California insurance commissioner Dave Jones says that life insurers representing over 55% of the total national market have agreed to use the DMF (AP/Rich Pedroncelli)

A new federal report finds a laundry list of problems with the Social Security Death Master File (DMF), the tool being mandated by state insurance regulators for insurance companies to use in verifying that they are in compliance with unclaimed property laws.

“Certain procedures that SSA uses for collecting, verifying, and maintaining death reports could result in erroneous or untimely death information,” the GAO says.

For example, the report says, SSA does not independently verify all reports before including them in its death records.

States have been hiring vendors to comb the software of insurers since 2008 and then fining them and ordering them to turn money over to the states based on the audits by the independent vendors.

The latest settlement was mid-month with Lincoln National Group, Philadelphia, Pa. Lincoln agreed to pay a total $12.6 million to the six states that headed the multi-state task force as well as other states that agree to sign on.

Lincoln also agreed to revise a number of business practice reforms, including using the Social Security Death Master File database to search its records for deceased life insurance policyholders so beneficiaries may be paid.

California insurance commissioner Dave Jones said Lincoln National holds roughly four percent of the national life insurance market, with over $21 billion in annual premiums. He said that with this latest settlement, life insurers representing over 55 percent of the total national market have conformed or agreed to reform their business practices and use the Death Master File to search for deceased policyholders and make benefit payments.

At the same time, the National Association of Insurance Commissioners Dec. 4 agreed to consider whether to shift gears on its handling of unclaimed property enforcement issues and try to provide guidance aimed at ensuring what the industry calls “fair and uniform” settlement practices, instead of continuing to pursue the individual claims.

The Life Insurance and Annuities (A) Committee will undertake a study to determine if recommendations should be made to address unclaimed death benefits, presumably through guidance to insurers and state regulators.

The insurance industry, led by the American Council of Life Insurance, individual companies, and outside law firms retained by the companies, have been clamoring for a change in direction.

A concern of the industry, and some regulators alike, is that continuing the current probes could undermine the solvency of smaller insurers. As Jones indicated, most of the larger, well-capitalized insurers, have settled with the state agencies, which include in some cases state comptroller and unclaimed property offices as well as insurance departments.

The report should give the A Committee some food for thought. The report was not prepared with the unclaimed property issue in mind. The GAO said it conducted the study because the federal government “must guard against improper payments.”

Specifically it said that federal agencies may avoid paying deceased beneficiaries by matching their payment data with death data SSA maintains and shares. In addition, recent legislation has established additional requirements for federal agencies to use death data to prevent improper payments, the GAO said. “However, the Social Security Administration Office of Inspector General has identified inaccuracies in SSA’s death data, which could diminish its usefulness to federal agencies,” the GAO said.

State and insurance company officials were not available to comment on the report during the Christmas-New Year’s recess.

But, the report said that SSA only verifies death reports for Social Security beneficiaries in order to stop benefit payments, and then, verifies only those reports from sources it considers less accurate, such as other federal agencies.

The GAO identified instances in its report where this approach led to inaccurate data. For example, GAO’s analysis of a sample of death records SSA erroneously included in its death data found that these errors may not have occurred if SSA had verified them, the report said.

In other cases, when data provided do not match SSA’s records, SSA typically does not record these deaths, the report said, which doesn’t comply with federal internal control standards. Agencies should conduct risk assessments of factors impeding their ability to achieve program objectives, such as data errors that could result in improper benefit payments, GAO said.

GAO officials working on the report said that SSA officials told them SSA has not performed such risk assessments, but has initiated work on a full redesign of its death processing system.

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