As I am writing my book “Regulated fraud”, I had to stop and rethink the development of my story because I realized something that was incredible. My work of fiction about fraud in the insurance industry committed by insurers had become a work of nonfiction. This was unbelievable. The plot of my story was based on the hypothesis that the insurance industry had become bankrupt because of the existence of toxic assets consisting of grossly mispriced life insurance policies. I further theorized that the government had reached a compromise to save this industry from bankruptcy by freezing the introduction of new laws for the protection of consumers and by turning a blind eye to commercial practices that were illegal and harmful to the consumers.
Great plot isn’t it? While this plot was based on facts observed through my 25 years experience in the life insurance industry, the fiction part was the conspiracy. For the plot of my book, I made the hypothesis that the facts I had observed during my career were not the result of an inefficient and chaotic market. These facts did not exist independently of each other, but instead were the organized results of combined efforts of the industry and governments.
These facts were:
1) Regulated commission structure that promotes sales through licensed life insurance agents while allowing the payment of service commission to non licensed agents who were then prohibited to provide the service they were paid to give.
2) Use of illegal incentives to promote sales based on sales volume
3) Existence of orphan policies and other practices to increase lapses
4) Freezing of insurance laws where commercial practices prohibited in other industries as being fraudulent would be allowed in the insurance industry.
5) Tax welfare: promotion of life sales through the use of tax avoidance strategies whereby Revenue Canada and Department of Finance would ignore such practices
6) Licensing that restrict advice to a distribution channel fully controlled by insurers while providing the arm’s length necessary for to the insurers to deny any responsibilities in the results of the delivery of the advice.
7) No organized consumer representation in the life insurance industry; this is the most important fact as we shall see below. No organized consumer presence in the life insurance industry would accept the facts mentioned above.
No consumer voice in the Canadian insurance industry
For the above facts to exist in the insurance industry there must absolutely not be any organized consumer representation. This is the only way consumers will remain unaware of these facts and practices. Contrary to the investment industry where consumer organizations receive money from government and companies to build consumer presence that will represent consumers with a strong voice, consumers are invisible in the life insurance industry.
Consumer advocacy is absolutely absent from the insurance industry. There is no representation at all. The government through institution such as the AMF which sit on a war chest of more than $35 million dollars comprised of the fines levied against financial advisors refuses to give one dime towards any sort of consumer organization in the insurance industry. The conclusion is easy to see. The government does not want an organized consumer presence. If there was a strong consumer presence, consumers would push for changes and for the elimination of the fact stated above.
An Organized Life Settlement industry will automatically act as a consumer organization
While I have worked in the financial industry, my background is sciences. I was trained as a scientist and therefore I believe in the process offered by sciences in testing theories about our natural world. Theories are tested through observation and experimentation.
My theory is simple. If an insurance industry has an organized and independent life settlement market, that market will become a “greater consumer” with the financial means equal to the insurers. Where the needs of this life settlement market or “greater consumer” are aligned with the needs of the “average consumer”, this life settlement market will act as a consumer advocate representing and protecting all of the rights of the consumers.
Can this theory be observed? The answer is positive. Our theory can be proven when looking at the US market where there is an organized life settlement market.
Lima versus Pheonix Life Insurance Company
Lima is a life settlement company and is an investor in the secondary market for Phoenix life insurance policies. Lima holds the interest in 197 Phoenix policies (the “Policies”) currently in force that were issued between 2003 and 2009. Lima is suing Pheonix for:
(1) monopsony1/monopoly in violation of Connecticut General Statutes § 35-27 against the Phoenix Defendants; (2) attempted monopsony/monopoly in violation of Connecticut General Statutes § 35-27 against the Phoenix Defendants; (3) violation of the Connecticut Unfair Trade Practices Act (“CUTPA”) and the Connecticut Unfair Insurance Practices Act against the Phoenix Defendants; (4) common law fraud against the Phoenix Defendants and the Individual Defendants; and (5) violation of the Racketeering Influenced and Corrupt Organizations Act against the Individual Defendants.
In fact Lima claims:
“After the stock market crashed in 2008, the Phoenix Defendants sustained massive financial losses and faced difficulty in meeting contractual obligations on billions of dollars in life insurance policies. In response to a weak financial position, the Individual Defendants and other corporate officers orchestrated a plan designed to eliminate the liabilities associated with the life insurance policies. Defendants launched an aggressive campaign to attack and undermine previously-issued policies by refusing to honor or record transfers of ownership. Through such strategy, a policy issued by defendants would become undesirable even to the policyholders, who would not know whether the policy would ultimately be honored; and such uncertainty would induce policyholders to lapse or surrender their policies back to the Phoenix Defendants. The 3 Phoenix Defendants would then be able to keep all or most of the premiums without paying the future benefits associated with the policies.
The Phoenix Defendants’ conduct has resulted in a diminished secondary market for their life insurance policies. Any buyers are only willing to purchase policies at severely reduced prices because they do not know whether the terms of the policies will be honored. Plaintiff has suffered and will continue to suffer financial injury because it has been deprived of revenue and profits that it would have made on the policies had the value of such policies not been diminished by defendants’ anticompetitive conduct.”
Lima’s claims prove that (1) insurers are able, through their commercial practices, to influence lapse rates in order to force the cancellation of life policies that have become toxic assets and (2) that Lima as a participant in the life settlement market and owner of Phoenix policies have become the guardian of the integrity of these policies and therefore act as a consumer advocate/greater consumer for all consumer in protecting their rights.
With the ongoing debate on life viatical settlements in Canada about whether to allow the creation and existence of such market, we have seen a strong push back from insurers. In fact, these insurers in attacking viatical settlements have made unethical and even criminal statements. For Manulife this includes threatening and blackmailing advisors in not helping their clients with this type of transaction in violation of their fiduciary duty toward their clients and their code of ethics.
But it is the statement of Assomption-Vie in Finance- Investissement, a web periodical in Quebec that raises the greatest concern. Assomption-Vie has declared that it will not respect the integrity of a life contract by unilaterally cancelling such contract by not proceeding with a requested change of ownership. This statement was made in a province were life viatical settlements are legal. Basically Assomption-Vie has declared it will not respect Quebec provincial laws and contract laws by cancelling life contracts whereby it considers a change of ownership as being improper. This is exactly what Pheonix has stated. Sadly there is in Lima in Canada or Quebec to fight back. It will be up to organization such as the Financial Services Consumer Alliance with its small resources to fight against such declaration.