New York Life and Northwestern have recently run very deceptive advertisements in leading financial publications. These two insurers are often cited by many as upstanding corporate citizens; but they really are not. While they are financially strong, New York Life and Northwestern, with and via their agents, engage in pervasive fraudulent conduct in the life insurance marketplace. At its source, these companies’ misconduct – like that endemic to their industry – arises from inadequate product disclosure, which sets the stage for agents, motivated with undisclosed financial incentives, to misrepresent products and fleece consumers. The story is as old as the marketplace. When financial products are not properly disclosed, as they have not been on cash value life insurance (not to overlook annuities and long term care policies – this industry’s two other big products, with different but similar problems), the competitive market does notand in fact cannot properly function.

In recent years, we have all most painfully seen and experienced the consequences of markets operating without enforcement or morality. The crimes in the subprime market were extraordinary, pervasive, and, in fact, in plain sight. Yet ten years ago the few who might have occasionally talked about the fraud in the subprime mortgage markets were dismissed. Virtually no one in positions of responsibility or authority took any appropriate actions to avert our financial system’s near meltdown.

The crimes in the life insurance marketplace are not as cataclysmic, but they are profoundly harmful and they have been around for generations. A century ago P. B. Armstrong, Vanguard founder Jack Bogle’s great grandfather, wrote a book, A License to Steal, about the life insurance industry. For the past fifty years, Professor Joseph Belth has written about the industry’s problems; his award-winning monthly newsletter is legendary. About thirty years ago, the Federal Trade Commission wrote such a scathing indictment of the life insurance industry’s practices that the industry lobbied Congress to enjoin any further Federal action. Consequently, no one should really be surprised to hear that the new Consumer Financial Protection Bureau does not have authority over the life insurance industry’s products.

Civil rights have never been bestowed to any passive or silent group; that is not the way to get the powerful to respond. And businesses in our country operate on the basis of power. Below are brief summaries of two separate articles about New York Life and Northwestern’s deceptive and harmful advertisements. It is safe to assume that their agents’ spoken sales presentations go far beyond the ad’s misrepresentations; in fact, with respect to Northwestern agents, I have specifically documented such in my January 2011 letter to the NAIC President.

But again until someone, like Rosa Parks, stands-up to say, ‘I’m not going to take this, I’m not going to allow my family to be shortchanged by the life insurance industry’s fraudulent and deceptive practices,’ the misrepresentations and harms will continue. After all, everyone saw and knew that Mr. Brown’s school was terribly unequal to Mr. White’s, but change only came after Thurgood Marshall began that fight for Brown’s civil rights.

New York Life’s Deceptive Advertisement

New York Life’s claim that its whole life policies provide “guaranteed annual growth” is an intentional perversion of the truth in order to induce another to part with something of value. And that, by definition, is fraud. A whole life policy does not provide “guaranteed annual growth” unless the guaranteed investment returns exceed the guaranteed insurance expenses, and for typical whole life policies there are many policy years in which such returns do not exceed such expenses. The ad, in its avoidance of policy costs, follows the age-old pervasive deceptive practices that have characterized the life insurance industry for generations. The ad is also replete with multiple additional problematic aspects, including material omissions and statements contradicting New York Life’s actual policy contracts. New York Life’s ad is terribly deceptive and irrefutably indefensible.

That New York Life’s ad ran in several leading national magazines for nearly two years – its fraud apparently going undetected by both insurance regulators, who no doubt saw it, and by these publications’ own quality control and business section editors, some of the publications are in fact known as leading financial publications – should be a clear and strong warning about these organizations’ professional competence, genuine knowledge about life insurance, and commitments to enforcing either legal or ethical standards. I recognize that the prior sentence will, at least initially or at first blush, hardly endear me to these possible allies in my efforts to reform the life insurance industry. But such stark truths, I am sorry, must be unequivocally stated and recognized if the public is to grasp the extent of the problems in the life insurance marketplace – a marketplace whose three leading products, life insurance, annuities, and long term care insurance, are all riddled with profound problems of sales misconduct arising from inadequate disclosure.

Northwestern’s Deceptive Advertisement

Northwestern’s ad is deceptive on multiple counts. It is untruthful because it materially misrepresents the differences in policy performance among the different insurers. The ad’s “number” for MetLife is shockingly erroneous, Northwestern had to know it was wrong, and yet the company used it anyway. Northwestern also represents the data behind the ad as comprehensive when they are not; therefore the ad’s broad claims and implications have not been and, in fact, cannot be documented. The ad’s claim that the results are unbiased is itself untruthful and indefensible because the ad’s touted “results” are based on an inherently problematic approach biased by premium size that misleadingly benefits Northwestern’s policy. The ad’s failure to mention this critical fact is a material omission. The ad is deceptive and clearly has the capacity and tendency to mislead and deceive because its assertion that its analytical approach provides “the one number” consumers need to know cannot be defended; in fact, Northwestern has actually argued privately elsewhere for other approaches when that has served its interests. Moreover, Northwestern touts the “20 year cash value return” as the “the one number” consumers need to know when fewer than half of its consumers even keep its touted policy for sixteen (16) years; so statistically speaking Northwestern knows that its touted “number” is not even relevant to its typical consumer, and its policy’s “returns” over all of the policy’s first nine years are actually negative. Furthermore, the ad facilitates misrepresentations by failing to specify the legal name of the product it references, which is significant as comparatively few of the company’s policyholders have bought the policy and received its touted “results.” Finally, but still of paramount importance, Northwestern’s ad is inherently misleading in its use and in its encouragement that consumers use and rely upon historic data without mentioning any of the necessary critical caveats to using past performance data. Given that Northwestern agents cite the company’s advertising, the ad thereby clearly and immeasurably facilitates deception of consumers by the company’s agents.

Closing Thoughts

The dictionary defines anomie (or anomy) as “a state of society in which normative standards of conduct [or belief] are weak or lacking.” Appropriate product disclosure is imperative for the proper functioning of a financial marketplace, and yet the life insurance industry’s products have never been properly disclosed. That is, the normative standard of conduct for fair exchange has been lacking. Despite fifty (50) state insurance commissioners and their more than forty (40) years of work since the late Senator Philip Hart in the early 1970s first began to talk about the idea of holding Congressional hearings on the scandalous life insurance industry and about the need for ‘truth in life insurance legislation,’ no meaningful reform has been accomplished. The anomic condition of the life insurance industry has simply been preserved, and with it, its marketplace’s terribly costly dysfunction.

The life insurance industry could be a very good industry, properly fulfilling society’s needs. Its agents, rather than widely perceived as hucksters, could be venerated like knowledgeable financial risk management doctors. Its consumers, rather than being suspicion, afraid, and uninformed, could be confident, proud and grateful policyholders.

The Corvair was not driven from the marketplace by regulation; it was driven from the market by Ralph Nader and his book, Unsafe at Any Speed. Similarly, this transformation of the life insurance marketplace will be driven by information, as all such changes fundamentally are.

Dissemination of information is the duty of our nation’s media, often referred to as either ‘our fourth branch of government (in the best meaning of government)’ or as that behemoth network of corporate and political public relations spin doctors. The financial media now needs to show American consumers of the life insurance industry’s products that it can truly function as the better angels our forefathers envisioned it being. Where are our Thomas Paines and Benjamin Franklins spreading pithy maxims, “Common Sense” and the vital truths about the life insurance industry’s products?

Please read the two Breadwinners’ articles (contained in the Archives) on New York Life and Northwestern’s deceptive ads, and share them with your friends and associates. Together, we can fix the life insurance industry and marketplace. An informational tsunami is coming, and it will cleanse the life insurance marketplace so it can be rebuilt with proper product disclosure. I welcome your assistance. I welcome your thoughts.
Sincerely,
Brian Fechtel, CFA, Agent & Founder
BreadwinnersInsurance.com

In late February, the American Academy of Actuaries responded to my invitation with the email below. Last week, in reply to their attempt to dismiss my invitation, I asked the AAA to resume their work on evaluating my disclosure approach and addressing the other issues raised in my original letter.

Please read these replies below. And know, as always, your own insightful and pithy views are invited, and your assistance in all forms (as an insurance buying client, a referral source, or as a Partner for Reform) is most gratefully appreciated. More importantly, I guarantee, getting involved will make you feel good.

Email from John Meetz of the AAA on Wed, Feb 23, 2011 at 10:46 AM
Brian,
The Academy’s Illustrations Group reviews proposals to modify Illustrations and disclosures that are under consideration at official regulatory or legislative groups. We limit our comments to the actuarial aspects of the proposals and do not comment on other issues. As such, our current work with Illustration proposals addresses the calculation specifics for certain products whose features differ from the traditional life products and not fully contemplated by the Illustration Regulations. While these other issues may be important to the overall conduct of the insurance business, we limit our comments to our area of expertise. The Academy is a professional organization whose work is conducted by volunteers. Due to the natural time limitations of working with volunteers, we must limit the scope of our work. While we have performed a cursory review of your proposals, we are not in a position to engage in further discussions with you on your proposals. We suggest you work through the established channels at the NAIC to get your ideas exposed to regulators and interested parties.

John H Meetz
Policy Analyst (Life) American Academy of Actuaries …….

My March 4, 2011 emailed reply to John Meetz at the AAA
Dear Mr. Meetz:

I am sorry to have to inform you that I think your reasons for declining to thoroughly review my policy disclosure approach are unsatisfactory. Your position indicates none of the initiative or societal concern that any self-respecting professional organization should have. Furthermore, your reply violates the AAA’s mission and vision statements – http://www.actuary.org/mission.asp – and certainly raises questions regarding compliance with AAA’s Section on Integrity in its Code of Professional Conduct. These words aren’t written to be harsh or mean; accomplishing things, as I am sure you agree, requires everyone to speak frankly about important issues and to hold others accountable.

Your reply, I assert, is unsatisfactory to the American public because Americans deserve, have always deserved, appropriate disclosure of life insurance policies. Actuaries have a professional and civic duty to contribute to such. Yet, the facts are that although nearly 20 years ago the AAA recommended that use of the interest-adjusted indices be discontinued, these defective indices remain (which is not to imply that they are used or useful; the AAA’s recommendation to discontinue was a very sound and good recommendation, albeit 15 to 20 years tardy.)

If the AAA cannot readily recognized my invitation/request to review my disclosure approach as a project that could be undertaken as a natural, logical continuation of the AAA’s prior work on disclosure, or if the AAA, knowing the paramount importance of product disclosure, does not have the initiative to seek the instructions it purportedly requires from regulatory or legislative groups to pursue such important review work, then you, John, have essentially acknowledged that the AAA is virtually incompetent or impotent.

Below is a copy of your email in which I have annotated with some additional specific rebuttals. As I am essentially a one-man band working to fix a dysfunctional trillion dollar industry, I hope you can accept my informal shortcuts as I endeavor both to work productively with the AAA and others on this vitally important matter while at the same time continuing to serve my ever growing list of clients.

So as to be unmistakably clear, I hereby assert that I think the AAA needs to find a way: 1) to resume working on reviewing my policy disclosure approach, and 2) to respond to the many other issues in my original letter. Although you have not previously taken advantage of my written overtures to call me to discuss matters, nor returned any of my own calls, I reiterate my suggestion that such dialogue could be very useful. I look forward to hearing your thoughts about how the AAA will now proceed, and to our starting anew to build a good and productive business friendship.

Sincerely,
Brian

Copies Sent to AAA Executive Director Mary Downs, Director of Public Policy Craig Hanna, and Actuary Nancy Bennett.

Annotated Copy of Mr. Meetz’s Email On Wed, Feb 23, 2011 at 10:46 AM, John Meetz wrote:

Brian, [Annotated comments set-off in new parenthetical paragraphs.]
The Academy’s Illustrations Group reviews proposals to modify Illustrations and disclosures that are under consideration at official regulatory or legislative groups. We limit our comments to the actuarial aspects of the proposals and do not comment on other issues. As such, our current work with Illustration proposals addresses the calculation specifics for certain products whose features differ from the traditional life products and [were] not fully contemplated by the Illustration Regulations. While these other issues may be important to the overall conduct of the insurance business, we limit our comments to our area of expertise.

(What other issues are you referring to? Certainly, one possible reasonable assumption readers can make is sales misrepresentations. If AAA thinks that sales misrepresentations are part of the overall conduct of the insurance business but somehow truly outside of the AAA’s expertise, please explain.)

[Mr. Meetz continued:] The Academy is a professional organization whose work is conducted by volunteers. Due to the natural time limitations of working with volunteers, we must limit the scope of our work.

(First, I believe that the AAA has some paid professionals. Second, while every organization has resource constraints, you have provided no satisfactory answer for why or how reviewing my disclosure approach, itself, would be such an unacceptable burden for the AAA. I contend that there could be no project of greater significance or worthiness for AAA than to endorse an appropriate policy disclosure approach; and undertaking a review of my disclosure approach, and, as my original letter requested, either affirming or, if fault is found, rejecting it, and providing something better is clearly part of such a project. If the AAA thinks that product disclosure is not of paramount importance and worthy of AAA allocating resources (and volunteers) to such, I think all four of you – Ms. Downs, Ms. Bennett, Mr. Hanna, and you – ought to sign such a statement documenting your unanimous concurrence with such a position.)

[Mr. Meetz continued:] While we have performed a cursory review of your proposals, we are not in a position to engage in further discussions with you on your proposals.

(Given its cursory review, I think the AAA, at the very least, ought to have provided in writing its initial perspective on my disclosure approach. But again, neither the American public nor I would find a cursory review satisfactory. Certainly, you may have a different perspective regarding this “obligation” that you might assert I am bestowing on you, but I think it is necessary for the AAA to go on the record on these matters. As a country, America can no longer afford superficial performances or any other unproductive practices.)

We suggest you work through the established channels at the NAIC to get your ideas exposed to regulators and interested parties.

(So again, if I’m understanding your email, if the NAIC asks you to review my approach, you would then review my approach, right? And, if that’s the case, certainly you must recognize that your emailed reply has a most bureaucratic element to it. Because if you are wanting me to write to the NAIC to ask it to so instruct the AAA, I will naturally ask you and the AAA whether you/the AAA supports my request. I of course assume that the AAA would support this request, because of the above facts already cited about the importance of this project. And for those same reasons, that the NAIC, or another body from which you purport to need instructions, would so instruct the AAA to proceed with the project. Which again will merely lead us back to Square 1; that is, where you were a month ago upon receipt of my letter. Because, since Policy Disclosure is an undeniable imperative in a properly functioning marketplace, the NAIC or some other regulatory or legislative body will, recognizing the existing problems, want the AAA to investigate the subject, and the AAA will have to perform the review. John, if the AAA wants to accomplish nothing on this vital public policy matter, I suppose it can merely continue functioning as it has as a life insurance industry lackey for the past 40 years. On the other hand, if you are committed to building a better world, as I suspect you and some of your honorable peers are, once the fears of reforming the dysfunctional life industry have been silenced, then I invite you and your AAA associates to take a few lessons from the technology leaders in our society, roll-up your sleeves, and get to work on our industry’s most important and significant problem – a problem that has been left unsolved for more than 40 years: Appropriate Actuarially-Approved, Regulator-Mandated, Consumer-Useful Policy Disclosure. Please, John, let’s not engage in any more bureaucratic stalling dances. Again, I’d like for us to have a good and productive business friendship. Sincerely, Brian)

[Meetz’s email concluded with his name and contact info]

Final Thoughts
Again, if you haven’t read my January letter to the actuaries, please make sure that you do, as I think you will find it most worthwhile. My letter documents – http://www.breadwinnersinsurance.com/wp-content/documents/FOA%20letter.pdf – the actuarial profession’s following failures in the life insurance arena: 1) failure to denounce sales presentations relying on simple sum of premiums where premiums have not been adjusted for the time value of money, 2) failure to answer Professor Belth’s 1970 question about its professional responsibilities, 3) failure to respond to Actuary John Keller’s public acknowledge of Northwestern’s knowledge of consumers’ likely dissatisfaction about past purchases if they were subsequently properly informed about products, 4) failure to advocate that sales illustrations are not to be used for comparative purposes, and 5) failure to provide the long-needed new Life Insurance Buyer’s Guide. My letter also encourages the actuaries to begin to make amends for their past professional conduct by: A) performing annually 10,000 of public service, B) establishing an unemployment insurance fund for failed life insurance agents, and C) redesigning their continuing education requirements to include much more effectively address issues pertaining to advocacy and ethics.

The reason that many problems persist is that people put-up with or accept such. Two reasons Middle East dictators have endured are that they have had bullets and their people have had fears. Obviously, if those oppressed people can rise up against armed dictators, we Americans ought to be able to rise up against the dysfunctional life insurance industry and its accomplices (the AAA, NAIC, etc.). At least, that’s what I believe. What do you believe, and think…., or want to know…., and want to do?

This, of course, is just one of the many typical misrepresentations that pervades the life insurance marketplace, and one that Professor Belth has written about in academic journal articles and his own newsletter for over 40 years. Like all of the industry’s misrepresentations, this distortion of a policy’s annual expense is directly facilitated by the industry’s inadequate policy disclosure practices. MTL’s Compliance Officer, Mr. John P. Seneczko replied to my December letter. Below is my response to Mr. Seneczko, addressing both his lame defense and his senseless counterattack, and offering that if he’ll act as some dishonored Japanese executives do, then I’ll buy him the sword. As always, your own thoughts on my blogs are welcomed and appreciated.

Dear Mr. Seneczko:
The promptness of your reply was admirable. I am sorry, though, to inform you that I see several serious problems with your reply. [MTL’s reply is presented in excerpts in my response, and in its entirety at the end of this blog.]

For instance, when you write, “While we disagree with your opinion of this article, it does not promote MTL products nor is [it] directed toward MTL customers and thus, is not an MTL Insurance Company endorsed solicitation. As a result, we do not believe it would be appropriate for us to comment further at this time,” I disagree. Given industry compliance practices, I do not think MTL can endeavor to distance itself from the nationally published work of its employee. Indeed, to assert that the article is not problematic because it is not directed to MTL customers and does not directly promote MTL products is to make a mockery of compliance rules. To follow your argument, Insurer X could write all sorts of misrepresentations in a published article, others in the industry could use such published material – either directly or indirectly by just verbally quoting the misrepresentation, and there would be no problem. Certainly, MTL’s own agents could not be held solely responsible for the misinformation that they might have learned from this article by their company’s Senior Marketing Communications Specialist. Mr. Seneczko, misrepresentations are pollution, as much as toxic waste is. MTL is responsible for the toxic waste that its employees put into the marketplace.

What is even more surprising than your letter’s plea of innocence is its second sentence which reads, “We have since reviewed the article written by Ms. Cicchetti,” suggesting that you might not have previously read her article – a suggestion that is incredulous on multiple counts. If MTL had not reviewed Ms. Cicchetti’s article prior to her submission of it to the National Underwriter then that indicates a compliance procedures problem. If you had read it before her submission then that of course indicates a different, and more serious, compliance problem. Not having read it in the 11 days after it had been published and before receipt of my prior letter, could well indicate yet another type of compliance problem. In all of these cases, for MTL to employee a Senior Marketing Communications Specialist who is not aware of the cited misrepresentation is for your company to have failed to properly train and supervise its employees. Such failure does not speak well of MTL, not merely regarding the article’s misrepresentations, but regarding the company’s actual other marketing materials that such an uninformed employee authored or approved. After all, for an MTL employee to not understand the mistake in the article’s blatant misrepresentation raises the compliance nightmare: How extensive are her and other MTL employees’ and agents’ misrepresentations?

So, which of the above compliance problems do you prefer: Inadequately trained employee(s), deficient supervision, and/or faulty compliance procedures? In the end, there can be doubt about a serious compliance problem at MTL when it has allowed an employee to attach credibility to her assertions by showing her role as Senior Marketing Communications Specialist with MTL when writing a trade publication article containing a blatant misrepresentation.

In spite of such, your letter merely asserts, without explanation, that you disagree with my opinion of Ms. Cicchitti’s article and that it would not be appropriate for you to comment further. Here again, you are incorrect. MTL does need to comment further. MTL needs to apologize for its employee’s misrepresentation, and it needs to conduct an internal audit to examine the possible pervasiveness of this misrepresentation in its materials and also possible other misrepresentations, given, again, that a Senior Marketing Communications Specialist who doesn’t recognize this age-old misrepresentation probably doesn’t recognize other age-old misrepresentations. Offering to apologize when you or your employees make a mistake is part of the necessary appropriate response. I will look forward to MTL publicly doing so with the same prominence and distribution that its original misrepresentation had. If MTL is not prepared to apologize, perhaps the Illinois regulators should impose a large fine upon MTL that directly impacts the company’s executive bonus pool by clawing back previously paid bonuses.

Let me also be clear about another matter. Punishment for Ms. Cicchetti’s article ought to, it would seem, fall on you or other MTL executives, not on Ms. Cicchetti. While I have not researched her employment history, qualifications, details regarding the writing of the article, etc., I suspect that she is young, does not have extensive financial knowledge, and merely wrote what she has heard others at MTL say. If my intuition is correct, then the responsibility for MTL’s misrepresentation rests exclusively with you or other MTL executives. Misrepresentation in the financial world will not be effectively curtailed until responsibility for such is taken by, or forced to be taken by, senior executives. Heretofore, many life insurance executives have been either ignorant or willfully blind regarding the pervasive misrepresentations in the marketplace. It is time for that to change. If you will take responsibility in the fashion that some dishonored Japanese executives do, I would be glad to purchase the sword for you.

Finally, I also must inform you that I vigorously object to your final paragraph. You certainly imply that there are misleading references made about MTL on my web site when you ask that I “immediately remove any and all misleading references about MTL.” There, however, are not any misleading references regarding MTL on my web site. It is of course true that in another blog, “Should Penn Mutual’s Old Policyholders in Good Health Replace Their Long-Held Policies?” I asked, “What about such policyholders at Mutual Trust Life? (Having nicknamed itself ‘The Whole Life Company,’ makes one wonder, how good must its policies really be?), and later in the blog stated, “Mutual Trust Life, MTL, a little Illinois insurer, touts itself as ‘The Whole Life Company,’ and proclaims MTL’s company vision is ‘to place in the top five of all companies for ten-year historical performance.’ To my knowledge, MTL has never even come near its happy-talk goal, and it may have about as much chance of ever achieving such as I have of being a top five contender to Mr. America….” But again, there is nothing misleading in my words.

On the other hand, MTL’s quoted company vision “to place in the top five of all companies” could, however, well be considered misleading. While it is wonderful to aspire, and self-laudatory words can be accepted as puffery, regulators, I think, might now have to determine (since you so adroitly reminded of my having referenced MTL a year ago on my web site): Does MTL’s vision statement constitutes puffery or unacceptable marketing? Insurance laws require any information provided to consumers “shall be sufficiently complete and clear so that it is neither misleading nor deceptive, nor has the capacity or tendency to mislead or deceive.” Does MTL have any current and relevant documentation regarding its policies’ 10 year performance relative to the industry that justifies its presentation of its company goal as anything other than a pipe dream and Ra-Ra sales talk dreamed up by its executives to promote MTL’s sales? I contend that without such documentation MTL’s public expression of its goal is entirely disingenuous and misleading.

Specifically, has MTL ever finished in even the top 10 on 10 year historical performance? And furthermore, how significant is 10 year policy performance when its cash-value policies have been sold to be lifelong assets? My recollection from old Best’s Review reports on the subject is that MTL in 20 year historical performance reports would typically finish in the bottom 20% of the relatively few insurers that Best’s actually reported upon. Moreover, does MTL possess the investment management capabilities, underwriting expertise, operational scale and efficiencies to have any realistic chance of ever finishing in even the top 20 of all life insurance companies in 10 year policy performance in 2021? While I am glad to have discovered that MTL has recently removed its “silly–talk” goal from its web site, I am still able to reference its previously posted words. In fact, I now contend that MTL’s removal of such constitutes an implicit admission of such words capacity to mislead and deceive consumers. (So, thanks again for reminding me of my prior mention of MTL. And, oh, by the way, who were your IMSA auditors? While I’m not surprised that your employee’s and your web-site’s misrepresentations made it past such fraudsters, perhaps some authorities who hadn’t previously realized the sham that IMSA has been [some apparently have not yet read my August 2010 letter to IMSA’s President posted in the articles above] will now be interested in speaking with such cracker-jack “compliance” auditors. Perhaps some claw-backs can be obtained from them as well. Wouldn’t that be sweet?)

In closing, I am sorry to have to inform you that I think executives like you actually maintain the life insurance industry’s age-old problems. You and your compliance officer peers throughout the industry not only fail to provide the necessary information that consumers need, but you also promote the illusion that your companies are law abiding and ethical. Any business maintained for generations upon inadequate product disclosure is fundamentally a business that facilitates misrepresentations. And knowingly facilitating such constitutes a patently-defective practice that is by definition inherently non-compliant; otherwise, compliance is meaningless. It is that simple. It is that obvious. It is you, Mr. Seneczko, you and the other duplicitous and/or ignorant compliance officers who do not function to truly promote compliance with genuine ethical practices and laws, but who fundamentally serve just to safeguard your employers from actually getting convicted of all the white collar crimes in which they and their associates engage that have prevented life insurers from becoming widely regarded as a reputable industry. Shakespeare said it very well, didn’t he, “Kill all the lawyers”? Admittedly, he exaggerated, dramatic speech permits such, and he used the professional title of his era. But the sentiment of Shakespeare’s sagacious observation is correct: many of those who are entrusted to uphold the law, compliance officers like you, are actually accomplices to crime. And so, again, I repeat my offer, if you’ll act as a Japanese executive, I’ll buy the sword.

Please know, of course, Mr. Seneczko, that while there is the need on vital issues to speak explicitly and unequivocally, I mean you no personal harm (specifically, despite the above reference to Hara-Kiri, no physical harm – added in the days after the horror in Arizona so that there can be no misunderstanding); the sword I would buy for you would be plastic. Possibly hard plastic! But plastic just the same. Life insurance executives, though, must finally begin in 2011 to take responsibility for their organization’s pervasive age-old misrepresentations. In fact, in doing so, you could actually be the first and become a genuine leader, and I would salute your ‘About Face.’ Wouldn’t that be something, a life insurance industry executive demonstrating the real leadership American consumers have always needed and deserved on the vital issues of product disclosure and ethical sales practices? Who knows, (since there certainly aren’t many mutual life insurers left in America, and none that have shown any real commitment to putting policyholders’ interests ahead of their commission-driven agents’.) if you and MTL effectively reform your operations to provide excellent value to consumers, there could be a good future for Mutual Trust Life.

Please do not hesitate to call me to discuss your thoughts; I will look forward to hearing from you and to MTL’s reply.

Sincerely,
Brian Fechtel, CFA, Agent & Founder of Breadwinners’ Ins.

PS Attention Consumers: Life Insurance Buyers Beware, Be Very Aware. To date, Product Marketing Materials Have Only Been Approved by Financial Regulatory Attorneys and Compliance Officers Who Have Repeatedly Demonstrated Their Ignorance or Willful Blindness.

Copies:
Dirk Kempthorne, President, The American Council of Life Insurers (ACLI),
Susan Voss, President, NAIC,
The executors of the recently euthanized Insurance Marketplace Standards Association (IMSA) – the foremost financial regulatory fraud in American history, founded and operated by a corporate attorney and a former insurance commissioner
and various regulators at the IL Division of Insurance, FINRA, and the SEC

Again, below is Mr. Seneczko’s letter of December 21, 2010 on behalf of MTL insurance Company, a member of the Mutual Trust Financial Group, NAIC member 66427.

Dear Mr. Fechtel:

We are writing to you in response to your email of December 17, 2010, at which time, you notified us of your concerns over an article written by Elizabeth Cicchetti in the National Underwriter.

We have since reviewed the article written by Ms. Cicchetti. While we disagree with your opinion of this article, it does not promote MTL products nor is directed toward MTL customers and thus, is not an MTL Insurance Company endorsed solicitation. As a result, we do not believe it would be appropriate for us to comment further at this time.

However, since this is not an MTL Insurance Company article, we hereby demand that you immediately remove any and all misleading references made about MTL Insurance Company from your website.

Sincerely,
John P. Seneczko, Compliance Officer

In some ways, this misrepresentation should not surprise anyone. The life insurance industry, after all, is built on misinformation and misrepresentations, and the regulators have never enforced the prohibitions against such. But, following the sales misconduct of the 1980s and 1990s, it is seldom that one currently sees such a blatant misrepresentation in print by a life insurer’s employee. Thank you, Ms. Cicchetti.

Contrary to Ms. Cicchetti, the annual expense of a whole life policy is not calculated by comparing the difference between the annual premium and the annual increase in cash-value. Ms. Cicchetti analysis constitutes a blatant misrepresentation. (For more information about the correct way to calculate the annual expense see page 7 of the “Policy Disclosure” article above, page 7 or examine Table 2 in the same article for an explicit example of a policy’s actual costs that proves the falsity in Ms. Cicchetti’s words.)

State insurance regulations require that information provided to consumers “shall be truthful and not misleading in fact or in implication…. and shall be sufficiently complete and clear so that it is neither misleading nor deceptive, nor has the capacity or tendency to mislead or deceive.” Misrepresenting a whole life policy’s on-going annual costs is a clear violation of this insurance regulation, although no doubt Ms. Cicchetti and Mutual Trust will try to explain their way out of this matter. Misrepresentations are an essential part the current sales practices of agents because there is nothing about whole life that justifies the excessive sales compensation that the industry and its agents have always extracted from consumers. Whole life is nothing but term insurance and a tax-advantaged side-fund. Consequently, to hide its huge sales loads agents routinely need to make misrepresentations. Despite histories of feckless enforcement, it will be interesting to see what Mutual Trust Life’s compliance department and the IL Department of Insurance will do regarding this black and white misrepresentation. Copies of this email have, of course, been sent to these parties, but feel free to forward it to your own state insurance regulator.

It will also be interesting to see what consumer organizations, plaintiff attorneys, and financial journalists do with this example of a blatant misrepresentation. While it troubles me to point out this additional fact, it must be noted that these groups, by not having provided good disclosure about policies, have allowed such misrepresentation to pervade the life insurance marketplace for generations. Fortunately, it does seem like these groups’ neglect of this pervasive problem is coming to an end, albeit slowly.

After all, Breadwinners’ Insurance has been providing the good disclosure of life insurance policies that consumers have always needed and deserved. However, until this disclosure is known about by all consumers, the multitude of misrepresentations in the life insurance marketplace will continue.

Again, Breadwinners’ Insurance is very grateful to Ms. Cicchetti and the National Underwriter Editor, Bill Coffin, for this early Christmas present and their apparently unwitting assist with Breadwinners’ Campaign to Fix the Life Insurance Industry’s inadequate disclosure and problematic sales practices.

For everyone else, there’s still time for consumer groups and financial journalists both to share-in this gift and to also provide their own gift to the Breadwinners’ Campaign to help America’s life insurance consumers.

15 Days Until 2011 – The Year in Which Good Disclosure Will Finally Come to All Life Insurance Consumers

Spread the News about Breadwinners’ Disclosure

With your help, Breadwinners’ Disclosure is changing the terribly sick life insurance industry.

Merry Christmas, Happy New Year, and Thank You, again, Ms. Cicchetti and Mr. Coffin!

As seen on the Late Show with David Letterman.

1) The regulators will never implement it.

2) The life insurance companies are categorically opposed to it.

3) Consumers don’t want it and wouldn’t use it. Many seem to think it is fun getting screwed.

4) It just can’t be done. IT IS ACTUALLY IMPOSSIBLE to provide appropriate disclosure of a life insurance policy.

5) Class-action attorneys, like almost everyone else, typically, don’t understand the product and its sales practices problems. And, unlike the tobacco litigation, states’ Attorney Generals haven’t provided the litigators with the downright fiscally-incompetent uncapped compensation.

6) Financial journalists, consumer advocates, and the regularly-quoted fee-only life insurance advisors don’t want it to happen because that would mean the end of their endless fun ridiculing the industry and its agents.

7) It shouldn’t be done. Life insurance agents need to make a living, and how would they if they couldn’t obtain the excessive compensation available from misrepresenting the advantages of whole life and other cash-value policies.

Northwestern has declared they will fire Agent Fechtel again. They fired him in 2008 after he proposed to the company’s Board it solve the company’s and the industry’s sales practices problems arising from inadequate policy disclosure, and Chairman Ed Zore has vowed, “I’ll fire Fechtel again and again if I have to. I don’t care that he’s not an agent of ours anymore. Fechtel has to be stopped.”

9) Agent Fechtel, Breadwinners’ Founder is really very afraid, terrified, of Mr. Zore and his corrupt cohorts; he stutters, “I’m g g going to cha cha change my career to become a ta ta tango teacher in Argentina or cycling trip leader in New Zealand.” While some may object to calling Mr. Zore and his cohorts “corrupt,” for the company manages many aspects of its business well, it is nonetheless corrupt to build a business on pervasive misrepresentations, and Northwestern and its industry peers have built their life insurance businesses on pervasive misrepresentations. Any skeptics can read the blog Tribute to Joseph M. Belth or the article “Misrepresentations.”

10)

Oh, NO! There’s not a 10th reason. Can you please provide one?

Because if not,

if there aren’t truly ten reasons why appropriate policy disclosure will never really happen,

then policy disclosure could possibly happen. Couldn’t it?

And, Oh My God, wouldn’t that be wonderful for America!?

Joseph Belth, Ph.D., is nationally recognized as being one of the foremost authorities on the life insurance industry. For over 40 years, he has been advocating policy disclosure and changes in sales practices on behalf of the consumer. He is Professor Emeritus of Insurance in the Kelley School of Business at Indiana University (Bloomington), editor of The Insurance Forum, author of Life Insurance: A Consumer’s Handbook, and winner of numerous awards over the years for his publications. Today, Breadwinners’ Insurance would like to pay tribute to him by sharing with all of you a few of his wise words. As indicated below, these quotes are largely taken from Professor Belth’s Insurance Forum (IF) articles over the years; as the life insurance industry has never addressed its fundamental problems arising from inadequate policy disclosure, these words represent his thinking to this day.

“The life insurance market is characterized not only by an absence of reliable price information, but also by the presence of deceptive price information. In my opinion, Mr. Chairman, the deceptive sales practices found in the life insurance industry constitute a national scandal.” First in February 1973 testimony before Subcommittee on Antitrust and Monopoly of the US Senate Committee on the Judiciary, repeated in IF many times over the years, i.e., IF 8/94 issue.

“There is a saying that nature abhors a vacuum. In many areas, including prices and rates of return, the absence of disclosure is an invitation for various types of deceptive information to rush into the vacuum. ….. [Consumers] are victimized by a variety of deceptive methods for portraying the price of the protection component and the rate of return on the savings component in life insurance.” IF 5/04 issue

“The solution to the problem of deceptive practices in the life insurance industry lies in disclosure, not in paternalistic regulation…..Three broad categories of disclosure are needed. First, life insurance companies should be required to disclose to regulators and the public how policy values are determined….Second, life insurance companies should be required to send an annual report to each policyowner including information about the price per $1000 of protection in the past year and the rate or return on the savings component. ….Third, life insurance companies and agents should be required to provide a prospectus at the point of sale, and the use of sales illustrations should be discontinued….The prospectus should explain all material risks associated with the proposed policy.” IF 8/94 issue

“Efforts to eradicate deceptive practices would be viewed as troublemaking behavior. Also, the practices are so widely used and so deeply embedded in the life insurance industry that many actuaries who try to do something would be treated as troublemakers.” IF 8/94 issue

“In the late 1970s, the staff of the Federal Trade Commission concluded, after careful study, that rate of return disclosure was needed. The companies did not just stifle the staff report; they mounted a successful effort to enact federal legislation barring the Commission from investigating life insurance without a request from Congress.” IF 5/04 issue

“One company executive told me that companies could not survive disclosure of yearly prices. I disagree. I think companies would prosper if price disclosure were routine. However, if he is right and I am wrong, and if companies cannot survive price disclosure, they should leave the business. Companies that can survive only by concealing the price of their product do not deserve to survive.” IF 5/04 issue

Professor Belth in November 1970 asked the chairman of the committee on professional conduct of the Society of Actuaries, “Is it the professional responsibility of the actuary to take positive action to eradicate deceptive practices, or is it the professional responsibility of the actuary merely to refrain from endorsing deceptive practices?” Belth continued, saying “In May 1971, the chairman of the committee wrote me that, after discussion ‘at length,’ the committee was unable to answer the question. After the shock wore off, I asked a friend who was a member of the committee to tell me what [had] happened. …. [Here is] the gist of his explanation: If the committee concluded it is the professional responsibility of the actuary merely to refrain from endorsing deceptive practices, the Society would become the laughingstock of professional organizations. On the other hand, if the committee concluded it is the professional responsibility of the actuary to take positive action to eradicate deceptive practices, the Society would condemn many members to being fired by their companies.” IF 8/94 issue

“Developments during the past 40+ years suggest that rigorous disclosure requirements will never be mandated by the state insurance departments. Industry opposition to such requirements is too strong. Nor do recent developments at the federal level offer any hope for consumers.” First stated in 1984 before a House subcommittee testimony at which time Professor Belth said 20 years; in IF 5/04issue reiterated comment, saying “past 40 years” and during our discussions this past year has reiterated these words, hence this landmark quote now reads “40+ years.”

“Some of those deceptive methods are used by advocates of cash-value insurance, and some of those deceptive methods are used by advocates of term insurance…..[Until appropriate disclosure] consumers will continue to be victimized by deceptive practices…..The time has come for the life insurance industry to confront deceptive sales practices and the risks being imposed on consumers.” IF 8/94

“Some life insurance companies construct their cash-value policies so that the agent can choose the amount of the commission….The companies should not have created such a conflict of interest for their agents.” IF 1/05 issue

“I have learned that companies do not merely fail to disclosure vital information. They often take strong action to prevent the disclosure of vital information. That is why I describe the life insurance industry as built on secrecy. Today I will provide examples of efforts by companies – and state insurance regulators – to prevent disclosure of vital information…..Yearly prices are so revealing that the companies took extraordinary action to prevent disclosure of the information. For example, in the early 1980s a committee of state insurance regulators concluded, after a careful study, that price disclosure was needed. The companies did not just stifle the committee report; the individuals primarily responsible for the preparation of the report lost their jobs. There were other heavy-handed actions, including unsuccessful attempts to have me fired by Indiana University.” IF 5/04issue

A Brief Personal Thought

In the early 1990s, after I had submitted my policy disclosure approach to Northwestern and was experiencing their actuaries’ attempts to kill it, I learned of Professor Belth’s pioneering and steadfast work over the then prior 25+ years, and sent him my approach. His letters greatly encouraged me, and started our long friendship. Throughout the life insurance industry’s sales practices scandals of the 1990s, I was fortunate to have enjoyed many hearty conversations with Professor Belth. His generous sharing of his industry knowledge and professorial manner, with both its didactic and humorous overtones, made for fascinating stories. I tried to learn all I could from him. While there are issues upon which – like any two people – we disagree, I without reservation recommend the entire 400+ month issues of The Insurance Forum as mandatory reading for every life insurance executive, director, and regulator. Moreover, for everyone, Professor Belth’s pioneering work is not only a fascinating study of modern American business and regulatory history, and not only has it made it easier for all others who champion the same and similar causes, but it can also be of great inspiration to all because of Professor Belth’s noble dedication.

Mr. Edward Zore, Chairman and CEO June 21, 2010
Northwestern Mutual Life Insurance Co.
720 East Wisconsin Ave.
Milwaukee, WI 53202

Dear Chairman Zore:

I am writing to invite you and your associates to visit my website, BreadwinnersInsurance.com. Since its launch in late March, my site has received many favorable comments. I very much welcome your and your associates’ thoughts, questions, criticisms, etc. on my views and information.

In particular, in light of New York’s imminent broker compensation disclosure regulation, I was wondering how the compensation disclosure information that Northwestern is preparing compares with the information provided in Table 3 of my Policy Disclosure: Press Release. Would you also please ask Chief Actuary Remstad and his team to review/assess the calculated annual costs produced by my Illustration Analyzer spreadsheet with Northwestern’s own internal numbers?

Also, could you explain why Northwestern is no longer an IMSA member? In many past annual reports to policyholders, you have touted Northwestern’s IMSA membership, stating, “For consumers, the IMSA designation indicates companies that have demonstrated a commitment to ethical marketplace conduct in the sale and promotion of life insurance and annuities.” IMSA has always advised consumers that because “..you want to be sure the company you choose is reputable and ethical. A good place to start is to look for the IMSA logo.” Is it no longer worthwhile to have IMSA’s endorsement? What has now changed that caused Northwestern to jump ship?

As you know, I have been a critic of IMSA since its inception in 1996, because despite its melodious sounding Golden Rule principles, its enforcement of such has always been a sham. In fact, during my July 2008 testimony at the NY State Department of Insurance Hearings on Compensation Disclosure I declared, “IMSA is a fraud.” Do you now agree, or is it that you recognize that IMSA’s principles, although unenforced, constitute a legal noose around Northwestern’s corporate neck virtually beckoning class-action attorneys, given the field-force’s pervasive misrepresentations? Indeed, when the chapter of our industry’s recent history is written, do you think that anyone will assert that IMSA, the brainchild of either a most duplicitous or absolutely incompetent group of corporate counsels, should ever have seen the light of day?

Please say hi to all my friends in the home office; their continuing notes and sentiments of support mean a lot to me. Although it has been disruptive to have been barred from attending Northwestern’s past two annual eastern regional meetings, perhaps your successor, President Schlifske, will find a way to make amends for such one day. Please don’t hesitate to call with any questions or concerns. I look forward to hearing from you.

Sincerely,

Brian Fechtel

PS A client, Full Name Replaced online with XXX, informs me that he recently exercised his term policy’s conversion option through the agent Northwestern assigned to service him after Northwestern had terminated my agent’s contract. XXX, however, was not sold a best-value, maximally-blended policy like Consumer Federation Advisor Jim Hunt and other fee-only advisers recommend. Could you please have this situation corrected for XXX or have Mr. Remstad’s team provide the information regarding potential maximum annual costs under the two alternatives (the sold blend vs. the maximal value blend) so that Steve and others could make a more informed decision? Also could you ask your compliance folks ( “The Gestapo” as they are known by some in your field force because of their unquestioning adherence to terribly misguided and in fact downright unconscionable rules) to explain how the policy sold to XXX complies with Northwestern’s rules of agent responsibility to serve the client’s best interest? Or, has Milwaukee also disavowed and discontinued this never-enforced rule when it dropped the IMSA charade?

Happy Summer, Ed. Perhaps, the fireworks that we all so enjoy on the Fourth of July may, if we’re lucky, continue all summer long in the life insurance industry.

Copies: State Regulators, IMSA’s President, Blog, and Northwestern employee friends

PS to Blog Readers Interested in Public Policy Issues What do you think of IMSA’s practice of allowing a life insurer to drop-out of IMSA after the insurer has advertised for 3 years (since its last IMSA audit) that it was in compliance with IMSA rules, and yet the insurer might not have been? For instance, what if the insurer’s (i.e., Northwestern’s) internal files are now so full of incriminating information that it could now never pass even IMSA’s flimsy audit, or if the insurer had simply begun violating IMSA rules shortly after its last audit (3 years earlier)? Have you ever heard of such an inherently faulty supervisory/compliance/certification system as IMSA’s that doesn’t demand members provide proof of compliance after they have claimed such? Isn’t this akin to allowing an athlete to claim an Olympic medal without submitting to the post-race urine/drug test?

The Appropriateness-for-Sale-to-the-General-Public Standard

Every product that obtains regulatory approval, and that is deemed salable to the public (from Rx drugs, to electronics to children’s toys, etc.), has passed some “suitability or appropriateness” test/standard. In the investment world, products are examined specifically for their suitability for sale to the general public and their suitability for sale to each particular individual purchaser is also evaluated. The word “appropriateness” is used here to apply the same type of analyses to insurance products, and yet to avoid any possible reader’s objection that “suitability” only applies to investment products. In approving insurance products for sale to the public, state insurance commissioners in essence declare that a policy is appropriate/suitable for sale to the general public.

While the appropriateness standard is not very rigorous, this easily-passed test nonetheless can provide an essential hurdle and an insightful perspective. After all, what if market data indicate that 60 percent or more of the individuals who are sold a particular life insurance policy wind-up being severely financially harmed by it, then how appropriate or suitable for sale to the general public is that policy? That is, should an insurer’s financial product that significantly harms more consumers than it helps ever be approved by the regulators for sale to the public? [see Endnote 1] Or, what obligations ought an insurer and its agents have to try to reduce such a product’s incredibly high harm rate?

Implications of Lapse Rates on Appropriateness

Currently-published life insurance policy lapse rates (often-cited by the industry’s lobbyists, the ACLI and NAIFA) are unfortunately based on each insurer’s total life insurance product line (term and cash-value policies combined into the one total rate.) Such total/combined lapse rates, however, are not very meaningful, given the very different financial implications of term and cash-value policies’ lapses. While the Society of Actuaries [see Endnote 2] has conducted studies of lapses with more detailed data from the relatively few insurers that voluntarily participate, its results are not available on an individual company basis. To calculate relevant lapse rates on specific companies’ cash-value policies, Breadwinners’ conducts a more thorough analysis of Annual Statement [see Endnote 3] Exhibit of Life Insurance data.

The large and often undisclosed and misrepresented upfront loads on most cash-value policies mean that these policies are unlikely to provide anything close to competitive or satisfactory value for purchasers if not kept for at least 20 years(Readers not familiar with the typical cash-value policy’s surrender values should see Tables 2, 4 or 5 in Policy Disclosure – Press Release). As shown below, actual lapse data on cash-value policies, however, plainly demonstrate that many insurers (and their regulators) have known, statistically speaking, that very few of their cash-value policies – policies purportedly sold to consumers as permanent/lifetime coverage – were likely to remain in-force for even two decades. Some insurers don’t even have 50% of their cash-value policies remain in force for 10 or 12 years, and given that the likelihood of lapsing is typically greater than average in the first few years, sometimes more than a quarter or a third of some types of policies (classified by size or some other characteristic) lapse within the first five years.

It is, of course, true that it is the policyholder who makes the decision to lapse the policy. But, again, when the data demonstrate that such lapses are common and pervasive, laying the responsibility for a lapse on the policyholder is hardly justified when statistically it was inevitable. Furthermore, when the financial performances of so many policies are so abysmal, a fact perpetuated for generations, if not centuries, by the industry’s inadequate disclosure practices (See NY Life’s Sy Sternberg’s and Northwestern’s John Keller’s statements. [hyperlink to paragraph 6 of Life Insurance: An Industry Built on Fraud), then there are at least a few serious flaws in the argument of blaming the policyholder for the lapse.

Data for four insurers provides some concrete evidence of the lapse problem. Insurer names and data have been slightly changed not to protect these fine corporations’ identities, which will possibly become publicized in future Congressional hearings, but to preserve, for the moment, Breadwinners’ proprietary data. Readers should be aware that these four insurers were chosen because of their actual well-known names and not because they have exceptionally-high cash-value policy lapse rates; the life insurers with truly exceptional high lapse rates on cash-value policies most likely make some of these company’s CEO’s beam with pride.

Do you think the NAIC should discontinue using the flawed Interest-Adjusted Indices as life insurance policy comparison measurements? (If any background on this subject is needed, please see Archive Documents “The Life Industry’s Policy of Confusion” and an American Academy of Actuaries’ 1992 Memo.)

F) Emphatically, YES. How many more reasons and years are needed for insurance commissioners to fulfill their duty to provide appropriate life insurance policy disclosure? (39.7%)

E) Yes, I suppose. (11.6%)
In contrast, votes counted in favor of retaining (that is, not discontinuing) the inherently-defective tool were as follows:

A) Definitely Not, No, Never. Although the indices are inherently defective, and were declared such by the American Academy of Actuaries in 1992, the life insurance industry should never abandon its problematic practices. (20.2%)

C) No. Although research has shown that agents and consumers do not understand nor use the indices, their continued use gives everyone a good feeling that the taxes collected to pay for life insurance commissioners’ salaries are, and have always been, very well spent. (13.6%)
B) No. Although the indices cannot be used to compare different “types” of policies, they must remain in use because there can’t possibly be anything better; for if there were, the innovative and consumer-concerned life insurance industry would have provided it. (10.2%)

D) Maybe, but let me first check with a local agent and his lobbying organization, NAIFA, because they proclaim to serve the consumer’s best interest and I know that they are always in the forefront of good reform. (4.7% )

Fortunately, this poll was supervised by an independent election committee (IEC) co-chaired by Katherine Harris, Theresa LePore, and former Associate Justice Sandra Day O’Connor – all, as readers recall, supremely experienced election officials from the 2000 US Presidential election controversy. They point out that although the industry complains and may challenge the poll, citing the inclusion of such phrases as “the industry should never change its problematic practices,” in its alternative choices for voters, that such statements are accurate and appropriate relevant information. They also defend their recording of all the “Maybe” votes as supporters of the status quo, and assert that, despite the large online voter turnout, there were no voting irregularities. They also have generously suggested that the election could be re-run if that would make the industry and the NAIC really happy, saying “The country should never have to endure another crazy court battle like Florida 2000.”

Breadwinners’ founder, Brian Fechtel, is apparently also willing to have the election re-run, saying that he “understands why the IEC technically had to award votes for A, B, and C as in favor of keeping the interest adjusted indices, but that undeniably many of those votes were cast in jest.” He continued, “If they want to re-run the election, the defective indices will be defeated 99 to 1.” Late yesterday, though, Breadwinners’ founder released the letter below so that voters who favor discontinuation of the indices could encourage the NAIC: 1) to accept the outcome of the vote, and 2) to begin work on the much more serious problems of pervasive misrepresentations in the life insurance marketplace. Printed below is the letter which he encourages others to personalize and send as they desire. Stay tuned for more details.

Shown in brackets [ ] are suggested choices and/or matters about which a selection is required.

[Dear/Dearest] Insurance Commissioner:
As you are no doubt aware, the American Academy of Actuaries in 1992 recommended use of the inherently-defective Interest-Adjusted Indices be discontinued; voters have recently seconded this rejection. Please explain why your department: 1) continues to require the use of this flawed analytical tool, and 2) fails to adopt appropriate policy disclosure along the lines called for by Professor Joseph Belth, BreadwinnersInsurance.com’s founder, Brian Fechtel, CFA, and others.

Given, however, that your department today is still requiring agents and consumers to use this defective tool, I would like you or one of your department associates to: 1) obtain [PICK-A-Number from 4 to 10, i.e. 6] policy illustrations for [amount of coverage, i.e $500,000] of coverage for an individual like me: [age] years old, and likely to receive coverage in the [best, second best, smoker, etc.] health class; and then 2) provide a written description of how I as a consumer should use the policies’ indices to inform and help make a possible purchase decision. Of the assortment of policies analyzed, please be sure that one of the policies is term, and another is a variable policy. Also, please explain how I might use the indices of the analyzed policies to compare with the indices of [pick a number from -3.21 to +2.97] on the in-force illustration I recently received on a policy I bought 10 years ago from my life insurer, an IMSA member that endlessly proclaims its support of fair economic competition and the golden rule. Isn’t my life insurer, and every other IMSA member, a wonderful company?

I also would like you to comment upon the Life Insurance Buyer’s Guide promulgated by the NAIC, and in particular to evaluate it with a grade-school letter grade (A to F). In doing so, please be sure to comment upon: 1) your Buyer’s Guide’s distinctions regarding types of life insurance, and 2) its omission of the tax advantages of cash-value policies, and the implications of such, and 3) any other contrasts with the draft of a new buyer’s guide advocated by www.Breadwinners Insurance.com.

Please call me with any questions. Thank you for your and your department associates’ work on this inquiry. I look forward to your reply with [baited breath, anticipated amusement].

Sincerely,
Your Forever [Admiring, Salary and Pension-Paying, Adjective of Your Choice] [Citizen, Subject, Slave],

PS If you’d like, please also share your thoughts regarding your fellow NAIC associate who 16 years ago proposed that life insurers improve illustrations by disclosing the policy’s annual rate of return as given by the formula: each year’s annual growth in cash-value divided by the annual premium paid in that one year. That’s right, that was the (pardon me for saying it, but it ought to be called what it is) Bozo formula the state regulator in charge of improving the disclosure of policies proposed at a May 1994 NAIC meeting. For details of such, see Regulators’ 1994 Hand-out posted in the Archives under Regulatory Incompetence at www.BreadwinnersInsurance .com. Please recall that the NAIC working group had promised to tackle the subject of policy disclosure after they fixed the industry’s sales practices of the 1980s and 1990s. With the NAIC these days currently revisiting the still unsolved illustration problem, it’s also obvious that you and your predecessors also failed to provide the promised and needed policy disclosure. Therefore, consequently, please be sure to tell your associates, that any who may now be inclined to offer ideas similar to that contained in their predecessor’s 1994 Handout, to leave their Bozo costumes, props, and ideas at home these days when they are supposed to be working for the American public.

PPS Oh, and if you find the “Bozo” comment objectionable, please understand that for decades you and your associates have not only failed to solve the fundamental disclosure problems in the life insurance marketplace, but you all have also failed to include any of the real critics with knowledge, experience, and solutions of the marketplace’s problems in your purported problem-solving working groups. In light of such, were not the seeds of the above admittedly-harsh, but unquestionably well-deserved rebuke regarding your organization’s Bozo-like performance sown by your predecessors’ own actions/inactions?

For many in the life insurance industry, such questions about policy replacement are heresy. Conventional thinking regarding whole life policies often runs along the following line: Don’t replace a policy bought 20 years ago because you couldn’t now get as low of a premium. A Prudential NY Times advertisement has stated, “In most situations the life insurance that you already own is your best buy.” Such misrepresentations or misconceptions are largely-irrelevant life insurance hogwash masquerading as financially-astute advice. The decision to keep or replace a policy primarily depends, not upon misleading premium comparisons and/or idiotic slogans, but upon a comparative financial performance assessment of policies/insurers.

For simplicity in this current example, let’s assume possible replacement of these insurers’ whole life policies would only be with other traditional cash-value policies. Consequently, then, the objective of this replacement assessment example is to find a policy that offers the prospects for the best future long-run combination of cost-effective internal charges and competitive compounding of one’s cash-values. In traditional cash-value policies, it is via such combined performance that the value of a policy’s death benefit is maximized.

Part 1 – Future Cost Assessment

Recently released data for a $250,000 Penn Mutual whole life policy issued in 1989 to a 45 year old male has been analyzed by BreadwinnersInsurance.com. It shows, based on Penn Mutual’s 2009 declared dividend rate of 6.34%, that the insurer’s current costs/thousand dollars of coverage (Costs/M$AR) for this insured (now age 64) were $18. Given that a currently-available competitive cost/M$AR for a healthy 64 year-old male is less than $10, significantly more attractive on-going mortality charges are available for Penn Mutual’s healthy long-time insureds of retirement ages. Recall that Penn Mutual’s current insureds’ future mortality costs may be largely “already set in stone” because Penn Mutual’s relevant future costs are based on its existing poll of insureds, which has resulted from the insurer’s sales and underwriting practices of the past 10, 20, and 30+ years. Also, there’s no evidence that the company’s experience on its 64 year-old insured males is a company anomaly. For such reasons, a life insurer’s past/current mortality performance is indicative of its future mortality performance (unless of course it begins using new business to subsidize old business, but that’s never really been a very popular practice in this sales-driven industry. And, as will be discussed in a future blog, it definitely does not appear to be Penn Mutual’s current strategy.)

Part 2 – Future Investment-related Performance

Another big issue to assess concerns Penn Mutual’s future dividend rates (a.k.a. investment returns passed through to policyholders) versus other insurers’ likely future dividends/returns. Everyone, of course, wishes he/she had a functioning crystal ball for such assessments of future investment performance; but, as everyone knows, no one does. Nonetheless, there are accepted due diligence procedures to making assessments about such.

Although investment-related advice admonishing that “past performance is not an indicator of future performance,” is often stated by agents, advisers and others when discussing cash-value life insurance, this admonition with respect to traditional whole life policies is belied by empirical data. Quite simply, recent past performance is indicative of near-term future performance because life insurers’ investment portfolios are not marked to market and change only slowly. The statistical likelihood that Penn Mutual’s dividend interest rate over the next 2 years climbs to 7.5% or falls to 4.5% is insignificant; it’s not going to happen. For non-variable life insurance policies, near-term future investment-related performance is closely correlated with current dividend rates. The implications of this fact are that policyholders can have greater confidence in making assessments and changes of traditional cash-value policies than they can have with respect to other investment-related decisions. That is, there is: 1) little likelihood that the replaced policy’s values would suddenly soar, and 2) little likelihood that an acquired traditional policy’s performance would suddenly plummet.

Decisions regarding cash-value life insurance policies should, of course, be based on long-term perspectives on likely future years’ performances. It is on such matters that the admonition regarding past performances has some validity. Historical performance, current financial holdings, and statements of investment principles/objectives are three commonly used methods to assess future performance. With respect to historical information, a comparison of Penn Mutual versus Northwestern shows that Penn Mutual has lagged Northwestern’s average dividend rate over the last 20 years by more than 70 basis points. Current financial holdings can be obtained from Penn Mutual’s annual financial statements and/or analysis of such. Obviously, in conducting a full replacement assessment, many other insurers and possible policies would be investigated. The upshot of this single comparative example is that Penn Mutual is unlikely to be an industry leader in either investment performance or financial strength ratings over the next 20, 30, or 40 years. Again, contrary to the life insurance industry’s conventional advice, there are clearly reasons to evaluate the replacement of old policies.

Part 3 – Transaction Costs

A final hurdle that must be cleared before a replacement is justified is the transaction cost. There are, of course, “no-load” or low-load life insurers such as TIAA and USAA, but more importantly, there are many ways to minimize sales compensation and other related set-up costs on many other insurers’ new policies. In general, if a policyholder (likely to have coverage in-force for at least another 15 to 25+ years) has the prospects of X% (i.e., 60%) lower future mortality charges and of earning Y% (i.e., ½%) percent more annually on cash-values, then a new policy that can be acquired for some Z% or less in initial costs could provide significantly greater long-term value. Again, the upshot of this example is to show that there can be very good reasons for healthy insureds to evaluate the replacement of old policies that are not performing competitively. (For less healthy insureds, the assessment obviously requires taking such into account, but even for some with minor health issues, a replacement assessment is seldom as cut-and-dried as the anti-replacement rhetoric would make one believe.) This is not to be interpreted as endorsing most agent-recommended replacements because such are typically based upon simplistic premium or illustration comparisons, rather than a real and thorough financial analysis. Evaluating the replacement of a policy involves obtaining good information, not life industry hogwash, nor fanciful illustrations.

Mutual Trust Life, MTL, a little Illinois insurer, touts itself as “The Whole Life Company,” and proclaims its company vision is “to place in the top five of all companies for ten-year historical performance.” To my knowledge, MTL has never even come near its happy-talk goal, and it may have about as much chance of ever achieving such as I have of being a top five contender to Mr. America. MTL’s 20th year’s performance on a $250,000 whole life policy issued in 1989 is quite similar to Penn Mutual’s. Specifically, it’s annual Cost/M$AR in 2009 for a 64 year-old male who bought coverage years ago is also approximately $18, and its dividend rate, which apparently varies across policies (that is, it is not uniform – a most “interesting” management practice) averaging in 2009 about 6.5%. So everything already discussed about the likely advantages to healthy insureds of retirement ages replacing old Penn Mutual policies seems equally applicable to Mutual Trust Life policyholders. Furthermore, despite its own blustery touting, MTL’s diminutive size will most likely present serious challenges for its long-term independent survival. In addition to the above analysis, MTL is being introduced to our readers in this report because this little Illinois insurer with its happy-talk vision and its huge, cross-state rival, State Farm, will be the subject of a future blog entitled: “The Battle of Two Illinois Life Insurers: Whose Whole Life Polices Are Worse?”

Concluding Thoughts

These three insurers, however, all deserve praise – if not for their whole life policies’ financial performance, then at least for these companies’ openness – or disclosing the financial performance of their 20 year old cash-value policies. Most other insurers, hundreds in fact, many with better known names, have failed to voluntarily and publicly provide 20 year historical data on their policies. It was, after all, the NAIC – The National Association of Insurance Commissioners –in the mid 1990s that deleted disclosure of policy performance data from insurer’s mandated, regulatory Annual Statements. Bravo, Commissioners, Bravo. There they go again, always endeavoring, as members of The Powers That Be, to preserve The Dark Ages for life insurance consumers. Life Insurance Consumers of the World Unite. You have nothing to lose but an abusive industry. All readers should request information on their cash-value policies so that they can evaluate their financial performance. To pay another annual premium without truly understanding your cash-value policy’s performance might otherwise be deemed a little masochistic. You’re certainly not a masochistic, are you? I didn’t think so.