Unclaimed property probes by states have escalated to now include mid-sized insurance companies.
Moreover, two new auditing firms are getting into this so-called “market,” with the new entrants having a reputation to conduct long-term probes of companies (sometimes five to seven years), insurers are being warned.
This new development was pointed out in a legal alert released this week by Sutherland, Asbill & Brennan.
The probes are mostly being initiated by the states and auditors and in New York and Minnesota state attorneys general are involved in the probe.
New York Attorney General Eric Schneiderman has initiated his own probe in coordination with the state comptroller that is separate from the probe being conducted by the Department of Financial Services.
The cost of these settlements are not insignificant. MetLife settled with 22 state regulators in May for $40 million, prompted by allegations that it used different methods to find holders of variable annuities with living benefits than it did to find beneficiaries of life insurance policies where the policyholder had died.
It also agreed to help find people who bought small face-value policies, or so-called industrial life policies, and did not pay cash in lieu of stock as part of its conversion from mutual to stock status in the late 1990s.
Lawyers and accountants at Sutherland estimate that more than 35 “cash-hungry” states are involved in the initiative to force insurance companies to turn over monies from insurance policies where the beneficiaries have not come forward to claim the proceeds, or, in some cases, where an insurance company could not locate the proper recipient of stock issued by insurance companies transitioning from mutual to public ownership.
According to the Sutherland alert, over the past three years, more than 25 insurance companies have become subject to market conduct exams and unclaimed property audits by states.
The largest settlements have been with John Hancock, Prudential Insurance and MetLife.
But, according to Sutherland lawyers, the probe has now been expanded, with unclaimed property auditors targeting middle-tier insurance companies.
The first auditing firm involved in the probes was Verus, based in Waterbury, Conn. Now, according to Sutherland, ACS Unclaimed Property Clearinghouse (UPCH), a Xerox affiliate, and Kelmar, Wakefield, Mass., are being retained by state auditors and insurance departments.
Verus started the probe using a computer program that matched insurance company files with the Social Security Death Master File (DMF).
They were looking to determine whether insurance companies were being more aggressive in using the DMF to determine whether claimants with variable annuities that offered living benefits had died than they were in seeking to find beneficiaries of life insurance policies where the policyholder had died.
The probe was later expanded to include the proceeds of mutual-to-stock conversions, as in the settlement with MetLife.
According to Sutherland, UPCH, formerly known as ACS, has significant unclaimed property experience. UPCH has contracts with more than 40 states and has audited some of the largest companies through several industries, the Sutherland alert said.
Kelmar has conducted audits, largely on behalf of Delaware, for more than 10 years, the alert said.
Of deepest concern, according to Sutherland, is that audits conducted by UPCH and Kelmar sometimes span a period of five to seven years.
“This can leave target companies with audit fatigue and may push them to settle on less than favorable terms,” the alert warned.
‘UPCH and Kelmar are well-staffed and typically manage several dozen audits simultaneously,” the alert said.
“Over the past five years, Verus has concluded or begun audits of approximately 20 companies,” the alert said. “But it is not uncommon for Kelmar to initiate 25 to 50 audits at once,” the alert cautioned.