In the aftermath of the financial crisis, life insurers faced a significant challenge due to the fall in interest rates. As a result, they raised costs for policyholders, which included long-time customers. However, these companies are now giving partial refunds to tens of thousands of their customers to settle a wave of lawsuits that were spurred by the increases.
The Taboo of Raising Rates:
Raising rates on people who bought their policies years in the past was historically considered taboo in the insurance industry. However, facing potential losses, many U.S. insurers scoured the contractual language of their policies to identify ways to increase the amounts billed to customers. Rate increases ranged from mid-single digits to more than 100%.
Impact of Low Interest Rates:
Life insurers typically invest customers’ premiums, mainly in bonds, until needed to pay claims. Historically low interest rates have cut into those profits, causing insurers to look for alternative ways to boost revenue.
Settlements and Refunds:
The higher charges spurred lawsuits alleging breach of contract and other wrongdoings. Insurers argue that their actions were in line with policy provisions allowing increases up to specified maximums. One of the settlements reached in the past year was by Voya’s reinsurer, which refunded 76% of the extra insurance charges between mid-2016 and mid-2021. The 2016 rate increases remain in effect, but the settlement restricts when they can be raised again.
Approximately 43,000 checks were issued to Voya policyholders in recent weeks, totaling $69 million, with an average of about $1,600 per check.
Impact on Consumers:
Consumers face tough decisions when they receive unexpectedly high bills for their policies. They can either pay more to keep their policies in place, trim back their death benefits to avoid increased payments, or cancel their policy altogether.
Settling Lawsuits:
Parties are settling lawsuits as many judges have issued rulings indicating that courtroom victory isn’t a guarantee for either side. Judges have dismissed some allegations against insurers but left others standing. Insurers want to avoid the expense and uncertainty of further litigation, while plaintiffs’ lawyers argue that policyholders are eager to be compensated at least partially after years of dispute.
Contractual Provisions:
In general, insurers’ contracts let them raise rates for multiple reasons. In the Voya policies, a section titled “Cost of Insurance Rate” states that adjustments will be based on future cost factors “such as mortality, investment income, expenses, and the length of time policies stay in force.” The lawsuit alleged that Voya hadn’t complied “with the entirety of this provision.”
In sum, Life insurers’ decision to raise rates for longtime customers after the financial crisis caused significant unrest, leading to lawsuits and settlements. The lawsuits have been settled to avoid further litigation and expenses, with insurers offering partial refunds to policyholders. In general, the contracts of insurers permit them to raise rates for various reasons, including cost factors such as mortality, investment income, and expenses.