The life insurance industry has recently come under fire by a combination of state regulatory agencies for a lack of compliance with unclaimed property laws and alleged failure to proactively search for beneficiaries entitled to proceeds from life policies.
Under scrutiny are industry practices that fail to 1) include regular monitoring of the Social Security Death Master File (DMF), 2) proactively notify the beneficiary of the policy, and 3) report policies as unclaimed property if the beneficiary is not located.
The states are arguing that life insurance companies should be utilizing this tool on a regular basis to help identify policyholders who have passed away. On the flipside, life insurance companies are arguing that they are concerned about fraudulent claims and therefore rely on relatives and beneficiaries -- who have a financial incentive to bring the deaths to the attention of the life insurance companies.
The problem is that many policyholders fail to inform their beneficiaries of their policy in the first place. In fact, nearly 2.5 million people die each year, and 60%, on average, fail to ever execute a last will and testament -- thus leaving their estates and beneficiaries with no knowledge of their investments.
If a beneficiary isn't notified of the policy -- either by the policyholder or the insurance company after death -- unclaimed property laws stipulate that the funds should be remitted to the state of the policyholder's last-known address as unclaimed property. The state then will make an attempt to notify the beneficiaries, so they can come forward and claim what's rightfully theirs.
As a result of these issues, there has been a significant increase in unclaimed property enforcement audits and, on the insurance side, market conduct exams across the industry, making it a very vulnerable time for life insurance companies and their agents. As a life insurance agent, if your company were faced with a compliance audit, it would not only be at risk of severe penalties for non-compliance, but also of damaging your reputation with your clients.
Understanding the landscape
State unclaimed property officials and insurance commissioners are teaming up to enlist third-party auditors to conduct unclaimed property audits and market conduct exams. Third-party auditors are largely compensated on a contingency basis -- leading to highly intense, aggressive audits. Verus Financial is one of the contractors retained by 37 states to perform these audits. Estimates suggest that they have been authorized to conduct examinations of more than 20 insurance companies since 2008.
The sudden surge in these unclaimed property audits -- and their findings -- has helped to identify significant problems related to the claim settlement practices of life insurance companies. As a result, in May, state regulators and the National Association of Insurance Commissioners (NAIC) took matters one step further by creating an unclaimed property task force with the goal of coordinating investigations related to these issues.
In a move that further justified these actions, John Hancock Life Insurance Company entered into a settlement agreement with the state of Florida. The company agreed to implement specific policies and procedures to strengthen its ability to comply with the expectations of the insurance department as well as those governing the unclaimed property laws. These policies and procedures must include the use of the DMF on a quarterly basis to identify potential deceased shareholders.
According to an article published in The Wall Street Journal on April 23, John Hancock agreed to restore the value of 6,400 California accounts dating back to 1992 and agreed to get more than $20 million of death benefits and matured annuities back into the hands of policyholders and/or their beneficiaries.
John Hancock also agreed to pay Florida regulatory agencies $2.4 million to cover investigative costs and fees. In June, the company signed a Global Resolution Agreement with Verus that essentially mirrors the settlement agreement the company made with the state of Florida. To date, approximately 29 states have approved this agreement.
The state of New York is also jumping in on the action. New York's Attorney General recently issued subpoenas to 30 insurance companies to investigate their use of the DMF and their compliance with New York's unclaimed property laws. In addition, as a result of this activity, the National Conference of Insurance Legislators (NCOIL) is considering an amendment to the 2010 Beneficiaries' Bill of Rights that would require insurers to search, track and locate beneficiaries of policies. If there is no beneficiary, insurers would be required to adhere to the states' unclaimed property laws.
All these events are beginning to pave the way for possible legislative changes in the insurance industry, and it's expected that the John Hancock settlement will set the standard for new required policies and procedures. There is still a long road ahead, however, and for life insurance companies, two things are sure: there will be more audits, and the industry will need to embrace the new rules that are on the horizon. It's not a matter of if, it's when -- and when is happening right now.
Impact on life insurance agents
While the audit landscape will likely cost insurance companies millions, in addition to fines and penalties for non-compliance, it's also impacting the life insurance agents that sell their policies. Insurance agents need to focus on building client relationships and growing their book of business -- and industry practices under scrutiny are casting some companies in a negative light. It's important for both life insurance agents -- and the organization overall -- to take necessary steps now to clean up company practices and ensure compliance with state unclaimed property laws.
Though the insurance company as a whole must shoulder most of the burden of this process, there are some things life insurance agents can do to ensure their client information is up-to-date and policyholder records are in good condition.
o Check in with policyholders.
Schedule annual check-ins with policyholders to ensure that you have the correct information on file. Policyholders may move, get married and change their names, or have children -- and their designated beneficiaries may need to be updated as well. Annual check-ins will not only give you a better handle on policyholder and beneficiary life events and contact information, but also give you the opportunity to regularly talk about other relevant products and services your company may offer. Document those communications and any changes to further confirm that your client is an active account.
o Search the DMF.
If attempts to contact the policyholder are unsuccessful, it might be wise to perform a DMF search to see if the person is deceased. If the policyholder is deceased, it's important to contact the listed beneficiaries and assist them with relevant paperwork so the policy can be settled. If the policyholder is deceased and you are unable to locate a beneficiary, steps will need to be taken to follow your company's procedures for the due diligence and escheatment processes.
o Know your company's unclaimed property procedures.
While widespread unclaimed property compliance is still not an industry-wide initiative, it soon will be. Inquire about your company's policies and procedures so that you know what steps are required of you if you are unable to identify a beneficiary after a policyholder has died.
o Conduct current systems reviews.
Periodically review data in your system to ensure that all relevant owner data and dates are captured and have been updated.
Proactive steps are key
The compliance microscope is currently on the insurance industry and letters of intent to conduct an examination have been going out nationally. In fact, MetLife and Nationwide have announced that they are also in the process of being audited. Whether under audit or not, the key is to be proactive in becoming and remaining compliant with the various unclaimed property laws.
A good first place to start is reviewing the John Hancock settlement agreement. This provides an understanding of the scope and nature of the anticipated changes on the horizon. Following the recommendations of the Insurance Commissioner's Task Force and NCOIL will provide a good foundation for the types of regulations and expectations on industry that may soon become law.
Added to all of that is the ability to navigate through the various unclaimed property laws, which can be complex. These issues however, can be effectively managed by taking proactive measures to ensure that the company and its agents have clear and comprehensive policies and procedures and by dedicating the necessary internal or external resources. These collective efforts can help decrease the risk of an audit and reinforce the public trust and commitment of the insurance industry.
Valerie Jundt is the managing director, Consulting & Advisory Services Group, for unclaimed property communication, compliance and consulting firm Keane. She is a seasoned professional, well-known for her commitment to unclaimed property compliance. Her unique background as a former state unclaimed property administrator and executive director of the National Association of Unclaimed Property Administrators (NAUPA), paired with more than 10 years of industry consulting experience as the national manager of state relations for Deloitte & Touche unclaimed property practice (now Thomson Reuters), is unparalleled. Valerie is a co-author of the BNA Portfolio "Unclaimed Property" and has been actively involved in the Unclaimed Property Professionals Organization (UPPO) since 2001; she currently serves as the organization's president. She is also the recipient of numerous awards presented by NAUPA, most notably the NAUPA Lifetime Achievement Award, the highest honor given by the organization.