The Insurance Industry Is Getting the Shirley Sherrod Treatment

In early July, the news industry and a number of politicians and government officials grossly over-reacted to an out of context news-bit in the case of Shirley Sherrod. The blowback was justified, and swift.

On July 28, it happened again. The news industry and a number of politicians grossly over-reacted to another out of context news-bit. This time it was death benefits’ insurance payments. The blowback is equally justified–but is nowhere to be found.

The reason is simple: Shirley Sherrod was a good woman maligned, and all it took was a few more minutes of video to prove it to anyone’s satisfaction.

By contrast, the insurance industry has no face to connect with the public, and their reputation is hardly warm and fuzzy. 

But since when should the reputation of the victim be allowed to justify bad behavior on the part of the press and the government?

The lessons should be the same. The reputation of the victim shouldn’t justify different treatment by press and politicians. The orgy of bombastic claims, the piling on of politicians and media alike are just as ugly and threatening to a free society as they were in the Sherrod case. 

Distortion and uncritical use of reports are an abuse of trust, regardless of target, and regardless of your politics. 

How the Press and Government are Reprising the Shirley Sherrod Mistake

It started with Bloomberg Markets Magazine on July 28. The headline was Duping the Families of Fallen Soldiers. That headline suggests a fraud; it suggests a particular class of victim; and it suggests an emotion-laden issue (fallen soldiers and greedy financiers).

The first paragraph then continues this three-part theme of fraud, victims and outrage:

"Life insurers are secretly profiting from death benefits owed to the survivors of service members and other Americans."  

The story then goes on to tell the sad story of the mother of a soldier killed in Afghanistan, who received a package, including what she thought was a checkbook, and who didn’t notice a disclaimer in the explanation. She was then “shocked” to find out her money wasn’t in an FDIC-insured bank.

Before I list everything wrong with this opening, let’s look at how politicians reacted:

The House of Representatives introduced a bill to set new rules for life insurance companies holding death benefits from policies of military…

Andrew Cuomo began an investigation, saying

“It is shocking and plain wrong for these multinational life insurance companies to pocket hundreds of millions in profits that really belong to those who have lost family members,”

The Department of Veterans Affairs says it will begin an investigation;

Defense Secretary Gates pledged help to assist the VA’s investigation;

“It’s disgusting, particularly in the case of dead soldiers, for insurance companies to be holding back” money from survivors, said Robert Hunter, Director of Insurance for the Consumer Federation of America.

“… insurance companies…profiting inappropriately from these service members’ sacrifice is completely unacceptable,” [said] Mike Walcoff, acting undersecretary for the VA’s Veterans Benefit Administration.

Senator Chuck Schumer says:

"It’s deeply troubling that insurance companies would promote these accounts as if they were run-of-the-mill checking accounts, yet the insurance companies profit from the interest, and provide no FDIC guarantee that the money itself is insured."

House Veterans Affairs Committee Chairman Bob Filner said he was “outraged."

The New York State Insurance Department pledged a review.

Even White House spokesman Nick Shapiro said President Obama “supports the VA’s immediate investigation" into the "unacceptable" practices.

What about the press?

Unlike the Sherrod case, where the left wing media gleefully jumped on Fox News, here they grabbed their own pitchforks. Mother Jones talked about Wall Street’s Dead Soldier Problem, calling it a scam.

Mainstream media? Here’s the CBS evening news preview: “A Fallen Hero: How an Insurance Company Profited.

"The consensus is in: there is massive fraud being committed by major insurance companies; the victims are the bereaved families of our fallen military heroes; and the ill-gotten gains, as well as the damages, are massive.

And what’s John Q. Public to believe? You can sample the blogs and letters to the editor yourself, but here’s a typical one:

"Prudential is literally making money off dead soldiers. That’s sick. Seriously, have they no shame? Is there anything lower than that?"

 The only problem is—as it was with Sherrod—the headlines are far from the real truth. Very far.

The Real Truth: It’s Not about the Soldiers

The Bloomberg story, reported by David Evans, was headlined Duping the Families of Fallen Soldiers, and as I said the lead paragraph continued the theme. But the article itself contained hints of how wrong that was.

First, the practice in question is called “retained-asset accounts.” As the article itself says,

“retained-asset accounts have become standard operating procedure in an industry that touches virtually every American: There are more than 300 million active life insurance policies in the U.S.”

The article goes on to identify three firms that collectively manage over a million retained asset accounts. 

Now do the math. About 2.5 million people die annually in the US. There are somewhere over 1 million retained asset accounts. And the number of US troops killed in Afghanistan and Iraq since those two wars began is about 4,300. 

Contrary to what the article suggests—and regardless of what you think about our wars—the retained asset account story has almost nothing to do with soldiers. They look to account for somewhere under 5% of total policies.

Of course, “fallen soldiers” is just about as emotionally loaded as “reverse racism,” the concept that underlay the Shirley Sherrod debacle. And it worked just as well on knee-jerk politicians and journalists. But it’s not the whole story.

The Real Truth: It’s Not a Scam

As the insurance commissioner of the State of Connecticut says, “[this] practice has been in place for at least twenty years, with 0 complaints or problems reported in Connecticut.”

Two life insurance analysts at FBR Capital Markets say:

"Accounts that life insurers offer to set up for beneficiaries are a long-established product feature that is optional for consumers, who can choose to take a lump sum in cash instead, the analysts said.

In fact, the practice is the essence of what insurers do everyday, they added.

The bereaved mother at the heart of the story, Ms. Lohman, “believed that” her insurance monies were in a bank, and were FDIC-insured. Quoting the article, “The company’s letter omits that the money is in MetLife’s corporate investment account, isn’t in a bank and has no FDIC insurance.”

Unfortunately, Ms. Lohman “believed” wrongly if she thought “Prudential” was a bank, and that its funds were FDIC-guaranteed. Mistaken beliefs are not a surprising thing when one has lost one’s child. 

But that’s precisely the reason behind retained asset accounts: it saves you from dealing with the complex emotional reality of a check received around the same time as the funeral of the person whose death caused you to get the money. Who among us thinks right at such moments? The validity of the accounts is they let you defer an important decision until you are ready to deal with it, and offer some nominal interest in the meantime.

As to the “omission” about FDIC insurance, the letters also “omit” that they are not insured by Warren Buffet, or Jimmy Buffet, or the local buffet restaurant. Of course they’re not—they’re guaranteed by the insurance company (and often to levels much higher than the FDIC guarantees).

The Real Truth: There’s No Ripoff

Most of the stories on this issue play on the emotional themes of dead soldiers and financial greed; the combination is as old as the villain in a novel. But in this case, it’s manufactured. Again, from the original article:

"Prudential paid survivors like Lohman 1 percent interest in 2008 on their Alliance Accounts, while it earned a 4.8 percent return on its corporate funds…’I’m shocked…it’s a betrayal,’ [says Lohman]

Ms. Lohman may have been shocked, but I can’t see why reporters from Bloomberg news should be. That’s a 3.8% spread on liquid funds. What does your bank make on your checking account balances?   For that matter, how much does your bank pay you on your checking account?

How about Prudential’s customers? Again from the original article:

Metlife spokesman Joseph Madden says his company’s customers are very happy with the Total Control Account. “The feedback from TCA customers has been overwhelmingly positive,” he says. “The TCA affords beneficiaries security, peace of mind and time to make an informed decision — while earning interest in the interim.”

The Real Truth: The Story Headlined Is Not the Real Story Here

The most you can say about retained-asset accounts is that they may unfairly use small-print.

Again quoting from the original story itself:

“Quite honestly, we deal with issues that our members want us to deal with,” says Michael Stevens, senior vice president for regulatory policy at the Washington-based Conference of State Bank Supervisors. “This is not one that has drawn their attention.”

Connecticut’s Insurance Commissioner has said, "I am committed to strengthening consumer awareness regarding this issue… I will not, however, overreact to a misinformed, sensationalized story that did not include all the facts.” He’s right. Regardless of what suspicions this story may have generated about state insurance commissioners, he’s right.

The original article hypothesized that, when people found out ‘the truth’ about these programs, there could be a run on the accounts, similar to a run on banks. I’ll have to defer to a financial expert here, but I find that comparison hard to believe. However, if it ever came true, I think you’d have to look not at the insurance companies but at articles like this for irresponsibly provoking panic.

And that’s what this blogpost is about. What happened with this article is not in principle different from what happened with Shirley Sherrod. An initial article, given a massively misleading headline (just as the Sherrod video was massively out of context), provoked knee jerk reactions in the media and in our politicians.

The issue here is not insurance companies. This story is about instinctive, knee-jerk, swaying-in-the-wind, irresponsible reactions by the press and by government officials. 

That’s two times in just one month. How many more times before they get it right? 

It’s simple. Check your facts; don’t repeat gossip; tell the whole story. 

Note: I emailed the writer of the original Bloomberg article, David Evans, about 30 hours ago, telling him of this blogpost, and linking him to my previous blogpost on the subject.  I wanted to make sure I got his perspective, as he’s clearly been researching this article for sometime, and I think has been busy with fielding it since its publication last week.  However, as of this posting, I have yet to hear back from him. If I do, I will happily repeat here anything he chooses to say. 

Who Can You Trust to Rake Muck if You Can’t Trust the Muckrakers?

Last week, some reporters at Bloomberg came up with a pretty aggressive headline: Fallen Soldiers Families Denied Cash as Insurers Profit.

National Public Radio was not far behind: their headline read: Life Insurance Firms Profit From Death Benefits.

Holy profiteering, Batman! Did BP pay Prudential insurance to kick them off the front page? This one is pretty juicy. You don’t get much lower than the bottom-feeding off the bereaved families of those who made the ultimate sacrifice for their country.

 As the NPR story puts it:

Survivors of service men and women are told they’ll get a $400,000 life insurance payout. They don’t. Instead, Prudential — which has a government contract to provide life insurance for military families — keeps their money.

And as Bloomberg further explained, in a story about mother Cindy Lohman:

“You can hold the money in the account for safekeeping for as long as you like,” the letter said. In tiny print, in a disclaimer that Lohman says she didn’t notice, Prudential disclosed that what it called its Alliance Account was not guaranteed by the Federal Deposit Insurance Corp., Bloomberg Markets magazine reports in its September issue.

Is That Really Muck You’re Raking?

Now, Trust Matters readers know that I have been more than occasionally critical of untrustworthy behavior in the financial services sector. But something about this one just didn’t feel 100% right to me. 

I contacted a close friend who is a financial planner. “Is this as bad as it sounds?” I asked.

“Not really,” she said. “Pretty much that’s what happens to everyone. Someone dies, they really don’t want the check showing up at the graveside service, or worse yet at a wake.   Most families prefer to separate decisions about the distribution of money from the events memorializing someone’s death.”

She continued, "It just feels wrong to bury someone and then deposit a big check that was triggered by that very death. Creepy, basically. So the insurance companies, at least the ones I’ve seen, send you something that says you can have the money whenever you want, meanwhile we’ll put it in an interest-bearing account. The interest rate may be well below market – the spread on funds is pretty much how insurance companies make their money in the first place — but it’s not unusual. And they’re not in any big hurry to send benefits out to civilians either, as far as I know.”

At this point, the plot wasn’t exactly thickening—in fact, it was sort of thinning, as far as I could tell. Further articles suggested that the insurance company was not in a big hurry to tell people that they could get their money quickly, or that the interest rate was low, and that some of their actions could be interpreted as acting like banks.  But this looked like a small print kind of issue, the sort of garden-variety obfuscation that we have come to expect from things like credit cards and insurance policies.

Bad? Sure, but suddenly all those headlines about veterans and the VA began to seem a little misleading. This wasn’t about the VA, or veterans, at all.  We weren’t getting the whole picture, I feared.

Well, Something’s Getting Raked

Meanwhile, things were popping. Suddenly NY Attorney General Andrew Cuomo was sending out subpoenas about the scam. Defense Secretary Robert Gates pledged to help the VA in its investigation. The VA itself had already gotten into the action. And of course, congressmen had a (predictably outraged) opinion. Finally, there’s talk of a class action lawsuit pending.

At this point, I was reminded of yet another sad tale in the news lately: that of Shirley Sherrod. The lesson there, if you’ll recall (I know it was way last week), was not to jump to knee-jerk conclusions about apparently valid information that turned out to be taken out of context.

Except the Sherrod story came from an avowed right-wing vigilante; this story comes from Bloomberg News. I continue to believe there’s a very, very big difference.

And yet: how to make sense of this? How could experienced reporters from a business network come up with a headline about veterans, loaded with trigger-cues, but with a backstory that said nothing unique about veterans?

The answer started showing up a day later—from another business-savvy outfit not known for its radical politics, the Wall Street Journal Marketwatch. Read for yourself:

Randy Binner and Kevin Barker, life insurance analysts at FBR Capital Markets, questioned the [death benefit] outcry on Thursday.

"We find the very sharp and rapid regulatory response to this surprising and apparently unfounded," they wrote in a note to investors.

Accounts that life insurers offer to set up for beneficiaries are a long-established product feature that is optional for consumers, who can choose to take a lump sum in cash instead, the analysts said.

In fact, the practice is the essence of what insurers do everyday, they added.

"Investing funds ultimately due to customers in the general account to earn a spread over what is paid out quite simply describes the business of insurance," Binner and Barker wrote.

How Much Muck Can a Muckraker Muck if a Muckraker Isn’t Raking Muck?

Seems to me the worst case financial story here is another depressingly familiar tale of low-grade small-print-itis by the insurance industry. Hardly great, hardly trustworthy behavior—but far from the next great scandal either.

The much bigger story, I fear, is another mainstream news source failing to put a story into context. 

I’m one who believes that incompetence offers a far better explanation for screwups than do conspiracy theories; this is not a Breitbart situation. Maybe the reporters just didn’t appreciate that what they were seeing was insurance-related, rather than veterans-related. Though for a business news organization, that’s not too great either. The big problem is, the results—lack of context—are in the same category as Andrew Breitbart.  

So now who do we believe?

A couple key disclaimers: I am not an expert in insurance, or in the workings of veterans’ affairs. I have not spoken to the Bloomberg reporter on the case. I could therefore soon have egg on my face, so I will be watching the weekend news reports with interest to see if there’s an angle I’ve missed, and if I owe a mea culpa I’ll be on it quickly.

But one thing makes me think my gut may be right on this: Prudential closed up strongly on both Thursday and Friday.  And whatever else markets do, I believe they price pretty well.