Business as usual is not the usual any more, and insurers might do well to prepare for a period of heightened enforcement and concomitant reputational risk.

Before they are forced to, insurers may wish to consider a more proactive approach to compliance that could have the secondary benefit of enhancing the industry's reputation for customer care. Because following the letter of the law may not be enough to prevent conviction in the court of public opinion.

The insurance industry may see itself—and rightly so—as largely blameless for the financial crisis, but it may not be wise to expect the public, burdened by slow economic growth and stubbornly high underemployment and unemployment, to make the fine distinctions that are more evident from the corner office. Even without actual wrongdoing, press conferences and big settlement announcements can dominate the news and damage reputations that took decades to build.

For example, one industry issue gaining exposure nationwide has to do with unclaimed death benefits and the use of the Social Security Death Master File (DMF). Led by Florida and California, regulators have been examining insurers' use of the DMF allegedly to halt annuity payments when it seems to be in their interests, but not to actively search out unfiled death claims and make those benefit payouts—or escheat unpaid benefits to the state as unclaimed property.

Whether or not this is a normal business practice that conforms to the terms of most life-insurance policies is not for us to say. But even the highest amount at issue mentioned by regulators is somewhere around $1 billion. Anywhere outside Washington, D.C., a billion dollars is still real money—but the fact is, it is a rounding error when compared with the life industry's payouts over the years. It's hard to see how that could be enough to cause the industry to risk its reputation.

That's not how a newspaper headline would read, however—and the insurance industry may be smart to focus on the emerging risk that regulatory or enforcement activities centered on “business as usual” items may represent.

In New York, for example, regulators under former Insurance Superintendent James Wrynn and current Department of Financial Services Superintendent Benjamin Lawsky have sought detailed information from insurers on their use of the DMF and have directed them to use it expansively to help to ensure no beneficiary is left unpaid.

But despite these actions by the highly regarded New York regulators, New York's attorney general and now its state comptroller have entered the fray, issuing subpoenas and starting what the attorney general called “the largest and most comprehensive investigation of life-insurance practices in the country.”

Their joint release pointedly noted that the attorney general's Taxpayer Protection Bureau “is charged with investigating fraud against the state and local governments. This includes monies owed to the state's unclaimed-property fund which might have been improperly withheld.” The release also said, “The collaboration stems from data uncovered by both offices that indicated some funds may have been improperly withheld.”

Assertions aren't facts, but they can influence public opinion. And while this is one specific item, expecting similar strong regulation and enforcement actions not to continue elsewhere may be hoping for too much. The industry needs to prepare—and to act.

In this new regulatory world, the preferred course for insurers may be to engage regulators even more actively than they have before.

Proactive engagement, self-reporting, acknowledging eventualities and dealing with them head-on provide a way to harmonize regulatory and industry goals, minimizing harm to both companies and consumers. The challenge of this new environment is obvious, but for those companies that seize it, there is the opportunity to assume reputational leadership as consumer-friendly, caring organizations willing to go beyond the letter of the law to serve the customers they value.

Insurance companies have normally been better at paying claims than telling their stories. It's time to do both—and to embrace transparency and effective regulation as the allies they should be.

Special Reports /

Embracing Transparency in Government Investigations Could Be a Reputational Boon to Carriers

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