Insurance Regulators Fiddled While Policyholders Got Burned

It's a fast-growing club that no one wants to join. For Margaret Barsocchi, co-owner of a Little Rock blueprint shop, membership came through a $7,500 investment she made nine years ago with a hometown insurance company. Confident that her money was secure, she had no idea her policy was transferred several times, winding up with the ailing Diamond Benefits Life Insurance Co. in Phoenix. In fact, the first she heard of it was when Diamond's receiver notified her and 1,400 other annuity holders that Diamond had gone under. Now, Barsocchi is part of a class action seeking the return of more than $31 million. It could take years to wend its way through the courts.

That club is likely to get much bigger soon. Consider, for instance, the hundreds of thousands of unlucky souls who hold the more than $55 billion in policies and annuities issued by the insurance units of First Executive Corp. Weighed down with bad junk-bond investments, the Los Angeles-based insurer is dangerously close to becoming the nation's largest insurance insolvency ever. State insurance guaranty funds set up to protect policyholders may be swamped by the size of First Executive's losses(table).