Friday, December 1, 2017

No. 243: Guardian Life's Problematic Dividend Announcement

On November 16, 2017, Guardian Life Insurance Company of America issued a press release entitled "Guardian Announces Largest Policyholder Dividend in Company's History." It is subtitled "Board of Directors Approves $911 Million Dividend Allocation to Participating Individual Life Policyholders." The press release quotes Deanna M. Mulligan, Guardian's president and chief executive officer, as referring to "our 5.85% dividend rate." A small-type footnote at the bottom of the press release, below the section entitled "About Guardian," reads:
Dividends are not guaranteed. They are declared annually by Guardian's Board of Directors. The total dividend calculation includes mortality experience and expense management as well as investment results.
I immediately emailed Guardian's media contact person. I forwarded my blog post No. 10 (November 25, 2013) entitled "The Danger of Announcing Dividend Interest Rates," which relates to a November 2013 dividend announcement by Massachusetts Mutual Life Insurance Company. I asked that the email be forwarded to Ms. Mulligan. I received neither an acknowledgment nor a reply to my email.

The Problem
I have long expressed the opinion that announcing dividend interest rates associated with traditional participating life insurance policies is a deceptive sales practice. The footnote in Guardian's press release fails to disclose the seriousness of the problem. As indicated in the footnote, dividend calculations generally include interest, mortality, and expense components. For as long as I can remember, life insurance companies have maintained total secrecy about the calculation of dividends on their participating life insurance policies.

In recent years, during a period of low interest rates on new investments, some life insurance companies have begun to relax the secrecy on the calculation of the interest component of the dividend while continuing to maintain secrecy on the calculation of the mortality and expense components of the dividend. The problem is that there can be no assurance that the disclosed dividend interest rate is in fact the dividend interest rate. For example, it would be possible for a company to decrease the expense component of the dividend and thereby seemingly increase the interest component of the dividend. Moreover, there is no limit to the possible extent of such a practice, because it would be possible to decrease the expense component of the dividend all the way into negative territory.

The Regulators
It is natural to wonder what state insurance regulators are doing about the problem. In that regard, most states do not have the resources to address the problem. The last time I checked, most state insurance departments did not have a full-time actuary on staff. I believe that only the New York State Department of Financial Services pays attention to dividend matters.

A Solution to the Problem
A solution to the problem is to require all companies that issue or have issued participating life insurance policies to disclose fully the details of their dividend calculations. I do not suggest that disclosure of such complex information should be made directly to policyholders. Rather, I suggest that the companies should be required to file such information every year with state insurance regulators, and that such information should be made available to interested members of the public through state open records laws.

It is my understanding that some years ago Northwestern Mutual seriously considered the idea of voluntarily providing such disclosure to state regulators. In the end, however, the company decided such unilateral disclosure would place the company at a disadvantage, because competitors would be able to criticize the company's methods without themselves being subjected to scrutiny. In other words, a solution to the problem is to require that all companies file the information publicly.

Another Solution to the Problem
Another solution to the problem is for regulators and legislators to require life insurance companies to provide rigorous point-of-sale and post-sale disclosure to life insurance consumers. I have long suggested imposing such a requirement, but have met with no success. My most complete description of a rigorous disclosure system is in an article published in the December 1975 issue of the Drake Law Review. The system includes disclosure of, among other things, point-of-sale and post-sale year-by-year disclosure of the yearly price per $1,000 of the protection component of life insurance policies, and point-of-sale and post-sale year-by-year disclosure of the yearly rate of return on the savings component of cash-value life insurance policies.

General Observations
I do not intend to suggest that any of our few remaining great mutual life insurance companies—Guardian Life, Massachusetts Mutual, New York Life, Northwestern Mutual, and Penn Mutual—would engage in the kind of manipulation discussed in "The Problem" above. However, many stock life insurance companies (some of them former mutual companies) have issued and may still be issuing participating policies, and some stock life insurance companies that have never been mutual companies have issued and may still be issuing participating policies.

Available Material
I am offering a complimentary 27-page PDF consisting of the recent Guardian Life press release (1 page) and my 1975 article in the Drake Law Review (26 pages). Email and ask for the November 2017 package relating to dividend interest rates.