1 More Reason Life Insurers May Need Damage Control

Just last month, a settlement was reached between California and 11 insurance companies over unpaid life insurance benefits. Now, the New York Department of Financial Services has released its findings in a similar investigation. The result -- $1.1 billion in unpaid benefits to customers nationwide. Let's take a look at what the insurers were doing, how it may effect them going forward, and what it means for investors.

Double-check your work
The New York DFS found that insurers were not using a standard practice of checking newly reported deaths from the Social Security Administration's report in order to pay out benefits in cases where no claim had been made. The issue stems from some beneficiaries not being aware of a policy in the first place, not knowing how to file for the benefits, or simply not filing for the benefits altogether. But regulators believe the insurers should be able to use the provided information to identify and pay benefits on their policies since the practice is used on the other side of the coin -- insurers paying out annuity benefits to customers were checking the same file in order to identify a client's death and halt the recurring payments.

As a result of the nearly two-year investigation, New York DFS Governor Andrew Cuomo sought to address this double-standard by issuing legislation last year requiring that the master death file from the SSA be used in both instances of identifying current clients. 

Insurers paying up
So far named insurers -- American International Group (NYSE: AIG  ) , MetLife (NYSE: MET  ) , Hartford Financial (NYSE: HIG  ) , Genworth Financial (NYSE: GNW  ) , and ING (NYSE: VOYA  ) -- have all participated in righting the wrongs committed by the one-sided practice. In one instance, the DFS reports a single beneficiary in the Montauk community of New York receiving over $400,000 in benefits from the death of a policy holder in 2003.

Though the total amount due based on the NY investigation tops $1 billion, the split between the insurers involved is unclear. Based on the 2012 market share, MetLife may pay out the biggest chunk in death benefits:

Insurer Market Share % Market Share Rank
MetLife 9.98% 1
AIG 2.21% 11
Hartford 2.01% 14
ING 1.85% 15
Genworth 1.31 20

Source: NAIC 2012 Top 25 Life Insurers.

Why should investors care
Though the payouts may hit the insurers' bottom lines, it may be their reputations that sustain the greatest damage. With MetLife's commanding lead of the market (its closest competitor has a full 3% smaller share) it is certainly one of the biggest names in the segment. But if clients' confidence in the insurer's willingness to pay out benefits drops, the likelihood of adding new clients may be less. And with the market really looking for signs of revenue growth, the insurer's stock may take a hit as well.

For long-term investors, this may be just another blip in the insurance market's radar. But if reputation damage is any measure of how the stocks perform, you'll want to see if there's any backlash against the named companies. Otherwise, be on the lookout for any comments from the firms stating that they have adjusted their methods and will be complying with any new regulation that looks to squash the previously lopsided practices.

If life insurers aren't your cup of tea, property and casualty focused insurers may be the way to go. With solid companies selling at depressed prices consistently helping generations of the world's most successful investors preserve capital, minimize risk, and achieve long-term, market-trampling returns, it is no surprise that some strategies work better than others. For one such strategically focused company, read our free report: "The One REMARKABLE Stock to Own Now." Just click here to get started.



Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 15, 2013, at 9:47 PM, Mega wrote:

    Probably less than 1% of life insurance customers or potential customers have heard of these lawsuits, and an even smaller percentage care about it.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2532874, ~/Articles/ArticleHandler.aspx, 11/23/2014 7:27:54 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement