Joseph M. Belth, Editor Ann I. Belth, Business Manager Jeffrey E. Belth, Circulation Manager

. . . for the unfettered exchange of ideas about insurance

In Retrospect Occasionally it is desirable to step back and observe what has happened over an extended period of time. Therefore, a few years ago we took a retrospective look at The Insurance Forum. We assembled some excerpts from articles going back at least five years and in one instance more than twenty years. (We excluded articles published recently because we think it is preferable to allow a period of time to elapse before attempting to make judgments about their significance.) In retrospect, we consider the articles from which the excerpts are taken to be some of our most important. From "Great News -- Except for Equitable's Old Policyholders" (April 1976) In my opinion, the Equitable's 1976 dividend scale [which involved the use of an investment-year method of allocating investment income in the determination of dividends on individual life insurance policies] represents a major development in the life insurance industry. Although the actuaries may be able to defend it as an improvement in equity, I fear that it is fundamentally an expedient way to deal with temporary market conditions, and that it will come back to haunt the life insurance industry. Furthermore, I am concerned about the speed with which the New York Insurance Department capitulated on this issue. And finally, I am troubled by the fact that the details of the change have been shrouded in secrecy. . . . Until such time as the New York Insurance Department and the Equitable make a full disclosure of the details of the company's 1976 dividend scale, I believe observers are justified in viewing this important development as an example of the way in which old policyholders are thrown to the wolves in the race for sales volume. From "The Anti-Disclosure Strategy of the Life Insurance Industry" (August 1977) Meanwhile, the Federal Trade Commission is presently engaged in a major study of the life insurance disclosure problem. Clearly the life insurance industry is worried about this investigation, because conceivably it could produce a recommendation that rigorous disclosure be mandated. It will be interesting to see how strongly entrenched the NAIC's [National Association of Insurance Commissioners'] pseudo disclosure has become by the time the FTC study is completed. From "How Not To Sell Term Insurance" (January 1978) It is regrettable, in my opinion, that life insurance buyers and policyholders are caught between term insurance advocates (some of whom overstate the price of cash-value insurance) and cash-value insurance advocates (some of whom understate the price of cash-value insurance). It should come as no surprise to regular readers of The Insurance Forum that my suggested solution to this unfortunate state of affairs is the promulgation of a uniform, rigorous, mandatory system of information disclosure to life insurance buyers and policyholders. Such a system is described in my article, "Information Disclosure to the Life Insurance Consumer," which appeared in the December 1975 issue of the Drake Law Review. From "Another Problem for the Terminated Agent" (December 1978) We have heard unsubstantiated horror stories about agents who, after moving from one company to another, proceed to take their policyholders with them by replacing (twisting?) the policies of their former companies with the policies of their new companies. By contrast, in the case of Mr. W we have an example of an agent apparently anxious to service the policyholders of his former company without compensation. Losing one's nonvested commissions, nonvested service fees, and nonvested pension rights is a painful thing. But losing the ability to service one's faithful clients effectively may be even more painful for an agent who tries to operate in a professional manner. It is unfortunate that no mechanism seems to be available for easing his task. From "The A. L. Williams Replacement Empire" (April 1981) There should be no objection to the sale of reasonably-priced term insurance when it is appropriate in view of the individual's circumstances and objectives, and there should be no objection to replacement when it is justified. We believe that the sales activities of ALW [the A. L. Williams organization], however, frequently will result in the sale of inappropriate, high-priced term insurance, and in replacements that are not justified. The operations of ALW involve the recruiting of large numbers of part-time sales representatives, the use of excessively complex replacement proposals, the obscuring of the high cost of the mod-11 policy through the inclusion of figures for the annuity rider, and an inordinate emphasis on the alleged opportunity for sales representatives to get rich quick. The organization displays some of the characteristics of a chain letter, and like a chain letter will sooner or later run out of prospective recruits and prospective customers. Until the operation runs its course, however, we fear that many people are going to be seriously hurt. Among those to be hurt are persons who replace policies that should not have been replaced, persons who buy high-cost term insurance when they should have purchased low-cost term insurance, and persons who enter the organization with high hopes that are dashed. The word "churning," as used in the securities industry, refers to the rollover of a portfolio for the purpose of generating commissions. We believe the sales activities of ALW are designed primarily for the purpose of channeling the cash values of existing life insurance policies directly into commissions for members of the ALW organization. For this reason, it is our opinion that the ALW organization is engaged primarily in the churning of life insurance. [ALW persuaded the North Carolina insurance department to ban the above article in North Carolina. However, a federal judge lifted the ban.] From "Confronting the Traditional Net Cost Method" (June 1981) On May 4, 1970, a prestigious life insurance industry committee acknowledged the inadequacy of the traditional net cost method. Since that fateful day, many efforts have been made to change the ingrained marketing practices of an industry represented by a powerful sales force that grew up with the traditional net cost method. The issue here is not the activity of a single agent; rather, it is the activity of the entire institutional framework of the life insurance industry -- including insurance companies, trade associations, professional organizations, regulatory agencies, and the trade press -- when confronting the traditional net cost method. To outsiders it probably seems incredible that there is so much resistance to recognition of interest in the analysis of a life insurance contract--a long-term financial instrument. To insiders, however, who thoroughly understand the chemistry of the life insurance sales process, the resistance to change probably comes as no surprise. We have pursued the case described in this article, and plan to continue to pursue it, because we believe it is necessary to make insurance institutions keenly sensitive to marketing practices. We believe that keen sensitivity on the part of those institutions is a prerequisite to major reform, and that major reform in life insurance marketing practices is essential. What is at stake is nothing less than the integrity of the life insurance industry. From "The War Over Universal Life" (December 1981) Some of the advantages claimed for universal life are seriously exaggerated. The most critical deception, we believe, is the use of prominently displayed gross rates of return that do not reflect expense charges, and that are based on currently high short-term market interest rates. We wonder what will happen to universal life when interest rates in general decline, or, in the alternative, when short-term market interest rates drop below long-term rates. From "Thinking the Unthinkable -- What Would Happen If a Big Life Insurance Company Were To Get into Financial Difficulty?" (August 1984) The consequences of a failure of one or more big life insurance companies -- especially in terms of a loss of public confidence in life insurance companies and in financial institutions generally -- would be disastrous. Yet it is possible for one or more big life insurance companies to get into financial difficulty. If it were to happen, I believe steps would be taken to prevent the collapse of any big companies. It is doubtful that the combined efforts of other life insurance companies, the banks, the state guaranty associations, and even the states themselves would be enough to bail out one or more big life insurance companies. For that reason, I believe it would be necessary for the federal government to participate in the rescue, through infusions by the Federal Reserve, or through some other mechanism. [Since publication of the above article, there have been failures of large companies -- such as Executive Life and Mutual Benefit Life -- and the federal government did not become involved. However, some policyowners suffered substantial losses and public confidence in life insurance was adversely affected.] From "The Piggybacking Scandal at Prudential" (December 1984) Mr. Burton [Arthur H. Burton, Jr. headed Prudential's North Central home office at the time] said in his letter that "we deplore what happened in Cedar Rapids, and have taken every reasonable precaution to eliminate or minimize the chances of recurrence." Whether the steps taken by the company are adequate remains to be seen. Further, the problems are not limited to Prudential. Indeed, I believe serious improprieties in connection with piggybacking [often called "churning" today] are widespread, and are a major problem for the life insurance industry. From "The Coming Era of Disillusionment" (October 1985) So-called interest sensitive life insurance products are being marketed today with heavy emphasis on high gross interest rates. Aside from the deceptive nature of many sales illustrations and advertising materials (because the rates do not reflect any portion of the expense charges), there is serious doubt about the financial ability of the companies to credit these rates in the future. Furthermore, consumers generally may not be aware of the magnitude of the interest rate risk they are assuming. When consumers begin to experience much smaller cash-value accumulations than anticipated, sharp premium increases, the reappearance of so-called vanishing premiums, sharp reductions in death benefits, or some combination of these items, there will be a backlash against the life insurance industry. During and after the inevitable era of disillusionment for consumers, it will be difficult to rebuild public confidence in the industry. Thus the result of the current marketing emphasis on high gross interest rates may be a permanent reduction in the importance of life insurance companies as financial institutions. From "The Reinsurance Disaster at Executive Life" (May 1987) In my opinion, New York's action is a disaster for the Executive companies. The New York report is one of the harshest examination reports I have ever seen. Indeed, I believe that the criticism of Executive Life -- NY is so strong that the company is fortunate to have retained its license to operate in New York. [The above article discussed an examination report that was released in March 1987 by the New York insurance department.] From "Venita VanCaspel and the Price of Life Insurance" (November 1987) Yearly prices per $1,000 of protection are at the heart of any rigorous system of price disclosure to life insurance consumers. Yet the life insurance companies have strongly opposed efforts to adopt regulations that would require the disclosure of such information. The vacuum created by the absence of an accurate, official method for calculating these figures is being filled partly by individuals such as Ms. VanCaspel, who disseminate erroneous information that overstates the price of cash-value insurance. (The vacuum is also being filled partly by insurance agents who disseminate deceptive information -- often with the approval of their companies -- that understates the price of cash-value insurance. This subject is outside the scope of the present article, but has been discussed in The Insurance Forum and elsewhere.) Ms. VanCaspel says millions of copies of her life insurance material have been distributed. It distorts the facts about cash-value insurance, but the life insurance companies are partially responsible for the problem because they have refused to provide consumers with accurate information. The biggest losers are consumers who make inappropriate decisions based on the erroneous information they receive about the price of life insurance. From "Executive Life and the California Insurance Department" (October 1988) Questions remain concerning Executive Life -- CA's financial condition as of December 31, 1987. Perhaps the most important is the question of why the California insurance department allowed the company to show as assets in its 1987 statement two $85 million promissory notes that appear to have been backdated. On the basis of available information, I believe that the department's recently filed examination report masks the truth about the company's financial condition. Although the report reduces the company's statutory net worth at the end of 1987 from $204 million (the figure shown in the company's statement) to $135 million, the report does not disallow $170 million of assets that appear to have been backdated. In my opinion, the company was insolvent on a statutory basis as of December 31, 1987. [The promissory notes referred to in the above article were given to Executive Life by its parent company in exchange for contribution certificates -- or surplus notes -- issued by Executive Life.] From "A System for the Exploitation of the Terminally Ill" (March 1989) A life insurance policy is property, and generally the owner has the power to dispose of the policy as he or she desires. Also, when the insured is terminally ill, the "fair market value" of the policy may substantially exceed the cash surrender value. In theory, therefore, a market exists for the kind of program offered by Living Benefits. In practice, however, the program is fraught with potential abuses. Living Benefits has no insurable interest in the life of the insured, and the purchase of the policy gives the firm a financial interest in the insured's early death. Also, persons who are terminally ill, and those close to them, are under great stress and may be vulnerable to exploitation. Living Benefits says it will pay about $66,000 for a $100,000 policy on a person with a life expectancy of one year. The net single premium for a $100,000 death benefit under those circumstances is about $88,000, assuming 9 percent interest. I believe that $22,000 is a large "loading" and therefore that $66,000 is a low price for such a policy. I believe it would be useful if an insurance regulatory agency would conduct a hearing to explore the public policy implications of the program offered by Living Benefits. Such a hearing might shed light on the question of whether the program is a form of insurance, and, if not, whether it is a form of gambling or a form of moneylending. In my opinion, the program offered by Living Benefits is a system for the exploitation of the terminally ill. I believe that any company receiving a request for the transfer of a policy to Living Benefits should do what it can to discourage the transfer. [Living Benefits, Inc. was the first of what are today called "viatical" companies. The above article was published before Living Benefits purchased its first policy.] From "Assumption Reinsurance and the Plight of the Consumer" (October 1989) Insurance companies enter into contracts with policyowners and incur obligations under those contracts. Apparently the companies think they can transfer those obligations to other insurance companies without the approval of the policyowners -- their contractual partners -- and in some cases without the approval of insurance regulators. Such arrogance! Surely insurance companies should not be allowed to extricate themselves from their contractual obligations that easily. Some assumption reinsurance agreements seem to be class action lawsuits waiting to happen. Some state laws require prior approval of an assumption reinsurance agreement only when the assumption involves an entire company. In my opinion, such laws should be amended to require prior approval of all assumption reinsurance agreements. As for procedures, I believe that any assumption reinsurance agreement involving only part of a company should require the approval of the affected policyowners. The approval should be evidenced by a positive reply; that is, a failure to reply should not be considered an approval. Policyowners who do not approve should be handled outside the assumption reinsurance agreement; the originating company should remain liable to those policyowners in the event of the reinsurer's insolvency or other failure to honor the obligations under the agreement. From "A New and Dangerous Era for the Life Insurance Industry" (July 1991) On April 11, 1991, the life insurance industry entered a new and dangerous era. On that day, John Garamendi, California's insurance commissioner, seized Executive Life Insurance Company, and the public learned it is possible for a large life insurance company to fail. Life insurance companies previously were taken for granted. No major life insurance company had failed, and various myths developed. One, for example, was that "no life insurance policyowner ever lost a dime." That was false, but nevertheless it gained wide acceptance. Aside from the tragic consequences of the Executive Life failure for the hundreds of thousands of individuals who may suffer substantial losses, the significance of the failure is that the public henceforth will be more sensitive to bad news about the financial condition of life insurance companies. Consequently, severe runs are now more likely to occur. [The above article was published in June 1991, a month before the collapse of Mutual Benefit Life.]