Damn the Insurance Companies (Again)

Bloomberg.com ran an article on Wednesday of this week that has gained a lot of interest from the media and from around the country.  The heart wrenching story is that of Cindy Lohman who lived out every mother's worst nightmare; to bury a child.  Her son and our fallen hero Ryan, an Army Sergeant, was killed in action in 2008 by a roadside bomb in Afghanistan. 

The Bloomberg story, though, doesn't focus on a mother's pain but instead concentrates on what happened two weeks later.  That's when Ms. Lohman received the insurance benefit packet from Prudential Financial, who handles life insurance for the Dept. of Veterans Affairs.  The letter accompanying the packet informed her that Ryan's $400,000 death benefit would sit in an interest bearing account at Prudential earning 1% until they received further instruction from her, so that she would have "time to decide how to use the benefit."

This story has created commotion and outrage from many for a few drawn conclusions; that the account offered was not FDIC guaranteed, that the checks used to draw on the funds were refused by a couple retailers and mostly because while Ms. Lohman was earning 1%, Prudential earned 4.8% on the funds. 

At first observation, it seems as though the insurance company profited greatly at the expense of this grieving mother.  Smelling blood in the water and seeing populist political opportunity, the posturing began.

On Thursday, New York Attorney General Andrew Cuomo began a fraud probe against Prudential (the second largest life insurer in the country) and MetLife (the largest).  In a statement, he built on seemingly unanimous outrage:

"It is shocking and plain wrong for these multinational life insurance companies to pocket hundreds of millions in profits that really belong to those who have lost family members... hoarding millions that belong to military families."

In an even stronger example of political mongering, Congressman and Iraq war veteran Patrick Murphy (D, PA) pontificated:

"Profiteering off the death of troops who sacrificed their lives in Iraq and Afghanistan cannot stand... I will also pursue legislation to ensure this never happens again."

Before we move to fully condemn the insurance companies, which seem fertile political fodder of late, we should investigate the three aforementioned concerns more closely.

First, while the account offered by Prudential to Ms. Lohman was not covered by the FDIC it wouldn't have been fully covered at any FDIC insured bank either.  For the majority of 2008, the year that Ms. Lohman received the benefit, the FDIC guarantee limit was $100,000 and even after it was raised to $250,000, a large portion of her deposit would have been unprotected if the bank failed like the 276 banks that failed since the start of the financial crisis.

Next, while the checks that she was given to access the account were not accepted by two retailers she visited, it was likely because these retailers had not seen this type of check before.  Ms. Lohman had complete access to her funds at anytime and any corner bank would have accepted those checks allowing her full liquidity.

The last qualm that antagonists have with the Prudential account is the most loudly trumpeted; how can any insurance company be allowed to profit from our fallen service members families?  The question might make you gnash your teeth at first but let us investigate. 

Ms. Lohman and other families who kept to funds in Prudential's account were paid 1%, which at the time was a competitive rate according to BankRate.com.  According to their data, by the end of 2008, the average bank interest checking account was paying a rate of about 1%, and falling fast to the current average of 0.662%

While the account wasn't backed by the FDIC, it was backed by the full faith of Prudential's general account; a promise of worth when we note that since the start of the financial crisis, no insurer has missed paying claims including AIG.

But if you still grimace at the thought that Prudential earned 4.8% while they paid only 1%, consider that the corporate bonds that Prudential earned the 4.8% on were not guaranteed and could have lost the insurer money.  If this happened, Ms. Lohman would have still been guaranteed her 1%.

In fact, the spread between what is paid and what is earned is how the American and world financial markets function.  Have you been able to find a checking account paying more than 1% recently?  Isn't the bank loaning money at 5-8%?  Shouldn't they be forced by an attorney general to pay that 5-8% to their depositors?

Like so many less transparent instances, what was first made out to be another example of corporate America taking advantage of those of us on Main Street has been refuted with just a basic degree of thought. But, this example does act as a reminder for us to keep our eyes open.

Brenton Stransky and Andrew Foy are the authors of "The Young Conservative's Field Guide" which is recently available. The authors can be contacted through their website at www.aHardRight.com.
Bloomberg.com ran an article on Wednesday of this week that has gained a lot of interest from the media and from around the country.  The heart wrenching story is that of Cindy Lohman who lived out every mother's worst nightmare; to bury a child.  Her son and our fallen hero Ryan, an Army Sergeant, was killed in action in 2008 by a roadside bomb in Afghanistan. 

The Bloomberg story, though, doesn't focus on a mother's pain but instead concentrates on what happened two weeks later.  That's when Ms. Lohman received the insurance benefit packet from Prudential Financial, who handles life insurance for the Dept. of Veterans Affairs.  The letter accompanying the packet informed her that Ryan's $400,000 death benefit would sit in an interest bearing account at Prudential earning 1% until they received further instruction from her, so that she would have "time to decide how to use the benefit."

This story has created commotion and outrage from many for a few drawn conclusions; that the account offered was not FDIC guaranteed, that the checks used to draw on the funds were refused by a couple retailers and mostly because while Ms. Lohman was earning 1%, Prudential earned 4.8% on the funds. 

At first observation, it seems as though the insurance company profited greatly at the expense of this grieving mother.  Smelling blood in the water and seeing populist political opportunity, the posturing began.

On Thursday, New York Attorney General Andrew Cuomo began a fraud probe against Prudential (the second largest life insurer in the country) and MetLife (the largest).  In a statement, he built on seemingly unanimous outrage:

"It is shocking and plain wrong for these multinational life insurance companies to pocket hundreds of millions in profits that really belong to those who have lost family members... hoarding millions that belong to military families."

In an even stronger example of political mongering, Congressman and Iraq war veteran Patrick Murphy (D, PA) pontificated:

"Profiteering off the death of troops who sacrificed their lives in Iraq and Afghanistan cannot stand... I will also pursue legislation to ensure this never happens again."

Before we move to fully condemn the insurance companies, which seem fertile political fodder of late, we should investigate the three aforementioned concerns more closely.

First, while the account offered by Prudential to Ms. Lohman was not covered by the FDIC it wouldn't have been fully covered at any FDIC insured bank either.  For the majority of 2008, the year that Ms. Lohman received the benefit, the FDIC guarantee limit was $100,000 and even after it was raised to $250,000, a large portion of her deposit would have been unprotected if the bank failed like the 276 banks that failed since the start of the financial crisis.

Next, while the checks that she was given to access the account were not accepted by two retailers she visited, it was likely because these retailers had not seen this type of check before.  Ms. Lohman had complete access to her funds at anytime and any corner bank would have accepted those checks allowing her full liquidity.

The last qualm that antagonists have with the Prudential account is the most loudly trumpeted; how can any insurance company be allowed to profit from our fallen service members families?  The question might make you gnash your teeth at first but let us investigate. 

Ms. Lohman and other families who kept to funds in Prudential's account were paid 1%, which at the time was a competitive rate according to BankRate.com.  According to their data, by the end of 2008, the average bank interest checking account was paying a rate of about 1%, and falling fast to the current average of 0.662%

While the account wasn't backed by the FDIC, it was backed by the full faith of Prudential's general account; a promise of worth when we note that since the start of the financial crisis, no insurer has missed paying claims including AIG.

But if you still grimace at the thought that Prudential earned 4.8% while they paid only 1%, consider that the corporate bonds that Prudential earned the 4.8% on were not guaranteed and could have lost the insurer money.  If this happened, Ms. Lohman would have still been guaranteed her 1%.

In fact, the spread between what is paid and what is earned is how the American and world financial markets function.  Have you been able to find a checking account paying more than 1% recently?  Isn't the bank loaning money at 5-8%?  Shouldn't they be forced by an attorney general to pay that 5-8% to their depositors?

Like so many less transparent instances, what was first made out to be another example of corporate America taking advantage of those of us on Main Street has been refuted with just a basic degree of thought. But, this example does act as a reminder for us to keep our eyes open.

Brenton Stransky and Andrew Foy are the authors of "The Young Conservative's Field Guide" which is recently available. The authors can be contacted through their website at www.aHardRight.com.