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. 

7 replies
  1. Louie
    Louie says:

    Well put Charles.  This administration has it’s target set on the insurance industry next. No doubt about it.  State run media just helping them out to fast track it.

    Reply
  2. Charlie (Green)
    Charlie (Green) says:

    For those of you troubled by the competing claims, I found the following to be very grounding.   It’s from a comment made on the CBS News website, one of many commenting on the issue:

    by WillyRC July 30, 2010 12:22 PM EDT
    This is much ado about nothing. I served in the Marine Corps for 29 years and saw several sad, but predictable, situations prior to 1999, where a survivor received a lump sum check and burned through the money in a few months. That is why the Department of Defense agreed to the "checkbook" method currently in use. It it also used by the Office of Personnel Management for civilians. If you really think it’s a good idea to hand a $400,000 insurance check (and a $100,000 death gratuity check) to an 18-year old survivor (or a 52-year old grieving mother as mentioned in the story), then go ahead and support the return to a lump sum check. I understand that the insurance company is investing the money it holds and turns a profit on it. I also know that the bank where a survivor deposits a check does the same thing. So long as the Prudential doesn’t default on their obligations, they have every right to keep their administrative costs down by investing the money they hold. Come on people, look at the whole picture. Casualty Assistance Officers tell every survivor that as soon as they get the "checkbook" they can cash it in. The smart ones also tell the survivors to resist the temptation to spend the money quickly. The "checkbook" method puts a little bit of a brake on the urge to spend.
    by WillyRC July 30, 2010 12:22 PM EDT
    This is much ado about nothing. I served in the Marine Corps for 29 years and saw several sad, but predictable, situations prior to 1999, where a survivor received a lump sum check and burned through the money in a few months. That is why the Department of Defense agreed to the "checkbook" method currently in use. It it also used by the Office of Personnel Management for civilians. If you really think it’s a good idea to hand a $400,000 insurance check (and a $100,000 death gratuity check) to an 18-year old survivor (or a 52-year old grieving mother as mentioned in the story), then go ahead and support the return to a lump sum check. I understand that the insurance company is investing the money it holds and turns a profit on it. I also know that the bank where a survivor deposits a check does the same thing. So long as the Prudential doesn’t default on their obligations, they have every right to keep their administrative costs down by investing the money they hold. Come on people, look at the whole picture. Casualty Assistance Officers tell every survivor that as soon as they get the "checkbook" they can cash it in. The smart ones also tell the survivors to resist the temptation to spend the money quickly. The "checkbook" method puts a little bit of a brake on the urge to spend.

    by WillyRC July 30, 2010 12:22 PM EDT

    This is much ado about nothing. I served in the Marine Corps for 29 years and saw several sad, but predictable, situations prior to 1999, where a survivor received a lump sum check and burned through the money in a few months. That is why the Department of Defense agreed to the "checkbook" method currently in use. It it also used by the Office of Personnel Management for civilians.
     
    If you really think it’s a good idea to hand a $400,000 insurance check (and a $100,000 death gratuity check) to an 18-year old survivor (or a 52-year old grieving mother as mentioned in the story), then go ahead and support the return to a lump sum check.
     
    I understand that the insurance company is investing the money it holds and turns a profit on it. I also know that the bank where a survivor deposits a check does the same thing. So long as the Prudential doesn’t default on their obligations, they have every right to keep their administrative costs down by investing the money they hold.
     
    Come on people, look at the whole picture. Casualty Assistance Officers tell every survivor that as soon as they get the "checkbook" they can cash it in. The smart ones also tell the survivors to resist the temptation to spend the money quickly. The "checkbook" method puts a little bit of a brake on the urge to spend.
    Reply
  3. James A. Boyd
    James A. Boyd says:

    Charlie, looks like you need to add journalism schools to your outreach.  Maybe a class on trust and all of its ramifications is in order.  You could design the curriculum.

    Make it a great day.

    Jim.

    Reply
  4. Charlie (Green)
    Charlie (Green) says:

    I’m going to keep following this story (a Bloomberg story about the insurance industry being  responsible for "Duping the Families of Fallen Soldiers.")

    The reason: it is a scary example of the power of media to influence mass opinion–even when the underlying story appears to be very wrong.  We saw this first in the case of Shirley Sherrod; this is another case, even scarier because it takes just a tad more investigation to uncover the flaws in the story.

    In the last few days, those other parts of the story have begun to emerge.

    1. A Wall Street Journal story says the issue has come to court ten times in the past years, and not once has anything wrong been found.  I don’t mean the insurance companies got away with something narrowly ‘legal’ but wrong: I mean quotes like the following from a judge:

    • "What am I missing here?" one judge asked in court before dismissing a complaint. "Your client has the ability to get all of her money from day one."

    2. In the Cincinnati Enquirer’s "A Rush to Judgment on Death Claims," a financial planner writes, "Here’s what hasn’t been reported in this case"and then proceeds to lay it out.

    3. Most interesting of all is a lengthy (over a dozen pages) discussion on an online forum among actuaries about this subject.  Consensus?  Very strongly the same as the above two sources: there is no case here at all.  It’s much ado about nothing.

    That ‘nothing,’ however, has gotten outraged statements from major media and politicians, as outlined in the original post.  (The most recent being John McCain, who stated, "It’s disgraceful on the part of insurance companies."

    Make Up Your Own Mind

    But don’t trust me–or McCain, or the White House, the Veteran’s Administration, Chuck Schumer, CBS News, Andrew Cuomo et al.  You don’t have to.  You can make up your own mind.

    Here’s a link to a television interview with David Evans, the author of the original Bloomberg article. 

    Go watch it; then read my original blogpost, and the three links above in this comment.

    Make up your own mind. 

    And let me know what it does to your trust in mainstream media. 

    Reply
  5. Charlie (Green)
    Charlie (Green) says:

    Dateline August 10: Two more updates on this story.

    First, Bloomberg News reported on August 8 that "Veterans Affairs Assures Families of Fallen Soldiers Their Money ‘Secure.‘"

    Second, the Wall Street Journal reported on August 10 that "New Jersey Says Prudential’s Payouts Are Acceptable."

    Contrast that with Bloomberg’s original headline: "Duping the Families of Fallen Soldiers."

    Read the Wall Street Journal story, together with their story from last week.  Among other things, the woman who said she couldn’t cash a check cashed 25 of them; about ten lawsuits have been filed in recent years over these accounts, with every one rejected; and now the home state insurance commissioner has rejected the original story’s claims, and the VA itself has publicly told vets their money is safe.

    What happened here?  Exactly what I said over a week ago.  A story written as if by Hollywood cast a dead soldier’s mom against a nameless, faceless insurance company–and the media and politicians couldn’t wait to jump on it.  Never mind fact-checking.

    The scandal here is not insurance, it’s media and politics.  It’s the gratuitous manipulation of people’s feelings, on a mass and public scale–for what?  A few cheap votes?  A blip in the polls?

    The reporters have yet to say they got anything wrong; they’re reprising a Dan Rather moment when he couldn’t handle the truth.  But the bigger villains are those who passed it along uncritically.

    It’s a lesson to all of us: trust, but also trust your commonsense, and if they’re in conflict–stop and look around.  

    Reply
  6. Charlie (Green)
    Charlie (Green) says:

    The story gets better.

    Bloomberg reported another escalation of the story on September 14, this time with the headline "Veterans Agency Made Secret Deal Over Benefits."

    What is Bloomberg talking about?  Here are the article’s first 3 paragraphs, uncensored by me:

    • "The U.S. Department of Veterans Affairs failed to inform 6 million soldiers and their families of an agreement enabling Prudential Financial Inc. to withhold lump-sum payments of life insurance benefits for survivors of fallen service members, according to records made public through a Freedom of Information request.
    • "The amendment to Prudential’s contract is the first document to show how VA officials sanctioned a payment practice that has spurred investigations by lawmakers and regulators. Since 1999, Prudential has used so-called retained-asset accounts, which allow the company to withhold lump-sum payments due to survivors and earn investment income on the money for itself.
    • "The Sept. 1, 2009, amendment to Prudential’s contract with the VA ratified another unpublicized deal that had been struck between the insurer and the government 10 years earlier — one that was never put into writing, Bloomberg Markets magazine reports in its November issue. This verbal agreement in 1999 provoked concern among top insurance officials of the agency, the documents released in the FOIA request show."

    Can you tell what the "secret deal" is from reading that?  Me neither.  And the rest of the article doesn’t reveal it either.

    But let’s get out of the weeds, and go to the 100,000 foot level.  Read this 1999 announcement from the Department of Defense, announcing the introduction of the program Bloomberg is complaining about–over a decade ago.  In particular, read the part where the DoD says:

    • "Since June 1999, benefits are immediately placed into interest-bearing checking accounts rather than lump-sum checks mailed to beneficiaries, which was the previous practice. Now, beneficiaries receive a checkbook for an Alliance Account set up by Prudential Insurance Co., which runs the program.
    • “This is important because it relieves the immediacy on the part of the beneficiary to find something to do with that money,” Navy Capt. Elliott Bloxom said during an interview. “It gives the beneficiary, during their time of grief, the opportunity to have that money available, but if they don’t use it right away, it gathers interest for them.”

    Where’s the secret?  Where’s the scam?  Where’s the harm?  Where’s a credible witness?  Where’s a court ruling?

    Why is Bloomberg pursuing this increasingly weak story?  And where’s the rest of the media? Why aren’t journalism schools pursuing this?  Why aren’t the investigate magazines speaking up?  (Must Jon Stewart do all the heavy lifting when it comes to media criticism?).

     

     

     

     

     

    Reply

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