1 More Reason 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, MetLife, Hartford Financial, Genworth Financial, and 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 may pay out the biggest chunk in death benefits:

InsurerMarket Share %Market Share Rank

Source: NAIC 2012 Top 25 Life Insurers.

Why should investors care
Though the payouts may hit the insurers' bottom lines, it may be their reputations that sustain the greatest damage. With MetLife's commanding lead of the market (its closest competitor has a full 3% smaller share) it is certainly one of the biggest names in the segment. But if clients' confidence in the insurer's willingness to pay out benefits drops, the likelihood of adding new clients may be less. And with the market really looking for signs of revenue growth, the insurer's stock may take a hit as well.

For long-term investors, this may be just another blip in the insurance market's radar. But if reputation damage is any measure of how the stocks perform, you'll want to see if there's any backlash against the named companies. Otherwise, be on the lookout for any comments from the firms stating that they have adjusted their methods and will be complying with any new regulation that looks to squash the previously lopsided practices.

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The article 1 More Reason Life Insurers May Need Damage Control originally appeared on Fool.com.

Fool contributor Jessica Alling has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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