The New York State Insurance Department plans to review the legality of an industry practice that directs death benefits to accounts managed by carriers on behalf of beneficiaries.
“It’s troubling that people are not getting an immediate payment and that the insurance companies at least seem to be making some effort to make money off this,” Matthew Gaul, deputy superintendent and head of the New York regulator’s life insurance division, said yesterday in an interview.
Gaul’s comments followed a Bloomberg Markets magazine report profiling a practice that allowed more than 100 carriers to retain and earn investment income on $28 billion owed to life insurance beneficiaries. New York-based MetLife Inc., the biggest U.S. life insurer, and No. 2 Prudential Financial Inc. are among the firms that administer these so-called retained- asset accounts, which aren’t guaranteed by the Federal Deposit Insurance Corp.
Insurance companies may be violating a federal bank law, Bloomberg Markets reported. A 1933 statute makes it a felony for any company to accept deposits without state or federal authorization.
“We’re looking at the legality of this whole process,” Gaul said. “There’s a question of whether this is really a banking business.”
MetLife and Newark, New Jersey-based Prudential place death benefits in interest-bearing accounts and issue IOUs to survivors. Insurers market the accounts as a service to allow bereaved beneficiaries time to think about what they’ll do with the payout. Carriers make money by investing the funds in bonds and keeping the difference between returns and the interest they credit to the accounts.
Prudential paid survivors like Cindy Lohman, the mother of a slain Army sergeant, 1 percent interest in 2008 on their Alliance Accounts, while it earned a 4.8 percent return on its corporate funds, according to regulatory filings. Lohman told Bloomberg Markets that her IOUs were rejected twice by salespeople when she tried to use them to make retail purchases.
“Beneficiaries have full access to the money in their retained asset accounts and can withdraw the full amount right away or at a later date,” the American Council of Life Insurers, the industry lobby headed by MetLife Chief Executive Officer Robert Henrikson, said in a statement. “Retained asset accounts provide a significant benefit to family members who are dealing with the emotional loss of a loved one.”
Thomas Considine, commissioner of the New Jersey Department of Banking & Insurance, said he instructed staff to question Prudential about Lohman’s rejected IOUs.
The New York regulator plans to issue a letter to insurers urging greater disclosure of the accounts’ terms and the absence of an FDIC backstop, Gaul said. The watchdog will then consider whether any rules would prohibit insurers from providing the accounts, Gaul said.
Pennsylvania Insurance Commissioner Joel Ario is considering a plan to require insurers to obtain the consent of beneficiaries before creating an account on their behalf. He said in an interview that his staff is studying the issue.
“Prudential and its Alliance Accounts are in compliance with all applicable laws and regulations,” Bob DeFillippo, a spokesman for Prudential, said yesterday. Christopher Breslin, a spokesman for MetLife, had no immediate comment. MetLife’s Joseph Madden told the magazine that customers were happy with the accounts.
Considine, of New Jersey, said his department has never received a complaint about retained accounts. State guarantee funds backstop insurers and provide account holders with protection against default by carriers, Considine said.
“They do bring a very, very real consumer benefit,” Considine, who was familiar with the accounts during his 17-year career at MetLife, said in an interview. Insurers shouldn’t be required to obtain consent to open accounts for beneficiaries because sometimes the bereaved aren’t ready to consider their options for the cash, Considine said.