Barb Fitch, ICAE President (National Life Group) provides insight as she welcomes attendees to the 2009 Exchange.

I want to thank everyone who participated in our highly successful 2009 Insurance Consumer Affairs Exchange in St. Louis. It was a great meeting, with a theme and a venue both appropriate to these times.

Meeting as we did virtually in the shadow of the Jefferson National Memorial Arch, the “Gateway to the West,” got me thinking about the concept of new frontiers. In fact, our industry is being challenged by new frontiers on several fronts.

Last year, when our 2008 Exchange was underway in Williamsburg, Virginia, the news breaking hour-by-hour was about desperate efforts by the U.S. Congress to pass a financial rescue bill aimed at preventing the collapse of the global financial system. As a part of the financial services industry, we knew there would be impacts on the insurance industry. As it happened, those impacts had more to do with broad-brush perceptions and a reduction in public trust given to the financial services industry as a whole, rather than the actual collapse of any major insurance carriers. Our industry was and remains financially sound and has done a good job managing risk. However, there is no doubt that perceptions of all financial services players have taken hits.

Now we face the new frontier of another unprecedented challenge – proposals that could forever change how health insurance is provided in the U.S. That challenge is also giving rise to suggestions that the McCarran-Ferguson Act allowing insurers to share loss data and enabling a robust system of state regulation may itself come under review.

In times such as these, I can think of few industry efforts more relevant or necessary than the give and take that goes on between regulators and insurance companies during ICAE events such as our St. Louis Exchange. Given all the uncertainty in our business and across the financial services spectrum as a whole, our concerted and dedicated response to the concerns of insurance consumers has never been more important.

During my association with the ICAE, including my term as President, I have been proud to be associated with an organization whose sole purpose is sharing ideas and best practices aimed at one overriding goal – improving our industry’s response to consumers. I want to thank everyone associated with that effort, from our ICAE Executive Committee members who guide the organization to the many participants who have contributed so much to the ICAE’s mission with their honest ideas and input.

Speaking of new frontiers, this will mark my last message to the ICAE as its President. I am moving on to an exciting new leadership opportunity within my company, but one that will make significant demands on my time and attention. At the end of my Presidential term in 2010, I will be stepping away from the ICAE to focus on my new responsibilities.  However, I will always remain a strong supporter of this exceptional organization.

To say I do so with mixed emotions is an understatement. I have been enriched both personally and professionally by the friendships I have made during my association with the ICAE. I will miss my close association with the group, but I can assure you that I will be keeping up with developments and activities of the ICAE in the years ahead. The work you do is important to consumers, regulators and companies alike.

So, once again, thank you for the friendships, experiences and insights you have given me over the years during my association with the ICAE. I know that whatever new frontiers challenge our industry in the years ahead, this group will lead the way in the exploration of best practices that will enhance this industry’s ability to deliver what matters to the people who matter most – our customers.

Contact info:

Barbara Fitch
2nd VP – Market Conduct & Compliance
National Life Group
802.229.3112
bfitch@nationallife.com
www.nationallife.com

John Huff (Director, Missouri Department of Insurance, Financial Institutions and Professional Registration) welcomes attendees to the 2009 Exchange and sets the tone for the event.

After several years working for Swiss Re as managing director, strategic claim officer and finally as global head of key case management for the huge reinsurer, John Huff developed an impressive resume in the area of dispute resolution.  Good thing too, because when he returned home to take on the role of Director, Missouri Department of Insurance, Financial Institutions and Professional Registration, he arrived just in time for one of the most unsettled, eventful and frankly exciting periods in the history of the business. And it happens to be a time when knowing how to handle disputes is a valuable skill indeed.

Appointed to his current position in February 2009, Huff leads a team totally committed to consumer protection. His department oversees a variety of aspects of the financial services markets in Missouri, being the chief regulatory body for insurance companies, banks, credit unions and professional licenses. On the insurance side, Missouri is the 18th largest market in the country in terms of premium volume, and is one of the most vibrant and dynamic markets in the U.S.

Increasingly, technology is playing a larger role in the accomplishment of that mission, noted Huff, with the introduction of new systems and applications geared to the enhancement and effective delivery of the department’s mission.

A time of great change

“This is a time of great change and technical advancement for our department,” Huff said. “It’s also a truly an exciting time of change for the insurance industry. It used to be that when my wife and I went to parties or social events, she never wanted me to talk about insurance. Too boring.  But at the pace things are changing in this business, and the importance of those changes in people’s lives, she has lifted that prohibition, for the time being anyway.”

Huff noted that a good deal of confusion still exists in the minds of many about the state of the insurance markets following the financial meltdown of a year ago. State regulators have a role to play in clearing up some of the confusion.

“For example, a lot of people keep pointing their fingers at AIG, suggesting that since it is largely known as an insurance company, it was the insurance side of the business that got them into trouble,” Huff said. “We all know that this was not the case. It was the financial products division that got them off kilter. The insurance businesses were and are sound, which is what a lot of state regulators have been careful to point out.”

Huff noted that during his brief time as a regulator, he has gained new respect for the current state-based regulatory system in the U.S.

“Is the state-based system the most efficient and cost effective?” he asked. “Probably not, but there are some real benefits of the kind of peer review and healthy tension between states that characterizes the current system.

“It’s healthy to be able to sit down across the table from a fellow regulator and be brutally honest when asking what’s going on with one of the companies based in his or her state,” Huff remarked. “It gives us all a chance to be constructively critical and to get a much better understanding of what’s happening in a business that is changing so fast that sometimes it’s hard even for a professional regulator to keep up.”

Contact Info:

John M. Huff
Director
MO Dept. of Insurance, Financial Regulation and Professional Registration
573.751.1927
john.huff@difp.mo.gov
www.difp.mo.gov

(l to r) John Huff (MO DOI), James Hall (ACLI), Tom Santos (AIA) and Rick Ramsay (AHIP) provide Exchange attendees with the latest, ever-changing news about insurance regulation and healthcare reform.

John Huff, Director, MO DOI, Financial Regulation and Professional Registration, moderates the national trades panel after kicking-off the St. Louis Exchange.

Given that the overarching story of the past 10 months, unseating even the global financial crisis for sheer intensity of emotions and decibels, is the potential for major reform in one-sixth of the U.S. economy – healthcare – you would have to have been in a very dark cave not to have heard that major change is in the wind.

So, it was no coincidence that the first panel discussion at the 2009 Exchange was “Federal Proposals: Its Impacts on Insurers, Regulators and Consumers,” featuring James Hall, regional vice president-State Relations, American Council of Life Insurers (ACLI), Richard Ramsay, vice president-State Advocacy, America’s Health Insurance Plans (AHIP), and Tom Santos, vice president-Federal Affairs, American Insurance Association (AIA). The discussion was led by none other than Missouri State Director of Insurance, John Huff.

Most sweeping changes since the 1930s?

Hall led off, quipping that there was once a rumor afoot that the State of Illinois was going to commission a sculpture of a giant croquet ball to match the giant “wicket” on the other side of the Mississippi River, also known as St. Louis’ famous Gateway Arch. However, the conversation quickly took on a more serious turn as Hall noted that the health insurance industry is not the only component of the insurance industry likely to be affected by changes in federal regulation and oversight.

“All aspects of our business are going to be affected by the pending proposals,” Hall said. “In the wake of the financial meltdown, the federal government is under terrific pressure to ‘do something.’ As a result, we could be looking at the most sweeping changes since the 1930s.”

Hall struck a positive note in his estimation that a good system of state regulation of the insurance industry would likely remain in place, but that the changes in a typically massive piece of proposed legislation wending its way through the House Financial Services Committee would have some as yet not entirely known downstream effects.

James Hall, regional vice president-State Relations, American Council of Life Insurers (ACLI), predicts that a good system of state regulation of the insurance industry would likely remain in place, but would have some as yet not entirely known downstream effects.

“It’s all typical ‘fedspeak,’ and it tends to change weekly,” Hall said. “Hearings are now going on in Washington and you can expect it to continue to change in the weeks ahead.”

One of the key issues is likely to be the establishment of clear guidelines concerning the fiduciary duties of agents and broker dealers with respect to the sale of life insurance and annuity products. Another is the proposed creation of a Federal Office of Insurance that would be given a variety of oversight responsibilities but not necessarily any regulatory authority. In addition, there may be much stronger regulation of the over-the-counter derivatives market, which could affect life insurers since they tend to be among the most significant end users of such instruments.

One of the many “Titles” or chapters contained within the proposed legislation, in fact the very first, Title 1, would create something called a Financial Services Oversight Council (FSOC). This entity would fall under the tutelage of either the Treasury Department or the Federal Reserve. Among the members of the FSOC would be the directors of both federal agencies.  The insurance industry is lobbying to have at least one member from the industry on the Council as well.

Another key development would be the development of the aforementioned Federal Insurance Office, or FIO. The FIO would maintain a strictly consultative role, in effect to try the make sure that the actions of other agencies would not “mess up” the orderly delivery of insurance products and services.

Other points of note include:

• Title 6 would expand the federal government’s ability to regulate the relationships between insurance companies and thrift institutions, Glass-Steagall barriers that were largely swept away by the Financial Modernization legislation of the late 1990s.
• Title 7 would address the regulation of over-the-counter derivatives, significantly tightening the oversight and transparency of the “bundling together” and securitization of instruments such as mortgages which are then sold to insurance companies. The intent is to prevent future “domino effects” that could result in severe systemic risk. It would also place a firewall between true insurance and the kinds of credit default obligations and swaps representing systemic risk.
• Title 9 would create an unambiguous, “harmonized” standard of fiduciary responsibility for investment advisors and broker-dealers to assure “conduct in the sole interest of the consumer.” Some proprietary life insurance products would most likely need to achieve harmony with any such standard.
• Title 10 would create a new Consumer Financial Products Administration (CFPA) that would parallel the role of the Consumer Products Safety Commission (CPSC).  For the moment, insurance would be excluded since it is being effectively regulated at the state level. Under the proposed legislation, only three types of insurance would be subject to oversight: mortgage, credit and title insurance.
• Title 12 would provide the government with enhanced resolution authority to act to prevent cascade effects on the wider economy when systemically significant companies run into trouble.

Noting that states already have good systems in place through the state guaranty fund systems, especially in the life insurance arena, Hall noted that the industry will continue to watch developing federal regulation with interest.

Transformation from ‘market-driven’ to ‘government-regulated’

Tom Santos, vice president-Federal Affairs, American Insurance Association (AIA), notes, "The emphasis has clearly shifted from a traditionally market-driven orientation to one that is much more government regulated."

The AIA’s Santos noted that the financial crisis of the past year and the now huge federal involvement in the financial system has initiated nothing less than a paradigm shift in much of the thinking in Washington.

“The emphasis has clearly shifted in a number of important ways from a traditionally market-driven orientation to one that is much more government regulated,” Santos said. “The desire of regulators is to help drive a more stable market and reduce reckless risk taking. In effect, we are seeing the tension between economic populism, driven by public outrage over the worst excesses of the financial services industry, and what we have traditionally known as the ‘free market.’”

Noting that AIA’s major concern is achieving the right balance between these two poles, Santos noted that there is some concern within the property and casualty industry as to what constitutes systemic risk. He noted that, at the present time, no significant property and casualty company faces such a risk, and that solvency requirements and mechanisms already in place are sufficient to address companies in distress.

Santos drew attention to the widely underreported fact that the core property and casualty insurance companies of the American International Group (AIG) were and remain in sound financial condition even as the holding company was facing potential catastrophe due to the credit default swaps sold by its unrelated financial products division.

“There remains a widespread perception that the problems included the insurance companies,” Santos said. “As a result, don’t be surprised if insurance continues to be a part of the debate. The question is, at what point would the government step in when they determine that the failure of a property and casualty insurer represents systemic risk.”

Moving target

Richard Ramsay, vice president-State Advocacy, America's Health Insurance Plans (AHIP), shares his thoughts on healthcare reform.

Ramsay, whose organization has been somewhere near the epicenter of the debate over healthcare reform, noted that thinking changes on an hourly basis on Capitol Hill, making it hard to make a forecast.

“One component would be if proposed reform would allow states to merge the individual and small group markets,” Ramsay said, noting that however attractive this approach may seem on the surface, history is not promising.

“The Massachusetts experience is that while individual rates went down, small group rates increased dramatically, which puts additional pressures on small business,” he said.

More promising might be state or regional exchanges based on interstate compacts, allowing groups of 50-100 to buy health insurance through such exchanges in the near future. Still, many unknowns remain to be addressed.

Ramsay noted one proposal would be for the National Association of Insurance Commissioners (NAIC) and individual states to develop model rates and forms for a framework of ‘floor benefits’ that would provide uniformity and a national standard. Indeed, the NAIC is charged with adopting such a framework within 12 months or the Department of Health and Human Services (HHS) may step in a promulgate its own rules.

Acknowledging that achieving such uniformity in a system long dominated by independent state regulation will be a challenge, Ramsay suggested one point of optimism. He noted that HHS has said that various state laws can conflict with a national standard in detail as long as they are consistent with the intent of the federal law in spirit and effect. In addition, states will continue to oversee solvency issues.

“The state-based system would remain,” Ramsay said. “Insurance commissioners would continue to handle rate reviews, reserving and solvency oversight. States would also maintain the responsibility to do market conduct exams.”

Under a system of state compacts in which health insurance policies are provided in one state but the company is domiciled in another, whose laws would be followed?

“In that case,” Ramsay said, “where the policy is written or issued extraterritorially, the state where the enrollee lives would be the deciding factor. Carriers must be licensed in the state where the coverage is issued or must at least meet with all state laws under the various compacts.”

In addition, by 2010 every state must have an ombudsman to oversee the delivery and servicing of health insurance products.

Ramsay noted that given the rapidity with which the healthcare reform target is moving on Capitol Hill, any predictions made before the President’s signature has dried on a final bill are liable to be off the final mark.

ACLI’s Hall offered a closing comment that perhaps best sums up most insurer, regulator and consumer concerns.

“First do no harm.”

Click here to view Ramsay’s presentation.

Contact Info:

James Hall
Regional VP – State Relations
American Council of Life Insurers (ACLI)
913.599.2320
jameshall@acli.com
www.acli.com

Richard Ramsay
VP – State Advocacy
America’s Health Insurance Plans (AHIP)
202.778.3230
rramsay@ahip.org
www.ahip.org

Thomas Santos
VP – Federal Affairs
American Insurance Association (AIA)
202.828.7100
tsantos@aiadc.org
www.aiadc.org

John M. Huff
Director
MO Dept. of Insurance, Financial Regulation and Professional Registration
573.751.1927
john.huff@difp.mo.gov
www.difp.mo.gov

Professor Barbara Cude, Department of Housing and Consumer Economics, University of Georgia, helps us understand how to work with consumers in a tough economy.

So said Professor Brenda Cude, Department of Housing and Consumer Economics, University of Georgia, whose first appearance at an earlier ICAE conference occurred in very different economic times. Her topic in 2009 said it all: “Meeting Consumer Needs During Tough Economic Times.”

Tough indeed. While the reduction in economic activity did not fall to the Depression-era levels feared by so many people, including more than a few professional economists, the events of the past year have still had significant and life-changing aftereffects on many consumers.

“The technical definition of a depression is a decline in GDP of 10 percent or more,” Cude said. “During the first quarter of 2009, we saw a decline on the order of 6.4 percent. While that’s not a depression, it’s still pretty significant.”

Significant enough to prompt real changes in the lives of many average Americans. A recent MetLife survey, titled “Study of the American Dream,” found that at least 30 percent of respondents believe that spending less is the “new norm.” While not a majority of consumers to be sure, this percentage of newly gun shy buyers may forever impact levels of economic activity for years if consumers follow through on their beliefs.

Demand for simplicity tops dominant trends

The same MetLife survey found that 47 percent of respondents are feeling the imperative of a newfound “demand for simplicity,” or the belief that they have enough of whatever they need right now and are prepared to try and live simpler lives. Such an orientation may not be encouraging news to organizations looking to increase production and sales of consumer goods long term.

However, a more problematic trend for corporate leaders may be a “focus on the boardroom” as business leaders come under greater scrutiny in the wake of the massive bailouts that made headlines in the past year, and the subsequent executive bonuses that also made headlines.

“People definitely believe there should be more oversight of these issues,” Cude said. “There is a strong perception that certain individuals have received obscene amounts of money when their companies were left in a mess.”

Less just might be more

Research has shown that fewer choices generally result in consumers being happier with their decisions. "People don't want access to 10 different kinds of annuities when they don't understand what they have now," Cude states.

“People don’t want access to 10 different kinds of annuities when they don’t understand what they have now,” Cude commented, noting that research has shown that fewer choices generally result in consumers being happier with their decisions. Cude noted that, in one case, participation in a company’s 401K plan actually increased when the optional choices were reduced from many to just one.

“The final choice was to simply check ‘yes’ and the company would deduct 2 percent of your salary and place it in your 401K account,” Cude said. “Oh, and the company would handle the investment strategy for you. Almost overnight, participation in the plan went from 9 percent to 34 percent.

“The message is that in a society with such a dizzying amount of choices,” Cude said, “consumers can actually become paralyzed by the number of choices available. It becomes easier not to choose. With fewer choices people feel they can make better decisions, and as a result are happier with those decisions.”

Advancing trends with insurance implications

Cude noted that there are a couple of additional trends that may be advancing in the post-crash environment. One is the idea of “discretionary thrift,” which means the consumer has the disposable income to afford a purchase, but elects a mindset that says, “I can afford to buy it, but I think I won’t.” The other advancing trend will likely be a retreat from conspicuous consumption. In the aftermath of a near depression, people may not want to be seen as status conscious or over the top in their consuming habits.

Other ways that consumers are likely to respond to a post-recessionary period will manifest in the possible slowing of trends such as “green consumerism” as well as a “decline of deference” to experts such as physicians and government. Other trends may put the damper on previously valued behaviors, including such unrelated factors as “ethical consumerism” and even “extreme experience seeking,” adventures that may seem too expensive and risky in more risk-averse post-recession times.

“There are implications in all this for the insurance industry,” said Cude. “People are scrutinizing all expenses more closely, paying much more attention. You may see more dumping of insurance even when it is mandatory. More complaints over credit scoring. Dropping comprehensive or discretionary coverages. Dropping flood or earthquake insurance. Reducing the limits on a home that may be worth less than it was before the recession even though rebuilding costs are pretty much the same. Or consumers may just become quicker to jump to an unknown company for a difference in price. We need to realize that, while the jury is still out, some degree of belt tightening may be permanent.”

What can the insurance industry do to maintain markets, drive growth and attempt to elevate consumer satisfaction?

• Communicate value – Make it clear why people need your services and how you can help them protect what is important to them.
• Demonstrate ethical behavior – Show consumers you are worthy of their trust.
• Develop “smart” advisors, both on the phone and online – Employ customer service people who can think on their feet and who can deliver the help customers need without resorting to the next canned script.

Click here to view Cude’s presentation.

Contact Info:

Brenda Cude
Professor, Dept. of Housing & Consumer Economics
University of Georgia
706.542.4857
bcude@uga.edu
www.uga.edu

(l to r) Ryan Wilson (AARP), Brian Atchinson (IMSA) and Stephanie Chappell (The Hartford) share their views on meeting the needs of the 50+ consumer.

Before launching into a snapshot of the 50-plus consumer, Ryan Wilson, Strategic Policy Advisor, Public Policy Institute, AARP, had to check whether he had his reading glasses with him. Partly in jest but partly serious, it was an example that our national demographic is changing at a rapid pace, promising significant changes for marketers in all fields, including insurance.

Wilson was one of three 2009 Exchange panelists “Addressing the insurance needs of the 50-plus consumer.” Other panelists included Brian Atchinson, president & CEO, Insurance Marketplace Standards Association (IMSA), and Stephanie Chappell, corporate gerontologist, The Harfford. ICAE President Barb Fitch moderated.

Big changes ahead – personal and societal

Ryan Wilson, Strategic Policy Advisor, Public Policy Institute, AARP, makes a point that the ability to “think and be cognizant” tends to diminish as we grow older.

In addition to money issues, the 50-plus cohort will face rapidly changing social situations, as they discover more time for family interactions, hobbies (if they have them), and other activities less frequently engaged in during younger and more responsibility-laden times of their lives. Goals change. Instead of worrying about moving up to the next house or the newer car, thoughts turn to personal legacy issues as well as taxes and educational expenses for college-age children.

Then, there are the physical changes, a major one being hearing loss. More than 60 percent of those over 65 and older have some degree of hearing loss, although the problem is frequently not acknowledged or is met with outright denial. Often, the need to repeat oneself to an individual over age 65 may be mistaken as a sign of incipient dementia.

Vision may be equally problematic. About 17 percent of those over age 40 are known to have cataracts, while fully 25 percent are nearsighted. About 7 percent of those over 80 are blind. All of which has implications for their ability to read and understand applications and other documents involved in the sale of insurance and annuity products.

Decreasing mobility is another issue, as hand rails, chairs with arms and even “walkers” become more frequent companions. For employers, ramps to and from parking lots may be required, as might sufficient room in the office to turn around wheelchairs.

And then there is the perennial question of mental ability. As Wilson noted: “The ability to think and be cognizant does tend to diminish somewhat over time. This clearly can become an issue when a client cannot seem to remember essential information during a sales situation.”

Among the results of all of these factors may be a tendency to depend more heavily on the advice and assistance of perceived experts. Indeed, older Americans, like most of us, don’t really understand the financial terms of the products and services they have. Wilson noted that in one recent survey:

• 30 percent of respondents said they’ve made an investment they regretted because they didn’t understand it
• 57 percent do not believe they understand diversification well enough to explain it to a friend or coworker
• 50 percent believe financial professionals use “complicated jargon” to distract people from focusing on the fees they will be charging
• 60 percent do not read financial literature because it is too hard to understand

Fortunately, there are increasing numbers of professionals available to help with these and other issues of aging, including specialized elder law, tax or probate attorneys, eldercare case managers, social workers, geriatric money managers and residence transition specialists.

Click here to view Wilson’s presentation.

‘Who’s preying on your grandparents?’

Brian Atchinson, president & CEO, Insurance Marketplace Standards Association (IMSA), stresses, "One of the main problems confronting older Americans is that they are the favored victims of swindlers."

“One of the main problems confronting older Americans is that they are the favored victims of swindlers,” Atchinson said. “The largest concentration of scam artists can be found in Florida, which is where the money is, both Florida and to a lesser degree Arizona.”

Fortunately, IMSA, AARP and other senior watchdogs are increasingly on the alert to help seniors, regulators and law enforcement assure the highest standards of marketplace conduct. IMSA is a voluntary, independent market conduct and compliance standards-setting and self-regulatory organization serving the life insurance marketplace. Launched in 1996, IMSA establishes national standards recommending how life insurers should market, sell and service individually sold annuities. Companies must undergo a rigorous independent assessment and must renew their IMSA certification every three years. IMSA-qualified companies operate in all 50 states.

Atchinson identified a number of current marketplace issues of particular interest to IMSA and consumers, including:

• STOLI (Stranger Owned/Originated Life Insurance)
• Suitability of sales of annuity products
• Product replacement activity
• Disclosures to consumers regarding annuities and life products
• Establishing a fiduciary standard of conduct for all sellers of life insurance, annuities and similar products

Click here to view Atchinson’s presentation.

Seizing opportunities to help an aging population

Stephanie Chappell, corporate gerontologist, The Harfford, states, "The Hartford remains dedicated to serving the market of older insurance customers."

“The Hartford remains dedicated to serving the market of older insurance customers,” Chappell said. “Twenty-five years ago we partnered with AARP to sell auto and homeowners insurance to their members. That commitment is as strong today as it has ever been.”

During that quarter century, Chappell’s team has learned that stereotypes of what constitutes the “older market” can be misleading and off the mark.

“The older we get, the fewer physical resources we have and the longer it takes us to recover,” Chappell said. “That is true of all of us, but there is a tremendous amount of diversity within that population.

“For instance, it is a fact that only about 10 percent of people over age 65 have any kind of dementia,” she said, “which means that 90 percent of older Americans do not have significant impairment in memory and cognition. However, our nervous systems do slow down, and what looks like cognitive problems may just be the challenge of sifting through 70 years of memories. Simple daily activities can get harder and people often need a little extra help.”

At The Hartford, that understanding of the needs of older, and even not so old, Americans has resulted in the creation of new business solutions. One of them is RecoverCare, a product that pays up to $2,500 per accident for specialized assistance in a variety of areas associated with giving the injured person that little extra help he or she may need to recover from an event such as a fall in the home. Customer service representatives who provide assistance under RecoverCare receive specialized training from one of the company’s gerontologists and must complete a certification program.

The Hartford is also engaged in original research and public education through The MIT AgeLab research program. In addition, the company maintains a special Internet blog called “In the Driver’s Seat,” which addresses the driving issues faced by older drivers and offers recommendations for safer driving.

“Everything we do is about providing empowerment and giving people the resources they need to solve problems as they develop,” Chappell said. “The last thing we want to do is to be patronizing to seniors. We want to help them take control of their lives and get the most out of this stage of their lives.”

Click here to view Chappell’s presentation.

Contact Info:

Brian Atchinson
President & CEO
Insurance Marketplace Standards Association (IMSA)
240.744.3020
brianatchinson@imsaethics.org
www.imsaethics.org

Stephanie Chappell
Corporate Gerontologist
The Hartford
860.620.6883
stephanie.chappell@thehartford.com
www.thehartford.com

Ryan Wilson
Strategic Policy Advisor
AARP Public Policy Institute
202434.3918
trwilson@aarp.org
www.aarp.org

Barbara Fitch
2nd VP – Market Conduct & Compliance
National Life Group
802.229.3112
bfitch@nationallife.com
www.nationallife.com

Jean Philipp, senior fraud investigator, Corporate Ethics & Compliance, MetLife, expresses her concerns with the recent increase in STOLI and IOLI activity.

Jean Philipp, senior fraud investigator, Corporate Ethics & Compliance, MetLife, focused on IOLI, a phenomenon that came on the scene around 1999-2000 and that reached a frenzied peak between 2004 and 2006. In effect, IOLI products are life contracts written on seniors by investors who would otherwise have no insurable interest in the people named in the policies.  The pitch focuses on the idea of convincing seniors that they have “personal unused life insurance capacity” that can be leveraged to create gifts to charities, provide windfall benefits for heirs or even aid in generating additional funds for retirement. The named insured doesn’t even need to pay the premium up front. It’s loaned by the investor group.

On its face, it sounds harmless enough, except that among the profusion of applications for IOLI arrangements over the years have been many falsified to obtain coverage on seniors who would not otherwise qualify for life insurance.  Agents submitting doctored apps are quick to point out that there is no harm to the customer and nothing to worry about. That is, unless the insured is drawn into an investigation triggered by a life insurer raising a red flag on a questionable submission, which has happened.

“Believe me, it is not pleasant to have someone wearing a badge show up at your door to inquire how your name and signature showed up on a fraudulent life insurance application,” said Philipp, whose company has a written policy prohibiting participation in the secondary market. “We will not knowingly issue policies in this market, and we are pleased that states are getting much more aggressive in investigating this business.”

Free lunch, blank apps

Philipp related one story in which an investor group invited seniors to a free breakfast or luncheon, gave them the pitch and then handed out blank applications to be picked up later. All that was required of the invitees was to sign the apps and turn them in. The applications were then used to attempt to secure life policies ranging from half a million to $2.5 million dollars.

“In cases such as this, the consumer can unwittingly become a suspect in the investigation,” Philipp said.  Incredibly, one 82-year-old in such a scheme ended up with 17 policies totaling face amounts worth $127 million.

The misrepresentations are often bold in the extreme. Philipp has interviewed individuals who were told that they could get up to $5 million in coverage with no medical exam required, a benefit level at which medicals involving blood and urine samples are routinely required. That’s not to say they weren’t submitted – just somebody else’s specimens in cases of medical substitution.

As to the question of “no harm” to the consumer, Philipp noted one aspect that may not be considered by the applicant. The process often involves generic medical information release forms with open-ended dates, allowing a third party access to the person’s medical records at any time.

Then, there are the premium financing loans advanced to seniors in order to cover the cost of the insurance. Just sign right there. No risk.  Except for one small problem.  Such contracts may require that the insured be responsible for the entire premium financing repayment in the event the face amount cannot be settled – at which point the insured or family members may be on the hook for thousands of dollars under the premium financing loan.

“In one case we discovered a so-called ‘longevity study’ that was being promoted in the states of Missouri and Florida,” Philipp said. “Seniors were contacted and told that if they agreed to take part in the study they would get free life insurance, with 1 percent of the benefit going to their heirs. Sounds pretty good when you consider the 1 percent of a million is $10,000.  However, as a part of the process the participants had to sign a HIPAA release that would allow the investors to track health history until the person died.”

In another Missouri case, an investor group was offering free housing to seniors who signed up for IOLI contracts.

“The whole premise sounded wrong,” Philipp said, prompting MetLife’s call to the DOI. “We saw a real possibility of some worst-case scenarios in this scheme.”

Philipp noted that MetLife is happy to collaborate with any other insurers to keep the life application process clean and to keep customers from getting caught up in such schemes.

Click here to view Philipp’s presentation.

Focus on suitability

Kim Shaul, Wisconsin Deputy Insurance Commissioner, notes that, "Seniors are the silent victims of unsuitability situations."

Like other regulators, companies and industry watchers, Shaul noted that the Wisconsin DOI too is concerned about issues such as STOLI/IOLI, suitability of annuity sales and other important consumer concerns. Wisconsin Commissioner of Insurance Sean Dilweg convened a Life Settlements Work Group in December 2008 to study issues of concern to companies and consumers. The effort included representatives from insurance and life settlement companies.

“The result of the working group was the agreement to arrive at a common definition of STOLI, to toughen disclosure requirements and to enact a five-year prohibition on life settlement transactions,” Shaul said. She noted that the STOLI definition and five-year prohibition elicited predictable opposition from the life settlement industry, but that there was general agreement on other provisions.

Another key concern of the Wisconsin DOI is the perennial issue of suitability related to annuity sales. State regulators are currently working to update suitability statutes in concert with the NAIC to update the model regulation. This follows more than 280 complaints regarding unsuitable sales of annuities in the past two and a half years and a number of major enforcement actions.

“Seniors are the silent victims of unsuitability situations,” Shaul said. “And the older they get the more hesitant they are to admit their mistakes to authorities or to go to their children. So to get a complaint is really significant, so the state of Wisconsin has gotten really proactive about looking into these complaints.”

Wisconsin is currently chairing the working group, with the current exposure draft closely parallels the FINRA (Financial Industry Regulatory Authority) rule 2821, which requires insurers to maintain effective supervision programs regarding the suitability of annuity sales.

“Expect a completed draft of the suitability recommendation sometime in December 2009,” Shaul said, noting that companies that adhere to appropriate suitability standards need not fear tightened regulation.

“Insurers will not be penalized unless there is a clear pattern of abuse in the suitability arena,” Shaul said.

Click here to view Shaul’s presentation.

Contact Info:

Jean Philipp
Sr. Investigator, corporate Ethics & Compliance
MetLife
314.525.9936
jphilipp@metlife.com
www.metlife.com

Kimberly Shaul, J.D.
Deputy Commissioner
Office of the Commissioner of Insurance, State of Wisconsin
608.267.1233
Kimberly.shaul@wisconsin.gov
http://www.oci.wi.gov/

Waggoner, Senior Special Agent, NICB, shares important listening techniques with Exchange attendees.

That’s because during Waggoner’s long, storied and still active career tripping up and catching wrongdoers, his acute and insightful ability to listen to verbal cues and hints pointing to misdeeds have proven to be his most effective weapon. He began his career as an officer on the St. Louis Police Department in 1968. During one sting operation, in which Waggoner acted as a crook selling government checks and other property to local fences, the department bagged 27 miscreants when their target list contained only seven.

During his time with the SPD, Waggoner gained a reputation as one of the ablest and most consistently effective interrogators on the force, securing confession after confession.  His secret? Learn how to listen.

Waggoner retired from the force in 1993, but shortly thereafter went to work for the NICB’s St. Louis office, where his skills as an investigator have been put to good use ever since.

The insurance industry’s campaign against fraud is as important to the honest insurance consumer as anything we do to deliver a fair quote or effectively handle a claim.  As crime statistics, including the NICB’s have shown, insurance fraud adds between $30 to $60 billion dollars a year to the tab being paid by honest Americans every time they mail in a premium check.

Since the merger of the Insurance Crime Prevention Institute (ICPI) and the National Auto Theft Bureau (NATB) created the NICB in 1992, it has been in the forefront of industry efforts to combat insurance crimes such as fraud. Today, the group is the premier industry initiative taking on insurance criminals and trying to reduce the costs of fraud to companies and the consumer. More than 1,000 insurance companies, from the largest to the smallest, support the work of the not-for-profit NICB. The Special Investigative Units of those companies refer more than 70,000 cases to the NICB annually, including 7,000 calls to a special hot line.

From crimes of opportunity to true professionals

Needless to say, the investigative and interrogation skills Waggoner learned as a police officer have been particularly useful in his second career as an insurance fraud investigator.

“There are three distinct levels of insurance crime,” Waggoner said. “On one level, you have an essentially honest claimant who has been paying premiums for many years and gives in to the temptation to get a deductible back with a little help from the body shop. Probably never did anything like that before and not likely to do anything else dishonest again. It’s still fraud.

“Then you have less honest people who may have a genuine claim like a burglary, but decide to take advantage of the claim by remembering a laptop or a large screen TV that was taken during the theft,” he said. “There was a burglary, but the TV or laptop never existed, except on the claim report.”

Finally, as Waggoner put it, you have the professionals who get up every morning with the full intent of defrauding an insurance company, like the head of a gypsy crime family who, upon giving himself up voluntarily, reported that he had earned $12 million in 15 years simply by staging slips and falls while traveling to and from favorite vacation spots such as Las Vegas.

“What many of these situations have in common is the belief on the part of the person doing the fraud that they’re not really hurting anyone because these huge companies can afford it,” Waggoner said.

Except that the combined toll of insurance crimes of all types annually adds from $30-60 billion from the system and imposes extra costs of $200 to $300 on every American family. And that’s just on the property and casualty side of the business.

Get ‘fraudsmart’

One of the most effective tools Waggoner has ever used during an investigation or interrogation is the simple power of listening, and listening in every sense of the word. Being alert to verbal cues and shifting details indicative of a person likely to be under stress. And giving the suspect the comfort level and the right opening to come clean when he or she simply feels the time is right.

“You have to remember that many of these people are continuously afraid of being caught from the moment they commit the fraud,” Waggoner said. “It’s on their conscience and it’s on their minds every moment. For some, it’s just a relief to get it out.”

Waggoner’s interrogation strategy is a far cry from the tough guy routines so often depicted in television crime dramas. His style is to put persons being questioned at ease, ask them how they’re doing, offer them a cup of water or coffee. Of course, the fact that he strategically positions himself between the subject and the door to the interrogation room or office is just one non-verbal cue as to who is in charge.

“The sad truth is that a lot of these people are basically honest,” Waggoner offered, not sounding like the tough street cop who patrolled the St. Louis byways across four decades. “A lot of times these are just people who got into tough situations, like getting behind on their car payments, and felt like taking the easy way out was the only way. So, suddenly the car ends up at the bottom of a quarry and the next day is reported stolen.”

Waggoner offered some other time-tested recommendations to claims people, SIU investigators and others aligned with the NICB in fighting insurance crime. In addition to listening – really listening – to what the other person is saying, stay focused on body language and mannerisms, avoid distractions and above all document your notes and impressions during or immediately after the interview, because memory is notoriously fleeting.

“I was once involved in a raid on a doctor’s office in Chicago in partnership with the FBI,” Waggoner said. “I and an FBI agent interviewed the suspect for two hours, after which I immediately sat down and typed seven pages of notes. When I next met with the FBI agent six weeks later, he had two pages of notes that he had written up a couple of weeks after the interview. In looking at my notes he was amazed at all the details he’d forgotten.  We used my notes for the final report.”

Tips for better listening

Bottom line, Waggoner offered several tips to improve effective listening that work as well in an office as they do in a police interrogation room or on the mean streets of a major city.

• Listen now, report later – Focus on what the person is saying and how he or she is saying it, not on how fast you can scribble.
• If you are using a recorder, forget it – The tool is a great aid, when it works, but don’t bet your whole interview on it.
• Learn to want to listen – If you don’t really want to be there or don’t really care, it will come across and you won’t be effective.
• Be present – Act interested and be in that room or on the telephone line, not sitting back with your feet up reading from a script.
• Control your emotional buttons – Don’t go off on the subject, accuse or openly intimidate.
• Control distractions – Tell colleagues what you are doing ahead of time.
• Listen to the other person to understand, not to refute.
• Avoid multi-part questions that can get the subject, and you, confused and off track or that allows the subject to get away with answering only a part of the question.
• At the same time, try not to ask questions that can be answered with a simple “yes” or “no.”
• Recognize the red flags represented by people who freely offer information for which you haven’t asked.

“Most of all have confidence in yourself and aim to try to make every interview you do the most excellent interview you’ve ever done,” Waggoner said. “It may pay off in court down the road.”

And considering the stakes in the insurance fraud game, that’s one police order we should all be happy to obey.

Click here to view Waggoners’s presentation.

Contact Info:

Walter Waggoner
Senior Special Agent
National Insurance Crime Bureau (NICB)
636.861.3715
wwattoner@nicb.org
www.nicb.org

Glen Daraskevich, senior vice president - Karen Clark & Company, shares the successes and benefits of modeling techniques for insurers and consumers.

In the wake of more frequent and costly natural catastrophes, insurers are turning to a variety of cutting-edge, data-mining tools aimed at helping to achieve a much better handle on predicting the frequency and severity of catastrophe losses.

As a senior vice president at a leader in the new breed of catastrophe modeling firms, Karen Clark & Company, Glen Daraskevich was quick to point out the benefits of such arcane statistical models. But he offered words of caution about letting the models do all of our thinking for us. Such models can be wonderful predictive tools, but as the legendary New York Yankees Manager Yogi Berra once said:  “Prediction is very hard — especially when it’s about the future.”

“Consider the models used to gauge risk transfer in the economic arena prior to the financial crisis,” Daraskevich said. “Over reliance on models that simply were not complete enough to anticipate all of the potential permutations helped lead to the mess that occurred.”

Windstorms edge out fires as main threats

Some of the same concerns surround the field of natural catastrophe modeling, which is still largely in its infancy. But the stakes are high. While actuarial and engineering science has helped the industry make terrific inroads against traditional causes of loss such as structure fires, trend lines related to natural catastrophes are headed in the other direction.

“From the 1970s to today, we have done an absolutely amazing job of managing and reducing fire risk in the U.S.,” Daraskevich said. “We have literally cut fire risk in this country by a third over the last three decades. It is a testament to what can be accomplished with improved construction and greater emphasis on prevention.

“However, over this same time period we saw a steady increase in catastrophe losses associated with natural disasters, principally windstorm,” he added. “As fire losses kept falling, the frequency and severity of catastrophe losses kept rising, until a line was crossed in 1992.”

That line, of course, was Hurricane Andrew. The category 5 hurricane became the worst single insured property loss up to that time, presenting the insurance industry and government with the most expensive cleanup in history, and providing the impetus for the developing science of catastrophe modeling, of which Daraskevich ’s firm, Karen Clark & Company, is a leading practitioner.

What made Hurricane Andrew such a watershed was abundantly clear when Daraskevich showed an archival aerial photo of Miami in 1920 contrasted with a shot taken from the same angle and altitude in 2007. To say that the pictures were barely recognizable as the same city would be an understatement. The Miami of 2007 is a bustling, modern, multi-billion-dollar metropolis as populated and developed as any city on earth, situated in the middle of one of the most active windstorm regions on the planet.

“Hurricane Andrew made it clear that standard actuarial techniques have become ineffective when it comes to predicting the impact of natural catastrophes on such high-value locations,” Daraskevich said. “There are few datapoints because such events are rare, but when they do happen they are hugely expensive.”

GDark1: Daraskevich stresses, “(CAT models) are great tools but you have to understand their strengths and weaknesses and use them appropriately.”

A science is born

Daraskevich stresses, “(CAT models) are great tools but you have to understand their strengths and weaknesses and use them appropriately."

“CAT models are fantastic tools,” he said, “but we began to see some of the results going directly into rate filings. That raises some concern. Again, these are great tools but you have to understand their strengths and weaknesses and use them appropriately.”

Daraskevich noted that, like other sciences, CAT modeling relies both on hard data and educated assumptions, the same way that scientists arrive at conclusions. The trouble is, the more scientists you squeeze into the same room, the more and different assumptions you are likely to get.

“Has anyone here ever attended a scientific conference and seen them disagree with each other?” Daraskevich quipped. “It’s fun, believe me. But it underscores the fact that even the smartest, most educated people can see the data very differently. And that makes it risky to base some of your most important business decisions solely on those assumptions.”

Andrew’s ghost gains strength

Interestingly, Daraskevich noted that Hurricane Andrew continued to gain strength more than 10 years after the storm dissipated as scientists continued to slice, dice and argue about the data.  Ultimately, Andrew was officially upgraded from a category 4 to a more serious category 5.

Hurricanes aren’t the only natural catastrophes coming under modeling scrutiny. Earthquakes are less frequent, equally worrisome and even more problematic to model and harder to predict. The United State Geological Survey (USGS) is the definitive authority on earthquake science, and even they change the rules every few years, which can throw the models up in the air. Indeed, like reassessment of the strength of Hurricane Andrew, the USGS has even revisited the strength of perhaps the most celebrated earthquake in U.S. history – the great New Madrid Quake of 1811 – studying newspaper accounts of the day and digging trenches to measure evidence of related soil liquefaction.

“As a result of this research, the USGS actually learned that there are technically no faults around New Madrid, Missouri where the epicenter occurred,” Daraskevich said. “Instead, they believe that there are something like five ‘hypothetical faults’ in the area, faults we know must be there but haven’t actually found yet.”

Daraskevich closed his presentation by referring to perhaps one of the most controversial aspects of catastrophe modeling today – whether or not climate change is actually producing more numerous and violent hurricanes, an issue of urgent concern to the insurance industry. In fact, the early statistical evidence is to the contrary. Rather than an increase in the number and severity of hurricanes, as predicted due to climate change by some theoreticians, it may be that the increased number of hurricanes may be due to improved detection and tracking techniques. Indeed, the research shows an actual downward trend in the number of hurricanes actually making landfalls.

More hurricanes or better observation?

“The models said that hurricanes were going up, but the data says they are not,” Daraskevich said. “We are seeing more hurricanes because observation is better, which if it proves out is a very good thing for the insurance industry.”

Bottom line, catastrophe models can be immensely useful to the insurance industry, but over reliance on them can lead to the wrong assumptions.

What models can do:

• Provide a framework for tying together the three main components of risk:  hazard, engineering, exposure
• Provide many scenarios of what could happen and estimates of loss from different types of events
• Deliver rough estimates of probabilities of losses of different sizes

What models can’t do:

• Produce accurate point estimates such as 1 in 100 and 1 in 250 loss amounts
• Produce credible estimates of losses for specific locations
• Predict “near term” catastrophe losses

Click here to view Daraskevich’s presentation.

Contact Info:

Glen Daraskevich
Sr. Vice President
Karen Clark & Company
6174.423.2800, Ext. 204
gdaraskevich@kcc.us.com
www.kcc.us.com

Dayle Axman, supervisor, Life & Health Consumer Affairs Section, Colorado Division of Insurance, presents the division’s complaint reconciliation system during the regulator’s showcase.

The Colorado Division of Insurance is an adherent of Market Analysis Core Competency Standard 5, which requires that “each department of insurance shall have a system for recording and tracking complaints in a database using a coding system to facilitate analysis and trending.” In other words, a department should have a procedure in place to monitor the accuracy of complaint data. A laudable goal, but not always easy to achieve, as the experience of the Colorado Division can attest.

“The reconciliation process used to be a very staff-time intensive process,” she said. So intensive, in fact, that for two years running (2002-03) Colorado didn’t even do it. Why so time intensive? Simply because twice a year paper reports were mailed to each company for review, with each company returning paper reports with any information regarding identified problem issues. Those returns had to be reviewed again by department staff members, eating up more time, postage costs and paper – a decidedly “un-green,” paper-intensive process.

Saving trees

That began to change in 2004, when Colorado introduced a new online, real-time, Web-based application that marked the beginning of the end of the old, paper process.

“The online system captures all the same data that we used to report on paper, but now it is available for access on line as soon as a complaint is closed.” Axman said.

Companies can access and verify data and statistics for closed complaints anytime during the year, an important feature since such information is used in calculating and publishing the complaint indices regarding company performance on the Division’s Website.

If a company agrees with the data, it is moved from “open” status to “agreed.”  If the company disagrees, it can mark the file “disagree” in a text box and resubmit it. The Division staff then reviews the disagreement, retaining the authority to determine whether the disagreement is valid and whether the entry needs to be changed. If changed, the Division will review the data elements again.

Those data elements include:

• The Division’s assigned number
• The “incident” date (if applicable)
• Date the Division “opened” its complaint investigation
• Date the Division “closed” its complaint investigation
• Complainant’s name
• Short description of the product line

Data elements not provided include complaint “reason” codes, “disposition” codes and the “confirmed” or “non-confirmed” status of the complaint.

Timely company reviews critical

The deadline for review of all data is January 30. Axman stressed that companies need to register for a user ID and access that data well enough in advance to allow time for a meaningful review.

“I would recommend that companies don’t wait until January 29 to look at their data,” Axman said. “If you have questions or issues with anything on the site, you need to give our people enough time to review your concerns before the indices are calculated.”

The Division does have some ability to remind companies that have not responded in a timely fashion, such as sending emails with complaint lists to those who have not reported in. Sometimes the Division will make calls to companies that may have had staff turnovers leaving gaps in the review process.

“It’s important for companies to review and comment on closed complaint data on a timely basis,” Axman said. “The fact is, as of February 1 all that data is gone, so asking for a user ID on January 29 is not going to cut it. The best approach is to go into our closed complaint database on a regular basis throughout the year.  Remember, this is a voluntary process. If you don’t reconcile your data, that’s what gets reported.”

Axman recommended that companies refer to Colorado Insurance Bulletin B-1.13 for information about the basic parameters of the complaint reconciliation process. The information can be found at www.dora.state.co.us/insurance/regs/bulletin.htm.

Axman concluded with a clear and unambiguous statement about the mission of the Colorado Division of Insurance.

“We are dedicated to preserving the integrity of the marketplace and are committed to the promotion of a fair and competitive business environment in Colorado,” she said. “We truly believe that effective regulation creates a level playing field where consumers are safe and businesses can flourish.”

Click here to view Axman’s presentation.

Contact Info:

Dayle Axman
Supervisor – L&H Consumer Affairs Section
CO Division of Insurance
303.894.7881
dayle.axman@dora.state.co.us
www.dora.state.co.us