The ongoing battle by states to identify and reclaim funds from insurance companies in cases where policy beneficiaries did not get the funds is, on its face, a righteous one.
Insurers clearly owe the money and the evidence presented by the states and the outside firms they have retained to audit insurance firms have presented a truly compelling case.
The insurance companies did indeed have different or “asymmetrical” policies regarding use of the Social Security Death Master File regarding variable and fixed annuities sold with riders that provided monthly or quarterly benefits as compared to cases where persons with life insurance policies died and the beneficiaries did not come forward.
Moreover, insurance companies perhaps did not aggressively seek to provide cash or stock to either holders of small-face life policies or their beneficiaries in cases where the companies went public and stock was granted to policyholders.
Insurance companies clearly acted in their own best interest, and this has been going on for a long time.
However, within the context of 150 years of insurance regulation, it is a witch hunt.
Going on for decades
First, state regulators have known this was going on for decades.
There are detailed records of intermittent probes of this going back to the 1970s, if not before.
For example, a law upheld by a Kentucky early last month allows the state immediate access to the funds if beneficiaries don’t come forward.
According to long-time industry observers, states over the past 40 years have gradually reduced the time period allotted before escheatment, that is, when the money is turned over to the state, from the average of seven years in the 1970s.
In fact, during the last crisis, in the late 1990s, a model law passed by states seeking to rectify the situation won support only in two states.
Second, in all cases, the outrage prompted by the discovery that insurers had been less than aggressive in finding beneficiaries or escheating funds to the applicable states developed during periods of economic downturns.
Third, as noted by the American Council of Life Insurers and the Association of California Life and Health Insurance Companies in reaction to a press release prompted by a lawsuit filed by California Comptroller John Chiang on May 7 against a Texas insurance company that refused California access to its records, “The fact is, 99 percent of claims made for benefits are paid promptly — in the normal course of business.”
Now, clearly, the gentlemen’s agreement between insurance companies and their state regulators is fraying.
For the past 150 years, insurance regulation has been lax and inconsistent because sole state oversight of insurance companies has worked to everyone’s advantage.
Insurance companies buy municipal bonds in the states where they do business, do business with local firms, and pay hefty but hidden premium taxes that help support states, a total of more than $20 billion.
State regulation also gives companies the power to confuse courts by arguing cases in state court that the case belongs in federal court, and vice versa.
Insurance oversight also creates state jobs, although the head count has dropped drastically as states cut costs. Agents are required to buy separate licenses for each product classification in which they sell products. Moreover, states now require continuing education programs that are another source of income.
Insurers have been allowed to call the shots in terms of capital standards and consumer protection because politicians and regulators indirectly benefited, including state jobs.
States also have the authority to appoint political supporters to workers compensation boards and lawyer/politicians with oversight over insurance have litigation handed their way, and insurance companies contribute a lot to political campaigns.
Now, the states are turning against the companies strictly because the insurance industry no longer provides enough off-the-books revenues.
States are desperate for money and with the insurance industry now apparently tapped out as a source of hidden revenues, politicians are being forced to pay a political price for generating new sources of revenue.
One sign is the Market Fairness Act, passed with strong support by the Senate in early May. Indeed, 22 Republican senators supported it.
Currently, states cannot force Internet retailers outside of their borders to collect sales tax on their behalf. The Marketplace Fairness Act would change that.
Now, states that might have looked the other way as insurers did business in their states are now being forced to chase spare nickels to pay for needed services in the face of opposition from constituents unwilling to pay higher taxes.
In other words, money talks.
For more from Arthur D. Postal, see:
- The road to comprehensive tax reform
- Washington regulation: 6 things to look for in 2013
- A different kind of climate change