Policies Of Deception?

Thousands of nurses read the pitch: If they would just provide their name and date of birth, they could learn about "something new, one of the most widely discussed retirement plans in the investment world today." The Nurses Guaranteed Retirement Savings Plan offered "high money market interest rates...access to the cash fund ...deposits that could be made monthly." To sign on, recipients had only to send back the form to the "nursing representative" who signed the letter.

Sounds innocent enough. But such whole-life solicitations are at the heart of the widening scandal hitting Metropolitan Life Insurance Co. and other big insurers. At least 13 states are investigating allegedly misleading sales practices by MetLife agents, mainly for national mailings made from its Tampa office. MetLife says it is cooperating.

Now, the scrutiny is spreading. Misleading sales literature for whole-life insurance policies, allegedly used by agents of New York Life Insurance Co. and Prudential Insurance Co. of America, has surfaced in state insurance-department offices. A New York Life spokesman says the company is cooperating with an investigation by the Florida Insurance Dept. and has hired a law firm to investigate. He says he is unaware of a New York inquiry. A Prudential spokesman says it has received an inquiry from New York about an agent's sales letter and has pulled the unauthorized letter. "We don't expect to have the same type of problem that we've read about," he says.

Few regulators believe the scandal will stop there, however. "There's no doubt in my mind that the scope of this is broader than just MetLife and some other companies mentioned," says Salvatore R. Curiale, New York's superintendent of insurance. "I think market conduct and misleading sales practices will be the major issue for life companies in 1994." Curiale is mailing a sternly worded letter to 147 life-insurance companies urging them to beef up internal controls of sales personnel. Adds Florida insurance commissioner Tom Gallagher: The investigations are "putting pressure on the industry to clean up its act."

At the heart of the scandal are whole-life insurance policies--long sold as products consumers can use to fund retirement, which, indeed, they can. The problem is that with competition for consumer dollars becoming more intense, insurers' sales tactics have become increasingly aggressive. Insurance agents, competing with banks, mutual funds, and others, "are looking for a competitive edge," says Lawrence G. Mayewski, senior vice-president at rating agency A.M. Best Co. "At times, it's fair to say that they might step over the line." In such cases, consumers can get a shock if they need ready cash from a policy: Early on, much of their money goes to commissions and expenses.

Why the temptation to cloak whole- life insurance products as savings plans? Consumers respond better to such offers, but whole-life policies can be far more profitable for agents and companies. MetLife agents can get up to 55%, or $550 on a $1,000 premium, as a commission for selling a whole-life policy. By contrast, an annuity earns them about 2% of the face amount in the first year, or $20 on a $1,000 investment.

DAMAGE. Insurers contend that abuses aren't widespread. "There are 230,000 agents out there," says Gene Grabowski, a spokesman for the American Council of Life Insurance, a Washington-based industry group. "Twenty agents can do a lot of damage to the business if they have good mailing lists." Adds Harry P. Kamen, MetLife's chairman: "So far as MetLife is concerned, we've taken care of the problem and are looking forward to moving ahead."

Indeed, MetLife feels it has responded aggressively. On Dec. 27, it expanded an earlier refund offer to include 40,000 policyholders nationwide, up from the original offer to 18,000 policyholders in Florida. It dismissed a star agent, along with six other executives, including a senior vice-president from the home office. And it announced a reorganization and an "enhanced" compliance unit.

Some of those dismissed, however, contend they're scapegoats. And indeed, measures taken in the past to address abuses seem less than adequate. A 1991 internal auditor's report congratulated the Tampa office "for [its] past and present contribution to the overall benefit of MetLife." After that, the main concern was that "pre-approach letters" contained unauthorized language that could lead to "negative publicity." The report noted an order from North Carolina nixing such letters.

The memo's cautions apparently didn't end the use of misleading language. By mid-1993, Florida regulators were investigating. At first, MetLife denied wrongdoing. But eventually, as it launched its own probe, MetLife acknowledged problems. Some brochures that the company now concedes were misleading were found to have been produced in the home office. And misleading literature was found to have been used outside Tampa.

The question now is, how far will the scandal spread? New York Life says that in December, it found that one of its agents in Florida had copied a misleading MetLife sales letter. The company says about 4,000 such letters were sent out, but no sales were made. New York Life notified Florida regulators and has hired an outside law firm to help with an internal investigation. Prudential's spokesman says it has "all kinds of control procedures, and unauthorized letters are taken out of circulation."

Life insurers are sure to come under more scrutiny. Senator Howard M. Metzenbaum (D-Ohio), chairman of the Subcommittee on Antitrust, Monopolies & Business Rights, plans a hearing on deceptive sales practices by life insurers later this month.

Meanwhile, MetLife has legal woes. Some nurses in Florida are trying to lodge a class action. While the company recently made a confidential settlement with two employees who sued under the whistle-blowing statute, other wrongful-dismissal suits by employees are pending.

Before long, the scandal may give new meaning to MetLife's slogan: "Get Met: It Pays." Already, the company has paid $11 million to refund policies made out of the Tampa office, and it projects costs of up to $30 million for its expanded offer. But despite such efforts, MetLife's cuddly mascot, Snoopy, could spend more time in his doghouse this year than in his usual pose on top of it.


From a seemingly isolated incident in Florida, the MetLife scandal just keeps getting bigger. Here's why the insurance industry is potentially vulnerable to abuses:


Short-term pay incentives favor the sale of whole-life insurance, while

investment plans have more consumer appeal. So agents are tempted to misrepresent whole-life policies as retirement or savings plans.


Politically potent insurers have avoided federal regulation, and states can rarely muster the resources needed for extensive investigations.


Lack of comprehensive screening systems and other internal safeguards can allow rogue agents to deviate from rules for years before being caught.


With mutual funds, banks, and securities houses all stepping up efforts to

attract long-term investment dollars, insurance agents are under pressure to respond competitively.