ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Wednesday, July 10, 1996 TAG: 9607100051
SECTION: BUSINESS PAGE: B-8 EDITION: METRO
DATELINE: TRENTON, N.J.
SOURCE: Associated Press
IN ADDITION to agreeing to the industry's highest fine ever, the nation's largest life insurance company set up a restitution program for customers misled by sales pitches.
Prudential, the nation's largest life insurance company, apologized to policyholders Tuesday as it agreed to pay a record $35million in fines.
The company also set up a restitution plan for up to 10.7million customers for failing to curb widespread sales abuses by its agents.
The restitution plan could be much more costly than the fines being paid to states that conducted a joint investigation of the Prudential Insurance Co. of America. The negative publicity could harm sales, something that led Wall Street credit agencies to place Newark, N.J.-based Prudential under close scrutiny.
New Jersey's banking and insurance commissioner, Elizabeth Randall, whose department led the 30-state investigation, said restitution could cost Prudential $100million. The report task force's 232-page report, however, said this could balloon to $1billion.
The fines will be distributed to states on the basis of the number of residents holding policies. Virginia is one of nine states that have signed letters of intent to enter the agreement. Under the terms Virginia would receive $384,200.
The report on deceptive sales practices, including misleading consumers about the cost of policies, did not recommend any action against top Prudential executives. It did say, however, that management knew of sales abuses by agents and routinely failed to investigate and impose effective discipline.
``The abuses were widespread and did occur across the country. Consumers put their confidence, and their money, into Prudential, and some of the company's agents misled them,'' Randall said.
Prudential chairman Arthur F. Ryan, who came to the company in a management shake-up after investment scandals surfaced, said the company would move swiftly to prevent these problems from recurring.
``The improper practices cited by the task force are intolerable to Prudential,'' Ryan said. ``We apologize to our policyowners who may have been misled. We pledge to satisfy all legitimate policyowner claims.''
The review focused on accusations of ``churning,'' in which agents persuade customers to use the built-up cash value of older life insurance policies to finance the cost of more expensive coverage. The report said agents took advantage of customers who were ill-informed or deceived about the cost of the transaction.
The report said Prudential will contact policyholders who bought permanent individual life insurance contracts from 1982 to 1995.
Under the plan, policyholders will be able to file for a ``no fault'' remedy that consists of preferred-rate loans or the opportunity to buy more life insurance or annuities.
The plan also allows policyholders to seek greater compensation through an alternate dispute resolution process that will be based on an agent's complaint history or a policyholder's proof of misrepresentations.
Randall promised that the process will not be cumbersome. She said those who have been wronged could get full refunds of premiums, continued coverage without having to pay more premiums, or partial refund of premiums.
Individuals also can sue Prudential. But the task force said its proposal ``should provide faster relief to consumers than if they pursued litigation against Prudential through the courts.''
The $35million fine is what would be paid if every state signs on to the plan.
An additional nine states say they intend to sign the agreement. That leaves 11 states that have not said they would agree to the plan: California, Florida, Michigan, Wisconsin, North Carolina, Washington, West Virginia, Rhode Island, Nebraska, New Mexico and Alaska.
Prudential said it anticipates several of these states will approve the plan this week.
Randall said action was not taken against top Prudential officers because the task force did not find management deliberately sought for its sales force to mislead.
The report cites cases in which agents with ``significant complaint histories'' were promoted to sales and general managers, with supervisory and training responsibility over agents. Randall said these moves were not made by top management. Ryan said the company has fired 900 agents and managers since learning of the sales practices.
The largest previous fine against an insurance company was the $20million paid in 1994 by the Metropolitan Life Insurance Co. for improperly selling life insurance as retirement plans.
Prudential, which like Met Life is a mutual insurer owned by its policyholders, could pay as much as $500million in the restitution program and legal costs, analysts have said. While Prudential's total assets exceed $150billion, according to A.M. Best Co., another ratings firm, Moody's Investors Service said it may lower its rating on $3.7billion in long-term debt.
Moody's placed its financial strength ratings and long-term debt ratings of Prudential on review for a possible downgrade. Standard & Poor's reaffirmed its rating on Prudential's claims-paying ability rating, but also issued a ``negative'' outlook, saying the publicity could undermine sales.
The fines and any other costs to Prudential come four months after the company said its 1995 net worth rose 20percent because of debt sales, increased investments and fewer legal and natural catastrophes. Prudential said its capital rose to $11.4billion from $9.5billion in 1994.
Bloomberg Business News contributed to this story.
LENGTH: Long : 110 lines ILLUSTRATION: PHOTO: AP Elizabeth Randall, New Jersey's insuranceby CNBcommissioner, and Martin Carus, her New York state counterpart,
discuss the findings against Prudential. color.