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Regulators Blast Insurers, Call for Reform : Consumers: A task force criticizes economic assumptions and marketing tactics used to sell life policies.

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TIMES STAFF WRITER

A task force of state insurance regulators, in uncharacteristically blunt language, has criticized the life insurance industry for the way it describes its products to consumers and has called for sweeping reforms to improve disclosure and accountability.

The sales pitches that agents use to explain their offerings and compare them to competing ones often are based on dubious economic assumptions, are bewilderingly complex and suffer from a lack of standard, industrywide terminology, according to a draft position paper by a study panel of the National Assn. of Insurance Commissioners.

Complaints about misleading life insurance illustrations have been raised for years, but the issue has grown more heated lately because of collapsing interest rates.

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Many consumers have been shocked to see their premium payments rise or their cash values shrink as falling rates dashed the rosy assumptions under which they had bought their policies. Many policies’ premiums are pegged to interest rates. If market rates rise above the expected range, policyholders can earn dividends or get reduced premiums. But when rates fall, the opposite happens.

And new types of policies--aggressively marketed universal life insurance, for example--are even more vulnerable to interest rate dips than traditional products.

“A lot of people are finding out the hard way what interest rate risks they were taking with certain policies,” said Joseph M. Belth, insurance professor emeritus at Indiana University.

The draft position paper, the product of a year’s research, is to be considered by the association’s full membership at its annual convention in Boston on Sept. 19. It was not scheduled for public release until then, but copies have circulated in Washington since the draft was completed Tuesday.

“It is an unbelievably unusual document from a body whose members are not always candidates for ‘Profiles in Courage,’ ” Sen. Howard M. Metzenbaum (D-Ohio) said Thursday.

Metzenbaum, who favors federal insurance regulation instead of the longstanding state-by-state system, sparked the formation of the state regulators’ study group when he aired complaints about product illustrations at a public hearing a year ago before his antitrust subcommittee of the Senate Judiciary Committee.

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The regulators’ panel, chaired by Iowa Insurance Commissioner David Lyons, cites such problems as:

* Insurance agents inappropriately trying to estimate future performance in selling their products. The panel suggests barring the use of future projections, in the same way that mutual fund brokers are allowed only to show past performance.

* No accountability on the part of agent, insurer or consumer. The panel recommends that no policy be sold before an agent presents the buyer with a product illustration form that simply and fairly explains the product and spells out its risks. Not only would the agent and consumer be required to sign the form, but so would an officer of the insurance company issuing the policy.

* No standard format for life insurance illustrations nor any consistent economic assumptions or definitions of terms. “In some cases, the consumer doesn’t even realize that a life insurance policy has been purchased and that future premium payments are required,” the report says.

The panel recommends adopting a system similar to Britain’s, where all insurers use brief, standardized forms developed by the government, and using simple examples, such as how much $1,000 would be worth in 10 years at interest rates of 4%, 7% and 10%.

Gene Grabowski, spokesman for the American Council of Life Insurance, the industry’s biggest trade group, said insurers acknowledge there are problems but “don’t think that drastic steps are necessary.”

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In most cases, he said, agents represent policies accurately, but consumers “want to hear the positive side and don’t always hear the negative.”

Metzenbaum, in a telephone interview Thursday, clearly relished putting pressure on the state regulators to follow up on their draft recommendations.

Noting that the recommendations could be implemented in many states without legislation, he said: “The question is whether they (the commissioners) have enough guts to do this or are too beholden to the industry. . . . If the association adopts this as a final draft and then the state commissioners do nothing about it, it would be proof positive that federal regulation is needed.”

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