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Lawmakers Question Value of Insurer Safety Net to Beneficiaries

Representative John Garamendi
It raises a red flag as to whether this would be covered Garamendi said in an interview. Photographer: Brendan Hoffman/Bloomberg

Aug. 13 (Bloomberg) -- The accounts life insurers set up for survivors of slain soldiers and other Americans may not be covered by state guarantee funds, U.S. and state lawmakers said.

MetLife Inc. and Prudential Financial Inc., the biggest U.S. life insurers, make investment income by keeping death benefits and placing the funds in interest-bearing products called retained-asset accounts.

U.S. Representative John Garamendi of California and Robert Damron, who heads a national group of state legislators focused on insurance law, said that a MetLife document casts doubt on whether survivors’ money is protected. MetLife tells beneficiaries whose death payouts stay with the New York-based firm that they’re creditors and should have no expectation of a “special relationship” with the insurer.

“It raises a red flag as to whether this would be covered,” Garamendi, a former California insurance commissioner, said in an interview. When an insurer fails, “you’re going to have a lawsuit and you’re going to have a judge that will eventually sort it all out,” said Garamendi.

Life insurers have drawn fire from state and national elected officials since Bloomberg Markets magazine reported last month that more than 100 carriers profit by holding death benefits. New York Attorney General Andrew Cuomo opened a fraud probe and subpoenaed companies including MetLife and Prudential.

The National Association of Insurance Commissioners has scheduled an Aug. 15 meeting at its conference in Seattle to begin a review. Insurers profit by investing the money in bonds that earn a higher yield than the interest they pay.

No FDIC Backing

Insurance guarantee associations lack the U.S. backing enjoyed by the Federal Deposit Insurance Corp., which can access a $500 billion credit line with the Treasury Department. The state backstops rely on contributions from solvent insurers in the same state as the failed carrier.

The National Organization of Life & Health Insurance Guaranty Associations said in a July 29 statement that retained-asset accounts would be protected in insolvencies. Retained benefits have a backstop of least $300,000 from most state guarantee associations, compared with $250,000 from the FDIC on bank deposits, the American Council of Life Insurers said.

“These are covered under guarantee funds,” said John Calagna, a spokesman for MetLife. “We’re saying it, the guarantee funds are saying it. I think that’s pretty powerful.” Calagna declined to comment on the client relationship described in the MetLife customer agreement.

‘Ready to Pay’

The retained benefits, which provide funds to customers on demand, give bereaved beneficiaries time to weigh their options before deciding what to do with their funds, said the ACLI, whose chairman is MetLife Chief Executive Officer Robert Henrikson. Paul Graham, ACLI senior vice president of insurance regulation, said in a conference call with reporters on Aug. 4 that consumers with retained-asset accounts shouldn’t worry.

“Insurance companies are backing those with very short-term investments so that they’re liquid and ready to pay,” he said.

State guarantee funds may not cover retained-asset account money if beneficiaries are creditors, said Damron, the Kentucky state representative who heads the National Conference of Insurance Legislators.

“The guarantee funds are to guarantee the payment of insurance policies, not to guarantee the payment of creditors,” said Damron. Unlike bank customers who are backed by the FDIC “there’s no such protection for creditors or depositors into an insurance company,” Damron said in an interview.

The FDIC is reviewing whether insurers misled customers about retained benefits, FDIC Chairman Sheila Bair said in an Aug. 5 letter to NAIC CEO Therese Vaughan. Bair urged insurance regulators to improve the disclosure provided on the accounts, in which carriers issue draft notes to customers in what the firms call “checkbooks.”

‘Appropriate Differentiation’

“It is important to avoid public confusion and provide appropriate differentiation” between FDIC backing and insurance guarantees, Bair said.

State backstop funds have a total of about $150 million on hand to satisfy policyholders in new insolvencies, according to 2008 data from the guarantee association group, or Nolhga. Insurer assessments to fund insolvencies raised an average of $67 million a year from 2004 to 2008, Nolhga said. The $150 million in guarantee funds represents less than 1 percent of the $28 billion insurance companies hold in retained-asset accounts.

“If there were some kind of widespread problem, the guarantee funds would collapse,” said Birny Birnbaum, executive director of the Center for Economic Justice, a consumer group. That compares with the FDIC, which “has the backing of the federal government in the event there’s a run on a lot of banks,” he said.

$10 Billion

MetLife, which holds about $10 billion owed to beneficiaries, told customers this week that while the funds are not backed by the FDIC, they are “guaranteed by the financial strength” of the company and protected by state backstops. Interest rates of 1.5 percent or better were credited to 80 percent of accounts as of June 30, the company said. About half of accounts were earning 3 percent, MetLife said.

The guarantee funds were created by states, starting with New York in 1941, and their boards are comprised of insurer representatives. Assessments may be suspended if solvent insurers aren’t strong enough to contribute, according to New York’s fund.

‘Not the Last Word’

Nolhga’s assurance of coverage is “not the last word,” said Garamendi, a Democrat. “The contract is the last word.”

Garamendi, as a regulator, oversaw the liquidation of Executive Life Insurance Co., which was seized in 1991 and is still being wound down by the state. Insurance customers and holders of other obligations competed for the company’s assets, Garamendi said. Payments were delayed, and even after guarantee association contributions, policyholders lost pennies on the dollar, he said.

“It’s very possible there could be a legal challenge” to the rights of retained-asset accountholders, Jane Cline, president of the NAIC, said in an interview. “But that doesn’t mean they’ll prevail.”

Insurance companies lack a federal regulator. Oversight is the responsibility of state commissioners who are appointed by governors or elected.

Georgia’s John Oxendine opened an investigation of MetLife and Prudential this week to review his “serious concerns” about consumer treatment. Such a probe, known as a market-conduct exam, could result in fines or the revocation of licenses to do business in the state. Matthew Gaul, a New York deputy superintendent, called benefits retention “troubling” and started a review to see whether banking laws were violated.

‘Setting the Record Straight’

Thomas Sullivan, the Connecticut commissioner who was named co-head of the NAIC review group, said he was concerned about “setting the record straight” by showing how the accounts help clients. New Jersey’s Thomas Considine said the products give “a very, very real consumer benefit.”

Guarantee associations cover retained-asset accounts according to legislation written by the NAIC and adopted by every state and have made payments to back them in the past, said Sean McKenna, a spokesman for Nolhga. The NAIC, a forum used by state regulators to develop policy and lobby Congress, provided for the coverage of “supplemental contracts” in a so-called model act on guarantee funds that the group proposed for adoption by state legislatures, according to Nolhga.

“While there are minor variations in this language from state to state, we do not believe any such variations alter our basic conclusion,” McKenna, said in an e-mail. “There has never been a challenge to guarantee-association coverage of a retained-asset account by a receiver, regulator or creditor.”

No Complaints

Consumers have never logged a complaint with the New Jersey department about the accounts, Considine said in an interview. Sandy Praeger, the Kansas commissioner and former NAIC president, said her office “hardly ever” gets calls about the products.

“The fact that people haven’t complained doesn’t necessarily mean appropriate conduct on the part of the company,” Georgia’s Oxendine said in an interview. If consumers “don’t understand, they don’t know to complain.”

California’s guarantee fund applies to unpaid beneficiaries as well as policyholders, said Patricia Staggs, deputy general counsel at the state’s insurance department. Backstop coverage exists in Mississippi and “will hold up in a liquidation,” said the state’s regulator, Mike Chaney.

Kansas, Florida

“You’re not going to have all of them go bankrupt at the same time,” Praeger said in an interview. “The guarantee fund is there to pay the claims.”

Liabilities of traditional life insurance policies mature over decades and aren’t subject to early settlement for the full amount. Insurers buy long-term bonds to back these policies with the expectation that they won’t face sudden withdrawal demands that could force them to sell investments when markets slump.

This time span has insulated carriers from liquidity squeezes and afforded guarantee associations, in the event of insolvencies, the luxury of raising money to cover shortfalls as liabilities come due. Retained-asset accounts, which require immediate payment on demand, could face a sudden drain, Garamendi said.

“If any company were to be perceived as weak, that money is immediately callable and then you start the cascading,” Garamendi said. “People panic and pretty soon you’ve got a classic run on the bank, which I think happened recently,” he said, citing the 2008 failure of Lehman Brothers Holdings Inc.

To contact the reporter on this story: Andrew Frye in New York at;

To contact the editor responsible for this story: Dan Kraut at

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