Metlife Inc (MET), American International Group Inc (AIG): Why Life Insurers May Need Damage Control

Just last month, a settlement was reached between California and 11 insurance companies over unpaid life insurance benefits. Now, the New York Department of Financial Services has released its findings in a similar investigation. The result — $1.1 billion in unpaid benefits to customers nationwide. Let’s take a look at what the insurers were doing, how it may effect them going forward, and what it means for investors.

Double-check your work
The New York DFS found that insurers were not using a standard practice of checking newly reported deaths from the Social Security Administration’s report in order to pay out benefits in cases where no claim had been made. The issue stems from some beneficiaries not being aware of a policy in the first place, not knowing how to file for the benefits, or simply not filing for the benefits altogether. But regulators believe the insurers should be able to use the provided information to identify and pay benefits on their policies since the practice is used on the other side of the coin — insurers paying out annuity benefits to customers were checking the same file in order to identify a client’s death and halt the recurring payments.

As a result of the nearly two-year investigation, New York DFS Governor Andrew Cuomo sought to address this double-standard by issuing legislation last year requiring that the master death file from the SSA be used in both instances of identifying current clients.

Insurers paying up
So far named insurers — American International Group Inc (NYSE:AIG), Metlife Inc (NYSE:MET), Hartford Financial Services Group Inc (NYSE:HIG), Genworth Financial Inc (NYSE:GNW), and ING Groep NV (ADR) (NYSE:ING) — have all participated in righting the wrongs committed by the one-sided practice. In one instance, the DFS reports a single beneficiary in the Montauk community of New York receiving over $400,000 in benefits from the death of a policy holder in 2003.

Though the total amount due based on the NY investigation tops $1 billion, the split between the insurers involved is unclear. Based on the 2012 market share, Metlife Inc (NYSE:MET) may pay out the biggest chunk in death benefits:

Source: NAIC 2012 Top 25 Life Insurers.