Insurance is an essential financial product intended to protect people and their property against significant financial loss. Yet unfair insurance industry practices can lead to consumer harm.
Insurance companies commonly use demographic factors to determine risk in setting rates, coverage, benefits, and eligibility. This can decrease availability and affordability. It can also reinforce discrimination. For instance, insurance redlining occurs when insurers do not offer coverage in neighborhoods with certain racial or ethnic makeups. Discrimination based on race or ethnicity is illegal. In addition, several states have also passed laws that ban or reduce the use of rate classifications based on age, gender, and marital status.
Because they are fast and relatively efficient to use, credit-based insurance scores are frequently used to help set premiums. Some people believe doing so harms people from historically disadvantaged racial and ethnic groups and people with low incomes. These groups on average have lower credit scores than the population as a whole, and these scores may overstate the actual risk.
Another area of growing concern involving older Americans is annuity sales. These products are sold as retirement investments. As sales have risen, consumers and regulators have reported instances of unfair and deceptive sales practices, particularly with respect to deferred annuities. According to the National Association of Insurance Commissioners, most states have adopted some form of its model suitability regulation for annuity transactions. In some of those states, suitability requirements apply only to individuals of a specified age, generally 65 and older. The terms used in annuity contracts may also be confusing. Insurance companies often use different terms for similar benefits under the contracts, which can make product comparison difficult.
Viatical and life settlement products are also a concern. Viatical settlement products are intended to enable people with terminal illnesses to obtain needed funds from their life insurance policies prior to death. Life settlement products involve healthy people who sell their whole life insurance policies when they no longer want them. Some of the settled policies are bundled into securities or bonds and sold in global financial markets. Policies for which a market has developed are typically whole life with a cash surrender value. These practices have the potential for fraud and misrepresentation for both the person who invests in the product and the person who provides the insurance policy.
Policyholders involved in these transactions are often unaware that selling their policies can limit their ability to obtain subsequent life insurance and can cause them to incur an income tax liability. Insurance companies are additionally concerned about strangers who buy (or originate) insurance policies on the lives of healthy older people with the intent to sell those policies. These transactions may pose risks for the life insurance marketplace and generally violate state insurable interest laws. People encouraging these transactions frequently give potential purchasers misleading information, including about how the premiums will be paid, to encourage them to consent to a policy.
Insurers have new tools and technologies to manage claims and costs. These practices can benefit consumers by keeping down the cost of insurance. Yet they can also be used unfairly. For example, life insurers have come under criticism for using the Social Security Administration’s death master file to end annuity payments when the annuitant has died but failing to use the file or other means to expedite payment of life insurance benefits.
Another product that can expose consumers to fraud is prepaid, or “preneed,” funeral insurance, which people buy to ensure that their specific funeral arrangements are carried out. The policies can cover such things as coffins, memorial services, cemetery plots, and headstones. Although such policies can be beneficial, the potential for scam artists and abuse exists (see also this chapter’s section on Other Consumer Protections— Funerals and Related Services). Similarly, consumers may encounter offers to pay for funeral expenses by assigning a life insurance policy to a funeral home or financial organization. This functions as a high-cost advance to pay for necessary and immediate expenses while family members wait for insurance proceeds. The costs and drawbacks of such a policy may not be transparent
UNFAIR INSURANCE PRACTICES: Policy
Eliminating unfair practices and promoting consumer protections
Policymakers should eliminate unfair, deceptive, or abusive practices in insurance. Policies should ensure consumer protections.
Insurance policy costs should accurately and fairly reflect the risks associated with the individual characteristics of each insured person.
Independent research should be undertaken in this area.
Information on risk-classification models used to set rates for personal lines of insurance should be made available to the public, and states should establish appropriate oversight of the third-party vendors of such models.
States should strengthen protections related to life insurance and life and viatical settlements.
States should require life insurers to use all reasonable means to locate the beneficiaries of life insurance policies.
States should pass laws regulating life and viatical settlements. Such laws should include requirements for licensing, record retention, and disclosures for both ends of the transaction. Such laws should not limit the authority of securities regulators over the secondary sale of life or viatical settlements as investments.
States should protect against unfair or fraudulent marketing practices. This includes taking swift, effective disciplinary action against unfair market practices and discriminatory pricing and service.
States should also require insurers to file replacement clauses with insurance regulators to help prevent the practice of churning policies.
State licensing and regulatory boards should monitor industry compliance with laws that address the marketing and offering of prepaid funeral insurance by funeral directors, cemeterians, and third-party salespeople.
Long-term care insurance providers should not use age-based practices that result in exorbitant or unfair pricing.
States should strengthen prohibitions against unfair and deceptive practices in the sale of annuity products. This includes equity-indexed annuities. States should implement needs-based sales requirements for all insurance products.
States should adopt a fiduciary standard of care for sales of annuities. At a minimum, they should put in place strong suitability requirements for annuity products that apply regardless of the purchaser’s age.
States should require and enforce effective and standardized disclosures. These disclosures should include information on the cost of insurance, financial strength of the insurer, and major terms and conditions of an insurance policy.
State departments of insurance should make credit-scoring models available to the public.