Cedric E. Stephens, Contributor
Question: Is there a schedule set by law by which consumers can determine the correctness of life- insurance mortality charges - that is, the charge percentage, age, and per-premium-dollar paid?
- bcrequa@flowja.com
Answer: The short answer to your question is no. This was confirmed by three reliable sources. The first was my friend and life-insurance company actuary, Horace Johnson. He found the time to write me a 400-word paper about mortality charges - in refreshingly, very clear language - which is not the norm for persons working in the local insurance industry.
My second source was another young man with actuarial experience. He says that life insurers file mortality assumptions for new products with the Financial Services Commission (FSC).
Information about these assumptions is not supplied to the public. They are treated as secrets under Section 15 of the Financial Services Act.
Wide powers
My third source was the Insurance Act. FSC has wide powers under it. Section 44, for example, gives it authority to appoint an actuary other than the company's official actuary, "if it thinks necessary." The cost of the new actuary is "at the insurer's expense".
The law and the regulations do not say that the public has any rights to the actuarial information or to the bases on which life insurance charges are set.
Not even doctors can say with any accuracy when a particular person will die. In a large group, however, death occurs with statistical regularity. In other words, it can be predicted fairly accurately.
The life-insurance industry came into being after that discovery. Experts, called actuaries, built life or mortality tables. The tables show for a person at each age, what the probability is that they would die before their next birthday.
Men and women have separate mortality tables. Their mortality rates are different. Lifestyle, occupation and other things affect mortality. It is the job of actuaries to use mortality tables to help insurers price the cost of insurance.
Johnson says: "The mortality assumption is one of the most important assumption parameters that drive the design of a universal life product. It forms the basis of the mortality charge which represents the cost of insurance protection."
That charge is derived from tables, which are developed by overseas actuaries. It is adjusted as appropriate by the (local) pricing actuary to fit "the particular circumstances of the company".
While this sounds okay, I find the lack of transparency worrying.
Insurers and others in business are not paragons of virtue. They sometimes cook their books to boost earnings and inflate stock prices. For example, a jury in the US Federal courts recently found four insurance-company top executives guilty of fraud and conspiracy charges.
They worked with some of the biggest names in the US and international insurance industry. Those misdeeds occurred under the watchful eyes of regulators.
Regulators are not infallible
Regulators make other kinds of mistakes. This was evident in the £100 billion bail-out of mortgage company Northern Rock by the United Kingdom government earlier this year.
According to TimesOnline (http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance), the chief executive of the Financial Services Authority (FSA), "admitted to MPs that the FSA's performance (in relation to Northern Rock) were unacceptable and that there were failings."
The FSA regulates banks, insurers and other financial services companies in the United Kingdom.
Johnson says: "It is possible for an individual to determine or verify the mortality charge deducted in any given policy year by obtaining the mortality-charges rates applicable to that product."
His statement was made in the context of filings (by insurers) with the FSC. I guess this means that his company will not provide that information to an interested consumer like you.
The inference is clearly that the FSC will supply it. On the other hand, the regulators consider that information a secret. So, we are back to square one. Consumers will have to use the market to find out if they are paying too much for life assurance.
Insurance regulators in many US states supervise the insurance rate-making process. They do this on behalf of consumers.
At times, they deny insurers' requests for rate increases. Local regulators are totally hands-off when it comes to rate making.
The FSC, in my opinion, needs to find a blend between the 'pro-consumerist stance' of its US counterparts and the more orthodox role it has been playing since 2001.
That process can start by getting a better balance between Section 15 of the Financial Services Act and the aims of the Access to Information Act.
Cedric E. Stephens provides independent information and advice about risk and insurance. For free information or counsel, email Mr Stephens: aegis@cwjamaica.com
