UPDATE: FDIC Reviews Insurer Disclosures On Retained-Asset Accounts

Sheila Bair, the head of the Federal Deposit Insurance Corp., said her agency is reviewing the disclosures life insurers send to beneficiaries to determine if they mislead consumers about whether her agency backs their accounts.

Bair cited "potential confusion" by consumers as a reason for the review of the so-called retained-asset accounts. When a policy holder dies, some insurers put beneficiaries' funds into the interest-bearing accounts and send them checkbooks to allow them to drawn down the funds instead of sending a single check for the full amount of their payout.

At least some insurers have both their company's name and the name of a bank that acts as an intermediary on their checks.

"Public understanding of FDIC insurance and when and how our guarantee applies is of the highest importance to us," Bair wrote in a letter to Therese Vaughan, the chief executive of the National Association of Insurance Commissioners. The letter, dated Aug. 5, was posted on the FDIC website.

Disclosures reviewed by Dow Jones show the two largest life insurers, MetLife Inc. (MET) and Prudential Financial Inc. (PRU), currently tell beneficiaries their accounts are not FDIC-insured. Prudential includes the information in a letter to beneficiaries, while MetLife includes it in the first paragraph of its "customer agreement" and in a brochure it sends to beneficiaries.

"Based on our Legal Counsel's initial review of sample documentation from an insurance company to a beneficiary, we believe that consumers may mistakenly conclude that the RAAs are products offered by insured depository institutions and, further, that the RAAs are FDIC-insured accounts," Bair's letter said.

Instead of the $250,000 guarantee that backs FDIC-insured bank accounts, funds in insurers' retained-asset accounts are backed by state insurance guaranty funds. They typically offer protection of $300,000 or more.

Some critics of the accounts have questioned whether the state guaranty funds would back the accounts if an insurer failed, suggesting they could be considered separate from the insurer's other obligations to policyholders.

But Peter Gallanis, the president of the National Organization of Life and Health Insurance Guaranty Associations, said that assertion was false. State guaranty funds, he said, have in fact paid out on the accounts in the past.

He cited the failure of several companies run by financier Martin Frankel that were taken over by state regulators in the late 1990s as an example. Frankel was sentenced to more than 16 years in prison in 2004 after pleading guilty to 24 counts of fraud and racketeering.

"They were treated just like a death benefit," Gallanis said of the retained-asset accounts at insurance companies where Frankel played a role. "For our record-keeping purposes, RAAs are categorized as death benefit payments. There's no difference in our eyes."

Still, the NAIC has announced its own review of what and how insurers tell beneficiaries about the accounts, and plans a meeting of a working group to examine the topic at the organization's quarterly meeting in Seattle this weekend.

New York Attorney General Andrew Cuomo is among the officials who have said they are examining the accounts. He announced a "major fraud investigation" last month, and said insurers are pocketing "secret profits" by paying less in interest than they make by investing the funds.

Insurers targeted by Cuomo, including MetLife and Prudential, have said the accounts provide a valuable service to grieving beneficiaries who need time before making decisions about what to do with their payouts. The practice of offering the accounts dates back more than two decades.

Edolphus Towns (D-N.Y.) also said this week that the House Oversight and Government Reform Committee that he chairs is investigating the payouts after he learned that Prudential does not automatically deliver a lump-sum check to beneficiaries of deceased soldiers. Prudential runs the government's life insurance programs for soldiers and veterans.

Seperately, the head of the National Conference of Insurance Legislators on Thursday proposed that states adopt a rule requiring insurers to have beneficiaries opt in to the accounts instead of making them the default option.

Insurers typically pay rates on the retained-asset accounts akin to money-market accounts. Some guarantee minimums either when the policies are sold or when they're redeemed, meaning some companies currently have customers earning 3% or more, at a time when money-markets are yielding far less.

-By Erik Holm, Dow Jones Newswires; 212-416-2892; erik.holm@dowjones.com

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