I might as well admit to you that I did not see the California ban on retained asset accounts coming. I mean, ever since this story first broke (much to Prudential’s dismay) more than a year ago, our continuing coverage of the RAA issue has pointed to a slow and inexorable movement toward some kind of regulation on the issue. In my heart, however, I never really thought it would come to pass. Surely, if an outright ban on retained asset accounts were to happen anywhere in the United States, it would be in the People’s Republic of California (as a few of my more conservative friends like to refer to the Golden State).
Part of me has always bristled at the way this issue first came to light, through what I felt (and continue to feel) was an unfair story published by Bloomberg that described retained asset accounts as little more than a form of financial trickery aimed at fleecing the beneficiaries of slain military service members. Sure, it made for great copy, and it created a brief media firestorm, but as I later learned, the companies named in that story, especially Prudential, never really suffered and lasting damage from it. Once folks got to understand exactly what RAAs are meant to do, the furor seemed to die down.
After all, RAAs do serve a useful purpose; they allow for beneficiary money to gain interest while the beneficiaries themselves figure out what needs to be done with it. This, on its own, is a good idea. Perhaps where insurers took a wrong turn was when they too gained interested off of this money, which to a cynical eye looks like nothing else other than trying to profit from the dead. And likewise, the industry could have been much more transparent about the practice, but to be fair, this practice had been widespread across the industry for many years. After a while, certain operations simply become “the way we have always done things,” and it begins to never even enter people’s minds that what has become everyday practice might be considered outrageous to others.
That is certainly what happened here. Now, there have been supplementary studies into the practice of RAAs that show how the practice really was being used more for the industry’s benefit than for that of any beneficiaries. A study by the State of Texas that was published back in March comes to mind. In a survey of some 140 insurance companies in the Lone Star State, some 41% of them used RAAs. But where it gets unflattering is when Texas revealed that almost all RAAs in the state offered interest of less than 2.0%, almost all companies offering RAAs had no fixed duration on the accounts. Over 20,000 RAAs in the state had no withdrawal activity for more than three years (in 8,646 cases, more than four years), and the total amount held was more than $329 million. Some37% of companies offering RAAs did not report unclaimed accounts to as unclaimed property (not good).
With findings like this in the wind, I suppose it became inevitable for regulators to move on this practice. And it comes as little surprise that we should see California make such a move. On one hand, it’s a laudable effort, if misguided, to protect consumer interests. But I cannot help but feel that a more productive measure would have been to pull the industry’s best and brightest into a room – say, the CEOs of the top 25 life insurers in the state—lay down the State’s grievances against the practice and figure out how RAAs could be tweaked so that they continue providing a valuable service to beneficiaries while not tripping off the sense among regulators that something was amiss.
I lost my father back in April. And there was a life insurance component to his passing. When I had a check in my hand, the last thing I really wanted to do was to go out and deposit it somewhere. The money felt…not entirely mine, really. It was almost as if I needed to wait on it to be respectful to the man whose hard work, foresight and love made sure there was something set aside for his kids once he was gone. So I get RAAs. I really do. Losing my father was about as gentle an experience as it could be, because I had the rare gift of being able to say good-bye to him at a time and place of my choosing. So I was ready for it. How is somebody who suddenly loses a mother, father or spouse supposed to run right down to the bank with a million-dollar check and cash it? There are other things on one’s mind, and frankly, were I in such a predicament, I would think it a good thing that the money I would need was safe in an account somewhere, earning at least a little something while I tried to get my head straight.
Alas, California would rather we not have that option, and so it put the hammer down on a practice that was not perfect, but could surely be fixed. But rather than calling in a repairman, it brought in a wrecking crew. No wonder why so much business is leaving the state.