After the failure of several major life insurers in the last year, regulators and members of Congress are seeking to restrict an increasingly widespread but little-known practice: the transfer of hundreds of thousands of annuities and life and health insurance policies from one company to another each year, leaving consumers with little or no choice about whether to switch.
When it comes time to collect their money, consumers may find the company they chose has washed its hands of their business. Consumers have the right to refuse the transfer of their policies, but companies often do not tell them so. And sometimes insurers send notices so confusing that consumers do not know what is happening.
In the worst cases, consumers have bought insurance or annuities from apparently strong companies only to find they must try to collect from other companies that are insolvent.
Gene and Jessie Chamness bought $33,000 in annuities in the early 1980s from an insurer in Little Rock, Ark. Today they live in a one-room workshop, behind the unfinished house that would have been the retirement home of their dreams.
When Mr. Chamness, 66, asked for his money back to complete the house, he discovered that the annuities had been traded three times without his permission and wound up with a bankrupt life insurance company in Arizona.
"If I dwell on it I get very bitter," said Mrs. Chamness, 56. "It was money that we earned. It was money we relied on. And we can't get it."
The practice of selling insurance customers' business, known as policy transfers, is increasingly common among companies attempting to survive in a rapidly changing in dustry, experts say.
Life or health insurers often sell policies to abandon a line of business or strengthen their books. Once they have sold the policies, companies generally relinquish their legal obligations to the customers.
Aetna and Mutual of New York are among the major companies that have each transferred tens of thousands of policies. Other large insurers, including Prudential and Northwestern Mutual Life, say they never engage in the practice.
The transfers are similar to the sale of mortgages by banks, but with one crucial difference: When a bank sells a mortgage the consumer has the institution's money. When an insurance company sells a policy, it passes on the consumers' investment or savings.
Consumers may not be concerned about the health of the institution that they write out their mortgage checks to every month. But they do have an interest in the condition of a company that promises to pay out when their families have illnesses or deaths.
Industry spokesmen say that cases where consumers are switched to companies that go insolvent are rare and that even in cases of insolvencies people usually get their money. Most often, they say, companies sell consumers' policies to stronger companies that will give consumers better service.
While state insurance commissioners and a Senate subcommittee consider how to regulate policy transfers, the life insurance industry argues that requiring consumers to give written permission would be impractical.
"It is an extremely valuable tool to management, to stabilize a company, to downsize a company, to make it stronger," said William Marcoux, a lawyer in Washington, D.C., representing the insurance industry in its dealings with the National Association of Insurance Commissioners.
But critics, including members of Congress and state regulators in Washington and Minnesota, say that transferring policies without a customer's permission violates a basic concept of contract law.
The issue is particularly important, they say, as more insurers report financial problems and consumers spend increasing amounts of time trying to find the safest companies.
"It violates the most common sense of fair play," said Joseph Belth, a professor of insurance at Indiana University and the publisher of a newsletter about the industry. "Consumers these days expect that if they buy from a company it will remain their company unless they agree to a change."
Patrick L. Carmody, a vice president at Mutual of Omaha and the chairman of an industry group advising the National Association of Insurance Commissioners on the issue, said that hundreds of thousands of customers, at least, are transferred by insurance companies each year. Transfers are most common in the life, health and annuity businesses.
Aetna Life Insurance Co. stopped providing health insurance for individuals last year and sold 108,000 policies to Mutual of Omaha. Mutual of New York, or MONY, sold more than 60,000 life insurance policies last year to other companies.
Few states have regulations governing what consumers must be told when transfers occur. New York, for example, requires that consumers be informed in writing, but the transfer can take place if they do not respond. Minnesota has required written consent from policyholders since 1987. Washington state made written consent a requirement last November.
Although an insurance policy or annuity is considered a binding contract between the insurer and the consumer -- and it generally requires the consent of both parties to alter a contract -- lawyers for insurance companies have argued that if consumers write a premium check to the new insurer without raising objections, they have given their implied consent.
In most cases, companies eventually inform consumers that a transfer is taking place. But few policyholders respond to mailings about policy transfers, said Henri Bersoux, a spokesman for the American Council of Life Insurers.