Court to insurer: You can't triple life insurance premiums

Judge rules that Conseco violated policies' terms in contemplating whopping hike in 21st year of coverage

Jan 21, 2011 @ 12:38 pm

By Darla Mercado

A federal court judge in California has ruled against Conseco Life Insurance Co. in a class action, barring it from hitting some 50,000 policyholders with sky-high rate increases on life insurance policies.

The ruling, delivered Wednesday in U.S. District Court for the Central District of California, centers on a block of Valulife and Valuterm universal life insurance policies that were sold in the late 1980s and into the 1990s. The decision could have serious repercussions for other carriers considering raising premiums on older policies, according to the plaintiffs' attorney.

The origin of the case dates back to 2002, according to the ruling. That's when the Indiana Department of Insurance raised concerns about the carrier's insolvency and asset adequacy. That year, Conseco had filed for Chapter 11 bankruptcy protection after problems arose from its earlier acquisition of Green Tree Financial Corp., a mobile home financer.

To avoid having to post reserves, the insurer searched for a way to find some $173 million of reduced future liabilities, according to the decision.

Conseco picked out two blocks of UL policies with lower than expected lapse rates and computed a pricing formula that would cut future losses from those UL blocks, according to court documents.

This formula called for a sharp increase in the cost of insurance when the policies reached their 21st year of being in force — which would have been 2010 or 2011 for the customers who've had their policies the longest, according to the ruling.

The rate hike would have tripled the cost of insurance for those customers, causing the policies to run out of cash value, according to the plaintiffs' attorney, Andrew S. Friedman of Bonnett Fairbourn Friedman & Balint PC.

Conseco had told the court last year that it would not put the rate hike in place. Judge A. Howard Matz, however, found that even the formulation of the proposed increases violated the terms of the policies. The judge noted that the policies require the insurer to determine its cost of insurance rates based on future mortality experience — which does not include lapse and interest factors.

Mr. Friedman said that the court's decision may dissuade other carriers from trying to raise premiums on older UL policies, many of which were sold in the 1980s. He did note that he has not directly heard of any other carrier attempting to raise premiums the way Conseco did. But he added that insurers have been raising rates of late on UL policies. Those increases, he said, "have been devastating to older policyholders."

Conseco Life expects to fight the decision.

“We were disappointed in the ruling and we intend to appeal,” said Tony Zehnder, a spokesman for CNO Financial Group, Conseco Life's parent.

But Mr. Friedman applauded the decision. "The policies were designed to be profitable in the early years and unprofitable later. These rate increases wouldn't have hit until year 21. These are people who have paid dutifully for 20 years and have the rug pulled out from under them.”

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