[A recent] ground-breaking New York Times front page story, referred to insurance companies without clearly showing that just a very few life insurers were involved and that this was not an industry-wide scam.
CRITICAL ISSUE REPORT
MORE ASSAULTS ON PUBLIC CONFIDENCE
Recent questionable insurance practices produce legislation
By Emanuel Levy
|
[A recent] ground-breaking New York Times front page story, referred to insurance companies without clearly showing that just a very few life insurers were involved and that this was not an industry-wide scam. |
There is enough blame to go around for permitting abusive selling tactics on some military bases that resulted in the purchase of unneeded and improper life insurance products, as well as obsolete and costly mutual funds. The deceptive practices were revealed in a lengthy article that appeared several months ago in the New York Times. The author was led to the story by, among other sources, the mother of a young soldier who discovered deductions in his salary for the payment of life insurance premiums. She was challenging his need for the product and the way in which it was sold to him.
The soldier’s mother went public, as did several other individuals. The New York Times evidently decided to investigate. The New York Times reporter did some extensive research and discovered a pattern of abuses and improprieties that she said were rampant on posts, permitting life insurance sales agents to accost personnel, even inside of barracks, using deceptive tactics to sell products allegedly of little or no value to the soldiers. The actual number of incidents she reported and the small number of companies she named were not impressive except by extrapolation.
Among the results is legislation overwhelmingly approved by both houses of Congress. According to a news story in the October 8 edition of the New York Times, if the legislation is enacted, the Pentagon would be required “to maintain a central registry of ‘predatory’ agents and strengthen the hand of state insurance regulators in monitoring insurance sales on military bases.” The bills also call for the abolishment of “archaic” types of insurance and investment instruments. That’s more of the federal nose in the insurance regulatory tent, even though the positive objective is to protect members of the armed forces. Perhaps a better approach is for the insurance regulators to positively assert their jurisdiction in certifying agents and approving coverages.
Regrettably, the headline on the ground-breaking New York Times front page story referred to insurance companies without clearly showing that just a very few life insurers were involved and that this was not an industry-wide scam. Newspaper stories of this kind enable readers, especially the many who skim headlines and text, to bolster already held doubts about the integrity of the business as a whole and insurance producers specifically. The Times’ story, which appeared in two lengthy installments, did not spare the army authorities, insurance companies or insurance regulators from responsibility for permitting the abuse of the young soldiers.
Nevertheless, the brunt of the attack fell on the invading agents and their “misleading” sales pitches. Without defending the misdeeds of the agents, their companies also deserve a full measure of blame. The products that were offered for sale were devised and issued by the insurers; clearly they sent the agents onto the bases, underwrote the coverage and were fully in position to stop the whole thing at every stage of the undertaking.
The military commands were no less culpable because of their failure to control access to soldiers on bases and their failure to monitor the payroll deductions to protect unwarranted purchases. This does not constitute invasion of privacy. Members of the armed services, who have no one to turn to for guidance when on post, are entitled to the protection of their superiors, said Rep. Corrine Brown-Waite, (R-Fla.), who testified at a hearing on the bill to regulate sales. Rep. Brown-Waite pointed out that the Department of Defense had failed to abide by its own rules by letting service personnel be captive audiences. She called it “absolutely shameful.” That’s true.
The New York Times reporter made some serious allegations that the insurers lobbied members of Congress to use their influence to prevent any interference with access to the soldiers. That may or may not be true, but the fact is that the soldiers were subjected to more than just personal visits from salespeople. According to a news story by Sandra Jontz, appearing in the European edition of Stars and Stripes, the long-established newspaper that circulates worldwide to military personnel, commanders permitted solicitors, described as financial advisors, to give their pitches at formations assembled by drill sergeants or other non-commissioned officers. This creates the impression among the young soldiers that the products being sold have official sanctions.
Stars and Stripes explained that commanders “are prohibited from ‘solicitation’ of recruits, trainees and transient personnel in a ‘mass’ or ‘captive’ audience, making appointments with or soliciting military personnel who are in an ‘on duty’ status” in any area of a military post.
As this writer experienced in my service on more than 10 separate military posts in the United States and overseas, before and during World War II, no one not cleared could enter a post, much less sit in a barracks. Under today’s sensitive security conditions, that should be an absolute rule.
Stars and Stripes also reported that some companies hire military retirees, who pass themselves off as financial advisors, which seems to be a reprehensible practice, possibly designed to maintain the illusion of command approval of the sales approach. It should be noted that the government already provides relatively high limits of insurance for members of the armed services, well above the $5,000/$10,000 optional coverage of National Service Life Insurance (NSLI) purchased by draftees during World War II.
Rep. David Scott (D-Ga.), a member of the subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises of the House Financial Services Committee, which held the hearing on the abusive sales activities, said, according to the Stars and Stripes’ report, “There is an apparent collusion going on within the military itself.” That seems to suggest that there was a quid pro quo among the insurers and some military leadership. If so, that’s awful on all sides. The very sad part of all this is that the negative public image the insurance business has been subject to becomes even more pronounced, particularly because young military service people are victimized.
The public at large rarely distinguishes between life and property/casualty—insurance is insurance to them. Fortunately, aside from the New York Times’ exposure, the story did not seem to get much play across the country. On the industry side, this writer found only two references. One was from the Independent Insurance Agents and Brokers of America (IIABA), which emphasized that only life insurers and life agents were involved. It also praised both houses of Congress for passing regulatory bills. A second observation came from the Insurance Market Standards Association (IMSA), a voluntary nonprofit organization created a decade or so ago, with the aim of strengthening consumer trust and confidence in the life insurance, long term care insurance, and annuity products industry. It has about 200 insurance company members representing more than 50% of the overall market share. IMSA asserts that members commit to maintaining high ethical standards and to being “fair, honest and open in the way they advertise, sell and service their products.” The probability is that those involved in the military sales scam are not among the IMSA membership.
In a press release IMSA issued in October, its executive director, Brian K. Atchinson, referred to its written statement filed with the House subcommittee, urging that the U.S. Defense Department ensure that only companies that meet high ethical standards be allowed to sell on its military bases. My own observation is that the Defense Department should also make sure that those who enter military compounds have security clearance.
Though the unfortunate excesses engaged in by a small number of life insurers and their exploitive agents is a blot on the business, a more serious situation was uncovered in mid-October by New York Attorney General Eliot Spitzer. It involves major insurance brokers accused of bid rigging in complicity with high-ranking insurers and brings into question the entire practice of contingent commissions. As this plays out, it may prove to be one of the most serious blots on the integrity of the business in recent times and a real blow to consumer confidence. It may also threaten the validity of the contingent commission system, not only in New York, but also perhaps in other parts of the country. In addition, it brings into question the ability of insurance regulators in their role as watchdogs. I recommend careful reading of articles in this month’s Rough Notes that are valuable expositions of these allegations, which constitute a most serious breach of integrity. (The articles begin here.)
It is really pathetic that elements of the business are intent on bringing disrepute to what is one of the most significant and vital elements of the entire economy. *
The author
Emanuel Levy, editor of Insurance Advocate from 1958 to 2004, joined the weekly insurance news magazine in 1946 after serving with the United States Army. He has appeared as a speaker at meetings and seminars across the country sponsored by producers and other industry associations, and is the recipient of many awards and citations. He served on the faculty of the College of Insurance for the annual orientation course for incoming insurance regulators and staff members, lecturing on the debate over state and federal regulation of the insurance business. He wrote insurance articles for the Economist Magazine and for many years was insurance section editor of the World Book Encyclopedia’s annual historical review book.