The Problem Is Not the Life Insurance Products, or the Illustrations
No court would ever expect that Emma should have remembered it all.
Chances are there are lots of these situations out there waiting to emerge, and it’s going to cost carriers a lot of money.
The Real Solution
So, what is the solution?
The main problem is that these products with complicated, nonguaranteed elements are just not “set it and forget it” types of products. They need maintenance.
Here’s an outline of what I think is needed:
1. Emphasize simple, short disclosures, both at issue and on an ongoing basis. Pages and pages aren’t going to cut it. The disclosures really need to be read and understood.
2. Make disclosures verifiable and ongoing. We need a method that, as much as possible, can be verified as having occurred. Require a sign-off by the customer, and, if that’s not possible, solid documentation that disclosures and options are delivered regularly.
3. Provide adequate disclosure at issue. This should be a short, simple paragraph that explains, at a high level, that the product the customer bought has nonguaranteed elements that are, to some degree, subject to the discretion of the carrier.
Note that even the “index formula” in indexed universal life products usually has some elements of carrier discretion that can change the amounts credited.
Let the carriers draft these disclosures (since all the various product types are different), as long as the disclosures are short, and as long as the disclosures make it clear that carriers have the discretion to make future changes.
4. When adverse changes are made, whether discretionary or not, tell the customers. Require that a verified communication is made, with an offer to show the customers what adjustments can be made to premiums, benefits or whatever to ensure that the initially illustrated benefits remain achievable.
If our Emma were treated this way, she would have had to pay small incremental premium increases over the years and avoided the big negative surprise.
If she elected not to pay the higher premiums over the years, the carrier would have documentation that she was warned. And the carrier should follow up regularly in this latter situation.
5. Carriers should take charge. There has been a historical debate as to who’s responsible for communicating with a customer.
Many companies and agents believe that the agent owns the customer, and agents have often been testy about companies talking directly to “their” customers.
But the contract is between the company and the carrier, and, generally, when lawsuits are being considered, the carrier is where the money is.
Also, agents come and go, but, for the most part, carriers stick around.
Perhaps there are ways to share the responsibility, but the buck must stop with the carrier.
6. Provide useful information that encourages market forces to act. I believe that market forces are better regulators of fair treatment than asking regulators to micro-manage illustrations.
For this purpose, I’d like to see answers to these questions:
a. What adverse historical nonguaranteed elements changes has a carrier made to its product? Each entry should be very brief; just a few lines indicating when, why, how much, etc. This list should be accessible with every verified communication.
b. Is the product still being sold? Many companies are more inclined to reduce benefits when the product is no longer for sale. The adverse changes list should include this status. Such documentation could be used to encourage carriers to treat old products fairly.
c. Do carriers ever improve nonguaranteed elements on existing products? This should be included in the list too. Such a list could encourage fair treatment in both directions.
d. Has your policy been sold to another carrier? Often, the new carrier is more inclined to make adverse changes to such policies. The list of adverse changes should include whether the carrier is the original carrier or not.
This is just a first shot at a solution. I’m sure others might have things to add.
Some of these ideas may be difficult to implement. But I strongly believe that simple, ongoing, verified communications is where the best solutions lie.
Chuck Ritzke is a fellow of the Society of Actuaries, a member of the American Academy of Actuaries and founder of Problem Solving Enterprises, an actuarial consulting firm.
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