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Unclaimed property the latest issue in a crazy quilt of regulatory compliance

If you’re a subscriber to the Alliance’s “Legislative and Regulatory Alerts” (formerly “Compliance Alerts”), then you have noted that over the past month there have been no fewer than 12 editions that dealt with unclaimed property regulations being debated in state legislatures across the country.

(If you’re not a subscriber, you should be. Just click HERE to view past Alerts and sign up to receive future ones. It’s one of the most important information services the Alliance provides, particularly for small and mid-size members who don’t have full-time government affairs or compliance professionals on staff to monitor these issues.)

 Of course, no two of these measures are exactly alike, which means that unclaimed property could be the latest square in the nation’s regulatory crazy quilt. Some proposals are based on the Model Law developed by the National Conference of Insurance Legislators (NCOIL), a group composed of state legislators that serve on their House or Senate insurance committees. The key provisions of the NCOIL Model include:

  • It is retrospective and applies to all in-force life insurance policies, annuities and retained asset accounts.
  • It requires semi-annual matching of all policies against the Social Security Death Master File (DMF).
  • It does not address financial hardships that may be imposed on an insurer by the requirement to implement DMF matching.

Death Master File

Most insurers view the mandate to match their policyholder or member records against the DMF as onerous and expensive, if not outright unconstitutional. But because state treasurers – who are responsible for oversight of unclaimed property in most states – discovered that several large insurers were found to be using the DMF on their annuity policies (to stop payments to policyholders that had died) and not their life policies (to determine if policyholders had died and benefits payments were due), the effort to eliminate requirements to match an insurer’s records against the DMF (no matter how flawed the information in that database) is an uphill battle, at best.

What the industry is left with is an effort to make such matching requirements fair and manageable – and that starts with making them consistent. Regulations that vary widely from state to state only increase the cost and complexity of compliance without any measureable benefit to consumers.

The industry has had some success in convincing state legislatures to amend the NCOIL model to require matching on a “prospective” rather than a “retrospective” basis. This means that insurers would only be required to match the records of individuals who became policyholders or members after the law became effective, rather than matching the files of every policyholder or member, including those acquired in a merger or for whom the organization does not have electronic records.

Other amendments to the NCOIL Model under consideration include provisions that would:

  • Permit an insurer to still require a valid death certificate as part of the claims process
  • Give the Insurance Commissioner the discretion to:
    • limit an insurer’s use of the DMF to the insurer’s electronic searchable files, or approve a plan and time line for conversion of the files to electronic searchable form
    • exempt an insurer from the DMF comparisons or permit an insurer to perform the comparisons less frequently than semi-annually upon a demonstration of hardship by the insurer
    • phase-in compliance according to a plan and time frame approved by the Commissioner

Insurers have also won a few legal battles on this, the latest being a case in West Virginia that held that: (1) there is no general good faith requirement in the WV Unclaimed Property Act that requires insurance companies to search the DMF; and (2) the dormancy period for life insurance proceeds is triggered either by the insured reaching the limiting age or by the insurer’s receipt of due proof of death of the insured. A Bulletin was issued on 1/7/2014 and can be found here.

While we understand public policymakers’ desire to protect consumers, there is still a role for personal responsibility in the world. A requirement to file a claim and provide proof that an insured is deceased before receiving a death benefit does not seem to be draconian to me.  We’re pleased to see some state lawmakers are taking this into account when addressing this issue.

If you would like to gain a firmer grasp of the many aspects of unclaimed property issues, we invite you to attend the Fraternal Operations Mid-Year Meeting and/or Fraternal Compliance Day, where unclaimed property will be discussed in detail.

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