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Here We Go Again.

A growing controversy about how small-face-amount policies are sold and priced may pose the next public-relations challenge for life insurers.

Once again, some products sold by the life insurance industry are attracting the kind of attention that insurers would prefer to be spared. This time, surprisingly enough, the controversy involves the policy with a small face amount--a product that has been around for many years and one that, from the point of view of the companies underwriting it, is well accepted in the marketplace.

But with regulators turning up the heat on insurers and some lawsuits by policyholders already in the courts, the issue is one that the industry cannot ignore. Indeed, the way the industry responds to this challenge could show whether it has learned any lessons from the market conduct scandals that recently put life insurers through a long and costly exercise in damage control--an experience no one in the industry would like to repeat.

Regulators are asking some hard questions about the value of small-face-amount policies to consumers and the way they are sold and priced. The pivotal issue concerns the fact that total premiums paid on these policies can ultimately exceed the death benefit paid-- an imbalance cited in many of the lawsuits that have been filed against insurers. A working group of the National Association of Insurance Commissioners, after holding extensive hearings on the issue, has asked the industry to find a solution by June.

Although the lawsuits filed to date primarily target home-service writers, many of the largest life companies have substantial exposure from older blocks of home-service business in force and from more recently sold direct-response business. In addition to home service, the policies that could be affected include fraternal policies, direct-response policies sold in the senior market and preneed policies sold in connection with funeral planning.

When these various business segments are taken together, the problem could involve more than 60 million policies in force and at least 4 million new policies sold each year. For the most part, attention has been focused on policies with face amounts no greater than $5,000, although there is no firm definition of what size policy constitutes a "small" policy. A proposed home-service model act suggests $15,000 as the cutoff point.

What's all the fuss about? That's the question many insurers are asking, noting that many policyholders pay premiums on homeowners and auto policies and never have occasion to file a claim. The potential imbalance between cost and benefit, they say, is not only actuarially possible but should hardly come as a surprise to the regulators that have been approving these policy forms over the years. Moreover, these policies serve a real need in the market.

Acting on the assumption that consumers need to be better educated about what they are buying, regulators appear to be leaning toward improved disclosure as a way to address the issue. Disclosure would be costly for insurers and cumbersome from a marketing perspective. Yet, unless the deadline for action is extended, disclosure would be more feasible than some of the more complicated solutions that have been suggested, which would take far more time to develop.These remedies include restructuring these policies into universal life-type contracts, setting minimum policy sizes and new risk-class standards, and making changes to commissions and pricing methods.

Some in the industry may resist the need for a "solution" when they don't see a problem. But here's where the lessons taught by the market-conduct experience should not be forgotten. Unless insurers can work with regulators to address the questions being raised about small-face-amount products, the controversy could well escalate from a public-relations perspective, resulting in another round of negative publicity that could do further damage to the industry's image.

This may be one time when it would be wise for the industry to cut its losses before they start to mount. This smoldering controversy, unwelcome as it is, gives the industry a chance to demonstrate that it is not only flexible enough to correct product deficiencies perceived by policyholders, but is willing and eager to do so. From that standpoint, it presents e industry means what it says opportunity to prove that hen it claims that the customer mes first. It's not a bad way to millennium.

Robert W.Stein, a Best's Review columnist, is chairman of Global Financial Services for Ernst & Young, New York.
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Title Annotation:small face-amount policies
Comment:Here We Go Again.(small face-amount policies)
Author:Stein, Robert W.
Publication:Best's Review
Article Type:Brief Article
Geographic Code:1USA
Date:Apr 1, 2001
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