Federal Employees' Group Life Insurance
Retirement Benefit and Retained Asset Account Disclosures Could Be Improved Gao ID: GAO-12-94 November 10, 2011The Federal Employees' Group Life Insurance program (FEGLI), administered by the Office of Personnel Management (OPM), insures over 4 million federal employees and annuitants in the event of an enrollee's death. As a result, it is important that the program is clearly explained and properly overseen. However, some aspects of FEGLI, such as program disclosures and the use of retained asset accounts (RAA)--financial accounts used to settle life insurance claims--have raised questions about the program's operations. GAO was asked to describe and evaluate (1) the FEGLI program's structure and operations, (2) OPM's administration and oversight of the program, and (3) the use of RAAs in FEGLI claims payments. To address these objectives, GAO reviewed FEGLI law and regulations, interviewed OPM, Metropolitan Life Insurance Company (MetLife), and state insurance officials, and met with insurance industry experts.
OPM, by directing the funding of the Employees' Life Insurance Fund, has effectively allowed the FEGLI program to assume the risk of loss, while MetLife provides administrative services for the program. FEGLI has some insurance coverage features that most private sector group life plans do not, but a lack of disclosure in certain areas may make it difficult for employees to make fully informed decisions about buying coverage. Generally with private group plans the employer pays the full premium for a set amount of basic coverage, but the statute that created FEGLI requires that enrolled employees contribute two-thirds of the premium for Basic coverage. In addition, FEGLI premiums include the cost of a portion of retirement coverage, a feature generally not found in private sector alternatives, and which can make FEGLI coverage more costly than those alternatives. Further, for Basic coverage, FEGLI premiums are level over employees' working lives, so that early on premiums may be higher than the actual cost of coverage, while later they may be lower. This feature can make FEGLI coverage appear to be more costly than private individual plans for certain employees. However, the materials that FEGLI provides to employees do not disclose either the retirement coverage costs or the level premiums. Employees, particularly those who might leave government service or stop participating in FEGLI before realizing the benefits of these features, may find such disclosures important when deciding whether to purchase the insurance. OPM oversees FEGLI's provision of life insurance, but certain processes for reviewing program benefits and premiums could be improved. OPM administers basic FEGLI functions such as determining and collecting premiums, publishing program regulations, and overseeing the claims payment processes of MetLife, the insurer contracted to provide claims services. Because the program was intended to provide a low-cost benefit to federal employees, OPM has periodically conducted informal comparisons of FEGLI costs and benefits to those of private group life plans. In addition, to better ensure that the program charges appropriate premium rates, OPM actuaries conduct annual reviews and may recommend rate changes. However, OPM does not have documented processes for conducting its comparisons or for documenting any recommended rate changes. The lack of documented processes in both areas creates a risk that FEGLI benefits may not be meeting the needs of federal employees and could be priced at inappropriate rates. From the mid 1990s until early 2011, RAAs were the default settlement option for many FEGLI beneficiaries. While RAAs offer some benefits to FEGLI beneficiaries, OPM does not provide beneficiaries with some important information on RAA operations and protections. According to OPM and some industry officials, RAAs can reduce administrative costs, provide guaranteed interest rates, and allow beneficiaries time to decide how to use settlement funds. But other industry participants and a federal regulator said that beneficiaries might not be fully aware of their settlement options or that RAAs are not insured by the Federal Deposit Insurance Corporation. OPM has recently improved FEGLI disclosures for RAAs, and RAAs are no longer the default settlement option. However, the disclosures still lack information on how the accounts are established and regulated, and how certain protections differ across states. Without this information, beneficiaries may not be able to make fully informed decisions when choosing a settlement option for their FEGLI claims payment. GAO recommends that OPM (1) improve disclosures on important FEGLI features, (2) develop and implement a more structured process for reviewing the FEGLI program and premium rates, and document review outcomes, and (3) improve disclosures on RAA protections and regulation. OPM concurred with these recommendations.
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: Alicia P. Cackley Team: Government Accountability Office: Financial Markets and Community Investment Phone: (202) 512-7022GAO-12-94, Federal Employees' Group Life Insurance: Retirement Benefit and Retained Asset Account Disclosures Could Be Improved
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United States Government Accountability Office:
GAO:
Report to Congressional Requesters:
November 2011:
Federal Employees' Group Life Insurance:
Retirement Benefit and Retained Asset Account Disclosures Could Be
Improved:
GAO-12-94:
GAO Highlights:
Highlights of GAO-12-94, a report to congressional requesters,
Why GAO Did This Study:
The Federal Employees‘ Group Life Insurance program (FEGLI),
administered by the Office of Personnel Management (OPM), insures over
4 million federal employees and annuitants in the event of an enrollee‘
s death. As a result, it is important that the program is clearly
explained and properly overseen. However, some aspects of FEGLI, such
as program disclosures and the use of retained asset accounts (RAA)”
financial accounts used to settle life insurance claims”have raised
questions about the program‘s operations.
GAO was asked to describe and evaluate (1) the FEGLI program‘s
structure and operations, (2) OPM‘s administration and oversight of
the program, and (3) the use of RAAs in FEGLI claims payments. To
address these objectives, GAO reviewed FEGLI law and regulations,
interviewed OPM, Metropolitan Life Insurance Company (MetLife), and
state insurance officials, and met with insurance industry experts.
What GAO Found:
OPM, by directing the funding of the Employees‘ Life Insurance Fund,
has effectively allowed the FEGLI program to assume the risk of loss,
while MetLife provides administrative services for the program. FEGLI
has some insurance coverage features that most private sector group
life plans do not, but a lack of disclosure in certain areas may make
it difficult for employees to make fully informed decisions about
buying coverage. Generally with private group plans the employer pays
the full premium for a set amount of basic coverage, but the statute
that created FEGLI requires that enrolled employees contribute two-
thirds of the premium for Basic coverage. In addition, FEGLI premiums
include the cost of a portion of retirement coverage, a feature
generally not found in private sector alternatives, and which can make
FEGLI coverage more costly than those alternatives. Further, for Basic
coverage, FEGLI premiums are level over employees‘ working lives, so
that early on premiums may be higher than the actual cost of coverage,
while later they may be lower. This feature can make FEGLI coverage
appear to be more costly than private individual plans for certain
employees. However, the materials that FEGLI provides to employees do
not disclose either the retirement coverage costs or the level
premiums. Employees, particularly those who might leave government
service or stop participating in FEGLI before realizing the benefits
of these features, may find such disclosures important when deciding
whether to purchase the insurance.
OPM oversees FEGLI‘s provision of life insurance, but certain
processes for reviewing program benefits and premiums could be
improved. OPM administers basic FEGLI functions such as determining
and collecting premiums, publishing program regulations, and
overseeing the claims payment processes of MetLife, the insurer
contracted to provide claims services. Because the program was
intended to provide a low-cost benefit to federal employees, OPM has
periodically conducted informal comparisons of FEGLI costs and
benefits to those of private group life plans. In addition, to better
ensure that the program charges appropriate premium rates, OPM
actuaries conduct annual reviews and may recommend rate changes.
However, OPM does not have documented processes for conducting its
comparisons or for documenting any recommended rate changes. The lack
of documented processes in both areas creates a risk that FEGLI
benefits may not be meeting the needs of federal employees and could
be priced at inappropriate rates.
From the mid 1990s until early 2011, RAAs were the default settlement
option for many FEGLI beneficiaries. While RAAs offer some benefits to
FEGLI beneficiaries, OPM does not provide beneficiaries with some
important information on RAA operations and protections. According to
OPM and some industry officials, RAAs can reduce administrative costs,
provide guaranteed interest rates, and allow beneficiaries time to
decide how to use settlement funds. But other industry participants
and a federal regulator said that beneficiaries might not be fully
aware of their settlement options or that RAAs are not insured by the
Federal Deposit Insurance Corporation. OPM has recently improved FEGLI
disclosures for RAAs, and RAAs are no longer the default settlement
option. However, the disclosures still lack information on how the
accounts are established and regulated, and how certain protections
differ across states. Without this information, beneficiaries may not
be able to make fully informed decisions when choosing a settlement
option for their FEGLI claims payment.
What GAO Recommends:
GAO recommends that OPM (1) improve disclosures on important FEGLI
features, (2) develop and implement a more structured process for
reviewing the FEGLI program and premium rates, and document review
outcomes, and (3) improve disclosures on RAA protections and
regulation. OPM concurred with these recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-12-94] for key
components. For more information, contact Alicia Puente Cackley at
(202) 512-7022 or cackleya@gao.gov.
[End of section]
Contents:
Letter:
Background:
Although Similar to Private Sector Plans, FEGLI Has Distinct Employee
Benefits and Costs That Are Not Clearly Disclosed:
In Overseeing FEGLI, Processes for Setting Premium Rates Could Be
Improved:
RAAs Are No Longer the Default Settlement Option, but Better
Disclosures Are Needed:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Federal Employees' Group Life Insurance Program Financial
Information:
Appendix III: Comments from the Office of Personnel Management:
Appendix IV: GAO Contact and Staff Acknowledgments:
Figures:
Figure 1: Example of a Sample FEGLI RAA Draft:
Figure 2: FEGLI Funds and Operations:
Figure 3: FEGLI Assets and Liabilities, 2000-2010:
Figure 4: State Regulation of RAAs, as of August 2011:
Figure 5: FEGLI Premiums, Claims Paid, and Interest Income, 2000-2010:
Abbreviations:
ACLI: American Council of Life Insurers:
AD&D: accidental death and dismemberment:
CSRS: Civil Service Retirement System:
FEGLI: Federal Employees' Group Life Insurance:
FERS: Federal Employees Retirement System:
FDIC: Federal Deposit Insurance Corporation:
LIFAR: Life Insurance Federal Acquisition Regulation:
MetLife: Metropolitan Life Insurance Company:
NAIC: National Association of Insurance Commissioners:
NCOIL: National Conference of Insurance Legislators:
OFEGLI: Office of Federal Employees' Group Life Insurance:
OPM: Office of Personnel Management:
RAA: retained asset account:
SFFAS: Statement of Federal Financial Accounting Standards:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
November 10, 2011:
The Honorable Elijah E. Cummings:
Ranking Member:
Committee on Oversight and Government Reform:
House of Representatives:
The Honorable Edolphus Towns:
Ranking Member:
Subcommittee on Government Organization, Efficiency and Financial
Management:
Committee on Oversight and Government Reform:
House of Representatives:
Life insurance is an important purchase for many Americans because it
provides income replacement and financial protection to beneficiaries
if they lose loved ones. While many Americans obtain life insurance by
purchasing individual policies in the private market, many also obtain
such coverage through employer-sponsored group plans, including the
approximately 4 million federal employees and annuitants who purchase
life insurance through the Federal Employees' Group Life Insurance
program (FEGLI). This program, administered by the Office of Personnel
Management (OPM), involves substantial federal resources. In fiscal
year 2010, the total amount of FEGLI life insurance coverage in force
was $824 billion, and the balance in the plan's financial fund--the
Employees' Life Insurance Fund (FEGLI Fund)--totaled approximately $38
billion.[Footnote 1] In addition, throughout 2010, FEGLI paid out
approximately $2.6 billion in insurance claims to beneficiaries of
federal employees. The program also involves substantial premium costs
to enrolled federal employees, who pay two-thirds of the premium for
an initial amount of Basic life insurance and the entire premium for
any Optional insurance.[Footnote 2] As a result, ensuring that FEGLI
is properly administered, with appropriately priced policies, and that
federal employees receive enough information to make an informed
decision about participating in the program, is important.
The processes and methods for paying FEGLI life insurance claims
determine how beneficiaries of federal employees receive insurance
settlement funds. For the first several decades of the program,
beneficiaries received settlement funds through a lump-sum check. In
1994, FEGLI began offering retained asset accounts (RAA) to
beneficiaries as the default settlement option where the proceeds
payable were $7,500 or more. With RAAs, the Metropolitan Life
Insurance Company (MetLife)--the life insurer under contract with OPM
for the FEGLI program since its creation by Congress in 1954--makes
claims payments by establishing guaranteed accounts in beneficiaries'
names, manages the assets backing RAA liabilities created by these
accounts, determines how to invest RAA funds, guarantees a minimum
interest rate to be credited to retained funds, and administers the
accounts that allow beneficiaries to access funds as they choose.
While some industry participants point to the potential benefits that
RAAs provide, other participants have raised questions about these
accounts. For FEGLI, these questions have included whether
policyholders fully understand their settlement options and their
associated costs, benefits, and protections.[Footnote 3]
This report responds to your interest in how FEGLI operates and how it
uses RAAs. The report describes and evaluates:
* how FEGLI is structured and operated,
* OPM's administration and oversight of FEGLI, and:
* FEGLI's use of RAAs to pay claims.
To describe and evaluate FEGLI's key operations, we examined the
program's authorizing statute and associated regulations and reviewed
its key policy documents, including the contract between OPM and
MetLife. In addition, we compared FEGLI's coverage and practices with
those of several large private sector group life insurers. To describe
and evaluate OPM's administration and oversight of the FEGLI program,
we reviewed applicable federal and state laws, regulations, policy
guidance, and materials from consumer advocates, and examined OPM's
monitoring, reporting, and other oversight activities. We also
interviewed OPM and MetLife officials and reviewed FEGLI annual
financial and performance reports to understand how FEGLI operates
financially and to determine its assets and liabilities. In addition,
we reviewed the federal budget for information on FEGLI's claims,
assets, and liabilities. We found FEGLI program information and data
from OPM and MetLife to be reliable for the purposes of this report.
To identify any FEGLI regulatory or consumer protection issues, we met
with industry association representatives, a consumer advocate, and
other experts. To describe and evaluate the role of RAAs in FEGLI's
settlement process, we examined key OPM and MetLife policy documents
and program guidance and interviewed OPM management officials. We
focused on how RAAs function, what kinds of RAA disclosures FEGLI
participants receive, and what RAA protections are available to FEGLI
beneficiaries.[Footnote 4] In addition, we examined how RAAs are
regulated by focusing on the activities and processes OPM and state
regulators use to oversee these accounts. In particular, we
interviewed insurance regulators from California, Florida, New York,
North Carolina, and Maryland to determine their methods for overseeing
RAAs. We selected this sample of states because it is geographically
diverse, has a large number of federal employees, and contains some
states that have RAA-specific regulations and others that do not. For
a more detailed description of our scope and methodology, see appendix
I.
We conducted this performance audit from September 2010 to November
2011 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.
Background:
Established by Congress in the Federal Employees' Group Life Insurance
Act of 1954[Footnote 5] as a benefit to federal employees and their
families and administered by OPM, FEGLI offers federal employees the
opportunity to choose from a range of group term life insurance
coverage options.[Footnote 6] FEGLI insurance is provided through a
contract OPM has established with MetLife. MetLife's Office of Federal
Employees' Group Life Insurance (OFEGLI) adjudicates claims under the
FEGLI program and makes payments to FEGLI beneficiaries.[Footnote 7]
FEGLI Insurance Coverage and Costs:
Most federal employees, including part-time employees, are eligible
for insurance under FEGLI, and approximately 85 percent purchase FEGLI
coverage. Upon starting their federal employment, federal employees
are automatically enrolled in FEGLI's Basic life insurance coverage
unless they file appropriate paperwork with their employing agency to
opt out of the program. Basic life insurance coverage equals a federal
employee's annual salary rounded up to the next even thousand plus two
thousand dollars, or $10,000, whichever is higher.[Footnote 8] Basic
insurance also provides an extra benefit to employees under age 45, at
no additional cost. This extra benefit doubles the amount of Basic
insurance payable if the employee dies at age 35 or younger. The extra
benefit decreases 10 percent each year until there is no extra benefit
at age 45 and above. For Basic coverage, employees pay two-thirds of
the premium determined by OPM, and the employing agencies pay the
remaining third.[Footnote 9] The rate all covered employees,
regardless of age, pay for each $1,000 of Basic insurance is $0.150 bi-
weekly or $0.325 monthly. FEGLI also provides accidental death and
dismemberment (AD&D) insurance as part of its Basic insurance at no
additional cost.[Footnote 10] AD&D insurance protects employees in the
event of a fatal accident or an accident which results in the loss of
a limb or eyesight. For benefits to be paid, the death or loss must
occur no later than 1 year from the date of the accident and must be a
result of bodily injury sustained from that accident.
Federal employees may also choose to purchase three types of Optional
insurance in addition to Basic coverage--Options A, B, and C--by
submitting a Life Insurance Election Form (SF 2817) within 60 days of
beginning their employment to their human resources office.[Footnote
11]
* Option A offers $10,000 of life insurance coverage. Premiums for
Option A coverage vary by age groups, as determined by OPM. These
groups start with employees "under age 35," progress in 5-year
increments until age 59, and finish with a "60 and over" group. Bi-
weekly and monthly costs for Option A coverage range from $0.30 and
$0.65, respectively, for the "under age 35" group to $6.00 and $13.00,
respectively, for the "60 and over" age group.[Footnote 12]
* Option B offers additional Optional insurance coverage in an amount
of one to five multiples of the employee's annual salary, after
rounding the salary up to the next even thousand. For Option B
coverage, age group designations also apply but begin with "under age
35," continue in 5-year age increments until age 79, and end with an
"80 and over" age group. Bi-weekly and monthly costs for each $1,000
in insurance can range from a low of $0.03 and $0.065, respectively,
for employees under 35 to a high of $2.40 and $5.20, respectively, for
employees 80 and older.
* Option C covers eligible family members of an employee or retiree,
including the enrollee's spouse and eligible dependent children. The
employee selects one to five times an amount (a "multiple")--$5,000
for a spouse and $2,500 for each eligible dependent child. If
employees purchase optional coverage within the 60 days, no medical
underwriting is necessary. For Option C coverage, the age group
designations are the same as for Option B, and costs range from bi-
weekly and monthly amounts of $0.27 and $0.59, respectively, per
multiple for those under 35 to $6.00 and $13.00, respectively, per
multiple for those 80 and older.
When federal employees retire, FEGLI also offers Basic and Optional
life insurance, and employees are able to choose among several
retirement coverage levels after age 65. For Basic insurance in
retirement, employees must choose whether to reduce their
postretirement insurance level by 75 percent, 50 percent, or maintain
full coverage. Those choosing the 75 percent reduction pay no premiums
after reaching age 65. Those choosing the 50 percent reduction or full
coverage option continue to pay premiums in amounts determined by OPM;
the postretirement premium rates are greater than preretirement rates.
When the 75 percent reduction in coverage is selected, OPM reduces the
coverage level by 2 percent per month beginning at age 65, until 25
percent of the original coverage remains. If the 50 percent reduction
is selected, the coverage level reduces by 1 percent per month
beginning at age 65, until 50 percent of the original coverage
remains. If no reduction is selected, the coverage does not reduce.
Federal employees may also choose to continue Optional coverage into
retirement and FEGLI offers several choices. Option A coverage reduces
2 percent per month beginning at age 65, to 25 percent of the
preretirement amount, and no premiums are charged in retirement after
the retiree reaches age 65. For Options B and C, employees desiring
coverage must elect to continue one to five multiples of coverage into
retirement, and elect whether to have all of those multiples retain
full coverage or reduce by 100 percent, at a rate of 2 percent per
month for 50 months, beginning at age 65. For the 100 percent
reduction option, once the reduction starts, retirees do not pay
premiums after reaching age 65. For the full coverage option, retirees
continue to pay the full premium, as determined by OPM for the
retiree's specific age group.[Footnote 13]
The following provides an example of FEGLI premiums for a 48-year old
federal employee, married with three children, and earning $88,300 per
year.
* According to OPM, Basic insurance would cost $13.65 bi-weekly and
$354.90 annually.[Footnote 14]
* If the employee seeks to maximize Option B coverage by purchasing
five times annual pay, Option B coverage would cost $40.05 bi-weekly
and $1,041.30 annually.[Footnote 15]
In this example, the employee purchases Basic and Optional life
insurance coverage totaling $536,000, at an annual cost of $1,396.20.
If this employee continues full Basic and Option B coverage after
retirement, by choosing the No Reduction option for both, and retires
at the age of 65 (assuming the same $88,300 salary), Basic insurance
would cost $1,998.36 annually and Option B coverage would cost
$8,330.40 annually.[Footnote 16] The total amount of Basic and
Optional insurance for the employee at the time they retire would be
$536,000 at an annual cost to the employee of approximately $10,300.
Adding or Adjusting FEGLI Coverage:
Federal employees may add or adjust FEGLI coverage when life events
such as marriage, divorce, death of a spouse, or the acquisition of an
eligible child occurs. Federal employees may also add or adjust
coverage when OPM offers open seasons, although OPM officials noted
that these periods are rare.[Footnote 17] FEGLI most recently offered
open seasons in 1999 and 2004. Employees who opted out of FEGLI
coverage upon starting federal employment may also add coverage during
these times. Additionally, if at least a year has passed since an
employee opted out of FEGLI, an employee may request FEGLI coverage by
providing medical information via a form partially completed by the
employee's physician. Employees are responsible for any associated
expenses such as a physician's fee. In addition, certain employees of
the Department of Defense are eligible to elect FEGLI coverage without
experiencing a qualifying life event or by providing medical
information.
Payment of FEGLI Benefits:
When a federal enrollee with FEGLI coverage dies, MetLife's OFEGLI
pays claims to the federal enrollee's designated beneficiary. If no
beneficiary has been designated, payments will be made roughly in the
following order pursuant to statute: to the enrollee's surviving
spouse; if none, to the child or children in equal shares; if none, to
surviving parents in equal shares; if none, to the executor or
administrator of the employee's estate; or, if none, to the enrollee's
next of kin as determined by applicable state laws. The enrollee's
beneficiary or other survivor must follow a prescribed process for
filing a claim and receiving payment that begins with contacting the
human resources office at the insured's agency to report the death,
submitting a certified death certificate, and submitting a Claim for
Death Benefits form.
According to FEGLI materials, beneficiaries may choose a payout by
receiving a lump-sum check or an RAA. According to the American
Council of Life Insurers (ACLI), RAAs have existed since 1982, and
many insurers provide them for both group and individual life
insurance policies. When an insured person dies, the life insurance
company that issued the policy may place the death benefit proceeds
into an RAA, which accrues interest for the beneficiaries from the day
the account is established for as long as the funds remain in the
account. Beneficiaries have full and immediate access to their funds
and can withdraw some or all of the funds at any time without penalty.
In addition, MetLife pays RAA accountholders a minimum guaranteed
interest rate that typically is calculated using one of several market
rate indexes.[Footnote 18] MetLife compounds interest on RAAs daily
and credits that interest monthly. MetLife issues a book of drafts to
the beneficiary, allowing immediate access to the funds without
penalty. Beneficiaries may then use them to meet various financial
needs, for example to pay bills, make retail purchases (figure 1), or
transfer funds from the RAA to another account, such as a savings or
checking account.[Footnote 19] FEGLI beneficiaries, like other life
insurance beneficiaries, may leave funds in their RAA for as long as
they wish or withdraw the entire amount at any time, and there are no
maintenance fees associated with these accounts. By investing the
assets backing the liabilities of RAAs funded with FEGLI claims
payments, MetLife may earn a profit in the form of a spread, or the
difference between the interest it pays beneficiaries and what it
earns on invested assets backing RAA liabilities less expenses.
MetLife assumes the investment risk associated with investing these
assets.
Figure 1: Example of a Sample FEGLI RAA Draft:
[Refer to PDF for image: illustration]
Source: MetLife.
[End of figure]
Although Similar to Private Sector Plans, FEGLI Has Distinct Employee
Benefits and Costs That Are Not Clearly Disclosed:
Some FEGLI Features Are Similar to Those of Private Sector Group Life
Insurance:
FEGLI's Basic life insurance coverage shares several similarities with
the coverage offered by private sector group plans. First, both FEGLI
and most private sector plans automatically enroll employees in basic
coverage, often including AD&D coverage, unless they opt out of the
program, and both provide options for employees who opted out of the
program to join later.[Footnote 20] Second, neither FEGLI nor private
sector basic insurance initially requires employees to provide
information on their medical condition or history.[Footnote 21] That
is, any employee can enroll in the program regardless of age or state
of health at the time that the employee is first eligible to join.
Third, while some private sector plans offer a flat amount of basic
insurance ranging from $5,000 to as much $50,000, many offer coverage
in an amount equal to the employee's salary or a multiple of it, as
FEGLI does. Finally, FEGLI and private sector programs both typically
use a composite rate structure to price their basic group life
benefits; that is, a rate structure where all employees pay the same
average rate regardless of age or health status. The effect of a
composite rate is that all employees pay the same rate per $1,000 of
insurance coverage regardless of characteristics such as age and
health that impact the cost of life insurance.
In addition to similarities with respect to basic coverage, FEGLI and
private sector group plans generally offer some form of optional
coverage that shares some similarities as well. First, employees in
both FEGLI and private group plans typically must fund any optional
coverage with no employer contribution. In addition, both FEGLI and
private sector employers generally offer optional coverage in
increments of one to five times the employee's annual salary. Finally,
both FEGLI and private sector plans generally offer life insurance
coverage on the employee's dependants.
Unlike Private Group Life Plans, FEGLI Assumes Most of the Insurance
Risk:
Unlike most private sector group life insurance plans, FEGLI,
according to OPM officials, assumes most of the risk of loss
associated with the program. In the private sector, according to
industry experts, employers generally purchase group life insurance
policies from insurers that then bear the risk of loss.[Footnote 22]
That is, the insurer bears the risk that the claims associated with
the policy may exceed the premiums collected from the policyholder. In
contrast, according to OPM officials, the FEGLI program effectively
bears all such risk based on the expectation that the FEGLI Fund is
sufficient to cover claims made by FEGLI beneficiaries.
FEGLI's creation contemplated the federal government purchasing group
life insurance from a private sector group life insurer or insurers
and mitigating the risk of loss by purchasing reinsurance for those
insurers. However, as the FEGLI Fund balance has grown over time, OPM
officials noted, the need for an insurer and reinsurers to assume the
program's risk of loss has diminished.[Footnote 23] For example,
according to OPM and MetLife officials, even though OPM has a policy
with MetLife to provide FEGLI life insurance and makes funds available
to MetLife for this policy, when FEGLI beneficiaries submit claims,
MetLife draws upon OPM's FEGLI Fund to make claims payments. In
addition, according to the same officials, MetLife's exposure to loss
is currently limited to its role as a reinsurer for the FEGLI program,
as it covers approximately 85 percent of the FEGLI program's
reinsurance. However, this exposure would only result in payment after
the depletion of the entire FEGLI Fund, which has a balance as of
September 30, 2010, of $37.6 billion, or approximately 14 times the
amount of FEGLI's annual claims payments. OPM and MetLife both
consider the possibility of exhausting the FEGLI Fund to be so remote
that the cost of the reinsurance is negligible. While the program
initially had about 160 reinsurers, only 10 were participating in
2011, with MetLife providing about 85 percent of the program's
reinsurance. OPM pays each of the 10 reinsurers approximately $500
annually for their participation in the program, and FEGLI has never
had to use this reinsurance coverage.
Certain FEGLI Features and Benefits Can Result in Higher Costs for
Employees Compared with Private Sector Group Term Insurance:
Compared with private sector group term life plans, FEGLI has certain
features and benefits that can make premiums for all coverage higher
for federal employees. First, FEGLI's statute requires enrolled
federal employees to pay two-thirds of the premium rate for their
Basic life insurance coverage, while employers in the private sector
generally cover the full cost of their employees' basic
coverage.[Footnote 24] According to insurance industry officials, the
amount of basic coverage that private group plans generally provide
can be a flat amount or equal to an employee's annual salary or more.
Whether an employee receives more employer-paid coverage through a
private plan that pays the entire premium for some amount of coverage
than through FEGLI would depend on the amount of no-cost coverage the
private sector employer provides.[Footnote 25]
Second, according to OPM officials, FEGLI offers federal employees a
retirement life insurance benefit that is financed, in part, by a
portion of the premiums charged while employees are working. FEGLI's
retirement benefit raises FEGLI premiums above those of most private
sector group plans, which generally do not offer such a benefit. As we
have seen, FEGLI offers a postretirement benefit for both Basic and
Optional coverage. According to OPM officials, federal employees who
participate in FEGLI begin prefunding, or paying in advance for, Basic
retirement coverage as soon as they begin their FEGLI coverage.
Prefunding for Basic coverage is necessary because newly retired
employees over age 65 who choose a 75 percent reduction in this
coverage are no longer required to pay premiums for the coverage they
are receiving. With Optional coverage, except for Option A, employees
begin prefunding the cost of their retirement benefits when they reach
age 55 and continue to do so until they retire. Newly retired
employees who choose a 75 percent reduction in their Option A
coverage, and a 100 percent reduction in Options B and C, coverage no
longer pay premiums for the Optional coverage they are receiving. In
addition, life insurance coverage for people of retirement age or
older can be expensive. According to private sector insurance industry
participants we spoke with, the cost of postretirement benefits is
quite high because as employees age, the likelihood of the insurer
being required to pay a claim also increases. As a result, few private
sector plans offer such benefits. While OPM has stated that having
flexible benefits, including life insurance coverage in retirement,
contributes to employee retention, insurance industry participants
with whom we spoke said that they have not seen any evidence that
postretirement coverage attracted or retained employees.
In addition, for certain individuals, FEGLI Basic coverage may appear
more costly than private sector basic life insurance. First, FEGLI
features level premiums that may not be a part of some private
individual policies. With such a feature, monthly premiums remain the
same over time instead of increasing with age. Compared to a policy
without such a feature, level premiums are higher earlier in life and
then become lower at a certain point. If relatively younger federal
employees compare FEGLI to private individual coverage without level
premiums, FEGLI coverage may appear to be more costly, depending on
their age. Second, because FEGLI is a group life program, all
individuals pay the same premiums regardless of their health status,
unlike individual coverage where premiums generally depend on the
health of the person being insured. As a result, if relatively
healthier federal employees compare FEGLI to private individual
coverage, FEGLI coverage could also appear more costly. Finally,
FEGLI's postretirement coverage, which increases FEGLI premiums but is
not generally part of private plans, also contributes to FEGLI's cost
relative to private sector alternatives that do not feature this
coverage. The possibility that FEGLI coverage may appear more costly
than private sector alternatives to relatively younger or healthier
federal employees is mitigated to some extent by the extra amount of
coverage FEGLI provides federal employees under age 45. However, in
cases where FEGLI's premiums exceed those for similar coverage in the
private sector, federal employees may conclude that FEGLI is more
expensive and choose to opt out of the program.
Although FEGLI's Disclosures Cover Key Aspects of the Program, They Do
Not Cover Some Important Features:
While FEGLI disclosures cover many key aspects of the program, they do
not cover certain program features that could affect an employee's
decision to purchase FEGLI coverage. Consistent with OPM's strategic
goal of helping ensure that federal employees fully understand their
benefits, and with the National Association of Insurance
Commissioners' (NAIC) guidance on informative marketing materials, OPM
provides a significant amount of information on FEGLI through a
handbook, program booklet (a condensed version of the handbook for
employees), and website. These disclosures provide information on a
range of topics, including enrollment, coverage options and costs,
designation of beneficiaries, claims and claims payments, and
resources for employees if they have questions or issues. OPM provides
this information in hard copy and through the FEGLI website, which
also includes a calculator that allows users to determine premiums for
various combinations of life insurance coverage. Providing timely and
informative FEGLI guidance materials to federal agency human resources
staff is another means through which OPM seeks to ensure that federal
employees understand their benefits.
While these disclosures are useful, they do not make employees aware
of some FEGLI benefits and features that could affect their decision
to participate in the program.
* The disclosures do not inform employees that premiums for Basic
coverage include a postretirement benefit and that employees prefund
this benefit.[Footnote 26] Employees who are unaware of this
prefunding element could decide that FEGLI coverage is too expensive,
decline participation in the program, and not receive FEGLI's
potentially valuable insurance benefits. Conversely, employees that
plan to work in the federal government for only a short period, or at
least not through retirement, could decide to participate in the
program, not knowing that they would be paying for a benefit they
would never receive.
* FEGLI disclosures, while showing a constant premium rate, do not
make employees aware of the level-premium feature of the program's
Basic coverage that spreads premiums equally over the duration of the
policy rather than charging less during early policy years and more in
later policy years. Employees unaware of this feature could conclude
that FEGLI coverage is more expensive than alternative private sector
coverage, particularly in the earlier years of the policy, and decide
to opt out, foregoing potentially valuable life insurance coverage.
* The disclosures also do not convey to federal employees that, for
Basic coverage, FEGLI charges a composite premium that averages the
cost of insurance for all participants regardless of age or health.
That is, participants pay the same regardless of whether they pose a
lesser or greater risk of loss. This averaging can be of great benefit
to some, especially those who may not be able to obtain coverage
elsewhere. However, as with the level-premium feature, those not aware
of this feature could conclude that FEGLI coverage is simply more
expensive than alternative private sector coverage and forego coverage
they might not be able to obtain elsewhere.
In Overseeing FEGLI, Processes for Setting Premium Rates Could Be
Improved:
OPM Performs Many of FEGLI's Administrative and Operational Functions
and Works Closely with MetLife:
According to OPM officials, OPM performs many FEGLI administrative and
operational functions, including collecting premiums, overseeing
FEGLI's claims settlement process (which MetLife administers), and
publishing FEGLI's regulations and disclosures. The same officials
said that FEGLI premiums are collected by withholding premiums from
enrollees' paychecks, annuities, or compensation and collecting agency
contributions from employing agencies or retirement systems, as
applicable, for deposit by OPM into the FEGLI Fund. On a monthly
basis, premiums are moved from the FEGLI Fund which is held by the
Treasury Department, into a letter of credit account, which is
administered by a Federal Reserve Bank and from which MetLife can draw
down funds to pay claims. MetLife's OFEGLI, which is responsible for
paying claims to beneficiaries, draws money from the FEGLI Fund on a
monthly basis using the line of credit and transfers claims payments
to beneficiaries. In addition to its premium collection function, OPM
officials said OPM is also responsible for investing FEGLI Fund assets
in government securities and ensuring that investment income on
program assets is taken into account when determining program costs.
Funds that flow through FEGLI, according to these officials,
ultimately begin with employee and agency premiums and end with a
payout to beneficiaries in the form of a check or an RAA. Figure 2
illustrates the flow of FEGLI funds between those endpoints, including
being held in the FEGLI Fund.
Figure 2: FEGLI Funds and Operations:
[Refer to PDF for image: illustration]
Federal agency: Premiums for Basic coverage;
Federal employee: Premiums for Basic and Optional coverage;
Go into:
Employees‘ Life Insurance Fund: Administered by OPM and held at the
U.S.Treasury:
Investments (U.S. Treasury securities);
Investment income returned to Fund.
MetLife-OFEGLI:
Lump-sum check to Employee's beneficiary; or:
RAA is established:
RAA: MetLife general account[A]:
Investments;
Investment income returned to account;
RAA withdrawal and interest: to Employee's beneficiary.
Sources: OPM; Art Explosion.
[A] MetLife's general account and the investment income it earns are
used to meet beneficiaries' RAA withdrawals and the interest MetLife
guarantees beneficiaries on their RAA accounts.
[End of figure]
In addition to managing FEGLI resources, OPM officials said they
monitor and oversee MetLife's claims settlement processes by receiving
and reviewing weekly reports on claims activity. In addition to
managing processes for dispersing FEGLI funds, OPM officials said they
receive annual financial reports on claims and administrative costs
that are used to determine the timeliness of payments and, as noted
earlier, help predict future claims and other expenses.[Footnote 27]
In addition to producing and updating FEGLI's Handbook, Program
Booklet, website and forms, OPM officials said that OPM also issues
FEGLI regulations, including the Life Insurance Federal Acquisition
Regulation (LIFAR), that guide the program's operations.[Footnote 28]
The regulations, for example, outline the types of Basic and Optional
insurance available through FEGLI, the amounts of FEGLI coverage that
the program offers, eligibility requirements, program costs, and
beneficiary designation. Additionally, the LIFAR describes the terms
of the contractual arrangement between OPM and MetLife under the FEGLI
program, including MetLife's receipt and administration of claims and
the calculation of administrative costs and profit levels. The LIFAR
also provides guidance on contract oversight, including requiring
policies and procedures to help ensure that FEGLI services conform to
the contract's quality requirements, and an OPM evaluation of
MetLife's system of internal controls. Additionally, the LIFAR
requires that MetLife develop a quality assurance program that
includes procedures to address (1) timeliness of claims payments to
beneficiaries, (2) quality of services and responsiveness to
beneficiaries and OPM, and (3) detection and recovery of fraudulent
claims, among other things. Although FEGLI's statute exempts the
program from contractual competitive bidding, the LIFAR also provides
direction on contract modifications and circumstances that would allow
for contract termination. According to OPM officials, they fulfill
these requirements by monitoring consumer feedback, tracking the
timeliness of claims payments, and reviewing external audits of
MetLife, which include OFEGLI. These officials said that they have not
received any indication of problems with timeliness or responsiveness,
or indications of any other deficiencies.
Although OPM has numerous administrative and oversight
responsibilities for FEGLI, MetLife, according to its officials, has a
central role in several key FEGLI financial and claims administration
functions. First, officials said that MetLife works with OPM on an
annual basis to develop a monthly premium amount. This premium is the
amount made available to MetLife to pay claims, MetLife's
administrative expenses, and MetLife's service charge. MetLife
annually conducts a review of claims paid and recommends a premium
amount to OPM based on the projected level of claims and expenses for
the upcoming fiscal year. Officials noted that OPM and MetLife then
agree on a total annual premium level for FEGLI, which OPM then uses
to determine rates for employees and federal agencies. Second, OPM
officials said that MetLife plays a key role in receiving life
insurance claims from FEGLI beneficiaries, processing these claims,
and ensuring that beneficiaries receive their life insurance
settlements. On a daily basis, MetLife officials said that they
determine how much they need to withdraw from the letter of credit
account to meet expenses associated with beneficiaries' use of their
RAAs.
In addition, OPM officials said MetLife prepares weekly and annual
financial reports on its FEGLI claims that provide important
information on the flow of funds from the FEGLI Fund to MetLife and
from MetLife to beneficiaries. OPM reimburses MetLife for its
administrative expenses for FEGLI, including its claims and financial
functions. OPM officials said that most of these expenses are the
result of MetLife's OFEGLI, through which MetLife processes and pays
claims. In 1997, according to MetLife officials, OPM and MetLife
entered into an agreement that capped MetLife's direct administrative
expenses for FEGLI at $6.1 million and indirect expenses at 20 percent
of that ceiling. This ceiling is adjusted annually by the Urban
Consumer Price Index. In addition to administrative expenses,
officials said that MetLife receives a service charge for adjudicating
and administering FEGLI claims. This service charge is calculated
using the profit analysis factors found in the LIFAR. For fiscal year
2011, according to OPM officials, MetLife's service charge was
$965,000.[Footnote 29]
Under OPM's Administration, FEGLI Funding Has Been Sufficient to Pay
Claims and Meet Program Liabilities:
Under OPM's administration of the FEGLI program, according to OPM
officials, program funds have been sufficient to pay life insurance
claims and meet program liabilities. According to OPM officials, one
of their key responsibilities is to determine FEGLI's liability for
current and future life insurance coverage and to take steps to ensure
that sufficient assets are available to meet these potential
liabilities. Various factors affect how these liabilities are
calculated, including changes in the mortality of federal employees,
federal salaries, and interest rates. OPM actuaries said that they use
these factors as part of an actuarial valuation model to make annual
estimates of FEGLI's current and future liabilities. The actuaries
then estimate the funds needed from premiums to cover these
liabilities and program expenses, taking into account interest on
retained funds and the FEGLI Fund balance. In addition, according to
OPM officials, OPM actuaries monitor and annually review the claims
experience for each FEGLI insurance coverage option, by age group and
gender, and make recommendations to OPM senior management on the
premium rates employees and their agencies should pay.
According to OPM officials, the FEGLI program is adequately funded if
FEGLI revenues meet or slightly exceed program costs and the program's
assets meet or exceed its liabilities. Figure 3 shows OPM data on
FEGLI's assets and liabilities from 2000 to 2010, and appendix II
provides additional information on FEGLI's annual premiums, claims,
and investment income. In particular, OPM reported in its 2010 annual
report that the program's liabilities as of September 30, 2010, were
approximately $43.9 billion and that its assets totaled $39.2
billion.[Footnote 30] According to OPM officials, while the reported
data would appear to indicate that the program was underfunded, they
believe FEGLI's financing is adequate because the overall liability
amount reported above does not take into account employee
contributions for optional insurance coverage, which has the effect of
making the liability appear to be larger than it actually is.[Footnote
31] According to OPM, they take these funds into account in other
internal analyses, and these analyses show that the program's assets
sufficiently meet the program's liability when employee contributions
are considered.[Footnote 32]
Figure 3: FEGLI Assets and Liabilities, 2000-2010:
[Refer to PDF for image: multiple line graph]
Nominal dollars in billions:
Calendar year: 2000;
Assets: $23.1 billion;
Liabilities: $25.1 billion.
Calendar year: 2001;
Assets: $24.6 billion;
Liabilities: $26.7 billion.
Calendar year: 2002;
Assets: $26.2 billion;
Liabilities: $28.1 billion.
Calendar year: 2003;
Assets: $27.7 billion;
Liabilities: $29.9 billion.
Calendar year: 2004;
Assets: $29.0 billion;
Liabilities: $31.5 billion.
Calendar year: 2005;
Assets: $30.5 billion;
Liabilities: $32.9 billion.
Calendar year: 2006;
Assets: $32.1 billion;
Liabilities: $34.2 billion.
Calendar year: 2007;
Assets: $33.7 billion;
Liabilities: $35.9 billion.
Calendar year: 2008;
Assets: $35.4 billion;
Liabilities: $37.5 billion.
Calendar year: 2009;
Assets: $37.3 billion;
Liabilities: $39.7 billion.
Calendar year: 2010;
Assets: $39.2 billion;
Liabilities: $44.0 billion.
Source: OPM Agency Financial Reports and Performance and
Accountability Reports.
[End of figure]
OPM's Processes for Achieving the Goal of Providing a Low-Cost Benefit
to Federal Employees Lacked Clarity:
The legislation that created FEGLI intended the program to offer a low-
cost insurance benefit to federal employees and their families.
Specifically, the statute that created FEGLI described the program as
an insurance benefit for federal employees that provides insurance at
rates OPM determines are generally consistent with the lowest basic
premium rates for new policies issued to large employers. Further,
FEGLI's legislative history suggests that the program's purpose is to
provide low-cost group life insurance to federal employees. In
addition, OPM's most recent strategic plan calls for ensuring that
available benefits, including life insurance benefits, align with
employees' needs.
As we have seen, however, FEGLI has features--some required by
statute--that can make its coverage more expensive for federal
employees compared with the type of coverage generally offered by
private group life insurance programs. For example, as noted earlier,
FEGLI requires an employee contribution for Basic insurance, something
generally not required in private sector plans. In addition, the
program features a postretirement benefit that, although not generally
found in private sector plans, does increase the premiums that FEGLI
participants must pay. OPM officials told us that they periodically
compare FEGLI to other large group life insurance plans, primarily in
terms of coverage levels, and have concluded that the features and
benefits FEGLI offered are on par with those offered by private sector
plans. In addition, OPM officials noted that key FEGLI characteristics
such as coverage levels, the portion of the cost paid by federal
employees, and the structure of Basic premiums are determined by
FEGLI's statute, and as a result, changing the program can involve
statutory changes that require congressional action. They further
noted that because of the program's size, the limited number of OPM
staff available to administer the program, the amount of
administrative work involved in making a change to the program, and
the potential need for the FEGLI statute to be changed, altering
program processes is not a simple task. OPM officials said that
because of various concerns, such as the length of time required for
legislative changes, inherent costs incurred with structural program
modifications, and their interest in preserving program continuity,
requests for significant changes are minimal and made only after
careful consideration. However, OPM is able to make changes to FEGLI
premium rates paid by federal employees and agencies, as well as other
changes including options available to beneficiaries for receiving
claims payments. Nevertheless, OPM did not appear to have a systematic
or documented process, or requirements, for comparing FEGLI with
private sector plans. In addition, OPM did not have a methodology or
criteria with appropriate benchmarks or measures for consistently
comparing FEGLI benefits with those provided by the private sector.
The results of such analyses could be used, for example, to make
changes to the program within OPM's authority or, potentially, suggest
legislative changes to Congress.
OPM Lacked Clear, Documented Processes for Considering FEGLI Premium
Rate Changes:
Since the last premium adjustment, OPM actuaries have recommended
changes--both increases and decreases--to FEGLI premium rates. As we
have seen, each year OPM actuaries review and analyze FEGLI's assets
and liabilities to determine the sufficiency of program assets to
cover life insurance benefit costs for all FEGLI enrollees. In
addition, the actuaries analyze the claims experience associated with
each type of coverage and age band and determine appropriate premium
rates, which may be higher or lower than the existing rates. OPM
actuarial and financial officials present the results of these
analyses and any rate change recommendations in an annual meeting with
OPM management that includes the FEGLI contracting officer, actuaries,
financial staff, and other OPM senior management. According to OPM
officials, OPM senior management then has the authority to decide
whether to raise, lower, or hold constant the rates that employees and
agencies pay for FEGLI insurance. However, according to OPM officials,
OPM management decided not to make these rate changes because they
believed they introduced more complexity for FEGLI participants and
entailed administrative changes that, at the time, were not practical
given the significant resources required.[Footnote 33]
Standards for internal control in the federal government state that
policies and procedures should exist for ensuring that findings from
any audits or reviews are promptly resolved and that all transactions
and other significant events are clearly documented.[Footnote 34]
OPM's annual actuarial reviews are effectively an internal control
designed to help ensure the accuracy and adequacy of premium rates.
However, OPM does not appear to have a documented process providing
guidance on what to include in the annual actuarial reviews and
recommendations to management. In addition, it does not have a process
for documenting management's decisions with respect to those
recommendations, including any accompanying rationale. Management's
decisions on the actuarial findings are significant events because of
their potential effect on the financial condition of the program and
its ability to pay claims to beneficiaries. Without documented
processes for actuarial and financial reviews and their disposition,
OPM risks compromising the efficiency and the effectiveness of these
reviews and being unable to help ensure premiums are consistent with
program experience.
RAAs Are No Longer the Default Settlement Option, but Better
Disclosures Are Needed:
RAAs Were the Default Option from 1994 to 2011:
RAAs had been the default method used from 1994 until February 2011
for many FEGLI beneficiaries to receive their life insurance
settlements. RAAs became the default option in 1994 for payments over
$7,500 after MetLife requested that OPM allow RAAs to be used in
addition to lump-sum check payments. OPM granted the request under
certain conditions, including RAAs be provided as additional benefits
to FEGLI beneficiaries at no additional cost. OPM officials noted that
the change to RAAs reduced administrative costs, including for staff
time and materials that were associated with issuing lump-sum checks.
In February 2011, OPM changed the FEGLI life insurance settlement
process, requiring beneficiaries to choose between receiving a lump-
sum check or an RAA when receiving a settlement. Specifically, OPM
revised the form that FEGLI beneficiaries submit for a life insurance
claim, removing the default option and requiring beneficiaries to
affirmatively choose a lump-sum payment or an RAA for settlement
amounts over $5,000.[Footnote 35] OPM officials said that they made
this change after reviewing RAA practices and procedures and published
concerns about RAA practices. Two major life insurers with whom we
spoke said that making the RAA payment method optional can have a
considerable effect on consumers. When consumers have the option to
choose between RAAs and lump-sum check payments, the overwhelming
majority choose lump-sum check payments.
Industry Views Vary on the Benefits and Consumer Protection Concerns
from RAAs:
According to several insurance companies and OPM, RAAs can benefit
beneficiaries, but others expressed concerns about the extent of RAA
disclosures and consumer protections. Industry participants cited
flexibility and a guaranteed interest rate as the primary benefits of
RAAs. For example, some said RAAs offer beneficiaries flexibility
during a difficult time and loss to determine how best to use or
invest the life insurance proceeds, which are often sizeable sums.
While deciding how to use the funds, beneficiaries with RAAs receive a
guaranteed minimum interest rate on their RAA account. According to
MetLife officials, for FEGLI, each beneficiary's minimum interest rate
is based on when the RAA was opened and is guaranteed for as long as
the beneficiary maintains the RAA. According to the same officials,
the guaranteed interest rates are 3.0 percent for RAAs opened before
April 2003, 1.5 percent for RAAs opened April 2003 to April 2009, and
0.5 percent for RAAs opened after April 2009. The officials noted that
even the most recent interest rate paid on RAAs is competitive
compared to what beneficiaries could currently earn on similar
alternative investments. For example, as of September 26, 2011, the
best available rates for a money market account ranged from .10
percent to 1.10 percent.[Footnote 36] In addition, they said that RAAs
provide beneficiaries the ability to access their funds at any time,
including the opportunity to withdraw either partial amounts or the
entire amount.
Despite these benefits, RAA disclosures in general do not convey some
important information to consumers, including information on options
beneficiaries have for receiving their life insurance settlement
funds. For example, the disclosures do not clearly indicate that OPM
considers life insurance claims to be closed, and its relationship
with beneficiaries ended--as it is with a lump-sum payment--once a
beneficiary chooses an RAA as a settlement option. In addition,
beneficiaries may not understand that RAAs involve a separate contract
with MetLife that is not part of the FEGLI program and is regulated by
states rather than the federal government. Regulatory officials we
interviewed from one state said that consumer choice and product
understanding is critically important to consumers and that that
state's law, in force since the mid-1990s, requires companies to offer
beneficiaries a choice of life insurance settlement options at the
time life insurance claims are submitted. The same officials noted
that RAAs cannot be the default life insurance settlement vehicle in
their state. Three other states' regulators were concerned about how
well beneficiaries understood RAAs and one of these states had
recently passed a bill that required RAA disclosures to include
information on settlement options available to beneficiaries. Another
part of the bill prevents insurance companies from offering RAAs as
their default settlement option. Regulatory officials from another of
these states said that their office had undertaken a regulatory review
and was developing guidance for insurance companies on using RAAs.
In addition to concerns about RAA disclosures, some industry
participants and a federal regulator expressed concern about the kinds
of protections that apply to RAAs and how well beneficiaries
understand them. For example, they indicated that while RAAs are not
insured by the Federal Deposit Insurance Corporation (FDIC), the use
of drafts that closely resemble checkbooks offered by banks could give
the appearance that FDIC insurance protects RAAs.[Footnote 37] Others
noted that whether state guaranty funds were adequate to fully protect
those with RAAs is unclear. Industry officials we spoke with noted
that state guaranty funds typically protect RAAs up to a limit of
$300,000, although in some states that limit may be as high as
$500,000. An insurance industry expert explained that beneficiaries
who have RAA assets that exceed state guaranty fund limits may not be
fully protected. According to OPM, approximately 25 percent of federal
employees covered by FEGLI have insurance in force of $300,000 or
more. Other officials noted that state guaranty fund protections are
not the same as FDIC insurance. Each FDIC-insured account is
protected; therefore, consumers with multiple accounts can be
protected above the $250,000 FDIC limit in the aggregate. Conversely,
state guaranty funds limit an individual's payout protection to the
statutory ceiling so consumers with multiple retained asset accounts
are not protected beyond it.
Insurance Industry Organizations Have Issued Guidance to Improve RAA
Regulation:
In late 2010, NAIC and the National Conference of Insurance
Legislators (NCOIL) addressed concerns about RAAs by issuing guidance
intended to improve disclosures to consumers. In December 2010, NAIC
issued a model bulletin for use by state insurance regulators to
establish standards for disclosing information about the payment of
life insurance benefits with RAAs.[Footnote 38] For example, under the
bulletin, disclosures should clearly state that choosing an RAA
involves establishing a supplemental contract with an insurance
company that is distinct from the life insurance policy. The bulletin
also notes that the supplemental policy should also provide clear
disclosures of the rights of the beneficiaries and the obligations of
insurers. Other key provisions in the bulletin included making sure
disclosures explain:
* available settlement options for beneficiaries,
* applicability of FDIC protections,
* applicable RAA fees charged by insurers,
* guaranteed interest rates associated with RAAs,
* provision and use of draft books,
* frequency of financial statements to beneficiaries, and:
* policies for inactive RAA accounts.
* Around the same time, NCOIL released its Beneficiaries' Bill of
Rights, a document which was intended to improve not only disclosures
associated with RAAs but also transparency and accountability. NCOIL's
new standards echoed many of NAIC's proposed improvements and also
included provisions that, if adopted, would require insurers to:
* refer beneficiaries to their state insurance departments if they had
further questions about RAAs,
* immediately return to beneficiaries remaining RAA balances if
accounts became inactive during a 4-year period,
* make clear that any violation of NCOIL's Bill of Rights would
constitute a violation of states' unfair trade practices law,
* identify any financial institution or entity that administers RAAs
on the insurer's behalf, and:
* report annually to state regulators on the number and dollar amount
of RAAs held, RAA structure and investment earnings, interest rates
paid to beneficiaries, and numbers and dollar amounts of RAAs that go
through state unclaimed property processes.
Some states already have regulations in place that specifically
address RAAs and others have recently taken action to address concerns
about the accounts. For example, according to NAIC, as of August 2011,
26 states had RAA-related statutes that allowed insurance companies to
establish RAAs for beneficiaries and hold life insurance assets in
these accounts. In addition, according to NAIC, 22 states had RAA-
specific regulatory protections and disclosures, including many of the
provisions found in NAIC's model bulletin. According to NAIC, many
states either enacted or updated RAA regulations since the beginning
of 2010. Figure 4 provides information on how states have approached
regulating RAAs.
Figure 4: State Regulation of RAAs, as of August 2011:
[Refer to PDF for image: illustrated U.S. map]
States with RAA-related statutes:
Alaska:
Arizona:
Arkansas:
Florida:
Hawaii:
Idaho:
Louisiana:
Michigan:
Mississippi:
Oklahoma:
Oregon:
South Dakota:
Utah:
Washington:
Wisconsin:
Wyoming:
States with RAA regulations:
California:
Colorado:
Connecticut:
Indiana:
Kansas:
Maryland:
Nebraska:
New Hampshire:
North Carolina:
North Dakota:
Ohio:
Rhode Island:
States with RAA statutes and regulations:
Delaware:
Illinois:
Montana:
Nevada:
New Jersey:
Minnesota:
Missouri:
Virginia:
West Virginia:
States with no RAA-related statutes or regulations:
Alabama:
Georgia:
Massachusetts:
New Mexico:
New York:
Pennsylvania:
South Carolina:
Tennessee:
Texas:
Vermont:
States that have enacted or updated RAA-related regulations since
January 2010:
California:
Delaware:
Illinois:
Indiana:
Iowa:
Kentucky:
Maine:
Massachusetts:
Montana:
Nebraska:
New Hampshire:
Ohio:
Rhode Island:
Virginia:
West Virginia:
Source: NAIC (data); MapInfo (map).
[End of figure]
Recently Improved FEGLI RAA Disclosures Still Lack Important
Information:
While OPM recently revised and improved the FEGLI RAA disclosures
beneficiaries receive, the disclosures still lack some important
information. In February 2011, OPM improved FEGLI disclosures,
particularly the form that beneficiaries must use to file a claim.
FEGLI disclosures now inform beneficiaries that they have settlement
options and include language stating that beneficiaries have an
important choice to make in choosing between a lump-sum check and an
RAA and indicating their choice on their claims form. In particular,
the new form explicitly states that MetLife offers a guaranteed
minimum interest rate that may be better or worse than the market's
prevailing interest rate and, unlike in the previous version, clearly
informs beneficiaries that MetLife may profit from RAAs. OPM further
improved disclosures by more clearly explaining that beneficiaries can
access the total amount of their funds at any time with no cost and by
improving the information on applicable protections. For instance, the
disclosures now explicitly state that RAAs are not bank accounts and
are not insured by FDIC or any other federal agency. They also explain
that MetLife guarantees all RAA accounts, including interest earned,
and that this guarantee is backed by state insurance guaranty
associations.
Despite OPM's improved disclosures, they continue to lack some
important information. In addition to failing to mention the
aforementioned separate RAA contract between FEGLI beneficiaries and
MetLife, OPM's revised disclosures:
* do not tell beneficiaries how to identify and contact the proper
state department of insurance regulation should they have any
questions or concerns about their RAAs. FEGLI beneficiaries may not
clearly understand that OPM oversees all aspects of FEGLI prior to
settlement but that state regulators become responsible thereafter. In
the event that beneficiaries have questions or face issues with an
RAA, they may not know where to turn for regulatory assistance.
Further, there may be differences of opinion among regulators about
who is the responsible regulator, making such guidance even more
important to beneficiaries:
* do not provide information on how to identify the relevant state
guaranty fund and its applicable limits, or where to find additional
information on a particular state's fund.[Footnote 39] According to
the National Organization of Life and Health Guarantee Associations,
beneficiaries whose RAA accounts contain more than their state
guarantees may be at risk of leaving some funds unprotected.
It is important for beneficiaries to be able to identify the relevant
state insurance regulator and guaranty fund in case they have
questions or issues regarding their RAAs and associated guarantee fund
protection. However, identifying the appropriate regulator is
challenging because some regulators differed on what type of
instruments RAAs are, as well as who regulates them. For example,
according to two state regulators and NAIC officials, RAAs are
supplemental insurance contracts between beneficiaries and insurance
companies. However, two other states' regulators classified them as
settlement options. Yet another state's regulator said that RAAs were
both supplemental contracts and settlement payouts of existing life
insurance policies. States also differed on the time frame for
considering insurance contracts and settlements settled. OPM officials
said that FEGLI life insurance claims were satisfied as soon as
beneficiaries established RAAs, and two of the five state regulators
with whom we spoke shared that view. However, regulatory officials we
interviewed from one state said that the original insurance contract
was not satisfied until all funds were withdrawn from the RAA. The
state insurance regulators and some industry officials with whom we
spoke also differed on which state's regulator oversees a particular
RAA account and, as a result, which state's guaranty fund would apply.
For example, two states' regulatory officials and NAIC representatives
said that the relevant regulator would be the one from the state where
the beneficiary resided. However, two other states' officials said it
would be the state where the original group life insurance policy was
issued, and yet another state regulator as well as officials from the
National Organization of Life and Health Guaranty Associations said it
would be the state where the group life insurer was domiciled. A
representative from a life insurance industry association with whom we
spoke said that the appropriate regulator could be the one from the
state where the insurance contract was established, where the
beneficiary resided, or both.
Without clarity on which state insurance regulator has jurisdiction
over an RAA held by a FEGLI beneficiary, or which state guaranty fund
might apply, beneficiaries may not know where to turn to find answers
to RAA-related questions on the extent of protections applicable to
their RAA. For example, the underlying FEGLI policyholder (the federal
government) is located in Washington, D.C.; the RAA provider (MetLife)
is domiciled in New York; and federal employees and their
beneficiaries can live anywhere in the United States. Identifying
which state has jurisdiction over a MetLife RAA contract, and which
state guaranty fund applies, could be difficult, especially if the
state regulators themselves might not agree on the proper
jurisdiction. And as we have seen, state guaranty funds provide
varying levels of protection. According to OPM officials, determining
the appropriate state regulator for RAAs is technically beyond their
purview because their involvement ends once the RAA is funded with the
FEGLI claim payment. However, OPM does work with MetLife to create the
disclosures that provide beneficiaries with information that helps
them determine whether or not they wish to select an RAA as their
settlement option. Information concerning the relevant state regulator
and guaranty fund would be important to have in deciding whether or
not to choose an RAA because it could determine the amount of
protection available to the beneficiary. In addition, it could also
inform the beneficiary of potential challenges in seeking regulatory
assistance if, for example, the beneficiary is located in one state
but the relevant regulator is located in a different state.
OPM Does Not Consider the Investment Income Earned on RAAs in Setting
Premium Levels:
In contrast to some private insurers with whom we spoke, OPM does not
consider any of the income MetLife earns on FEGLI RAAs when
determining premium rates for FEGLI coverage. Some insurance company
representatives we interviewed said that they considered all
investment income, including income earned on RAAs, when determining
the premium rates for their life insurance policies, and that this
income typically had the effect of reducing the premiums insurers
charge or defraying other related costs. While officials from two
companies with whom we spoke said that they considered RAA earnings
when pricing their overall group life insurance plans, other insurers
suggested that investment income from their RAA accounts was too small
to affect their rate-setting calculations.
Because OPM contracts with MetLife for settlement services, RAAs
funded with FEGLI claims payments are established and operated by
MetLife. As a result, MetLife retains investment gains and losses
earned on these accounts, as do most private insurers. According to
OPM officials, because OPM considers a FEGLI claim to be fully paid
when a MetLife RAA is established, OPM has no connection to the RAA
accounts or any of their funds. In addition, OPM does not track any
data related to MetLife's FEGLI-based RAAs. However, these RAAs are
established with FEGLI claims payments, and by not considering the
income earned on the accounts by MetLife, OPM may be missing an
opportunity to offset program expenses and potentially reduce premium
rates.
While MetLife officials said that they could not specifically
determine the amount of investment gains and losses on FEGLI-funded
RAAs, they did say that as of December 31, 2010, RAAs maintained for
FEGLI beneficiaries totaled approximately $3.5 billion. According to
MetLife's 2010 annual financial statements, the company had a total of
approximately $12 billion in FEGLI and non-FEGLI RAA accounts at year
end and had earned approximately $267 million in net investment income
on those accounts. The same officials also said that the company must
meet costs and expenses associated with these RAAs, including the
payment of guaranteed interest rates to FEGLI beneficiaries, and that
by guaranteeing the minimum rates previously noted, MetLife has
assumed financial risk. The same officials noted that these guaranteed
rates are higher than most rates of return beneficiaries could
currently receive through a bank or other liquid investment vehicle.
In addition, MetLife would pay and has paid interest at a higher rate
than the guaranteed minimum rates in more favorable interest rate
environments, and according to officials, approximately 40 percent of
FEGLI RAAs have been open for 5 or more years. This higher retention
percentage, they said, may be partially due to advantageous rates
MetLife is paying those beneficiaries. In contrast, several other life
insurers with whom we spoke said that RAAs are often a short-term
option for beneficiaries, and that beneficiaries typically close their
RAAs within 1 to 2 years.
Conclusions:
Because life insurance is an important purchase for those seeking to
protect their dependents, prospective buyers need to fully understand
the details of the policy they are considering. Although OPM provides
significant information on its life insurance program, some
information that could influence federal employees' decision to buy
FEGLI coverage is lacking. First, although FEGLI offers federal
employees postretirement coverage, a benefit not commonly found in
private sector group plans, FEGLI disclosures do not explain the
effect of this benefit on premium levels, particularly the fact that
federal employees begin prepaying for this coverage as part of their
Basic insurance when they begin their employment. As a result,
employees may be unaware that their premiums may be higher than those
of group plans that do not offer such coverage. Second, the
disclosures do not discuss FEGLI's level-premium and composite rate
structure for Basic coverage. Because these features can make FEGLI
premiums look more expensive than private individual coverage without
them, especially to younger and healthier individuals, some employees
might conclude that FEGLI coverage is not a beneficial choice and pass
up a potentially valuable benefit. Conversely, someone planning to
work for the federal government for a short period of time might
purchase FEGLI coverage without realizing that the coverage includes a
retirement benefit they may not receive and will likely cost more than
a group policy without such a benefit.
Since FEGLI's inception, OPM has sought to provide life insurance
benefits that meet federal employees' needs at reasonable costs. While
OPM has conducted some periodic comparisons of FEGLI benefits and
premiums with those found in other group life plans, without formal,
documented processes for these comparisons, OPM risks that FEGLI may
not meet employees' needs, that its premiums may exceed prices charged
for similar benefits in the private sector, or even that it may be
offering features that it does not need to offer to be competitive
with private sector group plans. For example, many private sector
employers no longer offer postretirement benefits in their group life
plans because of the cost. To help ensure that FEGLI premium rates are
appropriate, OPM officials said that OPM actuaries annually review and
assess FEGLI's claims experience across different plans and age
groups, recommending rate changes when they believe such changes are
necessary. However, OPM lacks documented processes for making such
recommendations and documenting management's disposition of any rate
change recommendations. Without a clear and consistent process for
making, reviewing, and implementing rate change recommendations, OPM
risks that needed changes may not be made and that the premiums
charged to federal employees may not reflect the coverage they are
receiving.
FEGLI now offers two settlement options--a lump-sum check payment or
an RAA--and it is important for beneficiaries to be able to choose the
option that best meets their needs and to know where to turn to
resolve any issues they might have. While RAAs may offer benefits that
some beneficiaries appreciate, such as certain flexibilities and a
guaranteed interest rate, they also have certain characteristics that
need to be fully disclosed. OPM has recently revised its disclosures
to beneficiaries to provide more information on RAAs, but the
disclosures still do not contain some important information. For
instance, they do not explicitly state that RAAs involve a new
contract between beneficiaries and MetLife that is regulated by states
rather than the federal government and that involves state-based
protections with certain limitations. As a result, FEGLI beneficiaries
may be unaware that new contractual terms and conditions govern their
RAAs. They also may not fully understand how their RAAs are protected
and what the limitations of that protection might be. Finally, the
disclosures do not provide the information that beneficiaries need to
find the proper regulator should they have questions about their
accounts--a problem that is complicated by the fact that the
regulators themselves may disagree over which one has jurisdiction.
Recommendations for Executive Action:
To help better ensure that federal employees have all the information
they need when deciding whether to purchase life insurance through
FEGLI, we recommend that the Director of the Office Personnel
Management take steps to ensure that FEGLI disclosures include
complete and accurate information on key benefits and features,
including the program's postretirement coverage, composite rates, and
level-premium structure.
To help ensure that FEGLI provides relevant benefits that meet the
needs of federal employees at a reasonable and appropriate cost, we
recommend that the Director of the Office of Personnel Management
develop and implement a more structured process for comparing FEGLI
with private sector group life insurance plans and for documenting OPM
actuaries' rate recommendations and any management decisions
concerning those recommendations.
To help ensure that FEGLI beneficiaries are provided with information
on all relevant aspects of selecting an RAA as a FEGLI settlement
option, we recommend that the Director of the Office of Personnel
Management include more complete information on financial protections
and regulatory oversight in program disclosures, working as necessary
with MetLife and NAIC to determine the appropriate state regulator for
beneficiaries and their RAAs.
Agency Comments and Our Evaluation:
On October 7, 2011, we provided a draft of the report to OPM for
comment. On October 28, 2011, OPM provided written comments, which are
reproduced in full in appendix III. OPM concurred with the
recommendations in the report and also provided technical comments,
which we incorporated as appropriate.
OPM concurred with our first recommendation that it take steps to
ensure FEGLI disclosures include complete and accurate information on
FEGLI's key benefits and features, including postretirement coverage,
composite rates, and level-premium structure. Specifically, OPM stated
that it strives for FEGLI transparency and will take steps to provide
more information on key FEGLI features to ensure federal employees
have the information they need to make an informed benefit decision.
OPM also concurred with our second recommendation that OPM develop and
implement a more structured process for comparing FEGLI with private
sector group life insurance plans and for documenting OPM actuaries'
rate recommendations and any management decisions concerning those
recommendations. Specifically, OPM stated that it believes that
benchmarking federal benefits programs, including FEGLI, with other
employer-provided benefits is essential to ensuring that the federal
government can recruit, retain, and honor a world-class workforce.
Finally, OPM concurred with our third recommendation that OPM include
more complete information on financial protections and regulatory
oversight, working as necessary with MetLife and NAIC to determine the
appropriate state regulator for beneficiaries and their RAAs.
Specifically, OPM stated that it has updated the FEGLI claims form and
website to provide more information about the choice for FEGLI
beneficiaries to receive a lump-sum check or RAA and will ensure that
the best information is available to assist beneficiaries in their
decision-making process.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of this report
to appropriate congressional committees, the Director of the U.S.
Office of Personnel Management, and the Chief Executive Officer of the
National Association of Insurance Commissioners. In addition, the
report will be available at no charge on GAO's website at [hyperlink,
http://www.gao.gov].
If you or your staffs have any questions regarding this report, please
contact me at (202) 512-7022 or cackleya@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:
Alicia Puente Cackley:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Scope and Methodology:
To describe and evaluate the Federal Employees' Group Life Insurance
(FEGLI) program's key operational and financial components, we
examined FEGLI's authorizing statute and associated regulations,
including the Life Insurance Federal Acquisition Regulation (LIFAR).
In addition, we reviewed the program's key policy documents, including
the FEGLI Handbook, FEGLI Program Booklet for Federal Employees, FEGLI
website, and the contract between the Office of Personnel Management
(OPM) and the Metropolitan Life Insurance Company (MetLife). We
focused on how FEGLI provides life insurance coverage to federal
employees and their families and the cost of that insurance to federal
employees and their respective agencies. Interviews with OPM and
MetLife officials provided additional information on FEGLI operations,
including the program's coverage options; how the government, MetLife,
and reinsurers bear insurance risk; and how the Employees' Life
Insurance Fund--FEGLI's main financial fund--is used for paying life
insurance claims and other program costs. We reviewed data from OPM
annual financial reports and performance and accountability reports
from 2000 to 2010 to analyze FEGLI's assets and liabilities. In
addition, we reviewed information in the U.S. Budget on FEGLI from
fiscal years 2002 to 2012 to analyze FEGLI premiums, claims payments,
and investment income. We also reviewed MetLife financial statements
to determine the total dollar amount of MetLife's retained asset
accounts (RAA) and the total investment income MetLife derives from
its RAA investments. Because these are audited documents and financial
statements, with unqualified audit opinions, we found data from these
documents and summary statistics from OPM and MetLife to be reliable
for the purposes of this report. In addition, to determine how FEGLI's
structure and operations compare to large private sector group life
insurance plans, we compared FEGLI to plans offered by six large
private sector group life insurers. Our comparison focused on
insurance coverage options, processes for determining premiums,
available settlement options, and methods for establishing capital or
surplus levels. We selected these insurers based on various insurer
characteristics including their group life insurance market share,
number of group life policies and certificates issued, and whether or
not they provided group life insurance to federal employees. We also
interviewed officials from the National Association of Insurance
Commissioners (NAIC) and the American Council of Life Insurers (ACLI)
to gain their perspective on group life insurance plans, finances, and
operations. For additional information on how private sector group
life plans are structured and the insurance they offer, we met with
insurance regulators and benefits administrators from the states of
California, Florida, New York, North Carolina, and Maryland. We
selected this sample of states because it is geographically diverse,
includes states of domicile for several large insurance companies that
sell a significant number of the industry's group life insurance
policies, has a large number of federal employees, and contains some
states that have RAA regulations and others that do not. In addition,
we met with representatives from two private companies with experience
in insurance brokerage, and human capital and benefits consulting.
To describe and evaluate OPM's oversight of the FEGLI program, we (1)
reviewed FEGLI's authorizing statute and regulations, including the
LIFAR, (2) reviewed OPM's program monitoring, reporting, and other
oversight activities, (3) interviewed OPM and MetLife officials, and
(4) met with industry association representatives. We focused on the
steps OPM takes to periodically monitor and review FEGLI's financial
condition, and on OPM processes for overseeing MetLife functions for
receiving, adjudicating, and paying claims to FEGLI beneficiaries. In
addition, to identify possible regulatory and consumer protection
issues with group life insurance plans and settlement vehicles, we met
with representatives from NAIC, ACLI, and a consumer advocate from the
Center for Economic Justice. To determine how states generally
regulate group life insurance plans, we met with insurance regulators
from the five states described earlier and compared FEGLI oversight
with state regulation of private group life insurers and identified
similarities and differences.
To describe and evaluate the role of RAAs in FEGLI's settlement
process, we examined key OPM disclosures, including the FEGLI
Handbook, FEGLI Program Booklet for Federal Employees, FEGLI website,
and Strategic Plan, 2010-2015, and we interviewed OPM officials. To
understand the kinds of information beneficiaries receive on life
insurance settlement processes, we also reviewed MetLife's Welcome Kit
for RAAs and interviewed MetLife officials. We focused on (1) what
RAAs are, how they function, and how they are funded, (2) the kinds of
RAA disclosures OPM and MetLife provide and how clearly they help
beneficiaries understand their use, and (3) what RAA protections apply
to FEGLI beneficiaries. In addition, we examined how RAAs are
regulated by focusing on the activities and processes OPM and state
regulators use to oversee these accounts. With respect to state RAA
oversight and to determine what kinds of regulatory and consumer
protection requirements states have for insurance companies that offer
RAAs, we chose a small number of states as described earlier, some of
which have RAA-specific regulation, and others that do not. In
addition, we compared FEGLI's use of RAAs to their use in the private
sector and looked for any similarities, differences, and emerging
issues. We also looked to the insurance industry for any applicable
best practices with respect to RAAs that might be used to improve the
FEGLI program. To better understand protections associated with RAAs,
we contacted officials from the Federal Deposit Insurance Corporation,
state regulators from our sample, and officials from the National
Organization of Health and Life Insurance Guaranty Associations and
the Center for Economic Justice. We also reviewed information on RAA
guidance from the National Conference of Insurance Legislators.
We conducted this performance audit from September 2010 to November
2011 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: Federal Employees' Group Life Insurance Program Financial
Information:
[End of section]
This appendix provides information on the dollar amount of premiums
the FEGLI program has collected from enrolled federal employees and
their respective agencies. It also shows the dollar amount of claims
the program has paid to beneficiaries of federal employees. In
addition, the figure shows the dollar amount of interest income
derived from investing FEGLI Fund assets in U.S. Treasury securities.
From 2000 to 2010, the dollar amount of premiums collected and claims
paid has grown, while the dollar amount of interest income has
declined slightly.
Figure 5: FEGLI Premiums, Claims Paid, and Interest Income, 2000-2010:
[Refer to PDF for image: multiple line graph]
Nominal dollars in billions:
Calendar Year: 2000;
Premiums paid: $1.8 billion;
Claims paid: $1.9 billion;
Interest income: $1.4 billion.
Calendar Year: 2001;
Premiums paid: $2.0 billion;
Claims paid: $2.1 billion;
Interest income: $1.4 billion.
Calendar Year: 2002;
Premiums paid: $2.1 billion;
Claims paid: $2 billion;
Interest income: $1.4 billion.
Calendar Year: 2003;
Premiums paid: $2.1 billion;
Claims paid: $2.0 billion;
Interest income: $1.4 billion.
Calendar Year: 2004;
Premiums paid: $2.2 billion;
Claims paid: $2.2 billion;
Interest income: $1.3 billion.
Calendar Year: 2005;
Premiums paid: $2.4 billion;
Claims paid: $2.2 billion;
Interest income: $1.2 billion.
Calendar Year: 2006;
Premiums paid: $2.6 billion;
Claims paid: $2.2 billion;
Interest income: $1.3 billion.
Calendar Year: 2007;
Premiums paid: $2.7 billion;
Claims paid: $2.5 billion;
Interest income: $1.3 billion.
Calendar Year: 2008;
Premiums paid: $2.9 billion;
Claims paid: $2.5 billion;
Interest income: $1.1 billion.
Calendar Year: 2009;
Premiums paid: $3.0 billion;
Claims paid: $2.5 billion;
Interest income: $1.3 billion.
Calendar Year: 2010;
Premiums paid: $3.2 billion;
Claims paid: $2.6 billion;
Interest income: $0.9 billion.
Source: U.S. Budget Appendix for OPM, Fiscal Years 2002-2012.
[End of figure]
[End of section]
Appendix III: Comments from the Office of Personnel Management:
United States Office Of Personnel Management:
The Director:
Washington, DC 2(1415:
October 28, 2011:
Ms. Alicia Puente Cackley:
Director, Financial Markets and Community Investment:
U.S. Government Accountability Office (GAO):
441 G Street NW:
Washington DC 20548:
Dear Ms. Cackley:
Thank you for providing the U.S. Office of Personnel Management (OPM)
the opportunity to comment on the Government Accountability Office
draft report "Federal Employees' Group Life Insurance: Retirement
Benefit and Retained Asset Account Disclosures Could Be Improved-.
We appreciate the opportunity to provide you with comments about this
report.
Recommendation 1:
To help better ensure that Federal employees have all the information
they need when deciding whether to purchase life insurance through
FEGLL we recommend that the Director of the Office of Personnel
Management take steps to ensure that FEGLI disclosures include
complete and accurate information on key benefits and features,
including the program's postretirement coverage, composite rates, and
level-premium structure.
OPNI Response:
We concur. We are pleased that your thorough review of the FEGLI
Program has shown that it is a sound program that has served the
Federal workforce for over 50 years, providing life insurance to over
four million Federal employees and retirees. We strive for
transparency of our program and will provide more information about
the level-premium structure. including the composite rates and post
retirement coverage, to ensure Federal employees have what they need
to make an informed benefit decision.
Recommendation 2:
To help better ensure that FEGLI provides relevant benefits that meet
the needs of Federal employees at a reasonable and appropriate cost,
we recommend that the Director of the Office of Personnel Management
develop and implement a more structured process for comparing FEGLI
with private sector group life insurance and for documenting OPM
actuaries' rate recommendations and any management decisions
concerning those recommendations.
OPM Response:
OPM concurs with GAO's recommendation to develop and implement a more
structured process for evaluating the FEGLI program. OPM believes that
periodic benchmarking of the Federal Benefits Programs. including the
FEGLI Program. with other employer-provided benefits is essential to
ensuring that the Federal government is able to recruit, retain and
honor a world-class workforce.
Recommendation 3:
To help ensure that FEGLI beneficiaries are provided with information
on all relevant aspects of selecting an RAA as a FEGLI settlement
option, we recommend that the Director of the Office of Personnel
Management include more complete information on financial protections
and regulatory oversight. working as necessary with MetLife and NAIC
to determine the appropriate state regulator for beneficiaries and
their RAAs.
OPM Response:
We concur. OPM has updated the FEGLI claim forms and website to
provide more information about the choice for beneficiaries between a
lump sum check and a Total Control Account. We want knowledgeable and
informed beneficiaries to make the best financial decision during a
difficult time. We will ensure that the best information available is
posted to assist beneficiaries in their decision making process.
OPNI appreciates the opportunity to respond to information in the
draft report.
Sincerely,
Signed by:
John Berry:
Director:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Alicia Puente Cackley (202 512-7022 or cackleya@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Patrick Ward (Assistant
Director), Joe Applebaum, Jan Bauer, Emily Chalmers, Marc Molino, Alan
Rozzi, Steve Ruszczyk, Mel Thomas, and Frank Todisco made key
contributions to this report.
[End of section]
Footnotes:
[1] This is the fund OPM uses for the FEGLI program to pay for life
insurance settlements, administrative costs, and compensation to
MetLife for adjudicating and paying FEGLI claims.
[2] For the purposes of this report, "Basic" coverage refers to FEGLI
coverage while "basic" refers to life insurance offered in the private
sector. We treat FEGLI's "Option A, B, and C" and the private sector's
"optional" coverage similarly.
[3] In this report, we use the term "industry participants" to refer
to those entities with a role in the insurance industry, including
state insurance regulators and benefit administrators, actuaries,
consumer advocates, and insurance industry associations.
[4] For the purposes of this report we use the term disclosures to
include the FEGLI Handbook, Employee Program Booklet, website, and
life insurance claim form.
[5] Pub L. No. 83-598. 68 Stat. 736 (Aug 17, 1954).
[6] In addition to FEGLI, the Civil Service Retirement System (CSRS)
and Federal Employees Retirement System (FERS) provide survivor
benefits under certain conditions to current and former spouses and
children in the event a federal employee dies. Under CSRS, survivors
may receive 55 percent of the accrued disability annuity for which the
employee would have been eligible. Under FERS, survivors of employees
who had at least 18 months of service may receive a lump-sum payment
(a fixed amount that is adjusted each year for inflation), plus the
greater of half of the employee's high-3 average pay or half of the
employee's annual rate of pay at death. According to OPM, high-3
average pay is determined by finding the highest average basic pay
over any 3-year period. The 3 years must be consecutive. Generally,
the final 3 years of service include the highest pay, but pay from an
earlier period can be used if it was higher. In addition to this lump-
sum payment, FERS survivors of employees who had at least 10 years of
service may receive an annuity equal to 50 percent of the employee's
accrued benefit. Under both CSRS and FERS, there are also benefits
payable to survivors of former employees and to survivors of retirees.
[7] Group life insurance protects a group of people and is usually
issued to an employer for the benefit of its employees. Each group
member holds a certificate as evidence of his or her insurance. Group
life insurance generally does not require individuals to demonstrate
medical proof of insurability and may be less expensive than
individual policies that require medical underwriting, depending on
the health of the individual. Term insurance is generally defined as
covering the insured for a certain period of time (the "term"). Term
policies provide death benefits only if the insured dies during the
term, which can be 1, 5, 10, or even 30 years, with group life
policies generally having a term of 1 year. Term policies generally do
not have any cash, or paid-up value, and those with term policies
cannot get loans by borrowing from this insurance.
[8] These premium amounts, as well as many aspects of the FEGLI
program, including for example, the percentage of the premium paid by
each employee, the amount of coverage for accidental death and
dismemberment (AD&D) coverage, and the existence and amount of
optional insurance coverage, are mandated by the FEGLI statute. See 5
U.S.C. §§ 8701-8716.
[9] According to OPM, the United States Postal Service pays the entire
cost of FEGLI Basic insurance for its employees.
[10] AD&D insurance is also included in Option A insurance coverage at
no additional cost.
[11] In addition, federal employees can elect Basic and Options A, B,
and C within 60 days of experiencing a qualifying life event.
Qualifying life events include marriage, divorce, the death of a
spouse, or acquisition of an eligible child.
[12] These premium rates are for the full $10,000 of Option A
coverage, not per $1,000 of coverage as the rates for Basic and Option
B coverage are quoted.
[13] For Option B coverage, these rates can range from $.065 per month
for each $1,000 of coverage for those under age 35 to $5.20 per month
for those 80 years of age and older. For Option C coverage, these
rates can range from $.59 per month for each multiple of coverage
selected for those under age 35 to $13.00 per month for those 80 years
and older.
[14] For Basic insurance, the employee's salary would be rounded up to
$91,000. Basic insurance cost would be 91 x $0.150, or $13.65 biweekly
and $354.90 annually.
[15] For Option B insurance, the salary would be rounded to $89,000 x
5 multiples of annual salary, or $445,000 in coverage. Option B
insurance cost would be 445 x $0.09, or $40.05 biweekly and $1,041.30
annually.
[16] This example assumes that the employee retires at age 65, is an
annuitant, and chooses the No Reduction option for Basic insurance and
five multiples of Option B coverage. The preretirement premium for
Basic insurance stops at age 65, but the employee pays an extra
premium for the Basic Insurance No Reduction option. The rate for
Basic insurance with No Reduction option is $1.83 per $1,000 of
coverage per month for an annual total cost of $1,998.36. Having
chosen the No Reduction option for five multiples of Option B coverage
in retirement at age 65 would cost the employee $8,330.40 annually
(445 x $1.560 x 12 months).
[17] An open season is a time designated by OPM during which federal
employees can assess their benefits and potentially change their
benefits enrollment without undergoing a medical examination or
qualifying life event.
[18] MetLife sets RAA interest rates by referencing two indexes: the
iMoneyNet Money Fund Report Averages/Government 7-Day Simple Yield (a
leading index of government money market mutual fund rates) and the
Bank Rate Monitor National Money Market Rate Index (a leading index of
rates paid by the 100 large banks and thrifts on money market
accounts).
[19] A draft is a payment order in writing that directs a second
party--in the case of RAAs, the insurance company--to pay a specified
sum to a third party, for example, a retailer. A check is a bank draft
that is payable when presented.
[20] For FEGLI, Basic coverage equals an employee's salary amount
rounded up to the next even thousand, plus two thousand dollars, or
$10,000, whichever is higher. According to industry officials, for
private plans basic coverage typically can be a flat dollar amount,
the amount of an employee's salary, or up to two times an employee's
salary.
[21] According to OPM, for FEGLI, employees enrolling as new hires or
during an open season do not need to provide information on their
medical condition or history.
[22] Some large private sector employers may share in the risk of loss
through certain arrangements with an insurer, such as receiving back
from the insurer a portion of premiums paid in excess of claims or
paying additional premiums if claims exceed a specified amount.
[23] A policy contract between OPM and MetLife established MetLife as
FEGLI's insurer. In addition to FEGLI's insurer, the program also has
additional insurance companies that provide reinsurance. According to
the ACLI, reinsurance involves the transfer of some or all risk to
another insurer. The company transferring the risk is called the
"ceding company" and the company receiving the risk is called the
"life assuming company" or "reinsurer."
[24] For employees of the U.S. Postal Service, Basic life insurance
for enrollees under FEGLI is free, as the U.S. Postal Service pays for
100 percent of this cost.
[25] For example, a private employer may offer $50,000 in basic life
insurance coverage without any premiums for employees. FEGLI may offer
$100,000 in Basic coverage, but federal employees must pay two-thirds
of the premium. So in essence, FEGLI employees who are over age 45 and
not receiving the program's extra benefit coverage are getting one-
third, or approximately $33,300 in employer-paid coverage.
[26] FEGLI disclosures characterize retirement coverage as "free" when
certain reduction options are selected after age 65.
[27] In addition to financial management and oversight by OPM's
actuarial and financial staff, OPM's Inspector General audits the
FEGLI program every 2 years. MetLife's auditors also audit
administrative and other expenses charged to the FEGLI program.
[28] The purpose of the LIFAR is to implement and supplement the
Federal Acquisition Regulation specifically for acquiring and
administering a contract, or contracts, for life insurance under
FEGLI. 48 C.F.R. § 2101.101(b). The part of the Federal Acquisition
Regulation that specifies contractual competition requirements does
not apply to FEGLI because the statute that created FEGLI, 5 U.S.C
Chapter 87, exempts the FEGLI program from competitive bidding.
[29] According to the LIFAR, OPM applies a weighted guidelines method
to determine the service charge for FEGLI. The profit analysis factors
include contractor performance, contract cost risk, federal
socioeconomic programs, capital investments, cost control, independent
development, and transitional services.
[30] In past reports we have noted the importance of federal agencies
determining the liability created by their insurance programs and
ensuring the availability of funds to meet those liabilities. See GAO,
Federal Emergency Management Agency: Action Needed to Improve
Administration of the National Flood Insurance Program, [hyperlink,
http://www.gao.gov/products/GAO-11-297] (Washington, D.C.: June 9,
2011) and Budget Issues: Budgeting for Federal Insurance Programs,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-97-16] (Washington,
D.C.: Sept. 30, 1997).
[31] According to OPM officials, they calculate FEGLI's actuarial
liability using methods that are consistent with guidance established
by the Federal Accounting Standards Accounting Board's Statement of
Federal Financial Accounting Standards (SFFAS) 5: Accounting for
Liabilities of the Federal Government. They also use SFFAS 33:
Pensions, Other Retirement Benefits, and Other Post-Employment
Benefits: Reporting Gains and Losses from Changes In Assumptions and
Selecting Discount Rates and Valuation Dates. When they perform
FEGLI's liability calculations following these standards, FEGLI's
total liability exceeds program assets. However, FEGLI's total
liability does not account for employee contributions for Optional
coverage.
[32] OPM provided us with the results of these internal analyses. We
did not verify them, both because of the potentially significant costs
involved and because of the program's history of meeting its claims
payment responsibilities in every year of its operation.
[33] The most recent changes to FEGLI premium rates took place in 2002
and were phased in between 2003 and 2005.
[34] See GAO, Standards for Internal Control in the Federal
Government, [hyperlink,
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.:
November 1999).
[35] As stated in OPM's official death claim form from February 2011,
if the proceeds exceed $5,000 and no box is checked, beneficiaries
will receive an RAA.
[36] Money market account interest rate information is according to
Bankrate.com.
[37] FDIC is an independent agency of the United States government
that provides protection against the loss of deposits if an FDIC-
insured bank fails. FDIC insurance covers all deposit accounts at
insured banks, including checking accounts, Negotiable Order of
Withdrawal (NOW) accounts, savings accounts, money market deposit
accounts, and certificates of deposit (CDs). The FDIC does not insure
money invested in stocks, bonds, mutual funds, life insurance
policies, annuities, or municipal securities, even if these products
were purchased from an insured bank. FDIC insurance is backed by the
full faith and credit of the United States government. Since the
FDIC's creation in 1933, no depositor has ever lost money on FDIC-
insured deposits.
[38] According to NAIC, model bulletins are documents produced by NAIC
that are generally used by state insurance departments to notify
companies and/or insurance producers on how state insurance
departments intend to interpret various issues or developments.
Bulletins do not generally carry the force of state law, though they
may be used to notify interested parties of adoptions or changes to
existing state law.
[39] FEGLI disclosures, however, now alert beneficiaries that RAAs,
including interest, are fully guaranteed by MetLife and that MetLife's
guarantee is further backed by state insurance guaranty funds. In
addition, the disclosures state that maximum limits on guarantees that
protect beneficiaries' RAAs vary across states.
[End of section]
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