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The Insurance Industry Under Audit AGAIN

April 28, 2011

Background and Best Practices Regarding the Ongoing Verus Financial LLC Audits

The Insurance Industry is likely the most audited industry in the area of abandoned and unclaimed property (“unclaimed property”).  As one of the most regulated industries, the insurance industry has one of the longest compliance histories as well as involvement in some of the earliest unclaimed property litigation.  Now, the insurance industry is under audit AGAIN, by a relative newcomer to the unclaimed property world – Verus Financial LLC (“Verus”).

Verus, a third party auditor, hails from Waterbury, Connecticut and is authorized by as many as 25 states, and counting, to serve as their authorized agent to determine the insurance companies’ compliance with the respective states’ unclaimed property laws.  Verus initially set its sights on life and annuity companies.  Along with the traditional focus on service offering, the apparent primary focus of these audits includes retained assets, a relatively new property type, which has received quite a bit of press in the past year.   Within the past few months, Verus’ target appears to have broadened to also include property and casualty companies.Given early audits by the states themselves dating back to the 1960s, the late 1980s and the 1990s saw an onslaught of audits of just about every major insurance company by the then National Abandoned Property Processing Company (“NAPPCO”).  In 2003, NAPPCO was acquired by ACS Unclaimed Property Clearinghouse (“ACS”), which concluded several of the NAPPCO audits and commenced several audits of its own.

Prior audits were consistent with one’s expectation of unclaimed property examinations and generally included a vetting of the books and records to identify lost owners and quantify the reportable exposure.  The Verus audits appear to be different in their approach in that much of the focus is on “contractual terms” and “process.”  For an example, Verus may question if proof of death of an annuitant is pursued as aggressively as the company’s confirmation of death for a life policy holder whose contract terminates upon death.  There have been no findings or assessments to date, so the impact of these audits is yet to be seen.

Consequently, if you are an insurance company (whether or not you have been audited in the past and/or you enjoy a full compliance history), and you have not yet received notice of audit, your company very well may receive such a notice in the near future.  If you are currently defending an audit or your company receives a notice of audit from Verus in the future, below are some relevant issues to consider:

  • Review the participating states to determine if you were previously audited by any of the states, either directly or  through a third party auditor.  If yes,   limit the scope of the audit to the period subsequent to the prior audit(s).  This may narrow the scope of the Verus audit significantly, especially if one   of those states is your state of legal incorporation;
  • Determine whether you filed any Voluntary Disclosure Agreements or amnesty filings with any of the participating states.  If yes, the closed years will  be removed from the Verus audit;
  • Confirm that distributions/payments are made consistently with the underlying contracts and review adherence to guarantee periods for annuity contracts;
  • Confirm that interest on death claims, currently and historically, are/were paid consistent with applicable state law;
  • Document the use of the Social Security Death Master Index and the Pension Benefit Index for confirmation of death as applicable;
  • Confirm consistency with the company’s definition of the Date-of-Death i.e., the date the insured died or the date the company received notification   and proof of death;
  • Identify whether retained asset accounts are held in the company’s bank account, or are merely supplemental products. This can affect the application of the unclaimed property laws;
  • Where necessary, perform searches to locate missing policy holders, annuitants or beneficiaries and reunite the owners with their property.

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