Initial regulatory responses to smoldering consumer issues.
The National Association of Insurance Commissioners ("NAIC") and the National Conference of Insurance Legislators ("NCOIL") recently issued proposed regulations to address a growing controversy over the use of Retained Asset Accounts ("RAAs") by insurance companies, sparked by a Bloomberg Markets news story this past summer. RAAs are a settlement option established by insurance companies for holding death-benefit proceeds until beneficiaries withdraw the cash using checks, payment cards or other means.
On July 28, 2010, Bloomberg's story spawned regulatory investigations about a report that Prudential Life Insurance Company sent checkbooks to survivors requesting lump-sum payouts for soldiers killed in action.1 According to the reports, the checkbooks are tied to an "Alliance Account," as drafts, or IOUs, and are not insured by the FDIC. Prudential invests the survivors' money in its general account, which earned 4.2 percent in 2009, mostly from bond investments, and the company paid survivors 0.5 percent in 2010. Over the past two decades, many insurance companies have used RAAs, investing nearly $28 billion as reported by Bloomberg.
On the very same day that the Bloomberg story broke, the ACLI issued a statement to address the use of RAAs.2 In its press release, the ACLI stated,
Beneficiaries have full access to the money in their retained asset account and can withdraw the full amount right away or at a later date.
Retained asset accounts provide a significant benefit to family members who are dealing with the emotional loss of a loved one. Not surprisingly, financial matters may not be the first thing on their minds and retained asset accounts provide a secure place for life insurance policy proceeds to be held until the money is needed.
Life insurers invest assets for retained asset accounts in their general accounts, generally in low-risk, conservative investments, to ensure the money is available on demand. The rate earned by the account is comparable to similar on-demand accounts and is typically guaranteed by the insurer not to drop below a certain level. Beneficiaries can access their money at any time and transfer it to a bank account, CD or other investments with a higher interest rate.
The ACLI advised that it supported a 1994 NAIC model bulletin for the treatment of RAAs and the re-examination of the model. The model had set forth minimum guidance on disclosure to consumers of the important features of the account, tax implications and interest rate payments.
The day after the Bloomberg story broke, NAIC President and West Virginia Insurance Commissioner Jane L. Cline issued the following statement regarding the RAA media reports:
Retained Asset Accounts (RAA) are a life insurance claims settlement mechanism that have been available to consumers for at least two decades. The accounts were initially created at the request of consumers to provide options for receiving benefits from a life insurance policy, and with proper disclosure, consumers have generally been happy with this flexibility. Traditionally, consumers earn interest under these accounts, allowing their benefit to grow without the need to make impulsive decisions about how to manage the benefit.
The NAIC is re-reviewing the disclosure requirements associated with RAA and is developing a consumer alert to help policyholders better understand the terms of these kinds of settlements. Regulators are also reviewing the transaction requirements/terms for the "checkbook" usage associated with these types of policies.
Depending on how an insurance company manages its RAA program, these accounts may not be FDIC insured. However, all states have a life insurance guaranty fund to protect policyholders.
In addition, all state insurance departments maintain active consumer assistance programs to address consumer complaints, and RAAs have generated few if any complaints. Any consumer who is confused, feels they have been mistreated regarding these types of settlements, or believes there may have been a misrepresentation of the settlement terms should contact their state insurance department.
Following on the heals of the Bloomberg story, New York Attorney General Andrew Cuomo opened a fraud investigation; the Georgia and New York insurance departments began probes of these practices; the U.S. Department of Veterans Affairs reviewed its own insurance program; and the U.S. House Oversight and Reform Committee said it would investigate insurance benefits for six million U.S. soldiers.3
The news stories and investigations have highlighted a variety of regulatory issues, including, among other things, disclosure of RAA rates, disclosure of general account information, misconceptions of "checking" versus draft accounts, lack of FDIC protection, and guaranty fund protection limitations. The NAIC and NCOIL set off on two separate tracks to consider appropriate uniform regulations and laws.
During the NAIC summer national meeting in August 2010, the NAIC Executive Committee directed the Life Insurance and Annuities (A) Committee and the Market Regulation and Consumer Affairs (D) Committee to establish a Joint Working Group to review the use of RAAs by insurance companies and make recommendations as may be necessary, including whether there is appropriate consumer disclosure.4 Roger Sevigny, New Hampshire Insurance Commissioner and immediate past president of the NAIC, and Thomas Sullivan, then Connecticut Commissioner and chair of the NAIC Life Insurance and Annuities Committee, were appointed co-chairs of the working group.
The RAA Working Group held meetings and conference calls to obtain further information regarding the use of RAAs and to discuss and develop an action plan. The RAA working group focused on developing a consumer alert, its action plan, and an NAIC model bulletin.
At the same time, NCOIL proceeded with drafting a new law, called the "Beneficiaries' Bill of Rights," in an effort to head off federal regulation and to prepare for upcoming state legislative sessions.
NAIC Issues Consumer Alert and Adopts RAA Bulletin
As a first course of action, the RAA Working Group issued a Consumer Alert in August 2010 that explained RAAs in plain terms, key questions to ask and understand, payout options to consider, and other tips.5
While leading up to the NAIC fall national meeting, the RAA Working Group established an Action Plan on September 1, 2010, which discussed certain preliminary conclusions about RAAs, additional needed information, options under consideration, and a timeline for action to complete major items by the end of October 2010.6
On September 10, 2010, the RAA Working Group issued a survey to 30 insurance companies to collect information, including disclosure forms, claims forms, insurance policy language and supplemental contracts used for life insurance policies.7
At the NAIC fall national meeting, the RAA Working Group met on October 18, 2010, to review the preliminary survey information, key findings, and establish the next steps, including the revision of the NAIC RAA sample bulletin.8 The findings reflected the following areas of possible improvement for company disclosures:
- Companies generally portray RAAs as "checkbooks" rather than draft accounts, leading to possible confusion for consumers.
- Companies do not always indicate where the proceeds are kept -- either transferred to a bank or kept in the company's general account.
- While companies indicate interest will be earned, they generally do not provide the interest rate to be earned in the initial disclosure form.
- Companies do not always clarify whether the funds are FDIC-insured.
- Companies do not reference the protection of guaranty fund coverage, when applicable.
- The disclosure forms vary widely in length from insurer to insurer.
- Additional disclosure may be needed regarding the proceeds exceeding FDIC and guaranty fund coverage.
The RAA Working Group also directed its subgroup to modify the NAIC RAA Sample Bulletin, consistent with its finding regarding company practices. The Working Group also directed the subgroup to include suggested language regarding the filing of RAA disclosures with state insurance regulators.9
The Consumer Liaison Committee also met at the NAIC fall national meeting to present its concerns, stressing key events, issues, and the need for further information before further action is taken.10
The NAIC adopted the sample bulletin on December 16.11
NCOIL Approves "Beneficiaries' Bill of Rights" Model Law
On November 21, 2010, at its annual meeting in Austin, Texas, NCOIL adopted its "Beneficiaries' Bill of Rights" to address RAA issues.12 In a press release, the NCOIL model's co-sponsor and outgoing NCOIL President Robert Damron (KY) stated that, "Upon hearing of the plight of beneficiaries of military death benefits, NCOIL moved swiftly to develop a model to require appropriate disclosure. I believe that the families of our fallen heroes in their time of need will benefit from these strong disclosures in the NCOIL model when the legislation is passed by the states. They deserve no less from a grateful nation for their sacrifice."13
Rep. Damron further stated, "While acknowledging the need to move quickly to provide guidance to states before the 2011 sessions convene, NCOIL carefully crafted a model law that will prohibit insurers from issuing an RAA unless they provide clear and comprehensive disclosure and give a complete listing and clear explanation of available beneficiary payment options."14
The model will set out extensive written disclosures to consumers about RAA features when payment options other than a lump-sum payment are offered -- including that beneficiaries can access the entire proceeds by cashing a single check.15 Required disclosures would also include any interest rates, fees, limitations and delays tied to the account, and whether or not the benefits have available FDIC coverage, among other items.
Insurers under the model must also file all RAA marketing materials, disclosures, and forms with insurance regulators prior to their use and report annually on the number and amount of their RAAs, on how long the accounts have existed, and details regarding RAAs transferred to state unclaimed property funds, among other things. It would also require insurers to return RAA balances to a beneficiary if - during any continuous three-year period - they did not give affirmative directive to maintain the account.16
The NAIC and NCOIL have taken quick but decidedly different steps to regulate RAAs in the wake of media coverage: the NAIC has opted to gather information and issue a sample bulletin without adopting a model regulation or law, whereas NCOIL has promptly drafted proposed legislation for states to enact. As the story continues to unfold, it appears that insurance departments, federal regulators and others are poised to implement minimum regulatory requirements but not prohibit or significantly restrict the use of RAAs by insurance companies.