Introduction
Throughout this discussion, we will analyze the history of life insurance companies, any major events which impacted the life insurance industry, including the Great Recession of 2007 which lasted for two years, rules or regulations proposed by Congress that govern the present operation of life insurance companies, including any changes of insurance laws, the current Presidential candidates plan on implementing for the life insurance industry and future expectations of the operational life insurance environment.
History
The life insurance industry began in the ancient city of Rome around 100 B.C. The Roman militant leader named Caius Marius, had created a certain type of club for the burial of his troops who died during the war. But whenever a troop may have died in an unexpected way, or by accident, members of the military would have to pay for that troop’s funeral expenses. At this time, the Romans had a cultural theory that if one of their citizens, or troops were not properly buried, then that individual would become miserable in the afterlife. So, the burial clubs eventually became a mandated way of the law by the Roman government, regardless of a person’s social class.
The burial club would also provide financial stipends to the families of the deceased. The burial club concepts disappeared when the Roman Empire collapsed in 450 A.D. For several years, the ideology of life insurance would not come back into existence until the 16th century when a small coffee shop in the city of London became a popular meeting place for the town’s local ship captains, ship owners, among other workers of the sea to discuss their stories and adventures. It was through these small discussions when the concept of marine insurance came into play. Several of these men became professional underwriters which was called the Lloyd’s of London.
Over 100 years later, in the 17th century, around 1769, “the Presbyterian church of Philadelphia had sponsored the first actual life insurance cooperation for the Presbyterian ministers and their intermediate family members” (Dahl, 2013). But there was a great deal of legal restrictions that came along with these life insurance policies. Many states throughout the United States did not allow women to receive life insurance policies, nor were they allowed to be named as a beneficiary to collect any insurance money from their deceased husband’s insurance policy.
The church was very strict in regards to spousal or dependent relationships and felt that it was not enough to be eligible to receive any financial proceeds from the insurance money either. There were also certain limiting criteria to be able to take out a life insurance policy. Males had to limit their traveling activities and could not travel to parts of the world which were perceived as unsafe, or a danger to one’s health. In addition, the males were required to have periodic medical check-ups and could not drink alcoholic beverages.
In the later parts of the 1800’s, there was a depression called the Panic of 1837 which will be discussed within great lengths in the next portion of our discussion. However, many years after this depression was over, in 1875, the Widows and Orphans society was discovered in New Jersey which provided burial insurance. This was a big milestone for the life insurance industry because this society later became The Prudential insurance company, which is still around today several generations later and this company was the first ever to offer life insurance to the working class men and women of the United States. In 1911, group life insurance was discovered which enabled employers to group all of their employees on one life insurance policy, and by 1930, the sales of life insurance sky-rocketed due to the ending of World War I. “The approximate number of life insurance policies increased to over $117 billion dollars” (Dahl, 2013). Around a day before the Great Depression, there were at present over 120 million active life insurance policies on file.
In 1965, the Serviceman Group’s Life Insurance Company was established for men and women enrolled in the armed forces, or on active duty. The specific insurance was underwritten by a team of commercial insurers and any extra expenses are funded by the United States government. Then in 1976, which was the end of the World War II, the economic boom once again increased the overall sales of life insurance. In present day, the life insurance companies conducted a survey which determined over “30 percent of United States households are currently living today with no life insurance protection, which is considered by analysts as a 50 year all time low for these families to not be protected” (Dahl, 2013).
Major Events of the Life Insurance Industry
One of the first major events which impacted the life insurance industry was the Panic of 1837. This event created a five-year depression. There was land owned and created by several state banks which caused the real estate prices to become unsteady and high inflation. The President at the time, who was Andrew Jackson had issued the Specie Circular of 1836, which mostly limited the payments of land to only silver and gold.
One primary reason for this limitation was partly due to the fact of the state banks overextended their financial resources and printed money way beyond the state mandated reserves. As a result, this caused an incredible deal of high unemployment rates, real estate failures and bank or business losses. Additionally, this financial crisis created a significant burden on life insurance companies. Over forty-six life insurance companies had to close its doors forever causing the life insurance industry to lose over thirty-five million dollars to new and existing police holders.
However, this Panic of 1837 did have some positive influences as well. Many widely popular life insurance companies’ that is known of in today’s society were created around this time, which included MetLife, MassMutual, New York Life and John Hancock. There were also several legal changes to life insurance policies. Women were finally able to purchase life insurance for themselves and become beneficiaries to their deceased spouses. A change such as this with the women enabled the life insurance industry to begin booming with business and profits again.
Next, the Great Depression of 1929 began and lasted for approximately ten years until 1939. This event was one of the longest economic blows to the United States and the life insurance industry. However, President Roosevelt issued a legislative policy, entitled the New Deal which helped the United States come out of the depression. Other major events including the Vietnam War, the Middle Eastern War of 1973, Hurricane Katrina, etc. are other examples which affected the insurance industry. In 1991, “life insurance premiums increased to 23 cents per one hundred dollars of an individual’s deposit, however it was lowered by the FDIC in 1995” ("FDIC: Historical Timeline", 2014).
When the millennium approached, the two major events which hit life insurance companies the hardest were the fraud conducted at the Enron corporation and the attacks on 9/11. First, many companies invested their stocks at the Enron company, not to mention, “several of the insurers invested into the Enron backed securities. These insurers were in bankruptcy when the company collapsed and were unable to pay much of the debt that was owed to the other service companies” (Hitter, 2007). Secondly, the attack of 9/11 caused the insurance industry to pay out the most money to the families or loved ones of the deceased from the bomb explosion of the twin towers. It was estimated that the losses from this terror attack cost the life insurance industry approximately thirty-two billion dollars ("9/11's Costly Insurance Impact", 2011).
Rules and Regulations
The process of regulation within the life insurance industry was developed in the year of 1868 during the Supreme court decision of Paul v. Virginia which carefully placed all aspects of insurance under the close supervision of the States. Then a few years later, the (NAIC) National Association of Insurance Commissioners was developed to handle the needs and coordinate the regulations of insurance agencies. These new regulations restored confidence in policy holders and the consumers overall. As a result, this returned the stability back to the United States and the country became more economically prosperous and it set a temporary solid foundation for the insurance industry.
However, in 1944, the earlier case of Paul v. Virginia was reversed by the Federal Supreme Court because another case in the (SEUA) South- Eastern Underwriters Association was convicted of several violations of the Sherman Antitrust Act, since life insurance was interstate commerce when the insurance policies, or transactions were conducted across state lines, therefore, it was subjective to federal regulation. After this case was reversed, Congress passed the McCarran-Ferguson regulation in 1945 which regulates that it is in the general public’s best interest if the state has authority over life insurance and its consumer policies; therefore, the overall insurance industry would not have to be subjected to any antitrust laws at the federal level if it was regulated, or the state held jurisdiction over it.
It is important to note the main reasons of having these state regulations over the insurance industry. These are the following reasons: a) the regulations protect consumers, b) regulate regular and premium insurance rates, c) allow individuals with bad health to still be eligible for life insurance and d) maintaining insurer solvency if necessary. The concept of insurer solvency is two folded because it is for those individuals who may experience financial burdens with their other expenses and cannot afford to pay premiums, or it can be the actual life insurance company who may lose their financial resources, let us say in a bankruptcy case or lawsuit, then the insurance agency will be unable to disburse insurance claims. With the insurer solvency, the state regulates against these types of things from happening which can hurt consumers. Another rule that the state has in place to protect consumers are the assurance of insurance agents and their agencies from misrepresenting the life insurance policies, making certain that the insurance contract is comprehensible and understandable in simple language where it may be easy for the potential customer, or consumer to understand what they are signing up for.
Changes of Life Insurance Laws
Although we briefly touched bases on the insurer solvency concept, we will analyze this subject more in depth because it is a very important law within the life insurance industry. As we previously mentioned that if in the event an insurer becomes insolvent, not only does this hurt the customer, but the state would have to step into the situation and provide assistance due to the insurer’s lack of responsibility. Therefore, every state within the United States have a special interest in this insurance laws and regularly completes audits of domestic life insurance agencies to ensure that there are no signs of financial problems and unable to pay a claim to policyholders. It is required by law that every active insurance company has to file reports on an annual basis to the state’s main insurance department, as well as the NAIC. Every three years or less, the insurance company is mandated to be audited (Spaulding, 2016).
Additionally, the NAIC, which is the Insurance Regulatory Information System reviews the submitted reports and look to calculate twelve exact ratios. Any ratio that is calculated to be outside of the normal range is at severe risk may be an indicator of potential financial issues, and any ratios with extremely high ratios will be immediately flagged and the state officials will bring attention to this immediately. Another method which the state utilizes to prevent insolvency is through the (RBC) Risk Based Capital.
“This sort of capital changes the amount of surplus which is required to be accurately maintained, then again, in order for the RBC to properly be effective, it is dependent upon the overall investment risk of the insurer, as well as the underwriter” (Spaulding, 2016). Furthermore, all states have these solvency laws, they may change from time to time, but one of the important characteristics are that when an insurer fails to pay a claim, in some cases, a policyholder or consumer may become severely affected. For instance, the individual who holds the policy may be forced to give up some of their rights, such as receiving less interest than what they originally were promised when they first entered into the life insurance contract.
Another change in the life insurance laws are the contestability periods. According to Insure.com, “the contestability period is considered a window which life insurance companies have to investigate and either approve or deny claims” (Marquand, 2014). The period lasts for approximately two years in most states and the window begins as soon as the life insurance policy begins. If an individual becomes deceased within two years of receiving their new life insurance policy, then the life insurance company reserve the lawful right to delay benefits to the beneficiary and investigate if the information provided on the insurance application was accurate and honest.
The life insurance agency could even deny paying anything altogether if there is a final determination of misrepresentation of the policyholder. However, these contestability periods became extremely problematic in the middle of the nineteenth century; therefore, state laws made a change to this law and prevented life insurance companies from denying payments just because an applicant made a mistake on the initial life insurance application. Yet, “the insurance companies found a way around the law and included a provision that claims could not be contested, only except during the contestable periods” (Marquand, 2014).
Life insurance policyholders must understand that beneficiaries are the victims in this situation as well because it places a financial burden on them, in the event the policyholder told a lie on their application and insurance proceeds are either delayed for months, or denied altogether. Another drawback to this matter is that the policyholder could get into legal trouble if it discovered that they have committed fraud on their insurance application, including a large fine, imprisonment and a flag on their social security number which denies them from being able to become approved for any life insurance in the future. Next, if the policyholder decided to want to take their own life and commit suicide, it is under state law that the life insurance company will not immediately pay out the entitled death benefit, instead the company will out pay back the beneficiary the total sum of premiums which the policy holder paid.
Presidential Candidate Plans
Since the beginning of the Presidential Election of 2015, both the Republican Party and the Democratic Party invested financially into the life insurance companies so that it looks appealing for their campaigns. For instance, “the Democratic party invested approximately $813k to the New York Life Insurance company, while the Republicans donated $838k” ("Insurance | Open Secrets", 2016). While on the other hand, the insurance industry also tends to invest right back into the Presidential Hopeful’s campaigns; the Republicans usually get more since they invest the most. In addition, the Presidential Candidate’s mainly focus on such topics as healthcare, or getting rid of Obamacare.
There is little research provided which discusses the candidates openly talking about any plans or changes to the life insurance laws or existing regulations with the companies. However, Hilary Clinton mentioned that once she is President, she would “advocate for the estate or death tax at up to forty-five percent” (Schoffstall, 2016). Many of Clinton’s opposing parties do not agree with this proposal and believe that it would significantly benefit the life insurance industry. An example of this is that financial proceeds from life insurance are always exempt from federal estate taxes and a rich individual could avoid this death tax and purchase large quantities of life insurance which would be distributed to the rich person’s loved ones or beneficiaries. Clinton wants to help the insurance industry because it has been putting money into her pocket since she first started campaigning in 2000.
While on the other hand, Presidential candidate Donald Trump wants to oppose Clinton’s plan and eliminate the death tax altogether because he believes that it punishes the population of individuals whose main desire is to live the American dream. Trump’s plan also consists of “phasing out any exemptions on life insurance policies and its interest for high income wage earners” ("Tax Reform", 2016).
He believes that by keeping this death tax, it would harm the citizens of the United States more than anything and he does not want that when he becomes the President. Unfortunately, the candidates do not give much discussion to the other main points within the subject of life insurance, for instance, higher premium rates for individuals with medical conditions or disabled, etc. Life Insurance premiums should be at a fixed rate for everyone regardless of condition, but none of the candidates ever addresses that. Additionally, the next part of our discussion, we will analyze the future outcomes of the insurance industry and how it should be reinvented and become versatile enough to fit the needs of all citizens, regardless of their ethnicities or cultural backgrounds.
Future Expectations of the Life Insurance Industry
It is a known fact that the life insurance industry needs to be redesigned to fit the needs of all consumers. The future expectations for the life insurance industry is about growth and a driven commitment. First, these companies need to improve their communication to these policyholders so they could earn their business for long-term purposes and keep a consistent client base. It is about developing a sense of precision and understanding the needs of the customer because the customer wants to be treated like their special and a priority. The life insurance industry is expected to educate consumers more on the insurance market, so that they will be fully aware of the life insurance benefits that they are purchasing and not just aggressively sell a product without fully informing the potential buyer.
Life insurance companies must also adequately address the risks which are forecasted in the long-term. Some examples of these risks are investment market uncertainties, not appropriately analyzing current economic or demographic trends, etc. Yet, these risks can be overcome by the achievement of information fluency. Several life insurance companies underestimate the importance of allowing the data to be more fluent and making the information be more accessible to the consumers. In addition, the expectation of this maybe turning the data into competitive advantages and strategic assets for the general population. Most importantly, life insurance companies will also seek to overcome the regulatory challenges that they are facing and not have to deal with the overseers at various levels within the state, international or federal levels. This will be achieved by “seeking out new group capital requirements, creating their very own risk and solvency assessment filing systems and increasing the regulatory scrutiny” (Shaw, 2015).
Conclusion
In conclusion, the life insurance industry had experience both positive and negative changes over the past several centuries including discrimination against women, dependents, working class families, even males had to possess certain standards to qualify. The life insurance industry also endured significant financial crisis which almost brought the industry to its knees, and not able to provide a solid foundation for protection for those who need the financial proceeds to bury either themselves or their loved ones. We learned about the rules and regulations for the life industry and that these rules are there to protect consumers, especially in the event if an insurance agency did not have enough funding to pay a claim for a deceased policyholder. The state has the authority to hold jurisdiction over these insurance agencies and can audit any agency within the mandated three-year period, or if the need arises, for instance, if the agency submits a financial report which seems like the company run into constant problems paying policy owners what they are owed.
In addition, we learned about the changes of the life insurance laws with the contestability periods where the life insurance companies could take up to two years to approve or deny a policyholder’s insurance claim. The state stepped in and believed that this was unfair to families and loved ones who were waiting on these insurance claims to bury the deceased. In my opinion, it almost seemed as if the insurance agencies do not want to pay up when the time is due to do so, and purposely give their clients the run around for all sorts of reasons why may not be available to the general public. This matter is more than unfair to the deceased or their family members because they are going through enough grieving and do not need the extra problems when the bills are due.
Furthermore, we discussed the presidential candidates and how their common theme is the death tax. One Republican party wants to get rid of it, while the Democratic party wants to keep it since it really is utilized for her own personal advantages. We, as the people watching these candidates with their opposing perceptions usually do not live up to these promises if they are elected to help the life insurance industry.
Finally, the future outcomes of the life insurance industry consist mainly around two concepts- commitment and growth. Customers are always right and should feel like a priority since they are paying their hard earned working dollars every month to have this life insurance protection in place in the event of their death. Life insurance must ensure that they are committed to the customer no matter what and even pre-pay a premium if the customer loses their job.
References
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Dahl, C. (2013). A Brief History of Life Insurance. Lifehealthpro.com. Retrieved 12 June 2016, from http://www.lifehealthpro.com/2013/09/09/a-brief-history-of-life-insurance?t=life-products&page=2&slreturn=1465763448
FDIC: Historical Timeline. (2014). Fdic.gov. Retrieved 13 June 2016, from https://www.fdic.gov/about/history/timeline/1990s.html
Hitter, E. (2007). Enron and the Insurance Industry. Ethitter. Retrieved 13 June 2016, from https://ethitter.com/2007/04/enron-and-the-insurance-industry/
Insurance | OpenSecrets. (2016). Opensecrets.org. Retrieved 13 June 2016, from http://www.opensecrets.org/industries/indus.php?ind=f09
Marquand, B. (2014). The life insurance 'contestability period': 7 things to know. insure.com. Retrieved 13 June 2016, from http://www.insure.com/life-insurance/life-insurance-contestability.html
Schoffstall, J. (2016). Sen. Lee: Hillary’s Estate Tax Would Be Huge Win for Life Insurance Industry. Washington Free Beacon. Retrieved 14 June 2016, from http://freebeacon.com/politics/sen-lee-hillarys-estate-tax-would-be-huge-win-for-life-insurance-industry/
Shaw, G. (2015). Life Insurance and Annuity Outlook | Deloitte US. Deloitte United States. Retrieved 14 June 2016, from http://www2.deloitte.com/us/en/pages/financial-services/articles/2015-life-insurance-and-annuity-outlook.html
Spaulding, W. (2016). Insurance Regulation. This Matter. Retrieved 13 June 2016, from http://thismatter.com/money/insurance/insurance-regulation.htm
Tax Reform. (2016). Donaldjtrump.com. Retrieved 14 June 2016, from https://www.donaldjtrump.com/positions/tax-reform
