CASE STUDY:
A LACK OF ETHICS AND DISGRACEFUL INEFFICIENCIES IN THE LIFE INSURANCE INDUSTRY

Nick Renton is an actuary who spent many years of his career in defending the life insurance industry from its critics. However, he was quite horrified at his own experiences when he later on became just an ordinary consumer. In this essay he reports on some less than impressive transactions.

The great secret is out. Some time ago I turned 65. As a result some life insurance policies with the Zurich group which had been taken out many years earlier had at long last reached their specified maturity date. Like many other people in similar circumstances I was looking forward to banking the proceeds of my earlier thrift and then getting on with the rest of my life.

I had expected that the winding up of these routine arrangements would be a simple formality, taking up little time and involving little effort on my part.

I had not counted on experiencing gross inefficiency at every turn and becoming exposed to a series of misleading statements of fact and of law. Eventually the unethical withholding of monies rightfully due to me from the company was the last straw which induced me to put pen to paper.

Two of my non-superannuation policies were due to mature on 1 February 1996, but when I contacted the company shortly before that date I was astonished to learn that the maturity date shown in their computer records was in fact 15 February 1996. We managed to sort that one out - the company was willing to accept the accuracy of the dates on the actual policy documents which I produced.

However, it became obvious that if I had not raised the subject then I would have been paid out some 14 days late and would have lost the benefit of a fortnight's worth of interest.

But this leaves open the wider question of how other people, less conscious of their rights or less familiar with the fine print of their contracts, would have got on. And what about people who had lost their policy documents - a common occurrence in the case of policies taken out over 30 years earlier?

I then received a rather curious circular letter from Zurich asking about my "current situation" in regard to these two policies. It went on to say: "Please note that we must receive a reply from you within 30 days. If no response is given we will to (sic) cancel your policy and forward the proceeds by cheque to your home address. It is essential that you contact Zurich as this is not a preferred option AS WE MUST DEDUCT ANY TAX PAYABLE AT THE HIGHEST MARGINAL TAX RATE." (My capitals.)

I then telephoned the company, only to be told, bluntly but quite incorrectly: "It is the law."

I was thus forced to send a stern reply to the company. I put it in the following terms: "I am puzzled by your letter of 17 January 1996 and its reference to `we must deduct tax at the highest marginal tax rate'. Any such action by you would, of course, be quite illegal."

Although I received no specific response to my letter that seemed to fix the matter - but again I wonder: How many other customers are given similar misinformation? What effect would such a threat have on the possibly nervous recipients of such letters? After all, it indicated that 48.5 per cent of their policy proceeds (both capital and interest) was about to be confiscated in this manner. And how easy would it have been for them to then get a refund out of the Australian Taxation Office if the monies had indeed been so withheld and finished up there?

SUPERANNUATION

I also held two superannuation policies with the same company which for a technical reason I needed to roll over into another fund. The letter from Zurich dealing with the paperwork warned me to "allow a period of twenty working (20) days to finalise the transfer".

I felt that such a period - effectively, a whole calendar month - seemed unduly long. It seemed all too reminiscent of the deliberate delaying tactics of insolvent companies when they are on the point of closing their doors for ever.

However, in this particular instance the company concerned was the local subsidiary of a large parent company based in a country which was renowned for its financial acumen. I thus relaxed, thinking that the quoted timeframe simply included a safety margin in case of mail delays or the like and that it did not really represent a normal processing period. After all, a competitor of this company had managed to process an identical transfer in four days. But I was wrong - Zurich actually took a disgraceful 33 days to complete the transaction.

Some curious things happened en route. The two "Eligible Termination Statement" forms were received eight days apart - a surprising circumstance seeing that the policies to which they related had been sent to the company in the same envelope.

However, even much more disturbing was the conversion on one of those forms of $5250 in undeducted contributions into a mere $3450. This $1800 understatement would have been quite costly in terms of unwarranted additional tax.

The error was doubly astonishing, as the latter figure would have agreed neither with the company's own records nor with the figures provided by me in answer to a specific question on its claim form.

Once again, how would customers who were less well informed as to these legal niceties have fared? And what about customers who are less meticulous in their own record keeping? Apart from that, the supplying of incorrect information on a form required by the tax authorities is in itself an offence under the taxation legislation.

The company's earlier letter dealing with their requirements had also had two rather strange twists in it - one clerical, the other ethical.

Astonishingly, it had said: "Our records indicate that contributions to your plan from 1st July 1992 to 30th June 1995 were paid by your employer." I found this somewhat puzzling, not only because I had had no employer in that period but also because no contributions from such a person - or indeed from anyone else - had been received by the company. So much for the accuracy of their records.

The letter also quoted both the current fund balance and the benefit available after the application of the "early termination charges". It went on to alert me as to the consequences (in terms of additional costs) if an "agent or advisor may have approached you suggesting moving your investments to another Company".

It is fair enough that Zurich should seek to preserve its business by such warnings, but the implication that a special penalty would be applied in the case of a withdrawal was rather misleading in the circumstance of this particular contract (and of many others like it).

Most customers would not have understood the ramifications of the fee structure involved in this type of unit-linked policy backed by managed investments. It works as follows:

If the contract remains in force then a charge of one per cent of the asset backing is levied at the end of each of the first five years following the purchase of any units. This is a cosmetic variation on the five per cent one-off fee at the beginning of the contract which could have been imposed instead. If, on the other hand, the policy is surrendered within this five year period then the remaining balance of these levies is deducted in one hit at the time of withdrawal.

The seeming penalty on early termination was thus little more than a bringing forward of a liability which would have been imposed regardless. For the company to imply otherwise in order to discourage surrenders was thus quite reprehensible.

It then turned out that at least part of the delay had arisen because the two cheques had been sent to the wrong postal address. Instead of apologising for this error the company - in complete disregard of the facts - wrote back to me claiming that the address of the rollover institution which I had provided was incorrect.

I wrote back, pointing out that that was a blatant lie: the address supplied had been checked and found in order; it had also featured on the letterhead of two letters to Zurich from the rollover institution itself; and it had been used without difficulty by the competitor mentioned above which had paid over its rollover monies within four days.

Then one of the missing cheques turned up at the office of the rollover institution to which it had been sent. The company's reaction to this was also less than impressive. First it assured the rollover institution that this cheque had not been stopped, then it immediately stopped payment.

Next, it refused to issue replacement cheques till its accounts department was satisfied that the bank had indeed stopped the original cheques. Of course, this is an internally inconsistent argument: a cheque which has been dishonoured can be replaced at once; a cheque which has not been dishonoured can be unstopped. In any case, it is the drawer of a cheque and not the bank which makes the decision to stop payment.

Finally, the company ignored my specific instructions to courier the replacement cheques, needlessly causing further delay. It also failed to ring back as promised in regard to this.

COMPENSATION

Conceding that it was at fault, the company did volunteer an interest adjustment on an "ex gratia" basis. I appreciated the sentiment but not the arithmetic: the offer was for less than a tenth of the amount that it should have been.

Seemingly not valuing its own goodwill, the company has now refused to rectify the matter. It apparently does not understand how investments in general or its own policies in particular work. If the staff of the company's client services section and its grandly-named "client liaison manager" are out of their depth in such matters then what hope is there for the lay customers?

As indicated above, these two policies were unit-linked, meaning that during the currency of the contracts the policyholder and not the company takes on board the risk and the effect of market fluctuations. However, at the time the withdrawals are processed this link is naturally broken and the policyholder is then entitled to a specific sum of money, namely, the cash value of the units on the day of withdrawal.

The company had based its calculations on subsequent movements in the unit prices. But these were utterly irrelevant in the circumstances.

It will be obvious from the facts that the company had had the use of the money from the time the fund assets were cashed in until the cheques were eventually received and banked. The other party to the deal had correspondingly been denied the use of the money over that time and had thus unfairly been deprived of the opportunity to earn an investment return elsewhere.

A fixed interest approach would thus have been much more logical and would clearly have been equitable to both sides. After all, insurance policies are contracts of the "utmost good faith" (surely this should apply in both directions).

In seeking to justify its figure the company said that the calculations had been done by its "actuarial department". The use of the name of this honourable profession as bogeymen in an attempt to hoodwink the general public in such a manner is to be deprecated. But, in any case, the problem of fair compensation is philosophical rather than arithmetical.

Unlike other organisations in similar circumstances Zurich also failed to draw attention to any of the established industry dispute resolution mechanisms which could possibly have been used to produce a more satisfactory outcome in this instance.

I should not really have been surprised at my recent treatment by this company in the light of its record of unethical overcharging on an earlier occasion when I was repaying a mortgage loan which it had inherited in a merger.

Admittedly, mortgagors always sign their life away in loan documents, but they expect mortgagees to do the right thing in practice and not to cheat them even if the amounts involved are not very large. Customers of big financial institutions simply do not count on these acting with mind-boggling greed.

I had been required to pay interest for both the last day and the first day of this loan - the equivalent, say, of paying eight days' interest for a period of one week. Looked at another way, at the close of business on the day of settlement the company was getting a return on the same sum not only from me but also from some other party with which the money had been reinvested.

To add insult to injury this Sydney-based organisation also quite unreasonably imposed a fee for "telex and interstate telephone calls" despite the fact that the loan had originally been arranged between a Melbourne lender and a Melbourne borrower in respect of a Melbourne property.

COMPUTER BLUES

The common business practice of blaming a computer for every human error and for any inability to meet legitimate customer requests for service or information is, of course, quite unacceptable.

It was thus disappointing to receive a letter from Zurich in connection with a home purchase loan which included the following remarkable paragraph:

"From this month, we have changed to a new E.D.P. System, which unfortunately can not cope effectively with quarterly instalments, on `Interest Only' loans. `The System', drew on your Account, in November for your quarterly amount of $958.50 and the program is such, that we can not prevent monthly drawings."

Not everyone suffers fools gladly, so the reply read:

"Quite apart from its appalling punctuation and grammar, your letter's reference to `The System' in capitals and inverted commas as though it were some deity is really quite astonishing. Surely `The System' to the customer is just `the company'. This system must have been drawn up by human beings paid for by the company and to its specific instructions. It is not something extraneous that can be expected to behave in an unpredictable way.

"I cannot understand how in this day and age you can set up a new computer system which is so poorly designed that it cannot even deal with perfectly standard contracts which are already on your books. Would it not be preferable to fix up the program rather than ask customers to vary the agreed arrangements and in the process incur higher costs? Should not, in any case, the program be made more flexible in order to be able to cope with future developments?"

While the above actual case studies show that the culture of this particular company leaves a lot to be desired they also have some valuable lessons both for its competitors and for all life insurance consumers.