UNCLAIMED LIFE INSURANCE BENEFITS (A) WORKING GROUP Saturday, March 28, :30 5:30 p.m. Phoenix Convention Center North Room 124 Street Level

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1 Draft: 3/17/ Spring National Meeting Phoenix, Arizona UNCLAIMED LIFE INSURANCE BENEFITS (A) WORKING GROUP Saturday, March 28, :30 5:30 p.m. Phoenix Convention Center North Room 124 Street Level ROLL CALL Julie Mix McPeak, Chair Nick Gerhart, Vice Chair Adam Cole Anoush Brangaccio Anne Marie Skallerup James J. Donelon Mike Rothman Bruce R. Ramge Roger A. Sevigny/Keith Nyhan Jeff Ubben Jill Froment Yen Lucas Joe Torti III/Elizabeth Dwyer Chlora Lindley-Myers Dan Schwartzer Tennessee Iowa California Florida Illinois Louisiana Minnesota Nebraska New Hampshire North Dakota Ohio Pennsylvania Rhode Island Tennessee Wisconsin AGENDA 1. Hear Stakeholder Testimony on Working Group Development of NAIC Model to Address Unclaimed Life Insurance Benefits Commissioner Julie Mix McPeak (TN) 2. Discuss Any Other Matters Brought Before the Working Group Commissioner Julie Mix McPeak (TN) 3. Adjournment w:\national Meetings\2015\Spring\Agenda\Unclaimed Life Ins Benefits WG.docx 2015 National Association of Insurance Commissioners

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3 Agenda Item #1 Hear Stakeholder Testimony on Working Group Development of NAIC Model To Address Unclaimed Life Insurance Benefits

4 Michael Lovendusky Vice President & Associate General Counsel Telephone March 2015 The Honorable Julie Mix McPeak, Commissioner Tennessee Department of Commerce & Insurance Chairwoman, Unclaimed Life Insurance Benefits Working Group c/o Jolie Matthews, Senior Health & Life Policy Counsel National Association of Insurance Commissioners Via RE: 2015 Spring National Meeting Unclaimed Life Insurance Benefits Dear Chairwoman McPeak & Members of the NAIC Working Group, You requested stakeholder testimony on three questions. The ACLI here responds. Yes, the NAIC should use the NCOIL model as a starting point for its modelling effort. Yes, if the NCOIL model is used, the ACLI will recommend the changes detailed in the document appended to this letter. Finally, one issue the ACLI would bring to the Working Group s attention regarding the NCOIL model in this writing is that the fuzzy matching provision should be deleted. Practical experience and empirical evidence from compliance with the insurance company settlements demonstrate to what extent fuzzy matching is cost-effective and reasonable. The ACLI is confident this point can be established should the relevant provision of the NCOIL model be considered. The ACLI and its member companies recognize the critical importance of the prompt and timely payment of claims. Regulators as well as customers are asking companies to be more proactive in paying claims and benefits today. ACLI will support new requirements for life insurer administration of unclaimed policy benefits and dormant retained asset accounts based upon reasonable and consistent standards which are triggered when the name and other sufficient identifying information of a person insured under a policy or owning a retained asset account appears in the US Social Security Administration's Death Master File. These new requirements may be satisfied if the insurer uses a third party database that is as least as comprehensive as the Social Security Administration Death Master File. In supporting this policy, the ACLI will seek appropriate provisions to allow companies to meet the new requirements over a period of time or through a phase-in. In addition, ACLI will seek accommodations for special forms of business. Life insurers adhere to the letter and spirit of all laws and regulations pertaining to unclaimed life insurance benefits. For more than 200 years, life insurers have been committed to keeping their promises to consumers who look to the industry for their financial and retirement security needs. In 2013, life insurance companies validated this commitment by paying $64 billion in life insurance benefits, and $1.5 billion in benefits from all lines of their businesses every day. Sincerely, Appended: NCOIL Model ACLI Enhancements (12/29/2014) American Council of Life Insurers 101 Constitution Avenue, NW, Washington, DC

5 Model Unclaimed Life Insurance Benefits Act ACLI Enhancements Updated version adopted by the NCOIL Executive Committee on November 23, Model originally adopted by the Executive Committee on November 20, ACLI Enhancements included December 29, Section 1. Short Title This Act shall be known as the Unclaimed Life Insurance Benefits Act. Section 2. Purpose This Act shall require recognition of the escheat or unclaimed property statutes of the adopting state and require the complete and proper disclosure, transparency, and accountability relating to any method of payment for life insurance death benefits regulated by the state's insurance department. Section 3. Definitions A. Account Owner means the owner of a retained asset account who is a resident of this state. B. Annuity Contract means an annuity contract. The term Annuity Contract shall not include an annuity used to fund an employment-based retirement plan or program where (1) the insurer does not perform the Record Keeping Services or (2) the insurer is not committed by terms of the annuity contract to pay death benefits to the beneficiaries of specific plan participants. C. "Death Master File means the United States Social Security Administration s Death Master File or any other database or service that is at least as comprehensive as the United States Social Security Administration s Death Master File for determining that a person has reportedly died. D. Death Master File Match means a search of the Death Master File that results in a match of the a Person s name and social security number or the name and date of birth of an insured, annuity owner, or retained asset account holder. E. Knowledge of Death shall, for the purposes of this section and [insert applicable unclaimed property code section], mean (a) receipt of an original or valid copy of a certified death certificate or (b) a Death Master File Match validated by the insurer in accordance with Section 4(A)(1)(a). F. Person means the Policy insured, Annuity Contract owner, annuitant or Account Owner, as applicable under the Policy, Annuity Contract or retained asset account at issue in this Act. G. Policy means any policy or certificate of life insurance issued in this state that provides a death benefit. The term Policy shall not include (i) any policy or certificate of life insurance that provides a death benefit under an employee benefit plan (a) subject to The Employee Retirement Income Security Act of 1974 [29 USC 1002], as periodically amended, or (b) under any Federal employee benefit program, or (ii) any policy or certificate of life insurance that is used to fund a preneed 1

6 funeral contract or prearrangement, or (iii) any policy or certificate of credit life or accidental death insurance, or (iv) any policy issued to a group master policyholder for which the insurer does not provide Record Keeping services. H. Record Keeping Services means those circumstances under which the insurer has agreed with a group Policy or Contract customer to be responsible for obtaining, maintaining and administering in its own or its agents' systems information about each individual insured under an Insured s group insurance contract (or a line of coverage thereunder), at least the following information: (1) Social Security number or name and date of birth, and (2) beneficiary designation information, (3) coverage eligibility, (4) benefit amount, and (5) premium payment status. I. Retained Asset Account means any mechanism whereby the settlement of proceeds payable under a Policy or Annuity Contract is accomplished by the insurer or an entity acting on behalf of the insurer depositing the proceeds into an account with check or draft writing privileges, where those proceeds are retained by the insurer or its agent, pursuant to a supplementary contract not involving Annuity Contract benefits other than death benefits. Drafting note: All other terms used in this Act shall be interpreted in a manner consistent with the definitions used in [Insert State Insurance Code]. Section 4. Insurer Conduct A. An insurer shall perform a comparison of its insureds in-force Policies, Annuity Contracts, and Retained Asset Accounts Account Owners against a Death Master File, on at least a semi-annual basis, by using the full Death Master File once and thereafter using the Death Master File update files for future comparisons to identify potential Death Master File Matches. matches of its insureds. For those potential matches identified as a result of a Death Master File Match, the insurer shall: 1. The insurer comparison of in-force Policies, Annuity Contracts, and Account Owners shall be conducted first to the extent that such records are available electronically and then using the most easily accessible insurer records for records that are not available electronically. 2. This Section shall not apply to Policies or Annuity Contracts for which the insurer is receiving premiums from outside the policy value, by check, bank draft, payroll deduction, or any other similar method of active premium payment within the eighteen (18) months immediately preceding the Death Master File comparison. 3. Nothing in this Section shall limit the insurer from requesting a valid death certificate as part of any claims validation process. 4. For those potential matches identified as a result of a Death Master File Match, or if an insurer learns of the possible death of a Person otherwise, then the insurer shall, within ninety (90) days of a Death Master File Match: a. complete a good faith effort, which shall be documented by the insurer, to confirm the death of the insured or retained asset account holder Person against other available records and information; b. review its records to determine whether the deceased Person had purchased any other products with the insurer; 2

7 c. determine whether benefits are may be due in accordance with the any applicable policy or contract; and if benefits are due in accordance with the applicable policy or contract: Policy, Annuity Contract or Retained Asset Account. i. use good faith efforts, which shall be documented by the insurer, to locate the beneficiary or beneficiaries; and ii. provide the appropriate claims forms or instructions to the beneficiary or beneficiaries to make a claim including the need to provide an official death certificate, if applicable under the policy, contract. 5. If the beneficiary or other authorized representative has not communicated with the insurer within the 90 day period, take reasonable steps, which shall be documented by the insurer, to locate and contact the beneficiary or beneficiaries or other authorized representative on any such Policy, Annuity Contract or retained asset account, including but not limited to sending the beneficiary information regarding the insurer s claims process, including the need to provide an official death certificate if applicable under the Policy, Annuity Contract or Retained Asset Account. 6. With respect to group life insurance, insurers are required to confirm the possible death of an insured when the insurers maintain at least the following information of those covered under a policy or certificate: (1) Social Security number or name and date of birth, and (2) beneficiary designation information, (3) coverage eligibility, (4) benefit amount, and (5) premium payment status. 3. Every insurer shall implement procedures to account for: a. common nicknames, initials used in lieu of a first or middle name, use of a middle name, compound first and middle names, and interchanged first and middle names; b. compound last names, maiden or married names, and hyphens, blank spaces or apostrophes in last names; c. transposition of the month and date portions of the date of birth; and d. incomplete social security number 6. To the extent permitted by law, the insurer may disclose minimum necessary personal information about the insured or beneficiary to a person Person or beneficiary who the insurer reasonably believes may be able to assist the insurer locate in locating the beneficiary or a person otherwise entitled to payment of the claims proceeds. B. An insurer or its service provider shall not charge any beneficiary or other authorized representative for any fees or costs associated with a Death Master File Search or verification of a Death Master File Match conducted pursuant to this section. C. The benefits from a Policy, Annuity Contract or a Retained Asset Account, plus any applicable accrued contractual interest shall first be payable to the designated beneficiaries or owners and in 3

8 the event said beneficiaries or owners can not be found, shall escheat to the state as unclaimed property pursuant to [Cite state statute for escheat or unclaimed life insurance benefits]. Interest payable under [cite insurance code statutory interest law] shall not be payable as unclaimed property under [cite state statute for escheat of unclaimed life insurance benefits]. Drafting note: Some states insurance commissioners may want to develop an informational notice that apprises beneficiaries of their rights to the payment of interest on the benefits or proceeds of a life insurance policy or retained asset account. The written notice should be provided by a life insurer to a beneficiary prior to or concurrent with the payment of any life insurance proceeds or the settlement of any life insurance claim, where applicable. D. An insurer shall notify the [Insert the state agency for unclaimed property] upon the expiration of the statutory time period for escheat that: 1. a Policy or Contract beneficiary or Retained Asset Account holder has not submitted a claim with the insurer; and 2. the insurer has complied with subsection A of this Section and has been unable, after good faith efforts documented by the insurer, to contact the Retained Asset Account holder, beneficiary or beneficiaries The department of insurance may adopt such rules and regulations as may be reasonably necessary to implement the provisions of this section. E. Upon such notice, an insurer shall immediately submit the unclaimed Policy or Contract benefits or unclaimed Retained Asset Accounts, plus any applicable accrued interest, to the [Insert the state agency for unclaimed property]. The commissioner may, in his or her reasonable discretion, make an order: 1. Limiting an insurer s Death Master File comparisons required under subsection A to the insurer s electronic searchable files or approving a plan and timeline for conversion of the insurer s files to electronic searchable files; 2. Exempting an insurer from the Death Master File comparisons required under subsection A or permitting an insurer to perform such comparisons less frequently than semi-annually upon a demonstration of hardship by the insurer; or 3. Phasing-in compliance with this section according to a plan and timeline approved by the commissioner. F. Failure to meet any requirement of this section with such frequency as to constitute a general business practice is a violation of [Insert State Unfair Trade Practices Statute]. Nothing herein shall be construed to create or imply a private cause of action for a violation of this Section. Drafting note: Some states Unfair Trade Practices statutes specify that an act must be shown to be a pattern or general business practice in order to constitute a violation of that statute. In those instances, care should be taken in the adoption of this model to ensure consistency across those two statutes. 4

9 Section 6. Effective Date This Act shall take effect no less than one year after the date signed into law. Drafting note: To address other concerns with transparency and accountability in life insurer procedures relating to treatment of retained asset accounts, please refer to the NCOIL Beneficiaries Bill of Rights, which requires extensive written disclosures to consumer and insurer reporting. 5

10 TESTIMONY PRESENTED BY JOHN CAMILLO TO THE NAIC UNCLAIMED LIFE INSURANCE BENEFITS WORKING GROUP MARCH 28, 2015 Good afternoon, my name is John Camillo and I am the Senior Vice President, Government Relations, for the Kemper Life & Health Group. I would like to thank the Chairperson and members of this Working Group for undertaking a review of a very significant issue for the entire insurance industry. Today, you have asked for comments on whether this Working Group should use the NCOIL Model on Unclaimed Benefits as a starting point for the adoption of an NAIC Model and what changes, if any, should be made to the NCOIL Model. To answer those questions, I respectfully suggest that this Working Group should look at how the states have reacted to the NCOIL Model, various versions of which have now been enacted in 15 states. Basically you will see that all of the states have enacted most of the provisions of the NCOIL Model with two significant exceptions. The first exception is that five states, namely Alabama, Georgia, Mississippi, New Mexico and Tennessee, have rejected the Model s requirement to have life insurance companies match their in-force policy files against the DMF on a retroactive basis and instead have required that matching be done on a prospective basis, at least for those insurance companies that have not used the DMF asymmetrically. In addition, the Montana Insurance Department, because of constitutional concerns, has also interpreted its statute should only be enforced prospectively. Finally, in a lawsuit challenging the constitutionality of the retroactive requirements of Kentucky s Unclaimed Property statute, the Kentucky Court of Appeals, in a unanimous decision, held that the Kentucky statute unlawfully changed a material provision in existing insurance contracts and therefore could only be applied prospectively. Taking a look at the current legislative session, the rejection of retroactive matching requirements continues with prospective statutes being introduced in Utah, where the bill has been passed in both houses and is on the way to the Governor for signature as well as Arkansas, North Carolina and Oklahoma. Also, Senator Travis Holdman, the current Vice President of NCOIL, who sponsored a retroactive bill that was enacted in Indiana last year, is now sponsoring an amendment to his own statute to make it prospective.

11 The rejection of retroactive matching requirements is consistent with every court decision to date holding that an insurance company has no legal obligation to match its in-force life insurance policies against the DMF or any similar data base. Also as is pointed out in the white paper put out by James M. Carson and Robert E. Hoyt, two leading economic experts on the insurance industry, copies of which have been distributed to members of this Working Group, legislation that forces small and medium-sized insurers, to conduct extensive and costly reviews of their existing in force policies, would impose substantial expenses on a segment of the insurance marketplace that increases competition and provides access to life insurance to many consumers, particularly at the lower economic levels. The second exception to the NCOIL Model relates to its so-called fuzzy matching criteria that was inserted into the model during the last NCOIL meeting. Many states have rejected fuzzy matching criteria because of the significant costs that it adds to the matching process, by increasing the number of false positive matches, with very little benefit to consumers. Even the ACLI no longer supports fuzzy matching criteria. Finally, this Working Group should take a look at what has been happening here at the NAIC. As you know there is a Task Force on Unclaimed Property, led by Commissioner McCarty of Florida, that has been investigating the top 40 life insurance companies which allegedly were involved in asymmetric use of the DMF. Approximately 17 of those companies have entered into settlement agreements requiring them to search the DMF on both a retroactive and prospective basis. However, even Commissioner McCarty has acknowledged that those life insurance companies that have not used the DMF asymmetrically have done nothing wrong, and therefore those Companies, many of which do not even sell annuities, should not be penalized by being forced to match their inforce policies against the DMF on a retroactive basis. Based on the foregoing, I believe that this Working Group should attempt to put together a model that can uniformly be accepted by the states, as well as by both small and large insurance companies and, at the same time, honor the terms of existing insurance contracts. I respectfully submit that this goal can be accomplished simply by taking the existing NCOIL Model and by modifying it to be either fully prospective in nature or, at least, prospective for those life insurance companies that have never used the DMF asymmetrically, and by deleting the fuzzy matching requirements. Thank you for your time and I will be happy to answer any questions.

12 UNCLAIMED LIFE INSURANCE BENEFITS: PROPOSED LEGISLATION AND ITS IMPACT ON INSURERS, CONSUMERS, AND STATES March 4, 2015 James M. Carson and Robert E. Hoyt EXECUTIVE SUMMARY Some states have adopted, and several other states are considering the adoption of, legislation related to an NCOIL Model Act requiring life insurers to use the Social Security Death Master File ( DMF ) to identify deceased insureds. Following verified matches of insurer data with the DMF, insurers would then either pay death benefits to beneficiaries identified through this process or escheat those death benefits to states as unclaimed property. While some states have imposed such requirements on a prospective-only basis, other states have made such requirements retroactive, applying to new and to existing policies (consistent with the related NCOIL Model Act). This paper identifies and considers the financial implications of proposed legislation related to unclaimed death benefits and concludes that such statutes best serve the overall interests of consumers when implemented on a prospective-only basis. In particular, our findings suggest that proposed legislation related to life insurance-related Unclaimed Property Claims that is retroactively applied to all existing policies, while presumably well intentioned, would have a number of adverse consequences for consumers: First, such legislation may accelerate the payment of funds to the UPC accounts of the states, but will not lead to finding new funds. Second, since many of the largest insurers have already reached settlements, the magnitude of the remaining recoveries is rather limited. Third, by forcing many small and medium-sized insurers to conduct extensive and costly reviews of their existing policies in force, such legislation would impose substantial expenses on a segment of the insurance marketplace that increases competition and provides access to life insurance to many consumers. These insurers in the market improve competition and help to keep premiums lower and life insurance more available to broader segments of the population. Loss of these small and medium-sized insurers would tend to result in increased costs for consumers. James M. Carson, Ph.D., CPCU, CLU, ARM, is the Daniel P. Amos Distinguished Professor of Insurance in the Department of Insurance, Legal Studies, and Real Estate at the Terry College of Business, University of Georgia, Athens, GA jcarson@uga.edu. Robert E. Hoyt, Ph.D., ChFC, CLU, holds the Dudley L. Moore, Jr. Chair of Insurance and serves as Department Head for Insurance, Legal Studies, and Real Estate at the Terry College of Business, University of Georgia, Athens, GA rhoyt@uga.edu. The National Alliance of Life Companies encouraged an independent review of the issues surrounding unclaimed property by academics with knowledge of the insurance industry. The authors acknowledge support of this research from Kemper Insurance. 1

13 Financial Impacts of Unclaimed Life Insurance Benefits Legislation 2 Fourth, such legislation seems to assume that the matching process required for existing books of business is low cost and the DMF is the truth. As we point out, evidence suggests that the DMF is not error free and the error rate increases significantly for policies that have been on the books for many years. Data quality issues, as we discuss, are substantial for mature books of business and the validation process that is required, due to the significant rate of false positives, increases the costs significantly. Fifth, many observers have questioned the asymmetric use of DMF search strategies by life insurers for annuities in payout versus life insurance in force. We explain the differences between these two lines of business and provide evidence that is consistent with a reasonable business case for differential use between these two lines of business. Based on our analysis, we provide the following policy recommendations. Given the regulatory structure that insurers have operated under and the enhanced data collection and analysis capabilities that insurers now have, we believe it is reasonable to require insurers to comply with DMF search requirements on a prospective basis. This approach would allow insurers to assure their data collection procedures reflect the unique requirements posed by searches utilizing the DMF. We believe that a prospective-only focus would allow all insurers, but especially medium and smaller insurers, to adjust to these requirements without significant adverse disruptions to the insurance market or significant adverse impacts on consumers. INTRODUCTION In 2008, various state treasurers (e.g., California) began conducting unclaimed property audits of life insurers to determine if information in the Social Security Death Master File would enable insurers to identify deceased insureds with unclaimed death benefits that should be escheated to the states (California, 2013). In the course of these state audits, state treasurers identified what has been referred to as the asymmetric use of a national database by some insurers (Hartley, 2013). Based on the findings of the state audits, the National Association of Insurance Commissioners formed a related Task Force in The NAIC Task Force investigated some insurers use of the DMF for determining whether annuitants had died and therefore were no longer entitled to annuity income payments, while simultaneously not using the DMF for determining whether insureds with life insurance had died and therefore were entitled to life insurance death benefits (NAIC, 2011; and Scism and Vara, 2011). The combination of some insurers asymmetrically using the DMF and the related issue of unclaimed death benefits led to life insurers being broadly characterized as lawbreakers with statements such as, For decades, too many insurers have fleeced their policyholders, according to California s State Controller (California, 2012). The Controller went on to say, But by vigorously enforcing California s unclaimed property laws on the books since 1959 we are protecting consumers by pushing the insurance industry to fully honor their payment obligations.

14 Financial Impacts of Unclaimed Life Insurance Benefits Legislation 3 Although several court decisions subsequently have ruled that insurers are not required to search external databases in relation to the possible payment or escheatment of life insurance benefits (discussed later), many life insurers who had engaged in some form of asymmetric use of the DMF entered into settlements. In the settlements, these insurers voluntarily agreed to use the database to regularly check for deceased insureds just as they used the DMF to check for deceased annuitants and to escheat any unclaimed death benefits identified through that process (Walsh, 2012). Below, Table 1 identifies 21 mostly large life insurers, comprising more than 60% of the U.S. life insurance market (as measured by admitted assets, see A.M. Best, 2014), that have entered into multi-state settlements with state treasurers and state insurance regulators. Table 1 Life Insurer Claims Practices Settlements with Insurance Regulators and with Unclaimed Property Regulators Insurer Settlement Date with Unclaimed Property Regulators* Settlement Date with Insurance Regulators Upfront Payment for Market Conduct Exam Costs** 1. John Hancock (FL) Apr 2011 May 2011 $3 million John Hancock (CA) Apr 2011 Nov 2012 $15 million 2. Prudential Feb 2012 Jan 2012 $17 million 3. MetLife Apr 2012 Apr 2012 $40 million 4. Forethought Oct 2012 N/A N/A 5. Nationwide Oct 2012 Oct 2012 $7.2 million 6. AIG Oct 2012 Oct 2012 $11 million 7. Lincoln National Dec 2012 Nov 2013 $12.6 million Lincoln National (FL) Dec TIAA-CREF Jun 2013 Jun 2013 $6.2 million 9. ING Jun 2013 Aug 2013 $10.7 million 10. Transamerica Jun 2013 Sep 2013 $11.2 million 11. Genworth Jun 2013 Dec 2013 $1.9 million 12. Pacific Life Jun The Hartford Jun New York Life Jun 2013 Oct 2013 $15 million 15. Western & Southern Jun Symetra Jun 2013 Nov 2014 $1.2 million Symetra (FL) Nov Midland National and North American Co. Jun 2013 Nov 2013 $3.3 million 18. Aviva Jun 2013 Nov 2013 $4 million 19. Northwestern Mutual Jun Sun Life Nov 2014 Nov 2013 $3.2 million Sun Life (FL) Nov Allianz Life Ins N. Am. Dec 2014 Dec 2014 $4.7 million Note: * Typically no upfront exam costs are associated with settlements with unclaimed property regulators. ** While the Insurance Regulators did not assess fines in connection with the resolution of the market conduct examinations, the payment of exam costs appears to be proportional to carrier size and number of policies involved.

15 Financial Impacts of Unclaimed Life Insurance Benefits Legislation 4 THE NCOIL MODEL ACT ON UNCLAIMED LIFE INSURANCE BENEFITS In the midst of the NAIC Task Force investigation and the ongoing settlements, the National Conference of Insurance Legislators (NCOIL) proposed model legislation in 2011 (with subsequent revisions) to address the issues surrounding unclaimed death benefits. The NCOIL Model Act, known as the Unclaimed Life Insurance Benefits Act, is based in part on the settlements that were reached through the NAIC Task Force that requires life insurers to regularly (at least twice per year) compare the insurer s in-force life insurance policies against the Social Security Death Master File (or other similar database). The NCOIL Model Act is retroactive in that it applies to not only new, but also to existing life insurance policies, annuity contracts, and retained asset accounts. If the insurer detects a possible match between the insured s name, date of birth and/or Social Security Number and a person listed in the DMF, the NCOIL Model Act requires the insurer to take steps to confirm the death of the insured through other available information and to locate and contact the beneficiary within 90 days of a match. That is, under most statutes, the insurer has 90 days not only to validate the DMF match, but also to contact and mail claim forms to the beneficiary. For many of these beneficiaries, however, insurers often lack address information and will have to develop processes for attempting to locate these beneficiaries. Some states have adopted, and several other states are considering the adoption of, legislation that largely follows the NCOIL Model Act that requires life insurers to use the DMF to identify deceased insureds. As shown on the next page in Table 2, five states (AL, GA, MS, NM, and TN) have adopted legislation on unclaimed death benefits on a prospective basis, meaning that the law expressly applies only to policies issued after the effective date of the statute. Ten states (IN, IA, KY, MD, MT, NV, NY, ND, RI, and VT) are silent as to whether the legislation related to unclaimed life insurance benefits is prospective or retroactive. Where the NCOIL Model Act is silent, the language typically states that the law applies to all in-force policies, leading some state regulators to believe the Act applies retroactively. For example, in three of these states (IN, KY, and MD), the Insurance Department has taken the position that the related statute applies retroactively, and court challenges have been filed in these states. 1 THE REGULATORY AND LEGAL ENVIRONMENT In this analysis of life insurance and unclaimed death benefits, it is important to understand the regulatory and legal environment within which life insurers and the life insurance industry function. Insurance Regulation As alluded to above, life insurers and life insurance contracts are primarily regulated by the states, and this regulation includes regulatory authority over insurance contract language and standardized forms. Life insurance contracts are generally defined as conditional contracts. Black and Skipper (2000, p. 191) observe that the insurer s obligation to pay a claim depends upon the performance of 1 The Kentucky appellate court has declared the state s presumption against retroactive laws prohibits the retroactive application of the NCOIL law as this would alter the existing contractual relationship between an insurer and its insured. With respect to Indiana and Maryland, the courts have not yet ruled on whether the laws in those states may be retroactive.

16 Financial Impacts of Unclaimed Life Insurance Benefits Legislation 5 certain acts, such as payment of premiums and furnishing proof of death. The requirement for proof of death is well established in the business of life insurance for both operational and public policy reasons. Black and Skipper (2000, pp ) further state that, Life insurance policies understandably require due proof of the insured s death before paying the face amount. Table 2 Adoption of Some Form of Legislation on Unclaimed Life Insurance Benefits State Adoption Date Prospective Silent** Retroactive Alabama May 2012 X Georgia Apr 2014 X Mississippi Mar 2014 X New Mexico* Apr 2013 X Tennessee* May 2014 X Indiana Mar 2014 X ^ Iowa May 2014 X Kentucky Apr 2014 X ^ Maryland May 2012 X ^ Montana Mar 2013 X Nevada Jun 2013 X New York Dec 2012 X North Dakota Apr 2013 X Rhode Island Jun 2014 X Vermont May 2013 X Note: * Two states (NM and TN) have adopted prospective legislation that also requires retroactive application for those insurers who have asymmetrically used the DMF. ** Where the NCOIL Model Act is silent, the language typically states that the law applies to all in-force policies, leading some state regulators to believe the Act applies retroactively. ^ The Insurance Department has taken the position that the NCOIL statute applies retroactively. Life insurance contracts long have contained regulator-approved language that the insurer will investigate and pay a claim upon receipt of proof of death. These contractual terms requiring that the insurer receive proof of death imply an obligation on the part of the beneficiary or insured s estate to initiate the claims process. That is, responsibility for initiating the process for a death claim lies not with the insurer but with the beneficiary or the insured s estate. In this regard, with respect to state insurance laws and as a contractual matter, insurers historically are not bound to investigate whether an insured has died. 2 2 A number of recent court decisions have confirmed that insurers have no obligation to affirmatively search for evidence of an insured s death, including by performing searches of the DMF. See, for example, Feingold v. John Hancock Life Insurance Company (2013), Feingold v. John Hancock Life Insurance Company (2014), Andrews v. Nationwide Mutual Insurance (2012), W.V. ex rel. Perdue v. Nationwide Life Insurance Company (2013), Thrivent Financial v. State of Florida (2014), and Total Asset Recovery Services v. Metlife, Inc. (2013).

17 Financial Impacts of Unclaimed Life Insurance Benefits Legislation 6 Clearly the incentive to file a death claim lies with the beneficiary. The incentive to notify the insurer and file a death claim with respect to a life insurance policy stands in contrast to the lack of incentive to notify the insurer to cease annuity income with respect to an annuity. Once a claim has been filed, life insurance contracts include language that the insurer will pay interest on the proceeds (Trieschmann, Hoyt, and Sommer, 2005). Some states mandate that the insurer pay interest from the date when a claim is filed to the date it is paid, if that period exceeds 30 days. 3 Other states provide for the payment of interest from the date the insured died until the claim is paid. 4 Thus, once a death claim is filed, it is in the insurer s interest to promptly pay. In general, if no claim is made and the life insurance policy remains in force when the insured attains the mortality limiting age (the age at which the applicable mortality table assumes death occurs), the insurer then is required either to pay the policy proceeds to the insured or the beneficiary, or to hold the funds with accumulated interest. 5 The mortality limiting age sometimes is established by statute or is mandated by state insurance departments. Unclaimed Property Laws Consistent with insurance regulation and insurance contract terms, state unclaimed property laws (e.g., AR) historically have provided that life insurers have an obligation to escheat policy proceeds either where death benefits are unclaimed after the insurer receives proof of death or where the insured has attained the mortality limiting age but cannot be located. That is, unclaimed life insurance proceeds do not stay with insurers indefinitely (see Sullivan, 2011). Some state unclaimed property laws (e.g., VA) also require escheatment where the insurer learns of an insured s death even though the insurer did not receive a claim and proof of death from the beneficiary. Property escheated to the state does not become property of the state. That is, unclaimed property laws generally are custodial in the sense that the state takes custody of unclaimed property that has been escheated to the state until the property is claimed (if ever) by the rightful owner. Unclaimed property laws typically allow states to use a portion of the funds held in state unclaimed property accounts, so long as the state maintains adequate funds to satisfy claims of the rightful property owners who may appear. As noted in a report of the Legislative Analyst s Office, unclaimed property is the fifth-largest revenue source for the California General Fund (California, 2013). Most states do not pay interest on the funds held in unclaimed property accounts. For example, California stopped paying interest in 2003 on the value of unclaimed property in possession of the state. Some states, however (e.g., VA), pay interest if the property would be interest bearing in the custody of the holder. While state laws vary with respect to the payment of interest on unclaimed property, insurers do pay interest on life insurance proceeds. Thus, beneficiaries are disadvantaged by escheat in those instances 3 For example, AZ, AR, ID, IA, KY, ME, MO, MT, NE, NC, OK, SC, and WI. 4 For example, CA, CO, and NH. 5 This mortality limiting age in most cash value policies has traditionally been age 100. In more recently issued policies the age may be higher, such as age 120.

18 Financial Impacts of Unclaimed Life Insurance Benefits Legislation 7 where the beneficiary would have been entitled to statutory interest from date of death because most states, like California, do not pay interest on escheated funds. An analysis of state insurance regulation and unclaimed property laws (Hudson and Murphey, 2014, p. 4) indicates that neither set of rules imposes a requirement that insurers search for potentially deceased policyholders or otherwise accelerate the contractual claims process or the statutory escheatment schedule in the absence of a claim. COMPETITION AND THE INSURANCE MARKETPLACE Regulators and consumers rely on the competitive nature of the insurance market to help keep prices relatively low. Competition in the insurance market contributes to better prices and products being available to consumers (Hoyt, Dumm, and Carson, 2005). Competition forces insurers to charge prices that closely match the costs they face. In life insurance this not only includes core costs like mortality charges, but also costs imposed by regulation. Regulation or other requirements that threaten the ability of small and medium-sized insurers to continue operating or lead to consolidation in the industry can result in fewer insurers and less competition. Therefore, it is important to understand the competitive landscape of the insurance industry. In assessing the competitiveness of a market, Vaughan and Vaughan (1999) indicate that economists typically focus on market structure and market conduct as measures of competition. They suggest that important factors in assessing market structure are the number of competitors and the percentage of the market controlled by one or a few insurers. They suggest that market conduct is reflected by the ease of entry and exit into the market and changes in market share over time, which is also impacted by the regulatory environment. What does the evidence suggest regarding the relative competitiveness of the U.S. life insurance market? Perfect competition in the classical sense requires the following characteristics in the marketplace: (1) many buyers and sellers; (2) perfect information; (3) unrestricted entry and exit; and (4) a homogenous product. However, rarely does perfect competition exist. Even if all of these characteristics are not fully met, a market can be viewed as competitive. Number of Competitors (Insurers and Buyers) In the United States, hundreds of insurance companies compete for business (Carson, Dumm, and Hoyt, 2007). While differences do exist between the exact products offered by different insurers, a relatively homogenous set of insurance products are offered by these insurers including term life, permanent life, and annuities. A number of insurers have been in business for well over 100 years, but many insurers have formed in recent periods or have entered new markets. This confirms the relative ease of entry into and exit from the insurance business as compared to firms in capitalintensive industries like heavy manufacturing, pharmaceuticals, and energy production. The data suggest that historically the life insurance industry overall has been a highly competitive business, in terms of both the numbers of insurers and the products, services and prices they offer. In 2012, more than 800 life insurers were operating in the United States. The top 10 insurers in individual

19 Financial Impacts of Unclaimed Life Insurance Benefits Legislation 8 life insurance represent about 57% of the market, but the remaining 43% of the life insurance market is distributed across a large number of insurers of varying size. Many smaller and medium-sized insurers continue to exist and thrive in the insurance marketplace, adding substantial amounts of capacity to the market. In turn, these insurers help to increase competition, reduce prices, and increase availability of insurance to consumers. In terms of insurance buyers, data from LIMRA reveals that the life insurance industry has been able to reach most U.S. citizens. Sixty-two percent of all people in the United States were covered by some type of life insurance in 2013, according to LIMRA s 2014 Insurance Barometer Study. Market Share Characteristics The second factor that Vaughan and Vaughan (1999) consider in assessing the competitiveness of a market is the market share characteristics and the level of concentration. A commonly accepted measure of market concentration is the Herfindahl-Hirschman Index (HHI). It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers. The HHI number can range from close to zero to 10,000. In this context, by any accepted measure the life insurance marketplace is a very competitive one. The U.S. Department of Justice defines any market concentration score under 1,000 as unconcentrated. Unconcentrated markets are generally viewed as being more competitive. Based on data from A.M. Best (2014) for the ordinary life insurance market, the concentration score (HHI) in 2013 was 450. Thus, while not all of the characteristics for perfect competition are fully met in the insurance marketplace, most observers would conclude that the market for insurance is highly competitive. Given the value of competition to insurance consumers, it is important to consider the impact of any regulatory actions on the competitiveness of the insurance marketplace. In the next section, we consider some of the potential implications of retroactive DMF-search legislation on competition in the insurance market. IMPLICATIONS OF RETROACTIVE DMF-SEARCH AND THE INSURANCE MARKET As discussed earlier, several states have enacted legislation that requires insurers to search the DMF on a regular basis in order to identify deceased insureds with unclaimed death benefits. Given today s technology, it would appear that the costs of complying with these statutes are not unduly burdensome for policies issued after the effective date of the new legislation because insurers have much better data for these policies that is readily accessible through modern electronic databases. However, costs of compliance for legislation that is applied retroactively on existing in-force policies would be significant, as discussed below. In addition, such compliance costs were not contemplated in pricing of these in-force policies, and compliance for such existing policies is challenging and often impracticable. Thus, while there seems to be general agreement that such legislation is reasonable and appropriate on a prospective basis, the impact of legislation, if applied retroactively to existing (and especially older) policies, is an area of concern due to its potential cost implications for insurers and consumers

20 Financial Impacts of Unclaimed Life Insurance Benefits Legislation 9 (see O Connor, 2012). Below, we discuss various issues related to the proposed legislation on unclaimed death benefits, focusing particularly on implications stemming from retroactive legislation in the context of the insurance market. Quality of Records on Existing Books of Policies Understandably, many individuals are unaware of some of the data quality challenges faced with existing books of mature policies held by insurers. Prior to the early 1980s, most data processing was handled with the standard IBM punch cards that often contained just 80 columns. As a result, only critical data fields were collected electronically and in many cases information was abbreviated. Social security numbers were not usually collected until after the mid-1980s. Names were often abbreviated, full birthdate information was not routinely entered, and insurers often only captured the insured s age at policy issue. Prior to the 1970s, many insurers relied heavily on paper records. This pattern was even more pronounced in smaller and medium-sized insurers due to the high cost of data processing and data storage. These normal business practices of the past make data matching with the DMF for older policies difficult, costly, and much more susceptible to errors. Differences between Life Insurance and Annuities and the Asymmetric Use of the DMF Some observers have commented on the asymmetry of using the DMF to review benefits being paid on annuities but not doing the same on life insurance for unclaimed death benefits. Several differences are important to consider. First, contact information is readily available and recent for annuity business that is in payout mode because regular checks are being sent and collected, and the interaction with the claimant is recent and ongoing. Information such as social security numbers and addresses are available due to tax reporting requirements. In the case of life insurance, mature policies have data that is much older, less accurate, and less complete, and contact with the policyholder is much less frequent. Second, annuities in payout, on which some insurers searched against the DMF, represent a much smaller portion of the book of business than would be impacted by the proposed legislation on unclaimed death benefits from life insurance policies. Annuities in payout represent approximately 5% of the total book of business in force (based on 2013 data from A.M. Best, 2014). In life insurance, searches are required of the entire book of business. This is much more costly and more likely to result in false positives, especially for older policies that would be included in legislation that is retroactive. Third, in the case of life insurance, money is being held in trust by the insurer pending appropriate notification that payment under the contract should be made. In the case of annuities, payments are being made from policyholder funds. If insurers did not monitor the appropriateness of continued payouts on annuities, not only would it encourage fraud but it would be contrary to the interest of all policyholders and other stakeholders of the insurer (Colquitt and Hoyt, 1997). It would lead to increased costs for all other policyholders and would force the insurer to raise prices for its products going forward. Thus, while some insurers have been criticized for asymmetrically searching the DMF for matches in annuities but not for life insurance policies, the practice is based on practical, reasonable, legal, and sound business concerns.

21 Financial Impacts of Unclaimed Life Insurance Benefits Legislation 10 Duties in Life Insurance Contracts As discussed earlier, the insurer is obligated to pay a claim following the performance of certain acts by the policyowner / beneficiary / estate, such as payment of premiums and furnishing proof of death, and the requirement for proof of death is well established. Retroactive requirements to search the DMF for evidence of death of an insured among the insurer s entire book of policies would clearly be activity that was not anticipated at the time the policies were underwritten, priced, and issued. Thus, legislation requiring retroactive DMF searching would impact adversely on the financial strength of insurers and would adversely affect the insurer s policyholders and/or shareholders. Industrial Life Insurance and Small Face Value Policies It is important to recognize that insurers focus on different segments of consumers. While some insurers write primarily large face value policies, others focus on providing coverage through policies with much smaller face values. Historically, a significant portion of small face value life insurance policies were referred to as industrial life insurance. An insurance textbook (Trieschmann et al., 2005, pp ) states that industrial life, home service life, or debit insurance, refers to a type of cash value life insurance that is sold in very small amounts, primarily to meet the burial needs of lowincome insureds. Due to insurance company financial reporting requirements, we are able to collect specific data on industrial life insurance. However, the analysis provided here would apply equally to other forms of small face value life insurance. Trieschmann et al. (2005, p. 330) further notes that because the face amount is so small, underwriting standards often are fairly liberal, and medical exams are rarely required. Similarly, the limited underwriting requirements frequently resulted in relatively limited information being collected by the insurer at time of issue (see also Colquitt, Fier, Hoyt, and Liebenberg, 2012). In the 1960s, approximately 98 million industrial life policies were in force, with approximately $41 billion in face amount of coverage. In Metropolitan Life s settlement with states, all of the policies at issue in the multistate settlement were... industrial life, which MetLife stopped selling in the 1960s (Walsh, 2012). Even today, however, some insurers, often small and medium-sized insurers, have industrial life insurance as part of their overall book of business. Also, as noted above, a number of insurers continue to provide other small face value life insurance to consumers and this coverage is important to many modest and low income consumers. While this line of insurance has continued to decline in significance relative to new issues, a large number of very small policies remain in force with insurers. Based on data from A.M. Best (2014), approximately 12 million industrial life insurance policies with a total face amount of coverage of approximately $11 billion remain in force in The average policy face amount was $904 for industrial life, which compares to an average policy face amount of $103,291 for ordinary life insurance. From these figures, if we assume a relatively fixed cost per policy of conducting a DMF search and verification process, this would mean that it is roughly 100 times more costly per unit of coverage to comply with retroactive requirements for industrial life insurance than for ordinary life insurance. Additionally, this cost estimate assumes that the quality of records between industrial life and ordinary