In another potentially
damaging blow to the US life insurance industry’s image, New York
State Attorney General Andrew M Cuomo has launched a fraud
investigation into “practices that appear to have denied grieving
military families and others of millions”.
According to Cuomo, he is
investigating how military families and others were misled into
putting benefits into insurer-controlled, low-yield, potentially
risky accounts which reapedms of secret profits for the
insurers.
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First in the line of fire were
Prudential Financial and MetLife which have both been served with
subpoenas. Both insurers provide life insurance policies to members
of the military as well as non-military federal employees.
Cuomo explained, at this stage of
the investigation, it appears that, rather than receiving an
automatic lump-sum payout from Prudential or MetLife upon the death
of the policyholder, families are told the money will be placed in
an interest-bearing account. These accounts, known as retained
asset accounts, are controlled by the insurers and referred to by
Prudential as the Alliance Account and by MetLife as the Total
Control Account.
Cuomo’s tirade
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By GlobalData“It is shocking and plain wrong for
these multinational life insurance companies to pocket hundreds
ofms in profits that really belong to those who have lost family
members and have already suffered immensely,” said Cuomo.
“To make matters worse, the
insurance industry appears to be hoardingms that belong to military
families whose loved ones have made the ultimate sacrifice for our
country.”
Specifically, according Cuomo, the
insurers place the cash belonging to beneficiaries in their own
corporate accounts. He said these accounts reportedly provide the
insurers with a yield of upwards of 4.8%. The insurers then pay
families as little as 0.5% interest, less than half the rate
available at some banks insured by the Federal Deposit Insurance
Corporation (FDIC).
Twisting the knife further, Cuomo
noted that, because insurers do not put the cash owed to families
in banks insured by the FDIC, these assets may not be safe.
Prudential beneficiaries, according
to Cuomo, also receive “what appears to be” a cheque book, with
cheques bearing the name of JPMorgan Chase & Co.
Beneficiaries are not informed by
Prudential that these ‘cheques’ are not bank cheques. Instead,
Prudential must send money to JPMorgan Chase before the cheques can
be cleared.
Prudential beneficiaries, continued
Cuomo, are also not informed that under a 2008 law, they have one
year to place the death benefits in an individual retirement
account and earn tax-free investment gains for the rest of their
lives.
“Thus, real financial harm is
suffered by Prudential’s lack of disclosure,” he stressed.
The subpoenas Cuomo has issued are
broad-ranging and demand comprehensive data from the insurers,
including information relating to how and when beneficiaries are
informed of the terms and conditions relating to the retained-asset
accounts, as well as data relating to the difference between
interest earned by the insurance companies and interest earned by
the beneficiaries.
Industry under
scrutiny
Cuomo has also launched a
comprehensive review of the life insurance industry and its
practices to determine the extent to which other companies are
engaged in these or any other, what he termed, similar fraudulent
practices.
It appears at this stage of the
investigation that some of these practices may be widespread in the
industry, he noted.
Prudential Chairman and CEO John
Strangfeld responded immediately to Cuomo’s announcement.
“Given the questions raised over
the life insurance programme we administer for the Department of
Veterans Affairs, we welcome an opportunity to address the concerns
and to set the record straight,” Strangfeld stressed.
To this end, Prudential
explained:
- It believes beneficiaries are
vulnerable targets for abusive sales tactics and that its Alliance
Account takes the pressure off beneficiaries to do something with
the money – a situation that may lead to imprudent and expensive
investment decisions; - The programme provides the option
to access an independent adviser; - Beneficiaries who feel confident
about making decisions right away have full access to their funds,
which may be deposited in the financial institution of their
choice, with funds earning interest until presented for
payment; - Beneficiaries who find a better
interest rate can move the money by simply writing a draft;
and - Beneficiaries receive the entire
amount they are owed plus interest in their account. Prudential
does not in any way take money from beneficiaries.
Prudential added that it received
more than 40,000 Prudential Alliance Account drafts cleared last
year and receives few complaints from beneficiaries about
difficulties.
The insurer argued it is a case of
“apples and oranges” to compare the rate paid on the Alliance
Account to either the historical rate on its total portfolio or a
rate that requires investing in long-term assets. Prudential
stressed it pays a “competitive rate” compared to other options
that involve funds readily available and do not put principal at
risk.
In addition, Prudential noted that
Alliance Account assets constitute less than 1% of its general
account assets, and the rate that it earns on Alliance Account
assets cannot be compared to the rate earned on the general account
as a whole.
On the subject of safety, while
Prudential conceded that its Alliance Accounts are not FDIC insured
– a fact that is fully disclosed in its material – it stressed
these accounts are protected by state guaranty funds that provide
protection of at least $250,000 per account in most states.
Responding to Cuomo’s move,
National Association of Insurance Commissioners president Jane
Cline said retained-asset accounts were introduced over two decades
ago in response to customer requests.
“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,” Cline added.
Cuomo appears to be unimpressed by the arguments and has
subpoenaed at least another six insurers: Genworth Financial, Unum
Group, New York Life Insurance, Guardian Life, Northwestern Mutual
Life Insurance and Mony Life Insurance, a unit of French insurer
Axa.
