wanted. If that’s so, and it sure looks like it is, then what happens when the states want more money? How many times can they go back to the well that is the insurance world?
A lot, I think. Which is what the second thing I’m thinking about addresses. Apparently, there is no statute of limitations on dormant policies. Right now, states are looking at insurers back to the 1940s. But there is nothing stopping them from going back to the 1840s. I’m starting to get the feeling like it’s going to be a long, miserable summer for anybody in the claims departments of any of the top 20 life insurers. California, Florida, Connecticut and MetLife look like just the first in what might be a long and destructive line of dominoes.