Insurance Sales to Military Personnnel
Additional Actions Needed to Prevent Improper Life Insurance Sales and Pay Allotment Transactions Gao ID: GAO-09-452 May 29, 2009Concerns over unsuitable insurance products and inappropriate sales practices directed at servicemembers have prompted legislative and regulatory changes to address these concerns. Congress asked GAO to assess oversight efforts by the Department of Defense (DOD), the National Association of Insurance Commissioners (NAIC), and state insurance regulators. In this report, GAO (1) describes actions to improve oversight of life insurance sales to servicemembers and the extent to which they have been completed, and (2) identifies and analyzes factors that contribute to apparent ongoing inappropriate insurance sales. To complete this work, GAO visited five military facilities, analyzed DOD pay records, reviewed DOD and state enforcement actions, and spoke with DOD, state regulatory, and insurance industry officials.
Since 2006, Congress, DOD, and state insurance regulators--through NAIC--have developed and implemented laws and regulations designed to help prevent inappropriate insurance product sales to military servicemembers. In 2006, Congress passed legislation that, among other things, sought to establish standards for life insurance products and sales practices. Also in 2006, DOD revised its instruction designed to govern insurance solicitations on military installations. In 2007, NAIC created a new regulation that, among other things, declared certain life insurance products and sales practices to be inappropriate. As of March 2009, all but five states had adopted the regulation. Further, DOD and state insurance regulators took actions against insurance companies and agents related to the inappropriate sale of life insurance products. Some actions are stayed, pending judicial review. Currently, DOD and NAIC have separate mechanisms to centralize the gathering of information on actions taken against those selling insurance to servicemembers. DOD maintains lists of such actions on its Web site, but these lists are not easily searchable and do not always contain some relevant information, such as the name of the insurance agent involved. In response to the 2006 law, NAIC created a system to inform state insurance regulators of such actions. However, as of March 2009, this system contained no data. According to DOD officials, their lists currently meet their needs, and they are reluctant to enter data into NAIC's system because they do not control it. Without ready access to relevant information on disciplinary actions against insurance agents and companies, DOD and state officials may be less able to identify patterns of problematic activities and prevent inappropriate insurance product sales to servicemembers. Despite regulatory progress such as that cited above, some sales of insurance products that new state regulations generally presume to be unsuitable for servicemembers appear to be continuing. State regulators attributed the continuing sales to the new state regulations not being fully tested yet in state courts. In addition, GAO's review of DOD pay records identified approximately 40,000 allotment transactions that appear to have been created through inappropriate use of DOD's automated pay system, MyPay. For example, DOD regulations and new state regulations prohibit the use of MyPay for insurance allotments, but GAO found records of allotments with certain characteristics and patterns of bank account numbers that state regulators had previously identified as belonging to insurance companies. DOD has limited controls in place to detect or prevent such allotments. Such sales transactions, accomplished through MyPay instead of the proper paper form process for insurance allotments, also circumvent the 7-day cooling-off period that DOD requires to occur between the signing of an insurance application and the certification of an allotment into DOD's pay system. Without adequate controls in place to prevent improper allotments and inappropriate sales activities, servicemembers may continue to be at risk of purchasing unsuitable insurance products.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-09-452, Insurance Sales to Military Personnnel: Additional Actions Needed to Prevent Improper Life Insurance Sales and Pay Allotment Transactions
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
May 2009:
Insurance Sales To Military Personnel:
Additional Actions Needed to Prevent Improper Life Insurance Sales and
Pay Allotment Transactions:
GAO-09-452:
GAO Highlights:
Highlights of GAO-09-452, a report to congressional requesters.
Why GAO Did This Study:
Concerns over unsuitable insurance products and inappropriate sales
practices directed at servicemembers have prompted legislative and
regulatory changes to address these concerns. Congress asked GAO to
assess oversight efforts by the Department of Defense (DOD), the
National Association of Insurance Commissioners (NAIC), and state
insurance regulators. In this report, GAO (1) describes actions to
improve oversight of life insurance sales to servicemembers and the
extent to which they have been completed, and (2) identifies and
analyzes factors that contribute to apparent ongoing inappropriate
insurance sales. To complete this work, GAO visited five military
facilities, analyzed DOD pay records, reviewed DOD and state
enforcement actions, and spoke with DOD, state regulatory, and
insurance industry officials.
What GAO Found:
Since 2006, Congress, DOD, and state insurance regulators”through NAIC”
have developed and implemented laws and regulations designed to help
prevent inappropriate insurance product sales to military
servicemembers. In 2006, Congress passed legislation that, among other
things, sought to establish standards for life insurance products and
sales practices. Also in 2006, DOD revised its instruction designed to
govern insurance solicitations on military installations. In 2007, NAIC
created a new regulation that, among other things, declared certain
life insurance products and sales practices to be inappropriate. As of
March 2009, all but five states had adopted the regulation. Further,
DOD and state insurance regulators took actions against insurance
companies and agents related to the inappropriate sale of life
insurance products. Some actions are stayed, pending judicial review.
Currently, DOD and NAIC have separate mechanisms to centralize the
gathering of information on actions taken against those selling
insurance to servicemembers. DOD maintains lists of such actions on its
Web site, but these lists are not easily searchable and do not always
contain some relevant information, such as the name of the insurance
agent involved. In response to the 2006 law, NAIC created a system to
inform state insurance regulators of such actions. However, as of March
2009, this system contained no data. According to DOD officials, their
lists currently meet their needs, and they are reluctant to enter data
into NAIC‘s system because they do not control it. Without ready access
to relevant information on disciplinary actions against insurance
agents and companies, DOD and state officials may be less able to
identify patterns of problematic activities and prevent inappropriate
insurance product sales to servicemembers.
Despite regulatory progress such as that cited above, some sales of
insurance products that new state regulations generally presume to be
unsuitable for servicemembers appear to be continuing. State regulators
attributed the continuing sales to the new state regulations not being
fully tested yet in state courts. In addition, GAO‘s review of DOD pay
records identified approximately 40,000 allotment transactions that
appear to have been created through inappropriate use of DOD‘s
automated pay system, MyPay. For example, DOD regulations and new state
regulations prohibit the use of MyPay for insurance allotments, but GAO
found records of allotments with certain characteristics and patterns
of bank account numbers that state regulators had previously identified
as belonging to insurance companies. DOD has limited controls in place
to detect or prevent such allotments. Such sales transactions,
accomplished through MyPay instead of the proper paper form process for
insurance allotments, also circumvent the 7-day cooling-off period that
DOD requires to occur between the signing of an insurance application
and the certification of an allotment into DOD‘s pay system. Without
adequate controls in place to prevent improper allotments and
inappropriate sales activities, servicemembers may continue to be at
risk of purchasing unsuitable insurance products.
What GAO Recommends:
GAO recommends that (1) DOD and NAIC work together to improve the
information shared on enforcement actions taken against insurers and
agents, and (2) DOD improve controls to detect and prevent
inappropriate insurance allotments, and report insurance companies to
federal and state authorities when such allotments are found. DOD
concurred with the recommendations and stated it would take actions to
implement them. NAIC generally agreed with the recommendation to them,
adding that it does not have authority to mandate use of the
information system it developed.
View [hyperlink, http://www.gao.gov/products/GAO-09-452] or key
components. For more information, contact Jack Edwards, (202) 512-8246,
edwardsj@gao.gov.
[End of section]
Contents:
Letter:
Background:
Some Actions Have Been Taken to Protect Servicemembers from
Inappropriate Insurance Sales, but Information-Sharing Mechanisms Have
Not Been Fully Utilized:
Inappropriate Sales Practices and Some Sales of Unsuitable Insurance
Products Appear to Continue:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: Comments from the National Association of Insurance
Commissioners:
Appendix IV: Contact and Staff Acknowledgments:
Related GAO Products:
Figures:
Figure 1: Summary of Key Actions Taken in 2006 or Later to Help Protect
Servicemembers from Inappropriate Insurance Sales Practices and the
Sale of Insurance Products Presumed Unsuitable:
Figure 2: MyPay Allotments Screen with Key Information Highlighted: :
Abbreviations:
AFDCB: Armed Forces Disciplinary Control Board:
DFAS: Defense Finance and Accounting Service:
DOD: Department of Defense:
MSORS: Military Sales Online Reporting System:
NAIC: National Association of Insurance Commissioners:
SGLI: Servicemembers Group Life Insurance:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
May 29, 2009:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Paul E. Kanjorski:
Chairman:
The Honorable Scott Garrett:
Ranking Member:
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises:
Committee on Financial Services:
House of Representatives:
Between January 2000 and December 2008, 13,148 active duty
servicemembers died in combat-and non-combat-related events. In 2005,
the federal government increased death benefits and life insurance
coverage for servicemembers, providing survivors of deceased
servicemembers with a $100,000 death benefit and offering
servicemembers up to $400,000 in low-cost life insurance coverage
through the government-sponsored Servicemembers Group Life Insurance
(SGLI) program.[Footnote 1] Some servicemembers and their families also
choose to purchase supplemental life insurance from private market
insurance companies. However, in reports we issued in 2005, we noted
congressional findings that servicemembers were being offered high-cost
life insurance and securities products by some financial services
companies engaging in abusive and misleading sales practices.[Footnote
2]
In the 2006 Military Personnel Financial Services Protection Act (the
Act), Congress found that certain life insurance products were
improperly marketed as investment products and provided minimal death
benefits in exchange for excessive premiums that were front-loaded in
the first few years, making the products inappropriate for most
servicemembers.[Footnote 3] The Act provided for state insurance
regulators, the National Association of Insurance Commissioners (NAIC),
[Footnote 4] and the Department of Defense (DOD) to address concerns
over unsuitable insurance products and inappropriate sales practices
directed at servicemembers.
To help ensure the protection of servicemembers in the purchase of
supplemental life insurance products, you asked us to provide an update
on steps that have been taken since we completed related work in 2005
and areas where continued improvement may be needed. Specifically, we
(1) identified actions initiated to improve oversight of life insurance
sales in the military market and described the extent to which such
actions have been completed, and (2) identified and analyzed factors
that contribute to ongoing inappropriate insurance product sales to
servicemembers.
To review actions taken to improve oversight of insurance sales
activities in the military market in the United States and the extent
to which such actions have been completed,[Footnote 5] we reviewed
federal laws, the extent to which the NAIC Military Sales Practices
Model Regulation (Model Regulation) has been adopted by the states,
[Footnote 6] and revisions of DOD and service regulations and guidance.
Further, we obtained information on actions taken to implement
practices covered by new laws and regulations. This work encompassed
conducting interviews with officials from state insurance
commissioners' offices and reviewing available documents from recent
state regulatory and DOD disciplinary actions against companies and
agents selling supplemental life insurance products in the military
market. We also gathered evidence on instances of cooperative efforts
related to oversight of insurance sales in the military market. For
example, we assessed the use of information-sharing mechanisms
available within DOD and state insurance commissioners' offices, as
well as practices at several military installations. We obtained
additional insights through interviews with life insurance industry
representatives.
To assess factors that contribute to inappropriate insurance products
and sales, we collected information on ongoing insurance sales
activities in the military market, comparing such activities with the
requirements of federal law, the NAIC Model Regulation that served as
the basis for recent changes to state regulations and laws, new state
insurance regulations in various states, and DOD service-specific
regulations. This work included collecting information from
representatives of DOD during site visits to five U.S. military
facilities, state insurance departments, and the life insurance
industry. We also obtained pay allotment data from DOD and assessed
their reliability for identifying payments made for life insurance
premiums that may have been improperly established. After we found the
data sufficiently reliable for the purposes of this review, we
calculated statistics to quantify the magnitude of various types of
potentially inappropriate activities known to DOD or state insurance
regulators. Appendix I contains a more detailed description of our
objectives, scope, and methodology.
We conducted this performance audit from August 2008 to May 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
We are recommending that DOD and NAIC work together to take further
steps to improve information sharing that will help ensure that each
has ready access to all relevant information on disciplinary actions
taken by the other. We are also recommending that DOD implement
controls that will help prevent and detect improper insurance
allotments of servicemembers, and report to federal and state
enforcement authorities information on companies that are found to
violate prohibitions associated with such allotments.
We provided a draft of this report to DOD and NAIC. The DOD Director of
Morale, Welfare and Recreation Policy, Office of the Under Secretary of
Defense for Personnel and Readiness, and the NAIC Chief Operating and
Legal Officer provided written comments, which are reprinted in
appendixes II and III, respectively. DOD agreed with the
recommendations in the report and stated that it would take actions to
improve information sharing on enforcement actions related to the sale
of life insurance as well as review options for detecting and
minimizing the use of MyPay for insurance allotments. NAIC generally
agreed with the recommendation that it work together with DOD to
improve the sharing of information on enforcement actions, and
described actions that it has taken to improve information sharing.
NAIC also noted that it does not have regulatory authority to mandate
the use of the information-sharing system it has developed. DOD's and
NAIC's comments, as well as our evaluation of their comments, are
summarized at the end of this report.
Background:
The federal government offers servicemembers life insurance as part of
their total benefits package. Each member is eligible for the low-cost
SGLI, which can provide up to $400,000 of term life insurance coverage.
Although many life insurance policies exclude coverage for death
resulting from an act of war, SGLI does not contain this exclusion. In
addition to the government-offered insurance, many servicemembers may
be offered life insurance from private market insurers to supplement
that offered through SGLI. Historically, a small number of insurance
companies have targeted their marketing efforts at selling supplemental
life insurance to servicemembers on and around military installations.
As we noted in November 2005, sales of a product that couples life
insurance with a side savings fund have been problematic, especially
for junior enlisted servicemembers.[Footnote 7][Footnote 8] Those
product sales had unfavorable features that included a high-cost life
insurance product that provided nominal supplemental coverage and a
side fund that had an unfavorable interest-crediting method and high
withdrawal penalties for the policyholder. The products used automatic
deductions from side fund savings to pay premiums in the event of
nonpayment, a feature that can exhaust all savings. According to
information provided by state regulators with whom we spoke for that
report, those products have had high lapse rates, that is, a high
percentage of the policies were terminated because of nonpayment by the
policyholder.
In the United States, states are the primary regulators of insurance
companies, products, and agents.[Footnote 9] The state insurance
regulators oversee the insurance companies that do business in their
jurisdictions in several ways, including reviewing and approving
products for sale and examining the operations of companies to help
ensure the companies' financial soundness and proper market conduct.
Each state has its own insurance regulator and insurance laws.
Additionally, NAIC provides a national forum for addressing and
resolving major insurance issues. Such issues include efforts to
develop consistent policies on the regulation of insurance among
states, when consistency is deemed appropriate. It also serves as a
clearinghouse for exchanging information and provides a structure for
interstate cooperation for examinations of multistate insurers. NAIC
coordinates the development of model insurance laws and regulations for
consideration by states.
Insurance sales to servicemembers are subject to state laws and
regulations, as well as regulations established by DOD, the services,
and individual installations. DOD's primary policy governing the
solicitation of most products and services on military installations is
set out in the DOD instruction on Personal Commercial Solicitation on
DOD Installations.[Footnote 10] Among other things, the instruction
identifies prohibited practices on DOD installations for agents
offering life insurance to servicemembers and the procedures agents are
to use to gain access to an installation for the purpose of commercial
solicitation of insurance and other types of products and most
services.
Within DOD, the Office of the Under Secretary of Defense for Personnel
and Readiness is responsible for developing the policies and procedures
governing personal commercial solicitation for life insurance and other
products. Further, the heads of DOD components, or their designees, are
responsible for ensuring implementation of the regulations and
compliance with their provisions. Each service provides additional
regulations regarding commercial solicitations, and some installations
further specify how these DOD and service policies and practices are to
be implemented locally. The Defense Finance and Accounting Service
(DFAS) oversees the financial management regulations and the payroll
computer systems and databases. DOD can provide some oversight of
activities off installations through Armed Forces Disciplinary Control
Boards (AFDCB), which can declare a business off-limits to
servicemembers if a board determines the business to be causing harm to
servicemembers.[Footnote 11]
Congress, DOD, and state insurance regulators have long recognized that
unique financial protections are warranted for servicemembers.
Regulations implementing the consumer protection provisions of the John
Warner National Defense Authorization Act for Fiscal Year 2007 cited
financial concerns as a major source of stress among servicemembers and
highlighted the importance of financial readiness to mission
readiness.[Footnote 12] A state insurance regulatory official, who has
worked on military issues for several years, mentioned that young
servicemembers are a vulnerable sector of society, as many are often
right out of high school and are generally a transient population.
Some Actions Have Been Taken to Protect Servicemembers from
Inappropriate Insurance Sales, but Information-Sharing Mechanisms Have
Not Been Fully Utilized:
Congress, DOD, and State Insurance Regulators Developed Laws and
Regulations Designed to Increase Protections for Servicemembers:
In September 2006, Congress passed the Act to regulate the marketing
and sale of life insurance products and securities on military
installations and thereby protect servicemembers from sales of
inappropriate financial products.[Footnote 13] (This and other actions
are summarized in figure 1.) The Act clarified that state insurance and
securities laws generally apply to insurance and securities sales and
related activities conducted on military installations worldwide. It
also generally provided that if federal or state agencies or courts
found that a person intentionally violated or willfully disregarded the
Act's disclosures, discussed below, that person could be banned from
selling insurance on federal lands, including military installations.
Figure 1: Summary of Key Actions Taken in 2006 or Later to Help Protect
Servicemembers from Inappropriate Insurance Sales Practices and the
Sale of Insurance Products Presumed Unsuitable:
[Refer to PDF for image: illustration]
Date: March 2006;
Rules and information-sharing mechanisms: DOD revised Personal
Commercial Solicitations on DOD Installations, DOD Instruction 1344.07.
Date: June 2006;
Regulatory actions: Insurance regulators in 48 jurisdictions (states,
District of Columbia, and Guam) reached a settlement with three life
insurance companies that sold a life insurance product with a side
fund. The companies, among other things, agreed to pay a cash payment
to each eligible person.
Date: September 2006;
Rules and information-sharing mechanisms: Congress enacted the Military
Personnel Financial Services Protection Act, Pub. L. No. 109-290.
Date: July 2007;
Rules and information-sharing mechanisms: The first of 47 jurisdictions
(states, District of Columbia, and Puerto Rico) adopted NAIC‘s Military
Sales Practices Model Regulation;
Regulatory actions: Legal services at the Naval Station Great Lakes
began working with AFDCB to investigate an insurance agency; the result
was an emergency off-limits restriction, which was later canceled
provided certain conditions were met.
Date: September 2007;
Rules and information-sharing mechanisms:
* NAIC and DOD executed a memorandum of understanding to establish a
partnership to share information, including complaints data and
disciplinary actions.
* NAIC implemented the Military Sales Online Reporting System, a system
for tracking disciplinary actions taken against insurance agents.
Date: March 2008;
Regulatory actions: Illinois received complaints filed by
servicemembers through the Naval Station Great Lakes against an
insurance agency. Illinois later held a hearing and is currently making
final decisions on what disciplinary actions to take.
Date: May 2008;
Regulatory actions: Florida issued a show-cause order to two insurers
for alleged inappropriate sales practices when soliciting
servicemembers. Several months later, Florida issued additional show
cause orders to suspend or revoke the insurers‘ certificates of
authority because of alleged sales of unsuitable insurance products.
Date: July 2008;
Regulatory actions: Georgia issued an order to revoke a company‘s
certificate of authority to operate as an insurer, which has been
stayed pending completion of a judicial review by a state court.
Date: November 2008;
Regulatory actions: North Carolina insurance regulators initiated
targeted exams on insurers and their agents that sell insurance
products with a side fund to servicemembers around Camp Lejeune and
Fort Bragg.
Source: GAO analysis.
[End of figure]
With respect to life insurance products, the Act created requirements
and encouraged DOD and state insurance regulators to take certain
actions. The Act:
* encouraged DOD and state regulators to work together to improve the
quality and sale of life insurance products sold on military
installations, including the development of product standards designed
to meet the needs of servicemembers whether or not the sale took place
on military installations;
* encouraged state insurance regulators to work with DOD to implement
standards that would protect servicemembers from dishonest and
predatory insurance sales practices while on military
installations;[Footnote 14] and:
* required insurance agents, at the time of sale of a supplemental life
insurance product to a servicemember on a military installation, to
disclose, in writing, information about SGLI (including the amount of
coverage and costs), the fact that the supplemental product is not
endorsed by the federal government, the structure and features (such as
side funds, savings features, and automatic premium payment features)
of the supplemental product, and contact information for making
complaints to the appropriate state insurance regulator.
Additional protections from the Act are covered later when we discuss
DOD's and NAIC's cooperation on a mechanism for sharing information on
disciplinary actions.
In addition to action by Congress, DOD updated its instruction on
Personal Commercial Solicitation on DOD Installations in March 2006,
adding new prohibitions and requirements for on-installation
solicitations for concerns that were not previously addressed. The
services subsequently modified their regulations to implement the
revised DOD instruction.[Footnote 15] Among other things, the revisions
assign new responsibilities to certain DOD personnel, including
installation commanders, to monitor sales practices of insurance
agents, enforce compliance, and report certain information to DOD,
state regulators, and appropriate federal personnel. The revisions also
specifically forbid certain sales practices and impose requirements for
insurance agents that, if violated, could result in the loss of
privileges to solicit life insurance on military installations. The
instruction does the following:
* It prohibits certain sales practices. For example, insurance agents
soliciting on military installations are now prohibited from using
promotional incentives, such as free items or contests, to facilitate
transactions or to eliminate competition.
* It specifies conditions for advertising and commercial sponsorship.
Among other things, businesses may not use sponsorship of an activity
on a military installation as a means of collecting personal contact
information from individuals without getting their written permission.
[Footnote 16]
* It requires installation commanders to monitor on-installation sales
practices, enforce the DOD instructions, and ask that appropriate state
officials determine whether a company or agent violated state law.
* It requires installation commanders to provide to, and request from,
appropriate DOD, state regulators, and appropriate federal personnel
certain types of information. For example, installation commanders
should verify an agent's licensing status and complaint history with
appropriate regulators prior to granting permission to solicit on an
installation; notify the appropriate regulators if an investigation
determines that an agent or company does not have a valid license or
fails to meet other state or federal regulatory requirements; report
concerns on the quality or suitability of financial products or
concerns or complaints involving marketing methods to appropriate
regulators; and report to DOD, state regulators, and appropriate
federal personnel concerning reinstated, suspended, or withdrawn
privileges to solicit on installations.
The new prohibitions were added to other standing prohibitions on
inappropriate sales practices such as soliciting recruits, trainees,
and transient personnel in a mass or captive audience; conducting
solicitations in unauthorized areas; and soliciting without an
appointment in certain housing or barracks areas.
Like the prior instruction that it replaced, the new DOD instruction
requires a 7-day cooling-off period before an insurance allotment is
certified, in order to give junior enlisted servicemembers an
opportunity to receive insurance counseling from a disinterested third
party and consider their decision before it becomes final. The
instruction states that "at least seven calendar days shall elapse
between the signing of a life insurance application and the
certification of a military pay allotment for any supplemental
commercial life insurance."[Footnote 17] The instruction assigned the
installation finance officer the responsibility for monitoring and
enforcing the 7-day cooling-off period for servicemembers. The new
instruction, however, expanded those subject to the 7-day cooling-off
period to servicemembers with a pay grade of E-4 and below who have
applied for life insurance, as compared with E-3 and below in the prior
instruction.[Footnote 18]
NAIC also took action to protect servicemembers from inappropriate life
insurance sales by developing the Military Sales Practices Model
Regulation. Among other things, the Model Regulation declared certain
sales practices to be "false, misleading, deceptive, or unfair," and
has provisions that apply to both on-and off-installation solicitations
and sales of life insurance products to servicemembers. An example of a
practice deemed inappropriate would be an agent assisting a
servicemember in initiating an allotment through DOD's automated
military pay system, MyPay, to remit life insurance premiums.[Footnote
19] The Model Regulation also declares that life insurance products
with a side fund are presumed to be unsuitable to junior servicemembers
(pay grades E-4 and below) who are currently enrolled in SGLI unless
after completion of a needs assessment, the insurer demonstrates that
the servicemember's SGLI benefit and other factors are insufficient to
meet his or her needs for life insurance. The Model Regulation also
deems products with certain features to be unsuitable for all
servicemembers, regardless of pay grade or whether a needs assessment
is completed. These features include deceptive interest-crediting
methodologies and automatic premium payment provisions.
According to NAIC, as of March 2009, 47 jurisdictions (states, the
District of Columbia, and Puerto Rico) had adopted NAIC's Model
Regulation covering insurance sales practices used with servicemembers.
Using DOD-supplied information on the numbers of active duty
servicemembers located in each state, NAIC estimated that about 99
percent of those servicemembers are currently in states that have
adopted a version of the Model Regulation.[Footnote 20] NAIC documents
indicate that NAIC expects the five remaining states that had not
passed it to do so in 2009.[Footnote 21]
Not all states have adopted the Model Regulation without revision. For
example, California and Florida expanded the application of certain
provisions to all servicemembers rather than restricting them to those
with a pay grade of E-4 and below, as the Model Regulation does.
Regulators from California said that for certain life insurance
products restricted by the regulation, a needs assessment is required
for all servicemembers, not just those of lower pay grades.
States and DOD Took Regulatory Actions against Insurers and Agents in
the Military Market:
In addition to creating new regulations, a number of state insurance
regulators and DOD took regulatory actions against some insurers and
agents. In June 2006, insurance regulators reached a multistate
settlement with three life insurance companies that sold a life
insurance product with a side fund.[Footnote 22] As of April 2009, NAIC
stated that 48 jurisdictions (states, the District of Columbia, and
Guam) had signed on to the multistate settlement. The companies denied
any wrongdoing or violation of law, but agreed to enter into a
settlement agreement that did several things:
* It prohibited the companies and their agents from soliciting and
selling any of their products on any U.S. military installation
(worldwide) for 5 years.
* It required each company to immediately terminate, for 5 years, the
appointments of agents upon the occurrence of certain events.
* It prohibited each company and its agents from sponsoring specified
activities without prior written approval.
* It prohibited each company and its agents from participating in or
assisting with any training for servicemembers regarding personal
finance when conducted off a military installation if an inducement to
attend the training exceeds the amount allowed by applicable law.
* It required each company to establish and perform specific due
diligence practices to ensure its agents are complying with laws and
regulations.
The settlement also defined procedures for the companies to use in
making compensatory cash payments or providing better policy terms to
over 90,400 potentially eligible persons.[Footnote 23] The settlement
required the companies to deposit $10 million for the future cash
payments to eligible persons. The Texas Comptroller was to hold the
deposit until the payments could be sent to eligible persons.[Footnote
24] As of April 2009, a state official said approximately 14,400 (26
percent) of 55,000 persons eligible for a refund could not be located.
[Footnote 25] Payments that the companies were unable to distribute or
remained unclaimed will be turned over to appropriate states.
State insurance regulators in several states also have ongoing
investigations or pending enforcement actions related to the sales of
life insurance to servicemembers by several agencies and two life
insurance companies. Four notable actions that had not been fully
resolved as of April 1, 2009, are described below.
* In 2008, Georgia's insurance regulators began investigating a company
selling an insurance product with a side fund that they believed
violated Georgia insurance regulations. On the basis of information
obtained from the state and other sources, the department and the
company entered into a consent order under which the company agreed,
among other things, to issue refunds for policies purchased on or after
September 1, 2007. The department's revocation of the company's
certificate of authority to operate as an insurer in Georgia has been
stayed pending the completion of a judicial review by a state court.
* In 2008, Florida's Office of Insurance Regulation began investigating
two affiliated insurance companies that may have violated Florida law
regarding deceptive sales practices when soliciting servicemembers.
[Footnote 26] Such sales practices included gaining access to
servicemembers' MyPay accounts, which insurance agents are alleged to
have used to establish ongoing electronic fund transfers to pay for
life insurance products. In January 2009, Florida initiated further
investigations of the two companies, focusing on the alleged
unsuitability of the products sold to active duty servicemembers. The
legal basis for the 2009 investigations is Florida's Military Sales
Practice regulations, which became effective in November 2007. In
January 2009, Florida issued a show-cause order to initiate action to
revoke the two insurers' certificates of authority, an action that
would prohibit them from selling insurance in the state. A Florida
official said hearings for the insurance companies are scheduled for
June and July of 2009.
* In November 2008, North Carolina's Department of Insurance and
officials at Marine Corps Base Camp Lejeune began working together to
investigate potential sales practice violations such as using MyPay to
initiate insurance allotments for life insurance products with a side
fund. With information provided by an installation official, state
insurance regulators made on-site visits at various insurance agency
locations throughout the state, including the area around Fort Bragg,
and obtained evidence of potential violations.
* In February 2008, the Illinois insurance regulator began working with
Naval Station Great Lakes to investigate an insurance agency and its
agents for alleged sales practice violations, which included selling
life insurance products with a side fund as well as obtaining and
changing servicemembers' personal identification numbers for their
MyPay accounts. In March 2008, the regulator conditionally revoked the
agency's license and three of its agents' licenses. As of April 2009,
Illinois officials said the Illinois insurance commission had held a
hearing on the alleged sales practice violations and was working toward
a final decision.
DOD and installations have additionally undertaken separate
investigations and enforcement actions against some life insurance
companies and agents. For the three companies involved in the
previously cited multistate settlement, DOD barred each company for a
period of 5 years from soliciting on any military installation
worldwide. Also, certain military installations have worked with an
AFDCB to investigate companies and agents alleged to have engaged in
inappropriate insurance sales activities.
During our site visit to Naval Station Great Lakes, installation
officials provided us with information on two investigations conducted
by the board involving alleged sales practice violations by an agency
selling life insurance products with a side fund for an insurance
company. Once its first investigation, which began in 2007, was
completed, the board initially rescinded the agency's permit to solicit
on the installation. After giving the agency an opportunity to take
corrective actions, the installation did not reinstate the agency's
permit to solicit on the installation but allowed the agency to pick up
servicemembers by the main gate. Beginning in February 2008, Great
Lakes staff again worked with the board to investigate the same
insurance agency and its agents, who were selling products for the same
insurance company as they had in the previous investigation. Shortly
after the board began its second investigation examining a number of
complaints involving the agency and the insurance products it was
selling, it placed the agency off-limits.[Footnote 27] The board also
rescinded permission for the agency to use the parking lot outside the
installation's main gate. Ultimately, the board rescinded its off-
limits restriction on the agency so long as the agency complied with
the corrective actions the board had proposed, but the insurance agents
left Illinois, according to DOD and state regulatory officials. We
observed that one of these agents was subsequently placed on DOD's list
of banned agents for activities under a different company name in
Florida.
DOD and NAIC Initiated Information-Sharing Efforts but Have Not Fully
Integrated Their Efforts to Track Disciplinary Actions:
While DOD, states, and NAIC have taken steps to cooperate on some life
insurance-related issues, they have not implemented an integrated
system that shares information on disciplinary actions taken against
life insurance companies and agents selling to the military market.
According to both DOD and NAIC officials, they communicate at least
quarterly by telephone or e-mail. The 2006 Act requires they meet at
least twice a year.[Footnote 28] Additionally, in their September 2007
memorandum of understanding, DOD and NAIC representatives agreed to an
information-sharing partnership. As part of that partnership, DOD is to
maintain information on persons who have been barred or persons whose
access to military installations has been limited. DOD is to make this
information accessible to state insurance regulators.
DOD has created lists designed to meet the requirements of the Act, but
this approach has limitations, some of which we identified in our June
2005 report. When we examined DOD's mechanism for maintaining
information on disciplinary actions against insurers as part of our
2005 report, we noted that DOD's then current list was not searchable,
did not provide the same information (e.g., agent names and insurer
names) on every case, and did not identify the specific types of
violations.[Footnote 29] To correct that problem, we recommended that
DOD develop and implement, with the services, a DOD-wide searchable
violations database that uses consistent data elements and coding
across services. The 2006 Act also required that DOD maintain a current
and easily accessible list of the names, addresses, and "other
appropriate information" of persons engaged in the business of
securities or insurance that have been barred from or otherwise limited
in access to installations or that have engaged in any transaction
prohibited by the Act.
Currently, DOD maintains its lists of disciplinary actions on the Web
on its Commanders Page [hyperlink, http://www.commanderspage.com].
According to NAIC and state insurance officials, these lists still have
some of the same limitations we reported in our 2005 report. For
example, these officials discussed with us problems with missing data,
such as the name of the insurance company for which an agent is selling
products; a lack of specificity on the violations involved; and the
inability to perform searches on the data (e.g., by agent or company
name). Similarly, in our own examination of these lists, we found that
there are separate lists for various time periods, and the lists cannot
be searched at the same time. For example, to search for an entity, a
user would have to know the time frame when an entity was initially
placed on a list. Otherwise, each list would have to be searched
individually. We also observed that the lists did not always contain
information relevant to violations that resulted in disciplinary
actions less severe than a barring or a limitation of access to an
installation, and in some cases, did not include other relevant
information, such as the name of the agent, agency, and insurer
involved or the type of product sold. According to an official from the
Office of the Under Secretary of Defense for Personnel and Readiness,
the Commanders Page meets the department's needs.
The system that NAIC has implemented to facilitate collection of
information on disciplinary actions also has some limitations, and it
has not been used. The Act asked the states to take a role in
monitoring disciplinary actions and collectively implement a system to
receive reports of disciplinary actions taken against persons that sell
or solicit life insurance products on any U.S. military installation
and disseminate such information to other states and DOD. In response
to that provision, NAIC implemented its Military Sales Online Reporting
System (MSORS) on the NAIC Web site. NAIC staff explained that MSORS is
designed to enable organizations--such as insurance companies and
federal and state agencies--to communicate disciplinary actions to NAIC
and state insurance regulators through the NAIC Web site. The
advantages that MSORS is intended to provide are its single point for
data reporting and its uniform set of data fields to collect consistent
information from all reporting organizations. Without MSORS as the
single point for data entry, information would have to be provided
separately to each of the 50 states, the District of Columbia, and
territories. We identified several limitations with this system, which
are described below.
* The Act requires whatever system is developed to include information
on disciplinary actions against insurers and agents, but does not
define what constitutes such an action. An NAIC official said that
because of this uncertainty, NAIC is operationally defining a
disciplinary action as an action that results in an insurer terminating
an agent's employment or appointment (where an agent is not employed
directly by the insurer but sells products for that insurer). As a
result, insurance companies or federal (e.g., DOD) and state agencies
may not enter data into MSORS on agents banned from an installation
when no employment or appointment termination occurred. For example,
because agents voluntarily left Illinois following the previously
discussed incident at Naval Station Great Lakes, MSORS would not have
any information on the agents, even if they had committed inappropriate
practices or sold unsuitable insurance products.
* MSORS is not designed for queries by external organizations such as
DOD. According to an NAIC official, installation officials would need
to contact state regulators to obtain information when performing
actions such as issuing a permit that allows an insurance agent to
solicit on an installation.
* As of March 2009, no data had been entered into MSORS, according to
NAIC officials. DOD can enter information on disciplinary actions it
has taken on insurance agents, agencies, or companies in MSORS.
However, such activity, as listed on the Commanders Page, has not yet
been entered into MSORS. An official from the Office of the Under
Secretary of Defense for Personnel and Readiness explained DOD staff
had not entered data into MSORS for two reasons. First, according to
the official, DOD is reluctant to enter information into MSORS because
it does not control the system or database; NAIC maintains MSORS.
Second, MSORS is intended to collect disciplinary information related
to sales activities that have taken place on military installations,
but sales activities have generally moved off military installations.
While MSORS could capture information related to activities that have
moved off the installations, the Act does not require such information
to be reported.
These limitations in DOD's lists and NAIC's system can have negative
effects. In our 2005 report, we identified adverse consequences
resulting from an inadequate system for monitoring disciplinary actions
against life insurance agents and companies that violate prohibitions
against certain sales practices. For example, the failure to
disseminate information to other parts of DOD or to state insurance
regulators about agents and companies that violate DOD solicitation
policy can enable violators to continue operating on other
installations and in other states. We also concluded that the continued
absence of important data would force DOD, the services, and
installations to take actions based on isolated incidents, anecdotes,
and other possibly insightful, but nonoptimal information on patterns
of behavior.
Inappropriate Sales Practices and Some Sales of Unsuitable Insurance
Products Appear to Continue:
Numerous Insurance Sales Appear to Continue through MyPay because of
Limited Controls to Detect and Prevent Insurance Allotments:
Despite new regulations and actions taken by DOD and state regulators,
inappropriate sales practices and some sales of unsuitable life
insurance products appear to continue. According to DOD's Financial
Management Regulation, a properly executed form or a written request
from a servicemember--or his or her agent acting under a power of
attorney--may be used to establish, discontinue, or change an
allotment.[Footnote 30] In a reply to a letter of inquiry from the
Texas Department of Insurance, DFAS confirmed that MyPay is not an
authorized medium to process transactions for insurance allotments and
is not intended for doing so. The DFAS response went on to note that
military members must complete a paper copy of the Department of
Defense Form 2558, Authorization to Start, Stop or Change an Allotment,
and send the form to their servicing finance or disbursing office for
processing. In interviews with DFAS representatives, they confirmed
that servicemembers are allowed to use MyPay only to initiate (1) a
"savings" allotment, which authorizes DFAS to direct part of an
individual's pay to a savings or checking account in the
servicemember's name, or (2) a "dependent" allotment, which authorizes
DFAS to direct part of an individual's pay to a savings or checking
account in the name of the dependent (The allotment selections in MyPay
are shown in figure 2.)
Figure 2: MyPay Allotments Screen with Key Information Highlighted:
[Refer to PDF for image: web page with highlighted section]
Highlighted sections are as follows:
* Financial Allotments which may be changed using MyPay are those
voluntary deductions to financial institutions with directs deposit.
This does not include such items as charity, insurance, thrift saving,
garnishments, union or other organizational dues. For these changes,
see your servicing payroll office or Customer Service Representative.
* To Start or Change, you need your Financial Institution‘s Routing
Transit Number, Account Number, and Account Type (Checking or Savings).
Source: DOD.
[End of figure]
Additionally, NAIC's Model Regulation, adopted by most states,
prohibits insurers and their agents from using or assisting in using a
servicemember's MyPay account or other similar Internet or electronic
medium for the purchase of life insurance. Further, insurers are
prohibited from receiving funds from a servicemember for the payment of
a premium from a depository institution with which the servicemember
has no formal banking relationship.[Footnote 31] Moreover, if an
allotment is started with MyPay, the Model Regulation requires a form
to be entered into the insurer's files on the insured servicemember.
Specifically, the Model Regulation indicates that it is a false,
misleading, deceptive, or unfair act or practice to "Knowingly
accepting an application for life insurance or issuing a policy of life
insurance on the life of an enlisted member of the United States Armed
Forces without first obtaining for the insurer's files a completed copy
of any required form [e.g., DOD Form 2558] which confirms that the
applicant has received counseling or fulfilled any other similar
requirement for the sale of life insurance established by regulations,
directives or rules of the DOD or any branch of the Armed Forces."
Our analyses of targeted allotment data, based on problems we
identified in our November 2005 report, showed that approximately
40,000 insurance allotment transactions for servicemembers appear to
have been initiated through MyPay to remit the premiums for life
insurance products for the years 2006 through 2008, despite regulations
prohibiting this method for establishing such allotments.[Footnote 32]
We did not verify these individual transactions with the insurance
companies in question because of ongoing litigation between regulators
and the companies, but we consulted with the Texas and Georgia
insurance commissioners' offices to determine characteristics of
allotments that they had found to be problematic in their
investigations of life insurance sales to the military market. We
observed one or more of these characteristics in each of these
allotments.
* We identified almost 29,000 allotment transactions--worth over $3.7
million--that directed funds to bank account numbers with specific
prefixes, used in conjunction with the servicemember's Social Security
number, which state insurance regulators had identified as being used
by insurance companies.
* We identified another almost 11,250 allotment transactions that
directed funds to a single bank account number, also identified by
state regulators as being used by an insurance company. Many
servicemembers directing funds to the same bank account would indicate
that the account number is not unique and therefore not in the name of
the servicemember.
* Among these two groups of allotments, we also identified many that
had a variation of the insurance company's name as the name of the
servicemember's dependent, indicating that those allotments were likely
not going to an account for a dependent.
Because each of these types of allotments is entered into MyPay as a
savings or dependent allotment, it is not designated on a
servicemember's leave and earnings statement as an insurance allotment.
In contrast, DFAS officials said that an insurance allotment
established properly, with the paper process, would be designated on a
leave and earnings statement as an insurance allotment.
DFAS lacks sufficient controls to prevent or routinely identify and
correct inappropriate insurance allotments initiated through MyPay.
While the computer screens that a servicemember accesses to create an
allotment include an advisement to the servicemember that the system is
not to be used for allotment changes tied to insurance, few other
controls that could detect or prevent insurance allotments are in
place. According to DFAS officials, the system checks allotment
information against a list of approved bank routing numbers and accepts
any bank account number as long as it contains the proper number of
characters. In addition, the system does not attempt to determine if
the name of a dependent entered by a servicemember is actually a
person's name. Officials said that instituting extensive controls over
allotments could be difficult and must be balanced against the
efficiencies gained by having a flexible, automated system.
The inappropriate use of MyPay to initiate insurance allotments can
harm servicemembers in at least two ways. First, because MyPay
allotments for insurance circumvent the intended paper allotment
process, they also bypass the encouraged counseling and required 7-day
cooling-off period (both specified in DOD's commercial solicitation
instruction). As a result, they make ineffective the safeguards that
are designed to help ensure that a servicemember acquires a life
insurance product that meets the individual's unique needs. We had
documented similar problems associated with using the allotment system
to pay for such products in our June 2005 report.[Footnote 33] For
example, allotments were being started without verification that a 7-
day cooling-off period had occurred and without an opportunity for
junior enlisted personnel to receive counseling about the purchase.
Second, given that our review of several physical examples of product
sales documents found that monthly premiums ranged between about $100
and $200 per month, a significant portion of a servicemember's monthly
basic income could be used to pay for a life insurance product that,
according to regulators, often had high lapse rates. For example, a
monthly premium of $100 would amount to more than 6 percent of the 2008
(a period covered by the allotments in our analysis) monthly pretax
basic pay of $1,509.90 for an E-2 servicemember with 2 years of
experience.
Some Sales of Potentially Unsuitable Insurance Products to
Servicemembers Appear to Continue:
Despite actions by DOD and state regulators, some insurance companies
appear to be continuing to sell servicemembers life insurance products
deemed to be unsuitable by state insurance regulators. In response to
the Act's direction that NAIC work with DOD to create standards for
life insurance products specifically designed to meet the particular
needs of servicemembers, NAIC incorporated such standards into its
Model Regulation. The Model Regulation, which has been adopted by most
states, identified conditions under which the sale of certain life
insurance products to E-4 and below servicemembers is declared "false,
misleading, deceptive or unfair."[Footnote 34] For example, offering
for sale or selling a life insurance product with a side fund to such
individuals currently enrolled in SGLI is "presumed unsuitable" unless,
after the completion of a needs assessment, the insurer demonstrates
that the applicant's SGLI death benefit, together with any other
military survivor benefits, savings and investments, survivor income,
and other life insurance are insufficient to meet the applicant's
insurable needs for life insurance. The Model Regulation also prohibits
deceptive interest-crediting methodologies and mandatory automatic
premium payment provisions, which divert accumulations from side funds
to pay for the life insurance in the event that payments to the insurer
cease. Products with such features are deemed unsuitable for
servicemembers regardless of pay grade or whether a needs assessment is
performed.
However, we found evidence of continued sales of life insurance
products that regulators deem to be unsuitable for many servicemembers.
Regulatory concerns and questions about the suitability of product
sales directed at servicemembers are found in the previously cited
regulatory actions currently under way in Georgia and Florida. In these
two states, one of the issues being investigated is the suitability of
the product. We identified additional suitability-related concerns as
part of our document reviews and interviews during site visits to
military installations. Also, in our review of materials documenting
the ongoing sales of insurance products to servicemembers, we found
indications that potentially unsuitable products were being sold. For
example, we obtained sample premium payment schedules and application
materials that combined high-cost life insurance coverage with a side
fund, consistent with the products that we described in our 2005
report. Such products offer servicemembers nominal supplemental
coverage at a high cost, particularly in the first year of the product,
and incorporate several adverse features that limit the benefits of the
side fund savings component of the product. In our November 2005
report, we similarly documented problems with such products. Our
findings showed that these products had (1) much higher premiums than
policies offered by the government or other companies; (2) a provision
that depletes any accumulated savings to pay the insurance premiums if
the servicemember stops making the scheduled payments;[Footnote 35] and
(3) adverse features on the side fund, including withdrawal penalties
and methods of interest crediting that significantly reduced the
advertised rate of return for the side fund savings component of these
products.
According to key state insurance regulators with whom we spoke, one
reason that sales of such products continue is that the new state
regulations intended to prohibit such sales have not yet been fully
tested by state courts. Those regulators suggested that while some
insurers had stopped selling a life insurance product in the military
market that coupled high-cost coverage with a side fund savings
component, others would likely continue such sales until state courts
rule definitively on whether selling such products is now illegal.
State regulators also noted that some of the insurance companies that
continue to sell these products essentially do not sell any other types
of products, and thus may be reluctant to stop. Some regulators
indicated that certain insurers remaining in the military market may
opt to change their policies to adhere to new state regulations, but
the regulators were uncertain as to whether such product changes would
be made across all states in the future.
To the extent that sales of insurance products presumed unsuitable for
many servicemembers continue, those servicemembers could be harmed
financially. As mentioned earlier, such products have features adverse
to servicemembers that can limit the returns on the savings component
of the product. Furthermore, if payments are discontinued, this can
trigger the exhaustion of all the savings in the side fund to pay for
the insurance premiums. As a result, the servicemember could end up
with no additional life insurance and have lost all the funds
accumulated in the savings portion of the product.
Conclusions:
DOD and state regulators have been using new laws and regulations to
take actions against insurers employing prohibited sales practices and
offering products that are presumed to be unsuitable for certain
servicemembers absent a demonstration to the contrary. With life
insurance sales moving largely off the installations, the increased
regulatory enforcement efforts of state insurance commissioners are
particularly important. DOD, NAIC, and states have moved forward on
partnership efforts to address some of the problems that continue to
exist. One partnership area where we documented concern pertains to
limitations in the mechanisms that DOD and NAIC use to monitor
disciplinary actions against insurance companies and agents.
Maintenance of separate mechanisms suggests that the Military Personnel
Financial Services Protection Act's call for monitoring of disciplinary
actions has not been fully accomplished. Further, the limitations of
DOD's lists and NAIC's MSORS continue, such as the narrow definition of
the disciplinary actions and the limited types of relevant data that
are collected. These limitations will continue to hamper DOD's and the
state regulators' ability to identify patterns of violations and will
prevent a closer partnership among DOD, NAIC, and the states. Not fully
resolving these concerns places servicemembers at risk of encountering
companies and agents using prohibited sales practices and being
solicited to purchase products that are presumed unsuitable for most
junior servicemembers.
States such as Georgia, Texas, and Florida have provided leadership in
addressing sales practices and products that have continued to be
problematic in the military market. While the 2006 multistate
settlement with three insurance companies was an important start toward
increased regulatory enforcement, the ongoing cases have not been fully
resolved. Until resolution is reached, it will not be clear what, if
any, limitations might exist in the provisions of the NAIC Model
Regulation, which has been adopted by almost all states, the District
of Columbia, and Puerto Rico. In the interim, inappropriate payments
for life insurance products appear to continue to be made using MyPay-
-an activity prohibited by DOD regulation and state insurance laws
adopting variations of the Model Regulation. Also, some sales of life
insurance products with a side fund appear to continue despite their
presumed unsuitability for many servicemembers and the movement of some
insurance companies away from offering such products. While there are
pending decisions as to whether ongoing enforcement actions regarding
certain life insurance products are permissible, delays in DOD's
tightening its monitoring of MyPay could deprive servicemembers of
savings and result in unsuitable life insurance products being
purchased through the military pay allotment system.
Recommendations for Executive Action:
To help ensure more coordinated and effective oversight of insurance
sales to servicemembers, we recommend that the Secretary of Defense
through the Under Secretary of Defense for Personnel and Readiness, and
state insurance regulators through NAIC, work together to take further
steps to improve the sharing of information available on enforcement
actions. Such steps could include:
* clarifying and expanding the definition of disciplinary actions that
should be entered and maintained in both DOD's and NAIC's databases
(e.g., beyond terminated agents, and agents and companies banned from
or limited in access to an installation);
* ensuring that all relevant information (e.g., agent, agency, and
company name; specific violation descriptions; and characteristics of
the life insurance product) on each disciplinary action is shared; and:
* reaching agreement on the mechanism to be used to share the collected
information, such that the information is proactively and
systematically communicated to both NAIC and DOD and can be readily
searched by either.
To better enforce existing DOD restrictions on the use of MyPay for
insurance allotments, we recommend that the Secretary of Defense direct
the Director of the Defense Finance and Accounting Service to:
* implement controls and measures that will improve DFAS's ability to
detect and minimize the use of MyPay to initiate insurance allotments,
and:
* provide state and federal enforcement authorities with information on
companies that are found to violate prohibitions on the use of MyPay to
establish a financial relationship other than those explicitly
permitted.
Agency Comments and Our Evaluation:
We provided a draft of this report to DOD and NAIC. The DOD Director of
Morale, Welfare and Recreation Policy, Office of the Under Secretary of
Defense, and the NAIC Chief Operating and Legal Officer submitted
written comments about the draft report. These comments are reprinted
in appendixes II and III, respectively. In addition, DOD and NAIC
provided technical comments on the report, which we incorporated as
appropriate.
In commenting on a draft of this report, DOD agreed with our
recommendations and stated that it would take actions to implement
them. For example, it stated that it would work with state insurance
regulators to take further steps to improve the sharing of information
on enforcement actions. In addition, the department stated that it
would review options for improving its ability to detect and minimize
the use of MyPay to initiate insurance allotments. These are important
efforts, and we would encourage DOD to develop plans and time frames
for their implementation. In response to our recommendation that DOD
provide state and federal enforcement authorities with information on
companies that are found to violate prohibitions on the use of MyPay,
DOD stated that it would provide information to these authorities when
requested. While providing such information when requested can help
these authorities with potential enforcement actions, we would
encourage DOD to be proactive in its sharing of such information.
Controls and measures implemented by DOD within the MyPay system could
identify instances where insurance companies and others may have
violated prohibitions on the use of the system, and federal and state
regulators might not become aware of such instances unless DOD takes
the initiative to provide them with the relevant information.
NAIC generally agreed with our recommendation that it work together
with DOD to improve the sharing of information on disciplinary actions,
and described efforts that it has undertaken to improve such
information sharing. For example, it stated that to help supplement the
reporting of information into MSORS, NAIC staff recently implemented a
more in-depth review of DOD's Commanders Page to identify relevant
information. NAIC emphasized, however, that it does not have regulatory
authority to mandate use of the system and the submission of data is
dependent on insurers, federal entities, and state entities other than
state insurance departments. We would encourage NAIC to be proactive in
its continuing efforts to work with DOD and others to help ensure that
its information-sharing system is fully utilized.
As agreed with your offices, unless you publicly release its contents
earlier, we plan no further distribution of this report until 30 days
from its date of issue. At that time we will send copies of this report
to interested congressional committees, the Secretary of Defense, the
Chief Executive Officer of the National Association of Insurance
Commissioners, and others. In addition, the report will be available at
no charge on GAO's Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-8246 or e [Hyperlink, edwardsj@gao.gov]
dwardsj@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. GAO staff that made major contributions to this report are
listed in appendix IV.
Signed by:
Jack E. Edwards:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Scope and Methodology:
To review recent actions taken to improve oversight of insurance sales
activities in the military market in the United States and the extent
to which such actions have been completed, we reviewed actions taken by
Congress, the Department of Defense (DOD), and state insurance
regulators since our previous reports were issued in 2005. As part of
our work, we interviewed officials from the National Association of
Insurance Commissioners (NAIC) as well as state insurance
commissioners' offices in several states and appropriate DOD officials
about their efforts. We selected particular states based on the
presence of military installations within those states known to have a
significant number of servicemembers with a rank of E-4 and below. To
identify new laws and regulations, we reviewed recent changes in
federal law passed by Congress; the Model Regulation created by NAIC;
several state laws based on the Model Regulation; and revised
regulations implemented by DOD, the services, and several
installations. To identify enforcement actions taken by state insurance
regulators and DOD officials, we spoke with relevant officials and
reviewed publicly available information and information provided by
state insurance regulators and DOD. To analyze the capabilities of the
information-sharing mechanism created by NAIC, we received a
demonstration at NAIC's offices of the system it had developed. We
reviewed DOD's information-sharing mechanism by accessing its publicly
available Web site. We also compared the data maintained by DOD and
NAIC. To review on-installation solicitation activities, we gathered
documents and other information during our visits to four military
installations, spoke with relevant officials at those installations,
and compared the activities identified with relevant state laws and DOD
regulations. We visited one installation each for the Army, Navy, Air
Force, and Marine Corps, and selected these installations based on the
presence at each of a significant number of servicemembers with a rank
of E-4 and below. Specifically, we visited Fort Sill, Oklahoma; Naval
Station Great Lakes, Illinois; Sheppard Air Force Base, Texas; and
Marine Corps Base Camp Lejeune, North Carolina. We also spoke with
several state insurance regulators during our fieldwork.
To assess factors that may contribute to ongoing improper insurance
product sales in the United States, we collected information on ongoing
insurance sales activities in the military market, comparing such
activities with the requirements of federal law, DOD regulations,
NAIC's Model Regulation, and state laws and regulations based on that
model. This work included collecting information from representatives
of DOD during site visits to the installations noted above, as well as
several state insurance regulators. To understand and review data on
insurance allotments created by servicemembers, we visited the Defense
Finance and Accounting Service (DFAS) in Indianapolis, Indiana, for an
explanation and demonstration of the MyPay system. We then obtained
from DFAS pay allotment data for calendar years 2006 through 2008. We
assessed the reliability of these data and found the data to be
sufficiently reliable for the purposes of this review. We conducted
analyses of these data to identify potentially improper allotments. In
general, these analyses consisted of searching for allotments with (1)
bank account numbers identified by state insurance regulators as being
used by insurance companies known to sell life insurance in the
military market; (2) bank account numbers, or partial bank account
numbers that incorporated the servicemember's Social Security number,
identified by regulators as being used by insurance companies; and (3)
the name of an insurance company listed as a dependent of the
servicemember. Because of ongoing litigation, we did not verify with
the servicemembers, insurance companies, or the banks involved that the
allotments identified by our searches were actually for the purchase of
life insurance or what type of product might be involved. However, as
noted in this report, the characteristics of the allotments identified
indicate that those allotments may have violated DOD and state
insurance regulations.
We conducted this performance audit from August 2008 to May 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from the Department of Defense:
Office Of The Under Secretary Of Defense:
Personnel And Readiness:
4000 Defense Pentagon:
Washington, D.C. 20301-4000:
May 18, 2009:
Mr. Jack E. Edwards:
Director:
Financial Markets and Community Investment:
U.S. Government Accountability Office (GAO):
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Edwards:
This is the Department of Defense (DOD) response to the GAO Draft
Report, GAO-09-452. "Insurance Sales To Military Personnel: Additional
Actions Needed to Prevent Improper Insurance Sales and Pay Allotments
Transactions," dated April 20, 2009 (GAO Code 250416).
The Department concurs with the findings. in this report. Questions
your staff may. have concerning these responses may be addressed to Mr.
James Ellis at (703) 588-0877 or via email James.Ellis@osd.mil.
Sincerely,
Signed by:
Pamela Crespi:
Director:
Morale, Welfare and Recreation Policy:
Attachment:
GAO Draft Report Dated April 20, 2009:
GAO-09-452 (GAO Codes 2504I6)
"Insurance Sales To Military Personnel: Additional Actions Needed To
Prevent Improper Insurance Sales And Pay Allotment Transactions"
Department Of Defense Comments To The GAO Recommendation:
Recommendation 1: The GAO recommended that the Under Secretary of
Defense for Personnel and Readiness and state insurance regulators,
through the National Association of Insurance Commissioners (NAIC),
work together to take further steps to improve the sharing of
information available on enforcement actions by clarifying and
expanding the definition of disciplinary actions that should be entered
and maintained in both DoD's and NAIC's databases. (p. 26/GAO Draft
Report)
DOD Response: Concur. The Department will work with State insurance
regulators to take further steps to improve information sharing
relative to enforcement actions.
Recommendation 2: The GAO recommended that the Under Secretary of
Defense for Personnel and Readiness and state insurance regulators,
through NAIC, work together to take further steps to improve the
sharing of information available on enforcement actions by ensuring
that all relevant information on each disciplinary action is shared (p.
27/GAO Draft Report)
DOD Response: Concur. The Department will work with the State insurance
regulators to take further steps to improve information sharing
relative to enforcement actions.
Recommendation 3: The GAO recommended that the Under Secretary of
Defense for Personnel and Readiness and state insurance regulators,
through NAIC, work together to take further steps to improve the
sharing of information available on enforcement actions by reaching
agreement on the mechanism to be used to share the information
collected, such that the information is proactively and systematically
communicated to both NAIC and DoD and can be readily shared by either,
(p. 27/GAO Draft Report)
DOD Response: Concur. The Department will work with the State insurance
regulators to take further stops to improve information sharing
relative to enforcement actions.
Recommendation 4: The GAO recommended that the Secretary of Defense
direct the Director of Defense Finance and Accounting Service (DFAS) to
implement controls and measures that will improve DFAS's ability to
detect and minimize the use of MyPay to initiate insurance allotments.
(p. 27/GAO Draft Report)
DOD Response: Concur. The DFAS will review options to detect and
minimize the use of MyPay to initiate insurance allotments.
Recommendation 5: The GAO recommended that the Secretary of Defense
direct the Director of DFAS to provide state and federal enforcement
authorities with information on companies that are found to violate
prohibitions on the use of MyPay to establish a financial relationship
other than those explicitly permitted. (p. 27/GAO Draft Report)
DOD Response: Concur. The DFAS will provide information to state and
federal enforcement authorities when requested.
[End of section]
Appendix III: Comments from the National Association of Insurance
Commissioners:
National Association of Insurance Commissioners:
May 18, 2009:
Jack E. Edwards:
Director, Financial Markets and Community Investment:
U.S. Government Accountability Office:
441 G. Street, NW:
Washington, DC 20548:
Dear Mr. Edwards,
Thank you for providing the NAIC with the GAO's draft report entitled
"Insurance Sales to Military Personnel: Additional Actions Needed to
Prevent Improper Insurance Sales and Pay Allotment Transactions" (GAO-
09-452). We appreciate the opportunity to comment on the continuing
commitment of state regulators to protect military personnel from
inappropriate sales of life insurance products.
With regard to specific references in the report calling for greater
data sharing between the NAIC and the Department of Defense (DoD), the
NAIC implemented the Military Sales Online Reporting System (MSORS).
This new system provides a centralized reporting mechanism through
which state regulators receive reports from insurers, federal
government entities and state government entities regarding
disciplinary actions taken against persons arising from the sale or
solicitation of any life insurance product on any military installation
of the United States. Through this system, the user has a uniform set
of data fields and a centralized point to report disciplinary actions
to all state insurance departments. MSORS may also be used to receive
reports from federal government entities and state regulatory entities
other than insurance departments. At the same time, it is important to
emphasize the NAIC does not have regulatory authority to mandate the
use of this system. The submission of data to this system is wholly
dependent upon the proactive reporting of information by insurers,
federal governmental entities and state governmental entities other
than state insurance departments. To help supplement the reporting of
information into MSORS, the internal staff of the NAIC has recently
implemented a more in-depth review of the DoD's Commander's Page to
identify relevant information. Finally, the NAIC agrees with the need
for greater clarification from Congress regarding the definition of a
"disciplinary action" to enhance the reporting of data.
While not mentioned in the report, the NAIC's Complaint Database
System, the national insurance database for the tracking of consumer
complaints, was also modified to collect complaint information
involving military personnel from state insurance departments.
Additionally, the NAIC's Regulatory Information Retrieval System (RIRS)
was modified to capture adjudicated final regulatory actions involving
solicitation and sales to military servicemembers. As part of this
effort, the NATC continues to encourage the DoD and military base
commanders to notify the appropriate state insurance regulator of
complaints and adjudicated regulatory actions upon receipt. By doing
so, the DoD can leverage the expertise and resources of state insurance
regulators early in the process to help identify inappropriate
practices and best protect military personnel.
Finally, the NAIC strongly supports and encourages the improvement of
controls to detect and prevent inappropriate insurance allotments
through the DoD's automated pay system, MyPay.
In closing, the NAIC would like to reiterate the proactive and positive
steps state regulators have taken to protect military personnel.
* Creation of a consumer brochure specifically tailored to address life
insurance issues faced by military personnel.
* Promulgation of the Military Sales Practices Model Regulation. To
date, 47 jurisdictions have adopted the model regulation.
* Execution of a Memorandum of Understanding with the DoD to encourage
the use of the NAIC's consumer brochure as part of the DoD campaign to
improve the financial literacy of military personnel and their
families, and promote the sharing of complaint data and disciplinary
actions with respect to sales or solicitations of life insurance
products to military personnel.
* Development of the Military Sales Policyholder Search Tool to help
military personnel research and recover compensation resulting from a
2006 multistate regulatory settlement agreement over life insurance
sales practices to the military.
* Ongoing monitoring by the NAIC Military Sales Working Group for
inappropriate sales activities to the military.
Again, the NAIC appreciates the opportunity to provide these comments
to the GAO and our members look forward to continued collaboration with
the DoD to protect the interests of military personnel and their
families.
Sincerely yours,
Signed by:
Andrew J. Beal:
Chief Operating Officer and Chief Legal Officer:
[End of section]
Appendix IV: Contact and Staff Acknowledgments:
GAO Contact:
Jack E. Edwards (202) 512-8246 or e [Hyperlink, edwardsj@gao.gov]
dwardsj@gao.gov.
Staff Acknowledgments:
In addition to the contact named above, Patrick Ward (Assistant
Director), Farah Angersola, William Bates, Tania Calhoun, Emily
Chalmers, William R. Chatlos, Barry Kirby, Marc Molino, Angela Pun,
Steve Ruszczyk, and Jennifer Schwartz made key contributions to this
report.
[End of section]
Related GAO Products:
Military Personnel: DOD Needs an Oversight Framework and Standards to
Improve Management of Its Casualty Assistance Programs. [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-06-1010]. Washington, D.C.:
September 22, 2006.
Financial Product Sales: Actions Needed to Protect Military Members.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-245T]. Washington,
D.C.: November 17, 2005.
Financial Product Sales: Actions Needed to Better Protect Military
Members. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-23].
Washington, D.C.: November 2, 2005.
Military Personnel: DOD Needs Better Controls over Supplemental Life
Insurance Solicitation Policies Involving Servicemembers. [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-05-696]. Washington, D.C.: June
29, 2005.
Military Personnel: Survivor Benefits for Servicemembers and Federal,
State, and City Government Employees. [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-04-814]. Washington, D.C.: July
15, 2004.
[End of section]
Footnotes:
[1] Additional information on government-provided survivor benefits is
available in the appendixes of GAO, Military Personnel: DOD Needs an
Oversight Framework and Standards to Improve Management of Its Casualty
Assistance Program, [hyperlink,
http://www.gao.gov/products/GAO-06-1010] (Washington, D.C.: Sept. 22,
2008). Also, comparisons of lump-sum and recurring benefits offered to
deceased servicemembers' survivors with those offered to deceased
federal, state, and local government employees' survivors are available
in GAO, Military Personnel: Survivor Benefits of Servicemembers and
Federal, State, and City Government Employees, [hyperlink,
http://www.gao.gov/products/GAO-04-814] (Washington, D.C.: July 15,
2004).
[2] GAO, Financial Product Sales: Actions Needed to Protect Military
Members, [hyperlink, http://www.gao.gov/products/GAO-06-245T]
(Washington, D.C.: Nov. 17, 2005); Financial Product Sales: Actions
Needed to Better Protect Military Members, [hyperlink,
http://www.gao.gov/products/GAO-06-23] (Washington, D.C.: Nov. 2,
2005); and Military Personnel: DOD Needs Better Controls over
Supplemental Life Insurance Solicitation Policies Involving
Servicemembers, [hyperlink, http://www.gao.gov/products/GAO-05-696]
(Washington, D.C.: June 29, 2005).
[3] Pub. L. No. 109-290, § 2, 120 Stat. 1317 (2006).
[4] NAIC is an association consisting of the heads of each state
insurance department and those of the District of Columbia and four
U.S. territories.
[5] DOD Inspector General, Personal Commercial Solicitation of Military
Personnel: Impact of DOD Actions and Public Law 109-290, Report No. D-
2009-056 (Arlington, Va.: Feb. 23, 2009), contains information on
supplemental life insurance sales to servicemembers in Germany and
Italy.
[6] For a copy of the Model Regulation, see appendix B of NAIC, Life
Insurance Sales to Members of the Armed Forces (Kansas City, Mo.: Sept.
28, 2007). Additional related information is available in NAIC, Life
Insurance Sales to Members of the Armed Forces--Report to Congress
(Kansas City, Mo.: Mar. 29, 2007). In this report, when we use "states"
in reference to state insurance laws or regulations, we are referring
to the 50 states, the District of Columbia, and the U.S. territories.
[7] [hyperlink, http://www.gao.gov/products/GAO-06-23]. The Related GAO
Products section at the end of this report lists recent products
pertaining to life insurance and other benefits available to
servicemembers and the survivors of deceased servicemembers.
[8] As defined in NAIC's Model Regulation, "side fund" means a fund or
reserve that is part of or otherwise attached to a life insurance
policy (excluding individually issued annuities) by rider, endorsement,
or other mechanism that accumulates premium or deposits with interest
or by other means. The term does not include (1) accumulated value or
cash value or secondary guarantees provided by a universal life policy;
(2) cash values provided by a whole life policy that are subject to
standard nonforfeiture law for life insurance; or (3) a premium deposit
fund that (a) contains only premiums paid in advance that accumulate at
interest; (b) imposes no penalty for withdrawal; (c) does not permit
funding beyond future required premiums; (d) is not marketed or
intended as an investment; and (e) does not carry a commission, either
paid or calculated.
[9] The federal government retains the authority to regulate insurance,
giving primary responsibility for insurance regulation to the states in
accordance with the McCarran-Ferguson Act of 1945. 15 U.S.C. §§ 1011-
1015. State insurance regulatory jurisdictions include the 50 states,
the District of Columbia, and four U.S. territories.
[10] DOD Instruction 1344.07 (rev. Mar. 30, 2006).
[11] The boards may be established by installation commanders to advise
and make recommendations to the commanders on matters concerning the
elimination of conditions that adversely affect the health, safety,
welfare, morale, and discipline of the armed forces. For the Joint
Service instruction, see Army Regulation 190-24, OPNAVINST1620.2A,
AFI31-213, MCO1620.2D, and COMDTINST1620.1E, Armed Forces Disciplinary
Control Boards and Off-Installations Liaison and Operations (July
2006).
[12] 72 Fed. Reg. 50580 (Aug. 31, 2007), final rule implementing the
consumer protection provisions of the John Warner National Defense
Authorization Act for Fiscal Year 2007, Pub. L. No. 109-364, § 670, 120
Stat. 2083, 2266 (2006).
[13] The scope of this report is generally limited to sections 8
through 13 of the Act, which address life insurance products, although
the Act addresses securities products in other sections.
[14] For sales and solicitations occurring off military installations,
state insurance law would apply.
[15] DOD Instruction 1344.07 applies to all individuals and businesses-
-including insurance agents--wanting to solicit on installations. The
revised service-specific regulations are Army, Personal Commercial
Solicitation on Army Installations, Army Regulation 210-7 (Oct. 18,
2007); Navy and Marine Corps, Solicitation and the Conduct of Personal
Commercial Affairs on Department of the Navy Installations, SECNAVINST
1740.2E (July 12, 2008); and Air Force, Personal Commercial
Solicitation on Air Force Installations, Instruction DODI1344.07_AFI36-
2917 (Nov. 7, 2007).
[16] For example, we obtained information about solicitation activities
on one military installation where an insurance agency provided some
funds to help sponsor an event on that installation. During the event,
the agency apparently offered a prize drawing (e.g., for a flat screen
television) as a means for collecting contact information from
servicemembers for insurance product solicitations. State insurance
regulators are currently reviewing whether such activities violate new
state regulations.
[17] The Office of the Under Secretary of Defense for Personnel and
Readiness reaffirmed DOD's view that DOD Instruction 1344.07, Section
E3.3, Use of the Allotment of Pay System, and requirements in this
section, such as the counseling and the 7-day cooling-off period, are
applicable to all military pay allotments for insurance purposes,
whether on or off the installation.
[18] A pay grade of E-4 is equivalent to a rank of corporal or
specialist in the Army, a petty officer third class in the Navy, a
corporal in the Marine Corps, and a senior airman in the Air Force.
[19] The Model Regulation states that this provision does not prohibit
assisting a servicemember by providing insurer or premium information
necessary to complete any allotment form.
[20] These numbers do not include active duty servicemembers stationed
on installations overseas--a population that is not within the scope of
this report. In 2008, DOD had approximately 1.4 million active duty
servicemembers worldwide.
[21] Indiana, Massachusetts, Michigan, Minnesota, and Pennsylvania had
not yet adopted the Model Regulation.
[22] The insurance commissioners for Georgia and Texas negotiated the
settlement on behalf of the participating regulators and NAIC.
[23] Policies purchased between January 1, 2000, and June 8, 2006, and
subsequently terminated will generally receive cash compensation. The
settlement also provides the formula for calculating the compensation.
Policies that are still in effect will generally receive better policy
terms, including cancellation of the automatic payment feature.
[24] The Texas Commissioner of Insurance is responsible for ordering
the release of the deposit. The settlement requires that compensation
to eligible owners be verified using protocols defined in the
settlement before the Commissioner can order release of the deposit.
[25] The settlement specified delivery procedures that the three
insurance companies should use to notify owners of eligible policies
about the payments. Initially, the policyholder's last known permanent
home address should be used. If a company cannot find a valid address
for a policyholder or the notice mailed was not deliverable, it is to
use other methods, including the use of a specified Internet-based
search engine.
[26] One of these two affiliated companies is the same company
currently under investigation in Georgia, according to publicly
available information.
[27] The off-limits restrictions for this investigation applied to all
armed forces located in the Navy's Midwest region.
[28] Pub. L. No. 109-290, § 9.
[29] [hyperlink, http://www.gao.gov/products/GAO-05-696].
[30] DOD, Financial Management Regulation 7000.14-R, Vol. 7A, Chapter
41, sec. 410801.
[31] The Model Regulation states that a formal banking relationship is
established when the depository institution (a) provides the
servicemember a deposit agreement and periodic statements and makes the
disclosures required by the Truth in Savings Act, 12 U.S.C. § 4301 et
seq., and the regulations promulgated thereunder, and (b) permits the
servicemember to make deposits and withdrawals unrelated to the payment
or processing of insurance premiums.
[32] We identified hundreds of thousands of additional questionable
allotments--besides those identified as going to insurance companies--
that did not appear to be going to accounts controlled by the
servicemembers. Many of these allotments used a common account among
multiple servicemembers or account numbers that included some variation
of the servicemember's Social Security number.
[33] [hyperlink, http://www.gao.gov/products/GAO-05-696].
[34] NAIC, Military Sales Practices Model Regulation § 7; see also § 6.
[35] After the automatic premium payment provision is triggered and the
savings fund becomes depleted, the policy then terminates, or lapses.
[End of section]
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