Insurance Sales to Military Personnnel:
Additional Actions Needed to Prevent Improper Life Insurance Sales and Pay Allotment Transactions
GAO-09-452: Published: May 29, 2009. Publicly Released: Jun 29, 2009.
Concerns over unsuitable insurance products and inappropriate sales practices directed at servicemembers have prompted legislative and regulatory changes to address these concerns. Congress asked GAO to assess oversight efforts by the Department of Defense (DOD), the National Association of Insurance Commissioners (NAIC), and state insurance regulators. In this report, GAO (1) describes actions to improve oversight of life insurance sales to servicemembers and the extent to which they have been completed, and (2) identifies and analyzes factors that contribute to apparent ongoing inappropriate insurance sales. To complete this work, GAO visited five military facilities, analyzed DOD pay records, reviewed DOD and state enforcement actions, and spoke with DOD, state regulatory, and insurance industry officials.
Since 2006, Congress, DOD, and state insurance regulators--through NAIC--have developed and implemented laws and regulations designed to help prevent inappropriate insurance product sales to military servicemembers. In 2006, Congress passed legislation that, among other things, sought to establish standards for life insurance products and sales practices. Also in 2006, DOD revised its instruction designed to govern insurance solicitations on military installations. In 2007, NAIC created a new regulation that, among other things, declared certain life insurance products and sales practices to be inappropriate. As of March 2009, all but five states had adopted the regulation. Further, DOD and state insurance regulators took actions against insurance companies and agents related to the inappropriate sale of life insurance products. Some actions are stayed, pending judicial review. Currently, DOD and NAIC have separate mechanisms to centralize the gathering of information on actions taken against those selling insurance to servicemembers. DOD maintains lists of such actions on its Web site, but these lists are not easily searchable and do not always contain some relevant information, such as the name of the insurance agent involved. In response to the 2006 law, NAIC created a system to inform state insurance regulators of such actions. However, as of March 2009, this system contained no data. According to DOD officials, their lists currently meet their needs, and they are reluctant to enter data into NAIC's system because they do not control it. Without ready access to relevant information on disciplinary actions against insurance agents and companies, DOD and state officials may be less able to identify patterns of problematic activities and prevent inappropriate insurance product sales to servicemembers. Despite regulatory progress such as that cited above, some sales of insurance products that new state regulations generally presume to be unsuitable for servicemembers appear to be continuing. State regulators attributed the continuing sales to the new state regulations not being fully tested yet in state courts. In addition, GAO's review of DOD pay records identified approximately 40,000 allotment transactions that appear to have been created through inappropriate use of DOD's automated pay system, MyPay. For example, DOD regulations and new state regulations prohibit the use of MyPay for insurance allotments, but GAO found records of allotments with certain characteristics and patterns of bank account numbers that state regulators had previously identified as belonging to insurance companies. DOD has limited controls in place to detect or prevent such allotments. Such sales transactions, accomplished through MyPay instead of the proper paper form process for insurance allotments, also circumvent the 7-day cooling-off period that DOD requires to occur between the signing of an insurance application and the certification of an allotment into DOD's pay system. Without adequate controls in place to prevent improper allotments and inappropriate sales activities, servicemembers may continue to be at risk of purchasing unsuitable insurance products.
Recommendations for Executive Action
Status: Closed - Implemented
Comments: In September 2010, DOD officials stated that they still concur with these recommendations and continue to work toward their implementation. They indicated that they are currently working with the National Association of Insurance Commissioners (NAIC) to evaluate the status of implementation efforts related to identifying and sharing information on problematic sales agents and companies. Subsequent to our report, DOD and NAIC have taken further actions to enhance information available to military and civilian authorities as well as to service members regarding inappropriate insurance sales. DOD has updated its list of banned agents and entities violating DOD's commercial solicitation policies and has been responsive to subsequent DOD Inspector General efforts to enhance information sharing and awareness on the issue. NAIC conducted outreach to military members, providing information and resources to help identify and resolve inappropriate insurance sales. DOD's continued efforts to update its list of banned agents and entities based on DOD and insurance regulatory enforcement actions will help prevent unsuitable financial product sales to military members going forward.
Recommendation: To help ensure more coordinated and effective oversight of insurance sales to servicemembers, the Secretary of Defense through the Under Secretary of Defense for Personnel and Readiness, and state insurance regulators through NAIC, should work together to take further steps to improve the sharing of information available on enforcement actions taken against insurers and agents. Such steps could include (1)clarifying and expanding the definition of disciplinary actions that should be entered and maintained in both DOD's and NAIC's databases (e.g., beyond terminated agents, and agents and companies banned from or limited in access to an installation); (2) ensuring that all relevant information (e.g., agent, agency, and company name; specific violation descriptions; and characteristics of the life insurance product) on each disciplinary action is shared; and (3) reaching agreement on the mechanism to be used to share the collected information, such that the information is proactively and systematically communicated to both NAIC and DOD and can be readily searched by either.
Agency Affected: Department of Defense
Status: Closed - Implemented
Comments: In September 2010, DOD officials stated that they still concur with these recommendations and continue to work toward their implementation. They indicated that they are currently working with the Defense Finance and Accounting Service (DFAS) to evaluate the status of efforts to incorporate controls that would deter improper use of military pay systems into the redevelopment of the MyPay system. They also said they are evaluating DFAS efforts to develop a system to better communicate with state and federal authorities regarding entities that violate prohibitions on the use of the system. Subsequently, DFAS has taken further steps to revise notices in MyPay to alert service members of inappropriate allotments involving commercial insurance sales and has been responsive to further DOD Inspector General efforts to enhance the MyPay system. These actions, along with continued monitoring of MyPay allotments for inappropriate insurance allotments, should help deter inappropriate insurance sales to military members going forward.
Recommendation: To better enforce existing DOD restrictions on the use of MyPay for insurance allotments, the Secretary of Defense should direct the Director of the Defense Finance and Accounting Service (DFAS) to (1) implement controls and measures that will improve DFAS's ability to detect and minimize the use of MyPay to initiate insurance allotments; and (2) provide state and federal enforcement authorities with information on companies that are found to violate prohibitions on the use of MyPay to establish a financial relationship other than those explicitly permitted.
Agency Affected: Department of Defense